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MACRO AND HOUSING

Bernanke Hints at Another Rate Cut

Fed Chairman Ben Bernanke said Thursday evening economic data to be released over coming week may determine whether or not the Fed cuts interest rates at its upcoming FOMC policy meeting on Dec. 11. Bernanke noted the labor market has remained solid, while home construction and sales have continued to be weak. Data received over the past month on consumer spending, "have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting," adding, "the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead." Echoing the view of Fed Vice Chairman Donald Kohn a day earlier, Bernanke noted the FOMC's outlook "has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October." Kohn's remarks Wednesday were a sharp departure from those of other Fed officials who had until now downplayed the chances of another rate cut. The change in tone rekindled investor hopes for interest rate cuts, sending equity markets to huge one-day gains (full story). "Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy," (full text).

Bank Coalition Near Accord to Freeze ARMs - WSJ

Treasury regulators and a coalition of banks with mortgage exposure are working together on a plan that will temporarily freeze interest rates on certain subprime home loans. The coalition, dubbed the Hope Now Alliance, includes Citigroup, Wells Fargo, Washington Mutual and Countrywide. It was brought together by Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson. Details about the plan could be announced as soon as next week. Investors and mortgage holders are apprehensive about the interest rates on over two million adjustable mortgages that are scheduled to be "reset," or to rise, over the next two years (full story). The plan will extend the low "teaser" rate on home loans for certain borrowers who would not be able to meet the adjusted payments. It remains to be determined exactly who will qualify and how long the freeze will last. The borrowers expected to be eligible are those who would be able to keep their homes if the teaser rate was frozen (as opposed to those who would be unable to pay in any case). Paulson, whom the WSJ describes as "philosophically opposed to federal meddling in markets," came around to the idea pitched by FDIC Chairwoman Sheila Bair to freeze ARM rates. "If I ever saw a role for government, it is... to bring the private sector together when innovation has really outrun our ability to deal with it," he said this week.

New Home Sales Rise, Median Sales Price Plunges

New home sales increased 1.7% in October from a downward-revised September figure, but median home prices fell sharply, the Commerce Department reported Thursday. October new home sales came in at an annual rate of 728,000, up from the downward-revised 716,000 in September, which was the lowest pace since January 1996. Economists were forecasting October sales would fall to 750,000 from a previously reported September rate of 770,000. "The overall picture is housing is still going to decline at least for the rest of this year," said Adam York, economic analyst at Wachovia Economics. "We would not be willing to call September the bottom." The median home price in October of $217,800 represented an 8.6% drop from the $238,400 price reported in September. At the current pace, it would 8.5 months to clear the new home inventory. "There is no question there has been another big leg down in housing in recent months," James O'Sullivan, senior UBS economist, said. "Prices will continue to slip." In a Q&A period after yesterday's speech, Fed Vice Chairman Donald Kohn said, "The housing sector has continued to decline and to erode at a very, very rapid rate. It would be nice to see some early signs that it was beginning to stabilize, and we haven't seen that yet."

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TECHNOLOGY

Dell Beats, But Slips in After-Hours

Shares of Dell fell more than 10% in after-hours trading despite a revenue beat, as investors focused on declining desktop sales and slower-than-expected declines in component costs. For the quarter, the company's income was $766 million ($0.34/share), up 27% from last year's $601 million ($0.27/share). Revenue increased to $15.65 billion from $14.4 billion. Excluding certain charges, the company would have earned $0.35/share, which was in-line with analyst estimates. The company was expected to generate $15.35 billion in revenue (earnings call transcript). PC sales were down 1% while mobility products including laptops were up 19%, a trend that is affected the entire industry. Dell said it expects near-term results to be adversely impacted by slower-than-expected declines in computer component costs, and a shift in emphasis toward the U.S. consumer and international markets. "Even though Dell had better revenue, they weren't able to capitalize on it," analyst Shaw Wu of American Technology Research said. "They cited a less favorable component environment. It contrasts greatly with what H-P and Apple have said."

Sprint Rebuffs $5 Billion Investment - WSJ

Sprint Nextel has turned down a $5 billion investment offer from SK Telecom and private equity firm Providence Equity Partners, the WSJ reported Thursday. The offer was in the form of convertible-preferred securities that could be converted into equity for a 20% premium to Sprint's current stock price. The terms of the offer included the installation of former Sprint Nextel Chairman Tim Donahue as CEO. Donahue and the consortium submitted the proposal in a November 10 letter to the board that offered "a deep wireless management team, a strategic relationship with a leading global wireless operator, significant strategic capital, and the public market sponsorship of an accomplished private equity investor." The board spurned the offer without meeting with Donahue or any members of the consortium -- a "unilateral rejection" that the WSJ said "might upset some investors, who have seen Sprint's stock price drop 36% since early June." Sprint is seeking a new CEO to replace Gary Forsee, who resigned a month ago under pressure from the board. Donahue was CEO of Nextel and negotiated its $35 billion sale to Sprint in 2004. He remains popular with the Nextel employees at the combined company, but he and Nextel are held accountable by some Sprint directors and investors for the company's poor performance since the merger. "They say Sprint bought a wireless carrier with a creaky network that needed major upgrades and a user base susceptible to being lured by competitors," the WSJ said. The board itself is divided into Sprint and Nextel factions, with both sides supporting the idea of bringing in a CEO from outside. Activist investor Ralph Whitworth, whose Relational Investors LLC holds about 2% of Sprint stock, supported the board's rejection of the offer. "It's bad business to link minority investments with CEO selection decisions," he said. "The board did the right thing."

