Wall Street Breakfast: Must-Know News

• Libor lies? There are serious concerns banks may be lowballing their Libor pegs -- which should depict the average three-month rate at which banks lend to each other (currently 2.716%) -- in an effort to hide the high rates they're paying in desperation for cash. Banks lend to customers at a spread above Libor to ensure they make money. If banks are indeed understating, it may signal they're in more trouble than they're willing to admit. And their problems could be further compounded by lending to clients at artificially low rates. "The long-term psychological and economic impacts this could have on the financial market are incalculable," Citigroup's Scott Peng wrote in a recent research note.
• JPMorgan beats despite $2.6B markdown. JPMorgan (JPM) reported Q1 EPS of $0.68, $0.04 better than analyst estimates. Revenue of $16.89B was in line. JPM upped its credit loss provision by $1.1B to $4.42B to allow for home-equity loan losses. Its investment banking unit took a $2.6B markdown. "Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress. These factors have affected, and are likely to continue to negatively impact, our firm's credit losses, overall business volumes and earnings -- possibly through the remainder of the year, or longer," CEO Jamie Dimon said. Shares are up 2.1 % at 8:00 AM.
• Sparkling Q1 for Coke. Coca-Cola (KO) reported adjusted Q1 EPS of $0.67, beating estimates by $0.05. Revenue of $7.38B was well ahead of analyst estimates of $6.85B. "Our international business once again led the way," president Muhtar Kent said. Gross margin fell to 64.4% from 64.9%. Beverage Digest said U.S. soft-drink volume fell 2.3% in 2007, a result of an industry-wide price increase of 5% due to sharply rising commodity costs. Shares are up 2.5% in pre-market trading.
• Intel beat reassures tech sector. Tech bellwether Intel (INTC) posted EPS of $0.28 ($0.04 better than $0.25 consensus) on revenue of $9.67B (in line), and issued an upbeat Q2 outlook that sent its shares soaring +7.3% in extended trading. Unlike many other firms, Intel said strong sales (+9.3%) were driven by North American demand, particularly for servers. CEO Paul Otellini said Intel is not seeing any effects from U.S. economic weakness, a sharp contrast to recent remarks by rival AMD (AMD) which told of widely weaker-than-forecast Q1 sales. For Q2, Intel sees revenue of $9-9.6B (vs. $9.26B consensus) and gross margins of 56% (vs. 53.6% this quarter). NAND flash memory chips revenue continued to flag.
• Another weak clickthrough month for Google. comScore's March search ad data, released late Tuesday, shows continuing weakness for Google's (GOOG) paid click-throughs, which grew just 2.7% Y/Y, giving a Q1 sum-total of 1.8% growth -- down from 25% and 48% in Q4 and Q3 of 2007. Google reports Thursday, and the data raises doubts about its ability to hit estimates. "The company would need to have implemented significant monetization improvements during the quarter in order to meet consensus estimates," UBS's Ben Schacter says. But Credit Suisse analyst Heath Terry says she thinks the revenue impact of the reduced clicks will be minor, because the contraction is mainly a result of improved ad quality.
• Merrill musings. Merrill Lynch (MER) reports tomorrow. The latest word on its impending writedown: $6-8B, bringing its 6-month total to about $30B. Sources say the firm is ready to cut 10-15% of its staff in weaker units. Meanwhile, there are reports Merrill snagged Morgan Stanley (MS) veteran Terence Keyes to head its Asia corporate finance division. Merrill has been badly bruised by its heavy exposure to mortgage-backed securities, which it compounded by hedging its risk with bond insurers who subsequently unravelled.
• Airline merger faces obstacles. Rep. James Oberstar (D-Minn), chairman of the House Committee on Transportation and Infrastructure, warned that a proposed Northwest (NWA) Delta (DAL) merger was likely to set off a cascade of consolidation which will leave the industry with three powerful carriers, with which discounters would have a hard time competing. Oberstar said he will insist the DoJ "does a very thorough, meticulous analysis of this merger." Unions from both companies swore to battle the combination. Despite all of which NWA and DAL said Tuesday they expect the deal to go through by year-end, and many industry watchers agree.
• Schumer wants SEC to step up ratings firms probe. Sources say Sen. Charles Schumer asked SEC chairman Christopher Cox to find out if Moody's (MCO) changed ratings on certain bond issues at the request of Wall Street issuers. A Friday WSJ article showed how Moody's "increased its market share in mortgage bonds while improving its relationships with many bond issuers." The SEC is investigating Moody's and Standard & Poor's (MHP) for conflicts of interest that may have exacerbated the rating companies' faulty reading of the housing market.
• Northrop tanks on $320M delay charge. Shares of Northrop Grumman (NOC) fell nearly 7% after it warned of a Q1 charge of $320-360M for delayed delivery of its LHD-8 ship to the navy. JPMorgan analyst Joseph Nadol noted Northrop has a reputation for problematic contracts. "Management did not understand the degree of the problem until the ship was in testing, and the cost of rework at this late stage increased the charge substantially." CEO Ronald Sugar: "We are deeply disappointed by the impact of this unanticipated development on our customer and our shareholders. This is not acceptable to me or anyone at this company."
• Telecom tie-up talk. France Telecom (FTE) is mulling a bid for TeliaSonera, Sweden's largest telecom firm. The media cited prices from €20-34 billion, and potentially more. FTE bought Orange in 2000 for £27.8B. A combo would bolster it in its rivalry with Deutsche Telekom (DT), Europe's number-one carrier. A Goldman analyst said he has a hard time envisaging sizeable cost savings from such a deal, because there is little overlap.
• Wholesale price jump surprises economists. Wholesale prices surged 1.1% in March, led by a 2.9% jump in energy prices and food prices that were 1.2% higher. Analysts were expecting far milder growth of just 0.4%. The data suggest the Fed will have to slow down with its interest rate cuts, which economists now think will drop by 0.25% later this month. "Inflation is everywhere within this report," Bear analyst John Ryding said. "Fed policy is stuck between the rock of recession and the hard place of rising inflation pressures." Core PPI growth of 0.2% was in line.
• China still looking for the brake pedal. China told its banks to put more money in reserves (+50 BP to a record 16%) in an effort to slow lending and the country's booming 10.6% Q1 GDP expansion, which was 0.2% higher than economist estimates. Consumer prices climbed 8.3% in March. Retail sales climbed an astronomical 21.5%, the fastest pace since at least 1999. To cool out-of-control growth, China needs "to raise interest rates a lot more and let the yuan appreciate," economist Jim Walker said. On the other hand, its resilient growth is great news for the rest of Asia, and will be "a major contributor to global growth," economist Glenn Maguire notes.
• European inflation rose to 3.6% in March, a 15-year high. It was up from 3.3% a month ago, and exceeded economist forecasts of 3.5%. "This may help push the euro-dollar to $1.60 in the short term," ING economist Martin van Vliet said.

