Wall Street Breakfast: Must-Know News

• S&P downgrade hits banks. Bank and brokerage stocks were pummeled Monday after Standard & Poor's lowered its debt ratings on Morgan Stanley (MS A+ from AA-), Merrill Lynch (MER A from A+) and Lehman (LEH A from A+), and downgraded its outlook on Bank of America (BAC), JPMorgan (JPM) and Citigroup (C) to Negative. "The outlooks on the large financial institutions sector in the U.S. are now predominantly negative," it said. It was also critical of their capital raising. "While the market has been open for those willing to raise money in the capital markets, it is open at stubbornly high rates," Atlantic Advisors' Bennet Sedacca said. Shares of LEH took the biggest hit (-8.1%); others fell 2-3%.
• Lehman plan to raise $3-4B suggests unwieldy Q2 loss. Sources say Lehman (LEH) is likely to raise $3-4B, likely by a common share issuance, as it gets set to report its first-ever quarterly loss as a traded company. Despite already having raised $6B, Lehman still has a lot of exposure to the mortgage market, and has been hurt by gains in some securities sold short by the firm to act as a hedge against further downside.
• Toll posts third straight loss. Toll Brothers (TOL) lost $0.59/share, $0.28 better than consensus. Revenue fell 30.3% to $819M vs. $809M consensus. Gross contracts of $730.5M and 1,237 homes were down 49% and 39%. Average price per unit fell to $590K from $711K last year, and $634K last quarter. Backlog fell 50% to $2.08B. $85M of its $288M in Q2 writedowns were from JVs. "Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize," CEO Robert Toll said. He advocates a time-limited tax break for home buyers to jump-start demand.

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• Yahoo court documents bare all. Yahoo (YHOO) shareholders are suing, claiming an employee-severance plan adopted after Microsoft's (MSFT) $31/share bid was aimed at thwarting the deal by adding $462M-2.1B to MSFT's costs. The filing reveals Microsoft offered Yahoo $40/share in January 2007, which was rejected by its board. It also shows that Yahoo dismissed a search-ad deal with Google (GOOG) even before Microsoft launched its offer, seeing it as a short-term gain at the expense of long-term growth, and accuses CEO Jerry Yang of "defensive and self-interested conduct." Executives from both Microsoft and Yahoo insist the two are no longer in negotiations for a full acquisition, but rumors persist.
• Staples nails down CE with new bid. Staples (SPLS) upped its offer to buy Corporate Express by 14% to €9.15/share from €8 (originally €7.25), but made the deal dependent on shareholders rejecting CE's May 21 €1.73B bid for French rival Lyreco. Staples said 23.3% of CE's shareholders have irrevocably committed to tender their shares and to vote against the Lyreco deal. "The game is over," analyst Marcel Hooijmaijers says. "This is a knockout bid." CE shares gained 7.9% in Amsterdam to within 1.4% of the offer.
• State Street to sell $2.5B in shares. State Street (STT) fell 1.5% in extended trading after it announced plans to sell $2.5B of stock, which will dilute existing investors by about 9%. It may need the funds to rescue $28.3B in mortgage-backed debt funds called conduits whose value has tumbled.
• Baidu boycott? Record companies (WMG, SNE) want advertisers to boycott Baidu.com (BIDU) over its loose policing of music piracy.
• One 'small' step for Intel. Intel (INTC) will launch its Atom processor for low-priced portables, but is already admitting to short-term production delays. Besides netbooks, Intel hopes the chips will gain popularity in mids (mobile internet devices), gadgets, and embedded-chip designs. It competes with ARM's (ARMH) core, embedded in new NVIDIA (NVDA) chips.
• GM to reveal comeback plans. GM (GM) is expected to unveil cost-cutting steps including production cutbacks. Other possibilities include a dividend reduction and more layoffs. GM gained 2% yesterday after Barron's magazine touted the stock over the weekend.
• Ford CEO cloudy on outlook. Ford (F) CEO Alan Mulally said he's now unsure when the company will return to profitability, now that he's abandoned a previous target of 2009. Ford's Jim Farley said today's sales numbers will be similar to those of April, with demand for small cars increasing at the expense of light-trucks and SUVs.
• Alcatel-Lucent gets $528M outsourcing deal. Alcatel-Lucent (ALU) announced a seven-year, €340M contract to provide outsourcing services to #2 Swiss telecom provider Sunrise.
• Wachovia dumps CEO; may indicate weakness. Wachovia's board ousted CEO Kennedy Thompson after a series of "disappointments and setbacks." Chairman Lanty Smith takes over in the interim. Analysts said the expulsion may signal a worse-than-expected Q2 loss, and could trigger a fire-sale. Possible suitors include Wells Fargo (WFC), JPMorgan (JPM) and Santander (STD).
• HP machines to use live search. Hewlett-Packard (HPQ) machines will come pre-loaded with Microsoft live search. Microsoft calls the deal its "most significant" live search deal ever. Google (GOOG) has similar deals with Dell (DELL) and Firefox.
• Lululemon sinks on weak outlook. Lululemon (LULU) dived 11.2% in AH trading after it lowered its full-year EPS forecast to $0.68-0.71 from $0.70-0.72, short of the $0.74 analysts expected. Q1 EPS of $0.12 was in-line. Revenue of $78.2M vs. $$71.8M consensus.
• Telecom re-org socks China shares. Shares of Chinese telecom giants China Telecom (CHA), China Unicom (CHU) and China Netcom (CN) plunged 12-14% as investors fretted the government-lead industry reorganization will increase competition and reduce profits. CHA agreed to pay CHU $15.9B for its CDMA assets, while CHU agreed to acquire CN in a share-swap worth $56.3B.
• Bernanke talks at 9:00 AM. Maybe he'll have some ideas for how to deal with inflation largely fueled by soaring energy and commodity prices.

Today's Markets

• Asia closed in the red Tuesday: Nikkei -1.6% to 14,209. Hang Seng -1.83% to 24,376. Shanghai -0.65% to 3,436. BSE Sensex -0.63% to 15,963.
• Europe at midday: FTSE -0.08%. CAC +0.04%. Dax -0.52%.
• U.S. futures at 7:10 AM: Dow -0.07%. S&P -0.02%. Nasdaq flat. Crude -0.13% to $127.61. Gold +0.12% to $893.

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Comments

[WAKEUP]

So, Yahoo (YHOO) shareholders are suing, whining that someone else did not hand them a free cash bundle, all nicely wrapped in red ribbon. What a bunch of crybabies. Why don't they just get jobs, and contribute something of tangible value, THEMSELVES, for once in their miserable lives?