Bush to Announce Five-Year ARM Freeze
President Bush is expected to announce a plan at 1:40 p.m. EST Thursday that will help homeowners struggling with adjustable-rate mortgages hold onto their homes. Interest rates on 1.5 million mortgages are expected to "reset" upward over the next year. "We have got to do something drastic, and we have to do something quickly," said Rep. Elton Gallegly (R-CA). "I don't like the government getting involved in the private sector, but we have potential problems we are already seeing come to pass." The plan, which is the product of an agreement between loan servicers and investors holding mortgage debt, will freeze the introductory "teaser" rate for certain borrowers for five years. It is geared toward borrowers who are current on their payments but would be unable to pay a higher rate following reset (full story). The plan is designed to assist homeowners, not lenders or speculators (recipients will have to live in their homes), but is already stirring dissent among homeowners who will not be eligible. Borrowers who would be able to pay reset rates might also benefit if the White House succeeds in swaying Congress to alter tax law to permit state and local governments to use more tax-exempt bond programs to fund refinancings.
Unexpected Nov. Employment Gains Call Recession Worries Into Question
The November job survey released Wednesday by ADP showed a surprising 189,000 private-sector job expansion, with strength in the service sector. Economists had been expecting non-farm payrolls, which is released Friday and which include both private- and public-sector jobs, to have grown about 60,000 in November. Adding an estimated 25,000 public-sector jobs pegs non-farm payrolls for November at a far higher-than-expected 214,000. The ADP survey is considered by many to be the single best predictor of the government's non-farm payroll report, which may in turn call into question whether the Federal Reserve is likely to cut interest rates by 0.50% next week, as the markets now predict (full story). Joel Prakken, chairman of Macroeconomics Advisers, the firm that computes the ADP index, said Wall Street economists may be taking too pessimistic a stance, given the new data. The service sector produced 197,000 jobs during the month; goods-producing jobs fell by 8,000; and manufacturing jobs fell 5,000. "It's time for the people who are telling this recession story to put up or shut up in terms of the data," economist Robert Stein said. "If you look at the labor market, if you look at consumption, nothing is falling off a cliff in the way you generally see at the beginning of a recession."
S&P Equity Research "Cautiously Optimistic" About Holiday Spending
A survey conducted by Standard & Poor's Equity Research Services has led it to be "cautiously optimistic" that consumer spending by Americans will grow this holiday season despite an economic downturn. The organization said the results support its earlier 3.0-3.5% sales gain forecast, which would be the slowest pace in a decade. A majority of the 1,100 respondents said they do not plan to reduce holiday spending from last year, and only 18% said they expect their financial position to deteriorate over the next six months. Gas prices are a major concern, but job security remains stable. "Despite a challenging economic environment, which many in our survey believe will worsen, the American consumer perseveres," S&P Equity Research Services said in a statement. The organization advised "tempered optimism" in view of the possible effect the housing downturn could have on confidence in 2008 as well as the effect of rising energy costs. "While Standard & Poor's believes that holiday sales will be up modestly, we still stress investors take a cautious approach," the statement said.
Fed Likely to Weigh 0.25% vs. 0.50% Cut Next Week
Influential Wall Street Journal fed-commentator Greg Ip says a rate cut at next week's FOMC meeting is "likely"; what remains to be seen is how and how much the Fed will drop its key rates. The current outlook, fostered after Bernanke and key officials hinted to further rate cuts last week (full story I, II) is in stark contrast to the prevailing view until recently, namely that the Fed saw the economy as "balanced" and would withhold further interest rate cuts unless things got much worse. Fed officials' main concern, Ip says, is not the economy, though recent data have leaned to the 'soft' side, nor the stock market, but rather the possibility that banks and other lenders will tighten their lending to small and medium-size businesses much as they already have to home borrowers, a move that could inhibit economic activity in credit-sensitive sectors. Futures markets currently expect a minimum 0.25% cut when the Fed meets on Dec. 11, and give a 66% probability to a 0.50% cut to the key fed funds rate. Some analysts say the Fed is more likely to cut rates by a quarter point, and adjust its statement to exclude the notion that weak U.S. economic growth and higher inflation are equally balanced, thereby leaving the door open for further cuts without an implied promise it will do so.