Google Set To Announce Bid for Wireless Spectrum - WSJ

Google plans to announce Friday its intent to apply to bid for wireless spectrum in a Federal Communications Commission auction scheduled for January 24, according to a report by The Wall Street Journal citing people familiar with the matter. The FCC has a Dec. 3 deadline for companies to declare their interest in bidding. Earlier this month, the WSJ said Google was preparing to bid at least $4.6B, the minimum reserve price (full story). At that time, a Google spokesman commented the company's goal "is to make sure that American consumers have more choices in an open and competitive wireless world." On Thursday, Verizon Wireless said it plans to open its network to any device and software by the end of next year. The decision was widely applauded and called a "great step forward" by Google CEO Eric Schmidt (full story). Google faces bidding competition from both Verizon and AT&T, however Barron's Eric Savitz noted a UBS internet analyst believes a Google bid at this stage -- given the FCC's decision to make the 700MHz band of spectrum "open-access" as Google had advocated and Verizon's "Any Apps - Any Device" announcement -- is merely to "save face" and will only be for the minimum reserve price. Shares of Google rose 0.7% to $697 on Thursday and added another 0.6% to $701 in extended trading.

Brocade Beats on EPS, But Comments Send Stock Lower

Brocade Communications Systems reported late Thursday a 60% jump in fiscal Q4 net income to $32 million, or $0.08/share. Excluding items including legal fees of $7.8M, Brocade earned $0.16/share, beating analyst estimates of $0.13. Sales surged 63% to $340M, compared to expectations of $341M. Shares of Brocade fell 1.8% to $7.60 in extended trading, after initially climbing as high as $7.97 (+3.0%), following CFO Richard Deranleau's cautious comments on the U.S. market. "We're still keeping a close eye on enterprise spending at a macro level and, as you have heard from several of our customers and partners, it is still a mixed environment out there," said Mr. Deranleau during the company's earnings conference call. Declining y/y gross margin, 58.5% vs. 62.1%, also may have influenced sellers, although it was an improvement sequentially (55%). Brocade reaffirmed its FY-2008 adjusted EPS guidance of $0.55 to $0.60 (vs. analyst expectations of $0.60), and said it expects Q1 adjusted EPS of $0.14 to $0.16 on sales of $345M to $360M, compared to analyst estimates of $0.14 on sales of $360M. In a post-earnings note, Citigroup analyst Paul Mansky, who has a $10/share price target on Brocade, commented, "We view last night's earnings report as the last significant barrier to our Buy thesis and with expectations realistically reset, we would aggressively build positions here." Brocade's three-largest customers, EMC, HP, and IBM accounted for 67% of total Q4 revenues, compared to 74% last year and 64% in Q3. Brocade said in Q4 it repurchased $50M of its common stock, or 6.6M shares, and said its Board authorized an additional $500M of buybacks. Brocade gained 0.5% to $7.74 during normal trading Thursday.

AT&T CEO Reveals Upcoming 3G iPhone

Investors reacted favorably to AT&T CEO Randall Stephenson's revelation Wednesday night that Apple would release a '3G' version of the iPhone sometime in 2008. The next generation of the iPhone will be capable of surfing the web at much higher speeds than the existing version of Apple's breakthrough phone. Apple shares closed up 2.26%, while AT&T's were up 1.41% Thursday. Tech Trader Daily's Eric Savitz blogged live from Stephenson's Wednesday night interview with Forbes's Quentin Hardy. Among his key takeaways: Stephenson didn't disclose details about AT&T's iPhone revenue-sharing deal with Apple (one analyst claims AT&T pays Apple $18 per month per iPhone customer), but did say a 3G iPhone was on its way "next year." Stephenson also took a swipe at Verizon, saying Verizon's recent decision to open its wireless network to third-party mobile devices (full summary) was "overblown." On Google's new handset operating system, Stephenson remarked that if it is successful, AT&T will certainly offer it to its customers. Financial blogger Larry Dignan summed up the reaction of many analysts when he wondered aloud if Stephenson's remarks will "freeze demand for the iPhone. Why buy a relatively slow iPhone when you can get a 3G one next year? The biggest complaint about the iPhone is AT&T’s slow EDGE network. Turbo charge the iPhone with 3G and a lot of complaints disappear."

