Wall Street Breakfast: Must-Know News

• BeRnanke. The Fed Chairman gave his most pessimistic assessment of the U.S. economy to date yesterday, using the R word. "Recession is possible," Bernanke told the Congress's Joint Economic Committee. "Our estimates are that we are slightly growing at the moment, but we think that there's a chance that for the first half, as a whole, there might be a slight contraction." While he remains optimistic growth will pick up in the second half as rate cuts and emergency measures thaw frozen debt markets, Bernanke conceded he has no elixir that can instantly ease the current financial crisis. "You mean to tell us you don't have answers?" Senator Ted Kennedy (D-Mass.) asked. "No, sir." Economists applauded Bernanke's frankness; some noted his remarks signalled the possibility of further rate cuts.
• Fed sets up shop inside brokerages. The Fed has put inspectors inside Wall Street's major investment banks (GS, MS, LEH, MER and BSC) to monitor their financial wellbeing. "We want to be sure that any lending we do to the investment banks will be done on an appropriately sound basis," Chairman Ben Bernanke said. The move is tied to the Fed's recent decision to lend money to I-banks, which, unlike banks, they don't regulate. All but MER have disclosed they have already borrowed from the Fed.
• Plan to save homeowners at risk goes to Senate. Democratic and Republican Senators agreed on a relief package to help millions of homeowners avoid foreclosure. Key points: $100M to counsel at-risk homeowners; $4B in grants to communities to buy and refurbish foreclosed properties; a $6B tax break for homebuilders and other troubled companies; a $7,000 tax credit for people buying a residence facing foreclosure; and $10B in mortgage-revenue bonds for states to help refinancers and for first-time home buyers. The Senate begins debate on the package today.
• Office sector looking vulnerable. For the first time in over four years, office space occupancy fell (by 1.73M square feet). "While rent growth remains healthy overall, the office market is showing signs of weakness amid uncertainty about the economy and short- and medium-term hiring plans," real estate research firm Reis said. New York (5.6% vacancy) remains the tightest market, while Detroit (21.8%) is the loosest. Implications for companies such as Vornado Realty Trust (VNO), Boston Properties (BXP) and Brookfield Properties (BPO), who recently saw ratings downgrades from Green Street.
• Monster job index edges up (.pdf). Monster Worldwide's employment index inched higher in March, up 2 points from February, but remains down 10% from a year ago. Monster saw a notable drop in finance and insurance industry jobs. Goods producing, arts & entertainment, government and healthcare jobs remain strong.
• RIM beats, boosts outlook. Research in Motion (RIMM) allayed fears its BlackBerry was losing ground to Apple's (AAPL) iPhone, posting FQ4 EPS of $0.72 (consensus = $0.70) on revenue of $1.88B (in line). What sent its shares flying (+4.7%) in AH trading was subscriber additions -- +2.18 million -- bringing total subscribers to 14M, up from 8M a year ago. Analysts expected 1.98M-2.1M. RIM says it expects another 2.2M new subscribers this quarter, which will generate EPS of $0.82-0.86 and revenue of $2.23-2.3B (consensus = $0.76 and $2.02B). Sony Ericsson (SNE) (ERIC) warned last month of slowing handset sales, but some think smart-phones, at 12% of total mobile units sold and growing, are a safehaven.
• Memory glut stings Micron; sees prices steadying. Micron Technology (MU) reported adjusted Q2 EPS of -$0.41, worse than the consensus of -$0.36. Revenue of $1.4B was in line. Year over year, average prices for the company's DRAM and NAND flash memory products plummeted 60% and 70%, respectively, as an industry glut has pushed prices below cost. Micron said DRAM supply is coming into balance with supply and prices are steadying; it predicts mid-single digit drops in DRAM pricing and mid-20s drops for NAND for the coming quarter. Micron said it is working to reduce manufacturing expenses. Shares rose 1.7% after the report.
• Four carriers probed by FAA. The FAA is investigating four airlines they say failed to comply with air-safety rules. The FAA didn't name the carriers, but Delta (DAL) and American (AMR) recently performed reinspections of equipment identical to the faults now cited by the FAA. Continental (CAL) is not one of the four. Meanwhile, two FAA inspectors claim Southwest (LUV) used an inappropriately cozy relationship with the regulator to try and have one of its investigator reassigned elsewhere, which they say thwarts their authority and compromises customer safety. The case is raising serious concerns about the adequacy of airline regulation.
• Panel approves tobacco oversight. The House Energy and Commerce Committee approved a landmark bill that will give the FDA regulatory power over the tobacco industry, including pre-sale review of new products, limiting advertising, and regulation of tar and nicotine levels. Cigarette companies will foot the bill for the oversight. The House votes this spring. Interesting note: Altria (MO) and other tobacco companies have expressed support.
• Sneaky card trick. Capital One (COF) changed interest rates on some new cards to fixed from variable -- meaning customers will not benefit from further rate cuts. "If rates continue to fall, we're going to see more banks convert to fixed rates," Curtis Arnold of CardRatings.com says. "If their cost of funds is decreasing, they don't have to pass along the lower rates to their customers." Of course not -- why would they do that?
• Bear Stearns not a bailout - Treasury. U.S. regulators stepped in to save Bear Stearns (BSC) from bankruptcy on March 14 over concerns for the broader market, Treasury Undersecretary for Domestic Finance Robert Steel will tell the Senate Banking Committee today. "Our focus was not on this specific institution, but on the more strategic concern of the implications of a bankruptcy. The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street."
• UBS may sell off I-bank, buy BofA's prime brokerage. UBS (UBS) is "quietly attempting to build out its prime brokerage business" - a lucrative unit that caters to hedge-fund clients. One possibility is for UBS to sell its bleeding investment-banking arm, and buy one of the various prime-brokerage operations with which it has talked in recent months, including Bank of America's (BAC).
• Sony suffering from strong yen. Sony (SNE) says it will cut costs to offset a strong yen's negative impact on profits. "We will lower our production costs as possible as we can and we will choose production sites to cope with the industry's weakness, and in the short term, we will try to accept more orders," President Ryoji Chubach said. Every one yen advance against the dollar cuts earnings by about 6B yen.
• GM may boost Delphi lifeline. Sources say GM (GM), which already agreed to take on $1.5B of Delphi's pension liabilities, is now in talks to increase that. Delphi is struggling to raise the $6.1B it needs to by Friday in order to emerge from bankruptcy. Investors who have agreed to pump $2.55B into Delphi, including MER, UBS, and GS, will have to sign off on GM's involvement, which has been a sticking point.
• Schering announces $1.5B in cost cuts. Schering-Plough (SGP) will cut costs by $1.5B over the next four years. The move comes a day after a NEJM study called for doctors to limit use of its blockbuster Vytorin (JV with MRK), sending shares diving 29%. About 10% of SGP's workforce will go (5,500 employees), and it will close some plants. SGP is estimated to derive about 60% of its profit from Vytorin and Zetia, its two cholesterol drugs.
• Crusade on Circuit City. Circuit City (CC) agitator 6.5% shareholder Wattles Capital Management called the firm's turnaround efforts "disastrous" in a letter to the board after yesterday's earnings announcement. Wattles reiterated that it wants CEO Philip Schoonover out. Wattles said senior management "has repeatedly touted the fact that they have cut $200M of annualized selling, general and administrative expenses -- while ignoring the fact that approximately $500M of gross profit has been wiped-out in the process."

