Wall Street Breakfast: Must-Know News

• Oil demand tapering. The IEA (International Energy Agency) trimmed its 2008 demand forecast by 80,000 barrels a day to 86.77M. At $130/barrel, the IEA thinks airlines will cut back and Asian countries will continue to reduce fuel subsidies. Crude fell in overnight trading, but is up 0.36% to $134.80 as of 7:00 AM.
• Fed signals rate cuts are done; bolsters CDS market. Chairman Ben Bernanke says the Fed will "strongly resist" any indications of growing inflation -- his clearest message yet the Fed's rate-cut cycle is over. Bernanke played down a recent 0.5% jump in unemployment, and said the risk of a "substantial downturn" has receded. Meanwhile NY Fed president Timothy Geithner unveiled a 17-bank pact that creates a central credit-default swap clearinghouse capable of absorbing the failure of one of the market-makers.
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• Lehman writedown bodes ill for UBS. UBS (UBS) will likely see more writedowns as prices on its $15B in subprime holdings and $17B in Alt-A mortgage securities have worsened in recent weeks. Monday, Lehman (LEH) warned of a $2.8B loss, "clearly indicative of further write-downs for UBS, as is the deterioration in AAA-rated securities and the U.K. mortgage market," Helvea's Peter Thorne said. Also disconcerting are recent moves by UBS executives and board members to sell their rights to buy shares. Shares are +3.4% in Zurich.
• Lehman warns of big loss; to raise $6B. Lehman (LEH) fell 8.7% after warning of a $2.8B Q2 loss, and saying it would raise $6B in fresh capital -- $4B in common stock and $2B in convertible preferred shares. The offering, at a 20% discount to book value, dilutes shares by about 30%. Lehman was quick to declare its ability to survive after the moves. WSJ's Heard on the Street today has its doubts.
• Libor makeover. The BBA (British Bankers Association) rolled out measures Tuesday it hopes will restore confidence to the much-maligned Libor (London Interbank Offered Rate). Moves include tighter scrutiny of participating banks; wider membership in its oversight committee; and increasing the number of contributors to some Libor panels.
• 3G iPhone unveiled, investors tepid. Apple (AAPL) CEO Steve Jobs announced the much-anticipated 3G iPhone. Focus features include GPS, internet speeds three times faster than the current version (and 30% faster than Nokia's (NOK) N95), and a much cheaper $199 price tag on the heels of higher subscription rates. Apple said it will no longer share in carrier partner revenues, which may have sparked the 2.2% drop in its shares. (Walt Mossberg's first impressions. David Pogue.)
• Thrifts, insurers fall on worsening mortgage loss outlook. Shares of Washington Mutual (WM) fell 17% to $6.25 Monday, capping a nine-day 34% drop, after UBS predicted the struggling bank will suffer mortgage losses of $21.7B through 2011. The news sent shudders through other thrifts: National City (NCC) fell 9.7%. Mortgage insurers dived: PMI Group (PMI) -10%, MGIC Investment (MTG) -8.3%, Radian Group (RDN) -16.1%, Triad Guaranty (TGIC) -11.1%.
• Letter writing war intensifies. Yahoo (YHOO) and activist investor Carl Icahn continued their war of letters. Icahn's letter to Yahoo's board took his criticism beyond the breakdown of Microsoft's (MSFT) bid to the company's weak performance over recent years. "I ask again what your great 'plan' has been over the last few years? Why did you permit Google to leave you in the dust?" Given Microsoft's apparent lack of interest in Yahoo, Icahn may be looking to gain support for his bid to oust Yahoo's board regardless. Yahoo countered by saying Icahn's proposed board slate "could result in substantial erosion of stockholder value," and outlined its plans to improve returns.
• Discover wants $6B from rivals. Discover (DFS) is suing Visa (V) and MasterCard (MA) for more than $6B on claims they blocked member banks from isuing rival credit cards. "We're confident that we have strong legal cases against Visa and MasterCard, and view the amount of damages sought as being conservative," it said. Visa and MasterCard called the claim "dramatically overstated" and "baseless" respectively.
• Upfronts surprise. Demand for TV ads at this year's upfront ad sales bazaar was surprisingly strong. Overall sales are thought to be equal to last year's $9B. NBC (GE), CBS (CBS), Fox (NWS) and ABC (DIS) are all more-or-less done.
• World Bank lowers global growth outlook. The World Bank now expects global economic growth of just 2.7% in 2008, down from a previous forecast of 3.3% and 1% lower than 2007's 3.7%. Developing country growth should expand 6.7%, it said, but noted, "the inflationary risk and impact of high food and oil prices pose an even more serious challenge than the effects of the U.S. slowdown and financial turmoil." The U.S. economy will see just 1.1% growth, down from a previous outlook of 1.9%.
• FHA facing a $4.6B loss. The FHA predicts $4.6B in losses due to unexpectedly high default rates -- its biggest loss since 2004. It will absorb the loss by drawing down its $21B capital reserve fund, but insists it's solvent.
• Shanghai drop pulls down Asia. Shanghai fell 7.7% Tuesday to 3,072, its worst drop in 15 months, after government officials decreed banks would have to raise their reserve ratio to 17.5%. "I think the decline today is a sign that [China's] economic growth will slow down - or at least that is the signal that government wants to give by lifting the deposit reserve to a historical high level," money manager Chen Wei said. In February 2007, a 8.8% fall in Shanghai triggered a global selloff. Asian markets were broadly lower (see below).