HP Widens Lead Over Dell, IBM

Hewlett-Packard padded its lead over rival PC manufacturer Dell in Q3 and boosted its shipments at almost twice the clip of the rest of the industry, market research tracker iSuppli reported Thursday. Shipments from all PC manufacturers grew to 68.1 million, a 13.8% growth rate over 2006, and an 11.1% increase from Q2 2007. HP's shipments gave it a 19.2% share of the PC market, followed by Dell with 14.6%, Lenovo at 8.1%, Acer at 7.9%, and Toshiba at 5.3%. This is the fifth consecutive quarter that HP has dominated the PC market. "Hewlett-Packard continues to gain momentum in the PC market due to its strong channel presence and its moves to capitalize on the strength of the notebook segment," said iSuppli analyst Matthew Wilkins. For its part, Dell shipped 9.9 million PCs in Q3, a scant 1.5% growth rate over the year-ago quarter, far behind HP's 32.7% and Acer's massive 68.8% growth rates. "Acer is almost certain to overtake Lenovo in the fourth quarter as a result of the Gateway acquisition and its continued momentum in the notebook PC market," Wilkins said. Regarding Dell, he said that "despite a renewed focus on its PC business, and the return of Michael Dell to the company's helm, Dell's channel business is taking time to ramp up and have an impact on company sales." HP's servers performed well in the quarter, with its blade server product exceeding $1 billion in sales for the first time. HP remains the world's #1 server manufacturer, with a 42.1% share. Competitor IBM's share shed 10 percentage points to 32.9%. Dell shares fell 9.9% to $25.36 in AH trading, despite a revenue beat, due in part to investor concerns about slipping desktop sales (full story).

ENERGY AND MATERIALS

Oil Drops Below $90 on Speedy Pipeline Repairs

Oil fell below $90/barrel during overnight trading after Enbridge said Thursday it expects a quick restart to its ruptured pipeline one day after a deadly blast killed two workers and cut off 10% of the oil flowing to the U.S. from Canada. Flow rates through the pipeline were back up to 80% capacity on Thursday, the company said. Oil initially surged $4 to above $95/barrel, but eased back over the day as refiners sought alternate suppliers in case of a prolonged shutdown, and as news of speedy repairs emerged. Enbridge said it expects full flow rates within three days. Oil prices have fallen after trading above $99/barrel on expectations of an OPEC output increase over the coming weeks. "The market stopped panicking once three of the four pipelines were restarted, and promises of emergency stockpiles would have solved any short-term supply issues," said MF Global broker Robert Laughlin. "We could see OPEC providing between a half million and a million barrels next week." January oil futures traded as low as $88.50/barrel, and stand at $89.25 at 7:00 a.m. ET.

Sources: Reuters, Bloomberg

Ethanol Going From Panacea to Pariah - WSJ

In the span of just one year, ethanol has "gone from panacea to pariah" in the eyes of many investors, the Wall Street Journal reports. Critics blame ethanol for high corn prices, and question whether it really reduces the need for oil and helps the environment. A recent study by the Organization for Economic Cooperation and Development said biofuels, "offer a cure [for oil dependence] that is worse than the disease." Another organization said ethanol bolstered corn-growing could strain water supplies, while the American Lung Association said it's concerned about the biofuel's contribution to air pollution. While ethanol producers such as VeraSun Energy (VSE) and Pacific Ethanol (NASDAQ:PEIX) continue to lobby Congress to boost the amount of ethanol refiners are required to mix into gasoline, "what once looked like a slam-dunk" is now far from a given, the Journal says. Other factors driving the share prices of ethanol stocks down include over-production, slipping prices, growing capacity and increasingly angry farmers and food-producers. "Our love affair with ethanol has finally ended because we've taken off the makeup and realized that, lo and behold, it's actually a fuel," Friedman, Billings, Ramsey analyst Kevin Book said recently.

FINANCIAL

Morgan Axe Falls on Co-President Zoe Cruz Following $3.7B Mortgage-Related Losses

Following the close Thursday Morgan Stanley announced it was letting go of Co-president and CEO-heir apparent Zoe Cruz on the heels of the investment bank's November 7 announcement (full summary) it was writing down $3.7 billion in mortgage-related losses, resulting in a net loss of up to $2.5 billion in Q4 earnings. In addition to the writedowns in a part of the business for which Cruz had considerable responsibility, Cruz's management style had been called into question in the past, and was described by some as "polarizing." Cruz spent the last 25 years at Morgan, gradually working her way up its corporate ladder. She was widely considered one of Wall Street's most powerful women. Replacing Cruz are current Chairman and CEO of Morgan Stanley International, Walid Chammah and current President and COO of the Global Wealth Management Group, James Gorman. According to the press release, "on a day to day basis, Institutional Securities will report to Mr. Chammah and Wealth Management and Asset Management will report to Mr. Gorman." Cruz's Co-President, Robert Scully, is joining a new "Office of the Chairman." Morgan shares were down 0.76% in after hours trading on the news, following a 2.17% drop Thursday.

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