Wall St. Breakfast's Pre-Market Snapshot:
U.S. Futures As of 9:12 AM ET
S&P 500: +4.50; 1,442.00
NASDAQ 100: +15.00; 2,043.00
Dow: +40; 13,039
NIKKEI 225: +1.12%; 15,211.52 (+168.96)
HANG SENG: +1.13%; 27,771.21 (+311.04)
SHANGHAI SE COMPOSITE: +0.45%; 5,293.70 (+23.89)
BSE SENSEX 30: -1.80%; 19,280.80 (-352.56)
FTSE 100: +0.45%; 6,148.40 (+27.60)
CAC 40: +0.40%; 5,454.31 (+21.74)
XETRA-DAX: +0.89%; 7,579.09 (+67.12)
Commodity Futures (Reuters/Jefferies CRB)
Oil: +1.08%; $95.66 (+$1.02)
Gold: +1.35%; $788.50 (+$10.50)
Natural Gas: -2.85%; $7.56 (-$0.22)
Silver: +2.12%; $14.46 (+$0.30)
U.S. Breaking Newssee today's Wall Street Breakfast for earlier news
Freddie Tanks on Earnings Miss, Possible Q4 Dividend Cut
Freddie Mac was last down 15.3% to $31.75 in pre-market trading, following its report of a more than doubling of Q3 losses to $2.03 billion ($3.29/share) and warning it may have to cut its dividend by 50%. Analysts were expecting a loss of $0.22/share, on average. Freddie Mac cited a higher provision for credit losses ($1.2B) and losses on mark-to-market items ($3.6B). The company reported a Q3 loss of $715M ($1.17/share) last year. Freddie Mac said the credit losses reflect the "significant deterioration of mortgage credit as a result of continued weakness in the housing market." Furthermore, Freddie Mac said the fair value of net assets attributable to common stockholders (before capital transactions) fell by around $8.1B in Q3, compared to an increase of about $300M last year. CFO Buddy Piszel commented that over the past year the company has "begun raising prices, tightened our credit standards and enhanced our risk management practices. We also continue to improve our internal controls as we move closer to completing our remediation efforts and returning to timely financial reporting. These actions position us well to take advantage of opportunities when the current market dislocation ends." (Earnings call transcript later today). Freddie Mac said it has "engaged Goldman Sachs and Lehman Brothers as financial advisors to help it consider very near term capital raising alternatives." Freddie Mac also said it is "seriously considering" reducing its Q4 dividend by 50%. Shares of Freddie Mac lost 7.9% to $37.50 on Monday.
Commentary: Fannie Mae Masking High Losses With Accounting Tweak - Fortune • Regulator Irate Over NY AG's Probe of Fannie and Freddie • Fannie, Freddie, WaMu Tumble on Expanded Probe
Stocks to watch: FRE, FNM
D.R. Horton Swings to Q4 Loss, But Not as Bad as Expected
Shares of D.R. Horton are higher in light pre-market trading at $11.75 (+4.4%), after reporting it swung to a fiscal Q4 loss of $50.1 million or $0.16/share, which is nowhere near the $0.66/share loss expected by the Street. Still, the company's outlook is pessimistic, as it expects the "housing environment to remain challenging." Last year D.R. Horton posted earnings of $277.7M ($0.88/share). Q4 homebuilding revenues fell 55% to $3.1B, but also were ahead of estimates of $2.9B. Backlog fell 48% to $2.7B. "D.R. Horton is going to be struggling for quite a few quarters to come simply because they entered this downturn with significantly more land than they'll need," commented a Morningstar analyst. In a more positive note, Chairman Donald R. Horton said, "Despite these challenging conditions, we exceeded our goal of generating $1 billion of cash flow from operations for the fiscal year, and all of our regions generated profits before impairments and land option cost write-offs for both the quarter and the fiscal year." (Earnings call transcript later today). Generating another $1B-plus of cash flow from operations in fiscal 2008 is listed as a goal, along with further inventory reduction, cost controlling and debt reduction. D.R. Horton lost 7.5% to $11.25 on Monday.