Today's Markets

• Asian markets closed higher Thursday. Nikkei +1.52% to 13,390. Hang Seng +1.64% to 24,265. Shanghai +2.94% to 3,446. BSE Sensex +0.52% to 15,833.
• In Europe, markets were down at midday. FTSE -0.39%. CAC -0.46%. DAX -0.48%.
• U.S. futures are down at 7:05 AM. Dow -0.25%. S&P -0.33%. Nasdaq -0.32%.

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Comments

[nukldrager]

Why is it now necessary for the Fed to put inspectors in the major investment banks. Wasn't that the job of the SEC? And does that mean that they are not sure if their previous lending was done on a sound basis?

[phdinsuntanning]

because otherwise they will short the US Treasury bonds,
they are been nationalized now basically because they are decapitalized:

March 31
Fiscal Year 2007: Capital/Assets
US
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%

[Mazel Tov]

Mozel Tov Eli!!!

[nukldrager]

Oh... not bad for a beach bum.

[Lisa]

Excellent summary. This is a must-read every morning. You do a great job -- thank you.

[nukldrager]

phdinsuntanning, does that mean taxpayerized?

[yogi]

BSE Sensex +0.52% to 24,265. ????

I think its a typo, it should be 14,265. Last week it was in 14,000s, it can't climb 10,000 points in a week or so.

[kkin365]

I echo the sentiment of another post (by Lisa) that this is an excellent summary of the day's major events. One suggestion is to be less verbose to facilitate reading, given that it would be wise to read this early in the morning, when one has a lot of other readings to do. Still, it is excellent service.

[beachie]

Thanks...i read this first every morning...really appreciate the tag on asian and europe markets......if you expand this coverage ....please continue to keep on one sheet so we can just scroll down....again respect/appreciate your work.

[SA Editor Eli Hoffmann]

Thanks for the comments and constructive criticism guys!

Yogi, fixed that typo.

[Richard Schweitzer]

"Implications for companies such as Vornado Realty Trust (VNO), Boston Properties (BXP) and Brookfield Properties (BPO), who recently saw ratings downgrades from Green Street. "

Please enlarge on that sentence, explaining what implications or exactly what contains "implications."

Agreed: you DO provide a great service.

[vaduz]

it is really in the contexxt of the tidings of information a very helpful piece day by day. thank you.

[MochaLatte]

More regulation? Bigger government? All this is coming from a Republican administration. Go figure. If this was a Democrat proposing this, right wingers would be crying socialism. People need to realize that there are times when policy needs to move either to the left or to the right in order to alleviate imbalances before they become structural. Those who think that a continuation of the Bush economic plan is the best way to go are completely deluded. There 's a time an a place for each platform. It's time to rebuild American infrastructure. Rethink your conservative ways.

[SA Editor Eli Hoffmann]

Thanks so much, everyone, for the great comments!

Richard, the implications for VNO, BXP, BPO in this case would be negative. They are all invested in the office space space, which until now seemed to have been more resilient than most other areas of real-estate.

[User 145944]

Thank you Eli, I like what you say and how you say it! A MUST read for me every day you write!