ISM Survey: Softening Growth in Service Sector
The Institute for Supply Management said Wednesday its Non-Manufacturing index fell to 54.1%, slipping more than expected. The reading did represent an expansion, as it was over 50%, but economists had expected the figure to fall to 55.0% after coming in at 55.8% for the month of October. "I don't think it should be a surprise that outside manufacturing things are turning down, given all the problems in the financial markets and downside in construction,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. Of the 16 industries covered by the index, 10 showed expansion for November. New orders fell to 51.1%, the lowest level since April 2003, and the employment index fell to 50.8% from 51.8%. Anthony Nieves, chair of the ISM Non-Manufacturing Survey, said employers were more cautious about hiring new workers in the service sector.The employment data seems to be somewhat at odds with the November job survey released Wednesday by the ADP, which showed a surprising 189,000 private-sector job expansion, with strength in the service sector (full story).
France Telecom's Guidance Disappoints
Ordinary shares of France Telecom (FTE) fell 2.8% to €25.39 Wednesday due to a corporate release ahead of its Investor Day event reaffirming 2007 guidance and an outlook with similar forecasts for 2008, which disappointed investors. France Telecom confirmed its target for 2007 organic cash flow growth of 10% to €7.5 billion ($11B), and said it expects to generate at least that much next year. Gross operating margin is seen stable in 2007 and 2008, with revenue expected to grow in-line with its operating markets. France Telecom said its expects to pay a dividend of €1.20 to €1.30 per share in 2008. Separately, France Telecom subsidiary mobile carrier Orange said it has sold 30,000 Apple (AAPL) iPhones since they debuted in France less than a week ago; nearly half of the sales are resulting in new subscribers for the carrier. Orange has a year-end target of 100,000 unit sales. Investors can gain exposure to France Telecom via iShares MSCI France Index (EWQ) and iShares S&P Global Telecommunications (IXP), of which it is a 4.2% and 3.4% holding, respectively.
Additional Reading: France Telecom: New VoIP, Broadband Offerings Boost Market Share • IXP: Calling All Global Large Cap Telecom Companies
Related: France Telecom Investor Day materials
MGM Board Approves New 20M Share Buyback
MGM Mirage (MGM) said Wednesday its board has approved a new share repurchase program for up to 20 million shares of common stock, theoretically valued at approximately $1.71 billion based on its Tuesday close of $85.52. The new buyback program allows for purchases on the open market, in privately negotiated third-party transactions or other transactions including, but not limited to tender offers. MGM said it has repurchased 5.08M shares in the current quarter-to-date, leaving 420,000 shares outstanding under its previous repurchase program approved in July 2004. MGM is making a company presentation Wednesday at the 11th Annual Wachovia Global Real Estate Conference in New York. MGM Mirage's biggest competitors are Las Vegas Sands (LVS), Harrah's Entertainment (HET) and Wynn Resorts (WYNN). Shares of casino stocks have fallen sharply since peaking in October, on disappointing Q3 earnings and concerns over the sustainability of growth in Macau and a slowdown in the U.S. economy. MGM Mirage is a 5%, top-5 holding, of the PowerShares Dynamic Leisure & Entertainment (PEJ) ETF. MGM closed up 2.7% to $87.86.
Earnings call transcript: MGM Mirage Q3 2007
Costco's Same-Store Sales Jump 9%, Beating Estimates
Costco (COST) said Thursday same-store sales jumped 9% in November, including a boost from higher gasoline prices. Net of gasoline prices, same-store sales would have risen 4%. Analysts polled by Reuters were expecting a 6.6% rise, inclusive of gas prices. The largest U.S. warehouse club said total sales jumped 13% percent to $5.72 billion.U.S. same-store rose 6%, while international same-store sales jumped 21% from a year ago. November's 9% gain matched that of October.