Commentary: D.R Horton Q4 Sales: -39%, Cancellations: 48% • Housing Market Tracker - Housing Stocks • Not Nibbling at Homebuilders Yet
Stocks to watch: DHI. Competitors: CTX, PHM, KBH, TOL. ETFs: XHB, ITB
Office Depot's Earnings Decline 9%, Top Estimates
Office Depot reported a 9% decline in Q3 net income, on a soft retail environment in the U.S. and Canada (full earnings call transcript later today). The company had delayed its latest quarterly results on October 30 due to "the timing of the recognition of certain vendor-program funds," leading shares lower 14% (full summary). Tuesday Office Depot restated its results going back to 2Q06, for the same reason it delayed its latest quarterly report. In the latest quarter, net income was $117.5, good for adjusted EPS of $0.43, versus restated net of $129.1 (adjusted EPS of $0.45) a year ago. Total sales rose 2% to $3.94 billion, on overseas growth of 13%. North American Retail Division were flat at $1.8 billion, while same store sales fell 5% Y/Y. Consensus analyst estimates were for adjusted EPS of $0.40 on sales of $3.95 billion. The earnings restatement shaved $0.04 a share in FY2006 earnings and $0.02 a share in first half 2007 earnings. The company also cut in half its number of planned new store openings through 2008. According to FTN Midwest Securities analyst Anthony Chukumba, who rates the shares a hold, Office Depot has "gone overboard with cost-cutting, and it affects the in-store experience." The company plans to continue reducing CapEx through 2008, down to $400, versus an expected $450-$475 million for CapEx in 2007. Shares were unmoved in pre-market trading; ODP is down nearly 51% YTD.
Commentary: Office Depot Delays Q3 Earnings; Shares Plunge 14% • Office Depot Is Cheap Relative To Peers Staples and OfficeMax • Analysts Cut Office Depot Estimates: Expecting Panic Selling, Possible Bounce
Stocks to watch: ODP. Competitors: SPLS, OMX. ETFs: XRT
Earnings call transcript: Office Depot Q2 2007 Earnings Call Transcript
Saks Q3 Net Triples, But Misses; Says Q4 Margins May Decline 'Modestly'
Saks reported a tripling of third-quarter net income to $21.6 million, or $0.14/share, but missed analyst expectations of $0.16/share. Sales grew a better-than-expected 14% to $796.1M. Saks posted a comparable-store-sales increase of 11.4%. "We are pleased with the year-over-year improvement in our third quarter operating results which primarily was driven by strong comparable store sales growth and expense leverage," commented CEO Stephen I. Sadove. (Earnings call transcript later today). Despite its strong quarterly results, Mr. Sadove acknowledged the company "began to experience a more challenging promotional and overall macroeconomic environment. This resulted in modest downward pressure on our merchandise margins which was offset by the impact of unredeemed gift cards, producing a flat year-over-year gross margin rate for the quarter." Mr. Sadove is optimistic about Q4, but warned there may be a "modest" decline gross margins. Shares of Saks lost 4.2% to $20.13 on Monday, but were last up more than 5% to $21.20 in thin pre-market activity.
Commentary: Are Retail Stocks Bargains? • Jon Asgeir/Baugur to Explore Aquisition of Saks • October Same-Store Sales: Comprehensive Roundup
Stocks to watch: SKS. Competitors: M, DDS, JWN. ETFs: RTH, XRT
Dollar Under Pressure as Gulf Nations Mull Break With Peg
The U.S. dollar fell against the euro and yen after a group of oil-rich Persian Gulf nations that have until now pegged their currencies to the U.S. dollar said they are mulling a change since the dollar's sudden drop has them concerned about inflation and reduced buying power. "The U.S. dollar is weaker across the board on the talk of a move away from the dollar peg," RBC Capital Markets analyst Sue Trinh said (Bloomberg). The dollar peg "served the economy... very well in the past," United Arab Emirates' central bank governor Sultan Nasser al-Suweidi said. "However, we have reached a crossroads." Countries like UAE, Qatar and Saudi Arabia, besides pegging to the dollar, also hold large caches of the currency. A decision to move from a dollar peg to a currency basket, such as Kuwait did in May, could encourage other countries with large dollar holdings to diversify, weakening demand for the greenback. Due to Saudi's close ties with the U.S., it is less likely to make such a move; last week it vetoed an OPEC push to mention dollar concerns in the cartel's post-meeting statement. Further U.S. interest rate cuts, a likely scenario, while helping ease downward pressure on the domestic economic slowdown, could push the dollar further down and boost inflation in oil-rich Persian Gulf nations that would otherwise see their local currencies rise on the tails of sky-high oil prices, thereby moderating inflation. Similar challenges are also faced by countries like China, whose yuan is closely tied to the dollar, Ukraine, and Ecuador, which doesn't have its own currency (Wall Street Journal). "The dollar peg is doomed," Jim Rogers, former George Soros partner said. PowerShares ETFs UUP (dollar bullish) and UDN (dollar bearish) are one way for investors to bet on dollar movement.