Today's Markets

• In Asia, the Nikkei climbed +1.2% to 13,146. Hang Seng -0.1% to 23,878. Shanghai -1.69% to 3,291. BSE +0.56% to 16,244.
• European markets are moving higher at midday. FTSE +0.82% to 5,955. CAC +0.74% to 4,816. DAX +0.49% to 6,615.
• In the U.S., futures are up at 7:30 AM on strong earnings from Intel and JPMorgan. Dow +0.41% to 12,405. S&P +0.51% to 1,343. Nasdaq +1.25% to 1,819.

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Comments

[JJJoseph]

Spelling errors always disrupt the flow and cause me to puzzle about what's being said and reach for the dictionary: "China still looking for the break pedal." Don't you mean "brake pedal"? Or is this a new financial procedure?

[SA EditorEli Hoffmann]

LOL, I need a brake. Thanks for the heads-up. Fixed.

[DeaverB]

Eli does great work for all of us every morning. Well done. I am a pedant by profession (we write and edit audiobooks, books, and text for software and audiobook deliveries), but skate right by Mr. Hoffman's errors. This speaks well to the ability to scan his report--focus in on the key elements. Well done!

[IML]

Simply a Freudian slip...

[vaduz]

who is telling that about the wrong libor.? this would be quite a thinbg.

[SageNot]

Hey Digger, you either need a "break" or learn how to concentrate more. My young grandsons could figure out what Eli meant, & he's only 11.

Keep up the good reporting Eli, nobody is poifect!

[KJSF]

Saving my money and still buying certain stocks.