Today's Markets

• Markets in Asia closed broadly lower Tuesday. Nikkei -1.13% to 14,021. Hang Seng -4.21% to 23,376. Shanghai -7.73% to 3,072. BSE Sensex -1.35% to 14,863.
• Europe at midday: London -0.5%. Paris -0.77%. Frankfurt -0.79%.
• U.S. futures: Dow -0.54%. S&P -0.68%. Nasdaq -0.79%. Crude +0.35% to $134.80. Gold -1.42% to $886.

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Comments

[nukldrager:]

Re Lehman warns of big loss, from the link;

"...The use of debt, which helped fuel record profits when markets were booming but also led to excessive risk-taking, has come back to haunt them.
As Lehman and other securities firms now curtail their use of borrowed cash, it will be much harder for them to generate the kind of profit growth investors had become accustomed to."

As someone new to market concepts, and making money by investing, the whole process described here (unsecured cdos, etc.) sounds pretty fishy. I'm assuming some investors were able to keep profits from the borrowed money deals, and companies like Bear Stearns, and Lehman are left holding (what's left in) the bag. The fed's weakened the economy by diluting the money supply in order to save the system, and some of the players, at the expense of a great number of Americans who play by the rules. I guess my question is this; does the bailout money end up in the investors income? And/or who lent the money to fund these funky financial instruments?

2008 Jun 10 08:22 AM

[nukldrager:]

By the way, I'm starting a co-dependancy group for people with issues around Eli Hoffmans Must-Know News lol

2008 Jun 10 08:29 AM

[stacked up:]

Any other "good news" ?

2008 Jun 10 08:50 AM

[R. Richard ...:]

What was the big idea of taking a day off?

Can't you get a "stand-in" to report?

We miss you

2008 Jun 10 09:31 AM

[R. Richard ...:]

oops!

I see now you did get a stand in. But, I could not find it yesterday during the several times a accessed the site.

Just me I guess.

2008 Jun 10 09:35 AM

[SA Editor E...:]

Things were a bit tardy yesterday, and WSB never made it to its normal place on the homepage, making it hard to locate.

Sorry about that.

2008 Jun 10 09:44 AM

[secmaven:]

And the US dollar is stronger while our financial house of cards comes tumbling down. Is there a disconnect here?

2008 Jun 10 03:09 PM

[sohcammer:]

To answer your question nukldrager - the bailout money ends up in the hands of the executives in the form of ever increasing compensation packages while the company continues to struggle in a downward spiral. Not one of the executives at any of the banking/investment houses has come forward and said that they'll take one for the team. They'll resign under pressure with a big, fat check and the common investor that plays by the rules will get kicked in the nuts just before the door hits him in the ass on his way out. Is this starting to sound like Wall Street yet??? I always got a kick out of "business ethics" in college. What an oxymoron. Call me jaded, but I've always believed that the deck was stacked from day one and that the only way you get rich on wall street is follow the dirty money...believe nothing you here and only half of what you see.


On Jun 10 08:22 AM nukldrager wrote:

> Re Lehman warns of big loss, from the link;
>
> "...The use of debt, which helped fuel record profits when markets
> were booming but also led to excessive risk-taking, has come back
> to haunt them.
> As Lehman and other securities firms now curtail their use of borrowed
> cash, it will be much harder for them to generate the kind of profit
> growth investors had become accustomed to."
>
> As someone new to market concepts, and making money by investing,
> the whole process described here (unsecured cdos, etc.) sounds pretty
> fishy. I'm assuming some investors were able to keep profits from
> the borrowed money deals, and companies like Bear Stearns, and Lehman
> are left holding (what's left in) the bag. The fed's weakened the
> economy by diluting the money supply in order to save the system,
> and some of the players, at the expense of a great number of Americans
> who play by the rules. I guess my question is this; does the bailout
> money end up in the investors income? And/or who lent the money to
> fund these funky financial instruments?
>
>

2008 Jun 12 01:40 AM