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• Video game retailer GameStop Corp. (NYSE:GME) saw shares tumble 8.74% in pre-market trading Tuesday (as of 8:44 AM ET) despite a strong earnings beat in Q3. Net nearly quadrupled to $52 million (EPS of $0.31), vs. $13.6 million (EPS of $0.09) a year ago. Sales jumped 59.3% to $1.61 billion, while comparable store sales rose 46.3%, well above previous guidance of 30%-32% growth. The company projects EPS of $0.95 to $0.97 in Q4; analysts were expecting Q4 EPS of $1.00 on average. (sources: MarketWatch • Trading Markets)
• Shares of retailer Dick's Sporting Goods (NYSE:DKS) are trading up 7.72% in pre-market action (as of 8:22 AM ET) on a strong earnings beat. The company also raised guidance for next year to above consensus analyst estimates. Dick's reported a Q3 net income increase of 57% to $12.2 million, good for EPS of $0.10, vs. net of $7.8 million (EPS of $0.07) a year ago. Sales climbed 18% to $838.8 million. Consensus estimates were for EPS of $0.06 on sales of $849 million. Same store sales were down 2.5% Y/Y. The company projected Q4 earnings of $0.59 and upped its FY2008 guidance from EPS of $1.24-$1.25 to $1.29, on same store sales growth of 2%. Analysts were expecting, on average, Q4 EPS of $0.59 and FY 2008 EPS of $1.28. (source: Thomson Financial delivered by Newstex)
Today's Market (via Sam Collins, ChangeWave.com)
Recap of Yesterday's Action
Stocks suffered more losses yesterday as a result of "fear" that there would be additional credit problems disclosed at major banks. This was heightened by Goldman Sachs' (NYSE:GS) downgrade of Citigroup (NYSE:C) to an outright "Sell" and Lowe's (NYSE:LOW) missed earnings forecast.
As if that wasn't enough, several retail analysts warned of a slow holiday shopping season, and the National Association of Home Builders' confidence index had the lowest reading in its history. With all of that, the networks were full of dire predictions for a recession.
Oh, and there was one more thing: resounding fear that the Fed would not reduce rates again in December.
In the end, the Dow Industrials closed at 12,958, off 218 points. The S&P 500 was down 25 points at 1,433, and the Nasdaq closed at 2,593, down 44 points. Volume on the NYSE totaled 1.7 billion shares and 2.2 billion shares were traded on the Nasdaq. Breadth on both exchanges was negative at about 4.5-to-1.
The new spot month (January) crude oil futures gained 80 cents to $94.64 a barrel, and the Amex Energy SPDR (NYSEARCA:XLE) fell $1.19 to close at $71.47. Gold (December contract) fell again, this time by $9 per troy ounce, closing at $778. The Philadelphia Gold/Silver Index [XAU] lost $8.40 to close at $164.28.
What the Markets Are Saying
It has become almost trite to say that investors have two primary motivators -- fear and greed -- but it is hard to ignore that fear was the reason yesterday's market fell as hard as it did.
Yet we are still in a bull market with little or no evidence to the contrary.
Consider what our own Tobin Smith had to say regarding the technical makeup of the market, "As we look at this most-informative of market measures [the five-year chart of the S&P 500], we see that we have now pulled back to support -- a tell-tale sign of a normal correction phase. We also see that the 50-day moving average has not broken down below the 200-day, which is the classic bear-market genesis signal. What we do see in the five-year S&P 500 chart is the usual pattern of higher highs and higher lows, along with a retest of higher support levels. Hey, it's the same old story, and the same old song-and-dance we've seen for the past four years of this bull market. Until things get a lot worse technically, there is no way anyone can, in good conscience, call this a bear market."
Toby, I couldn't agree more. As for this shortened Thanksgiving week for domestic markets: With all of the fear exhibited yesterday, I wouldn't be surprised to see the line at S&P 1,430 temporarily broken, as it was in August with a final emotional bottom as the result. For now, hold at least 25% cash so that you can take advantage of potentially lower prices.