Chico’s Stumbles on 44% Drop in Profits
Shares of Chico's FAS (CHS) plunged 12.5% Wednesday after the company announced a decline in profits and weak third-quarter sales figures after the bell Tuesday. For the quarter, the apparel retailer's net income was $23.6 million ($0.13/share) compared to $42.1 million ($0.24/share) a year ago. Excluding certain gains, the company earned $0.11/share, which was in line with analysts' estimates. Revenues increased 3.4% to $416 million, below analysts' forecasts of $421 million. "We are greatly disappointed with our performance to date. Numerous challenges continue to affect the entire retail sector. It now appears that based on our November sales performance, our fourth quarter earnings could approach the break even level," said CEO Scott Edmonds. Analysts had been expecting Chico's to earn $0.07/share in the fourth quarter. The company's November comparable store sales decreased 13.7% from last year.
Competitors: TLB, M. ETFs: RTH, XRT
Earnings call transcript: Chico's FAS Inc. Q2 2007
TRANSPORT AND AEROSPACE
Credit-market stresses are moving from mortgages to auto loans, the Wall Street Journal reported Thursday. About 4.5% of 2006 auto loans to top-rated borrowers were at least 30-days delinquent in September, up from 2.9% in August, the biggest one-month jump in at least eight years. A full 12% of subprime borrowers were delinquent, the highest level since 2002 and up from 11.1% in August. "The numbers will get worse for auto loans," said Dan Castro of GSC Group. "We're starting to see signs of rising losses, and delinquencies are creeping up." The strain on home borrowers pinched by rising rates on adjustable-rate mortgages may be compounding the problem, though few in the industry forecast that auto-loan defaults will attain the crisis level currently witnessed in home loans. One key difference between the two is that investors took home loans in order to speculate on rising real-estate -- a bet that backfired -- and something impossible in the auto-loan industry. Similar to the debt bundling common with mortgages, $89 billion of auto loans were packaged and resold to investors in 2006; auto-debt is the biggest debt-asset class after mortgages and credit cards. Estimates are that the market has shrunk 19% to $69 billion in 2007. Any debt concerns could damage the already-hurting auto industry if lenders begin tightening loan terms in fear of defaults. U.S. auto sales are already down 2.5% in 2007. AmeriCredit (ACF) and Capital One (COF) are two of the biggest U.S. subprime auto lenders. Ford's Ford Credit (F) and GM's GMAC Financial (GM) tend to shun subprime auto loans.
ENERGY AND MATERIALS
BP and Husky Energy Partner in Oil Sands Project
BP (BP) and Husky Energy have formed a partnership to extract crude from Alberta's oil sands. The two companies will spend about $5.5 billion through 2015 to bring the oil to the markets. The project will be developed in three stages and could reach an output of 200,000 barrels a day between 2015-2020. "It's a bit of a turnaround in strategy for BP, who has not previously been involved with oil sands," said ING analyst Jason Kenney. "It's a positive thing because of the integrated nature of the project. It's not a minor investment, nor is it over the top in oil sands, which have seen costs escalate." BP had been the only company out of all the oil majors without a major investment in oil sands. Alberta's oil sands hold the second largest oil reserves in the world behind Saudi Arabia, the Canadian government estimates. Shares of both companies moved higher on the news: BP traded 1.8% higher and Husky gained 5.5%.
SIV Superfund Could Be Halved - WSJ
The three banks involved in assembling a "superfund" to bail out distressed SIVs are reducing its size due to lack of interest, the WSJ reported Thursday. The fund was originally envisaged at $100 billion, but that figure will probably be halved. Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) have been trying for four months to find a way to ease liquidity for SIVs, which have been in freefall since the debt market seized up on concerns about subprime exposure. The banks, which have not managed to drum up interest from other financial firms, plan to start syndicating the fund within a few days. If the superfund fails to bail out SIVs, the banks that sponsor them will have no choice but to pull their assets on to their own balance sheets, a move the WSJ notes will diminish their capital bases and could impede their ability to lend. Last week, HSBC Holdings did just this, shutting down two SIVs and taking $45 billion in mortgage-backed securities and other assets onto its balance sheet. Citigroup's seven SIVs, which were valued at $100 billion during the summer, are now worth an estimated $66 billion.
