Wall Street Breakfast: Must-Know News

• Alt-A downgrade socks Bear. Shares of Bear Stearns (BSC) plunged 11% Monday to $62.30 after Moody's downgraded 163 tranches of securities it issued amid high rates of delinquency and foreclosure. Bear is believed to have about $6B in exposure to the downgraded Alt-A mortgages. Lehman (LEH), which announced layoffs of 5% of its workforce, may have $15B in exposure. Alt-A loan delinquencies currently stand at 10.97%, 14.48% and 8.96% for mortgages issued in 2005, 2006 and 2007. Bear says its "balance sheet, liquidity and capital remain strong."
• Time for something different? With no sign of an end to the credit squeeze in sight, the Fed may have to open itself up to innovative ways of backstopping the economy. Two possibilities: 1) Buying distressed mortgage-backed securities guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE). 2) Lending money directly to companies in need, not just banks. More rate cuts? They're likely on the way, but at a current 3%, the Fed has only so many cuts to go. Banks have borrowed $160B since December, and were set to take on another $50B in a Monday auction, but have failed to significantly increase their lending amid surging defaults and the need to keep more cash on hand.
• Wholesale inventories grow, sales surge. Wholesale inventories increased by 0.8% in January, more than the 0.5% growth expected by economists. The ratio of inventories-to-sales is now 1.07, down from 1.09 last month and 1.16 a year ago. Wholesale sales surged 2.7%, the biggest jump in more than 3.5 years, indicating businesses were confident enough to stock new goods as inventory left the shelves.
• EU frets strong euro. EU officials worry about the risk of a runaway collapse in the U.S. dollar and a disorderly unwinding of the global economy. Key leaders say the euro (FXE) is bearing the brunt of a weak dollar, while the yen and the yuan fail to reflect macroeconomic realities, and reiterated the ECB remains ready to act.
• Texas Instruments drops outlook. Texas Instruments (TXN) lowered its Q1 net profit and revenue outlook, sending its shares down 3.4% to $28.65 in extended trading. TXN now expects EPS of $0.41-0.45; a $0.43 midpoint is $0.03 lower than its January forecast and analyst consensus. Sales of $3.21-$3.35B are $130M less than January's outlook and short of analysts' $3.4B. Recent moves by Nokia (NOK) and Sony Ericsson (SNE) (ERIC) to consider rival chips for their cellphones have hurt the company.
• Sickly economy takes toll on health insurer. WellPoint (WLP) said higher expenses and weak enrollments would take a toll on its profits, sending shares down 16.8% to $54.85 in extended trading. Shares of Humana (HUM), Aetna (AET) and UnitedHealth Group (UNH) were down 9-10% in sympathy. 2008 EPS is forecast at $5.76-$6.01, down from a previous $6.41. Some analysts took the warning as an indication the Street's lack of confidence in WLP's new management team was well-based; others noted an economic downturn would likely hit the entire industry, because "prices are higher than people feel they are able to afford." This morning, Goldman downgraded managed health care to Neutral from Attractive.
• Homely quarter for Hovnanian. Homebuilder Hovnanian (HOV) reported its sixth straight quarterly loss. EPS were -$2.07 on revenue of $1.09B (-6.2%); analysts expected -$1.96/share on revenue of $911M. HOV sees 2008 cash flow from operations in excess of $100M. Shares gained 1.3% in AH trading. Meanwhile Toll Brothers (TOL) says it could suffer "significant losses" if some of its JV partners (it won't say which) fail to honor their obligations. WSJ thinks one of the partners may be Kimball Hill Homes, which is in trouble. KB Home (KBH) and Beazer (BZH) are involved in the same JV. Homebuilders used JV deals during the housing boom to buy expensive land with leverage while keeping it off of their balance sheets.
• Foot Locker slips on weak outlook. Foot Locker (FL) posted Q4 EPS of $0.56 ($87M) on revenue of $1.48B, beating estimates of $0.44 on revenue of $1.48B. Looking ahead, FL sees 2008 EPS of $0.65-0.85, short of consensus of $1.01. Shares fell 2.7% in AH trading.
• GE targets global growth. GE's (GE) Energy Financial Services unit will invest $5B over the next three years in energy and water projects in Latin America, Asia and the Middle East, areas it feels will grow faster than the U.S. "GE is globalizing all of its businesses," GE said, adding it plans to use financial instruments to hedge its risk from currency and fuel-price fluctuations. Meanwhile, GE chairman Jeffrey Immelt says NBC Universal is not for sale.
• Take-Two sued by investors. Take-Two Interactive Software (TTWO) is being sued by a group of shareholders who allege the company tried to keep shareholders from finding out about a $2B buyout offer from Electronic Arts (ERTS) so that executives could boost their compensation packages in the event of a successful acquisition. Take-Two says the claim "lacks merit."
• Google addresses clickthrough decrease. Google (GOOG) executives said recent data indicating a slowdown in paid clickthroughs were due to an intentional move to reduce accidental clicks and increase advertiser value -- the sum of which is a long-term plus for the business. "Conversions actually go up for advertisers, which is positive, but there are less clicks overall," Google's Tim Armstrong said.
• Novartis cancer drug cuts risk. Researchers found Novartis' (NVS) breast cancer pill Femara significantly reduces recurrence, long after post-menopausal women have stopped a five-year regimen of the estrogen blocker tamoxifen. The drug cut the risk of recurrence by 63%, and the risk of spread to other body parts by 61% and to the unaffected breast by over 80%.
• Murdoch to Ballmer: You can have Yahoo. News Corp. (NWS) chairman Rupert Murdoch says he has no interest in entering into a bidding war with Microsoft (MSFT) over Yahoo! (YHOO). "We're very happy to be in the Google camp," Murdoch went on. "They sell out search advertising, and they pay us well for it." He said ad sales at Fox Broadcasting's upfront are up 40% since last summer, and that he wants the WSJ to be the sources of the "greatest global and national coverage" on top of its business focus. "There are 60-70 million people joining the world economy every day, there's wealth being created, and they all need economic information," he said, calling financial news the "most valuable in the world."
• Sony/Bertlesmann ready for sign-ups. Sony BMG (SNE) and Bertelsmann's recorded music JV is set to start signing performers to music publishing contracts, and is already in talks with some producers and songwriters.
• Freddie Mac to issue $6 billion in new reference notes
• Talks fall apart over AEG stake
• FDA staff wants input on Amgen clot drug risks
• Exxon Mobil will not sell Argentine assets

Today's Markets

• In Asia Tuesday, Markets gained despite Monday's selling in the U.S. Nikkei +1.01% to 12,658. Hang Seng +1.28% to 22,995. Shanghai +0.47% to 4,166. BSE Sensex +1.285% to 16,123.
• European markets posted solid gains in the morning session. FTSE +1.16% to 5,694.50. CAC +0.48% to 4,589. DAX +0.3% to 6,644.
• U.S. futures are up as of 7:55 AM. Dow +0.62% to 11,852. S&P +0.69% to 1,284.25. Nasdaq +0.33% to 1,682.25.

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