Today's Trading Landscape
Earnings are due from Amarin, Apsen Technology, Barnes & Noble, BJ’s Wholesale Club, Blue Coat Systems, Borders Group, D.R. Horton, Dick’s Sporting Goods, Eaton Vance, Foot Locker, Forrester Research, Gamestop, Gymboree, Hibbett Sports, Home Inns, Hormel Foods, Hot Topic, Jamba Juice, Limited Brands, LTX Corp, New York & Company, Office Depot, Pacific Sunwear, Ross Stores, Shoe Carnival, Target, Ubisoft, United Natural Foods, Whole Foods and Zales Corp.
We'll also get the FOMC minutes from its October meeting at 2 p.m. Eastern and October building permits (the consensus expects 1.2 million) and housing starts (the consensus expects 1.17 million).
Hewlett-Packard (NYSE:HPQ) reported fiscal fourth-quarter results of 81 cents a share versus 60 cents last year. Excluding charges and one-time items, HPQ would have earned 86 cents versus analysts' expectations of 82 cents, and that should help markets today.
Asian Headlines (via Bloomberg.com)
Japanese Stocks Rise on Speculation Declines Present Bargain Opportunities Japanese shares rose, reversing earlier losses, on speculation this month's 10 percent declines for the Nikkei 225 Stock Average and Topix index didn't reflect future earnings prospects.
Boeing, Toray in Talks to Expand $6 Billion Dreamliner Carbon-Fiber Deal Boeing Co. is in talks with Japan's Toray Industries Inc. to expand a $6 billion contract to supply carbon-fiber sheets for the 787 Dreamliner, the U.S. planemaker's fastest-selling passenger jet.
Flowers Leads $1.8 Billion Bid for Stake in Shinsei, Japan Bank He Rescued Christopher Flowers, whose 2000 takeover of Shinsei Bank Ltd. was Japan's most lucrative buyout, is leading a group that will offer 202 billion yen ($1.8 billion) for a stake in the company after its shares slumped.
China Shipping Container May Raise $2.4 Billion Selling Shares in Shanghai China Shipping Container Lines Co., Asia's second-largest cargo-box carrier, may raise as much as $2.4 billion selling shares in Shanghai to buy ships as the country's booming exports fuel sea-freight traffic.
Volkswagen, Proton End Talks, Leaving Malaysian Carmaker Without Partner Malaysia's government ended talks for an alliance between state-owned carmaker Proton Holdings Bhd. and Volkswagen AG, Europe's biggest automaker, fueling concern about the unprofitable Asian company's future.
China Railway to Sell $409 Million of Shares to Private Investors in IPO China Railway Group Ltd., the world's third-biggest construction company, will sell HK$3.18 billion ($409 million) of shares to nine corporate investors including China Investment Corp., the nation's first sovereign fund.
European Headlines (via Bloomberg.com)
European Stocks Rise From Three-Month Low; Vodafone, Shell, Total Advance European stocks rebounded from a three-month low, led by chemical producers, carmakers and technology companies, as investors speculated the sell-off was overdone given the prospects for corporate profits.
Dollar Declines to Record Low Against Euro Before Report on Housing Starts The dollar fell to a record low against the euro and the Swiss franc on speculation a U.S. government report will show a deepening property slump, prompting the Federal Reserve to lower interest rates.
Norske Skog Will Cut Dividend to Overhaul Factories, Move Into New Markets Norske Skogindustrier ASA, the world's second-biggest newsprint maker, will cut its dividend after a slump in prices led to two straight annual losses. The stock fell to the lowest for more than 13 years.
Northern Rock Slumps for Second Day; Bank Bids May Be Below Current Value Northern Rock Plc, the U.K. bank bailed out by the Bank of England, slumped for a second day in London trading after saying yesterday that bids are ``materially below'' its market value.
Gieve of BOE Says Money Markets May See Renewed Tightening Before Year-end John Gieve, deputy governor for financial stability at the Bank of England, said that money markets may face renewed ``tightening'' before the end of the year.
ICAP Profit Rises 34% on Record Trading in Currencies, Stocks, Derivatives ICAP Plc, the world's largest broker of transactions between banks, said first-half profit increased 34 percent after the slump in credit markets spurred record trading in currencies, bonds and their derivatives.