Additional Reading: As Banks Opt Out, What is the Real Purpose of Paulson's Super-SIV Plan?
MBIA Tanks On Moody's Warning
Shares of monoline insurer MBIA (MBI) fell 16% to close at $27.42 Wednesday -- its worst drop in over twenty years -- after Moody's Investor Service said the company's AAA rating could be threatened by a greater-than-forecast risk of capital shortage. The company is now trading at a seven-year low. "The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated," Moody's said. "We now consider this somewhat likely." The loss of the AAA rating could have a ripple effect on the $652 billion worth of state, municipal and structured finance bonds guaranteed by MBIA. Moody's is conducting a review of seven AAA-rated guarantors that is expected to be completed within two weeks. The firm is forecasting that in addition to MBIA, Ambac (ABK), Financial Guaranty Insurance, and Security Capital Assurance (SCA) are also "somewhat likely" to suffer a capital shortfall. Ambac fell 8.9% to $23.52 Wednesday; Security Capital fell 9.3% to $6.67. "It's Moody's firing a warning shot saying 'you have two weeks, so do something,'" said Paul Berliner of Schottenfeld Group. "The drama behind MBIA and Ambac should be the most important focus for the entire financial sector right now."
Additional reading: Pershing's Ackman: MBIA and Ambac Could Be Belly-Up By Q2 2008
AIG Up on Outlook, Comments about Housing Exposure
Shares of American International Group (AIG) rose 4.5% to $58.15 Wednesday, following the company's better-than-expected earnings outlook and optimistic comments about its exposure to the U.S. housing market. At an investor presentation, CEO Martin Sullivan called AIG's exposure "manageable," and AIG's financial products unit head said the company doesn't expect to sell mortgage-related investments at a loss in a weak market. AIG said the value of some mortgage-related investments has decreased by $3.5B, or less than 0.5% of corporate assets. The company also said it doesn't plan to cut its dividend. AIG projected five-year adjusted EPS growth of 10% to 12% and ROE of 15% to 16%. Lehman Brothers analyst Jay Gelb, who is maintaining his Overweight rating and a $71/share target, was expecting EPS growth of 9% in 2008, and noted AIG's forecast was better than analyst estimates. AIG is a Dow component (DIA) and is a 23% holding of iShares Dow Jones US Insurance ETF (IAK) and an 8% holding of the KBW Insurance ETF (KIE).
Additional Reading: AIG Profits Skid on Housing Losses • Hank Greenberg Takes On AIG Management Via SEC Filing • Housing Market Tracker - Commercial Real Estate Review
FDA Panel Rejects Avastin for Breast Cancer
An FDA advisory panel voted by a 5-4 margin to recommend against approval of Genentech's (DNA) blockbuster oncology drug Avastin for treatment of advanced breast cancer. The $1.85 billion drug is already approved in the U.S. for colon and lung cancer and in Europe for breast cancer. Though the FDA usually follows the recommendations of its panels, the closeness of the vote leaves open the possibility that it might approve the drug. Four of the nay votes came from statisticians and consumer advocates; four of the yea votes came from oncologists. Genentech's hopes were based on a study by the National Cancer Institute that showed that patients taking Avastin in combination with a chemotherapy drug had a longer period of "progression-free survival" than those taking the chemotherapy drug alone (11.3 months with; 5.8 months without). Some panel members claimed that because the patients on Avastin did not live substantially longer, there is not enough of a survival benefit to justify approval, particularly in view of safety issues. "These patients are terminal, and it's our job to make their lives better, not to say that it's OK to have a stroke or that it's manageable," said Maha Hussain, the advisory panel's chairwoman. "[Genentech] didn't show that patients are living better or that they're living longer." Genentech shares closed down 8.4% at $66.64.
Additional Reading: Genentech Stock Slide: FDA Meeting Should Have Been Webcast
Bristol-Myers to Lay Off 10% of Workforce
Bristol-Myers Squibb (BMY) said Wednesday it will cut 10% of its workforce and shut down half of its plants to save $1.5 billion in costs. The layoffs began last month, and the company said it will consider "strategic alternatives" that could lead to selling certain units in the company including the medical imaging, wound care and baby formula divisions. "While we are reducing headcount in certain functions, we will continue to invest in R&D, biologics and commercialization talent," CEO James Cornelius said. Cornelius has headed the company for a little more than a year. His company faces a potential $3 billion/year loss of revenue in 2012, when Bristol-Myers' top selling blood thinner Plavix loses its patent and begins to face competition from generics. "Bristol is playing a bit of a catch-up game after their change of CEO," said Linda Bannister, an analyst at Edward Jones. "Manufacturing is an area where there's some fat to trim, and in administration, because their drug portfolio has changed to be more specialized." The company also raised its 2008 forecast excluding restructuring costs to $1.65-$1.75/share from $1.60-$1.70/share, and raised its quarterly dividend $0.03 to $0.31. Besides challenges from generic drugmakers, big pharmaceutical companies are also struggling to get new products to market and replace sales lost to patent expiration. "The business is changing pretty rapidly and the cost structure out of the industry is out of sync," Deutsche Bank analyst Barbara Ryan said last week. "You have a pretty violent loss of earnings from patent expirations and therefore an inherent cyclicality to the earnings. The industry needs to find ways to be more efficient and also to make its cost structure more flexible." Shares of BMY gained 0.7% to $29.26 Wednesday.
Additional Reading: Bristol-Myers Squibb Q3 2007 Earnings Call Transcript
INTERNATIONALBank of England Cuts Key Rate by 0.25%
The Bank of England cut its key interest rate by 0.25% to 5.5% Thursday. Until recently, economists predicted the Bank would leave the rate at 5.5%, but many changed their forecast after economic data released over the past showed a sharp slowdown in consumer confidence and in service-sector growth. Twenty-eight of 62 analysts surveyed by Bloomberg were expecting the 0.25% reduction, while the rest continued to forecast no change. The rate-cut is the first since August 2005; BoE has hiked the rate five times since August 2006. "Even though inflation pressures are a concern, the downside risks to growth seem to be crystallizing," Lloyds economist Kenneth Broux said. "It's all piling up, and that puts the bank under pressure." "Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow," the Bank said. "Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead." The cut came ahead of a rate decision by the European Central Bank (7:45 a.m. EST); the ECB is widely expected to keep rates unchanged at 4%. Earlier this week, the Bank of Canada surprised economists by cutting rates by 0.25% to 4.25%.
Yuan Takes Biggest One-Day Loss vs. Dollar in Two Years
The yuan fell the most against the U.S. Thursday since the yuan's peg to the dollar was lifted in July 2005, dropping 0.29% to 7.4095/$. However, given the timing, with a delegation led by U.S. Treasury Secretary Henry Paulson headed to China for biannual strategy talks next week, some currency traders say the People's Bank of China is deliberately setting the stage for yuan strength. At the same time, Paulson is feeding the media rhetorical comments about the need for faster yuan appreciation. He has company in Europe, where an undervalued yuan is particularly hard-felt considering the yuan has lost 8% against the euro during even as it rose nearly 12% against the dollar. Mr. Paulson says the yuan "... has become a touchstone for broader anxieties about competition from China," leading to rising "economic nationalism and protectionist sentiment" in both the U.S. and China. A-shares and B-shares in Shanghai traded slightly lower, while those in Shenzhen posted modest gains. ETFs FXI, GXC and PGJ, as well as closed-end fund CAF, all offer U.S. investors broad exposure to Chinese equity markets.
Additional Reading: Asian Markets Thursday: Japan Jumps, China Falls on Yuan Concerns • China's Bank Lending Effectively Frozen • Bulging Economic Data Make China Rate Hike Likely
MUST-READS ON SEEKING ALPHA TODAY
Have Wall Street Breakfast emailed to you every morning before the market opens.