Wall Street Breakfast: Must-Know News

• Credit crunch, take two. Goldman Sachs analysts warned there is more financial market turmoil ahead. Act-II of the credit crisis will be lead by consumer-debt losses and writedowns, forcing banks to raise another $65B at high costs. Looking at past credit cycles, it says four hurdles must be cleared before a recovery: 1) Credit costs stabilize. 2) Banks complete their recapitalization. 3) Consensus estimates narrow to a more realistic range. 4) The yield curve steepens. Bank stocks and ETFs took a beating Tuesday: ZION -10.2%. STI -8.8%. WM -7.85%. WB -5.35%. RKH -3.3%. KBE -3.5%.
• Goldman still manages to beat. Goldman Sachs (GS -1.5%) posted Q2 EPS of $4.58, $1.16 better than consensus. Revenue of $9.42B (-7.5%) exceeded consensus estimates of $8.74B. The firm took a $775M loss, including $500M on hedges gone bad. "We are realistic about the market challenges we face, but times of market dislocation also produce opportunities, and we will continue to take advantage of the most attractive of these as they arise." Goldman trimmed its LBO debt exposure to $11B from $53B last summer, and reduced its leverage to 24.3x from 27.9x (earnings call transcript).
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• Olivant boosts stake in UBS, wants action. Activist investment group Olivant said it now owns 2.5% of UBS (UBS), up from 0.7% in April. It plans to push for radical reform, though it said its stake "demonstrates "its belief in the potential restoration of shareholder value," and that it fully supports UBS's recently announced $15.5B rights issue.
• DreamWorks closing in on deal with India's Reliance. Steven Spielberg's DreamWorks is working on a deal with India's Reliance Group that would give it the ability to follow through on its plans to break away from Paramount (VIA). Reliance will provide DreamWorks with $500-600M, for which it will receive a large stake in the new company. After that, it would auction off distribution rights (potential bidders: VIA, Universal (GE), Fox (NWS)). Viacom bought DreamWorks for $1.6B in 2005. Last year Viacom CEO Philippe Dauman said the departure would be "completely immaterial" to its future.
• Sanofi ignites bidding war over Czech pharma. Sanofi-aventis (SNY) plans to make a $2.57B counterbid for Czech drugmaker Zentiva, topping a bid from financial group PPF by 10.5%. "Sanofi-Aventis is already established in the various markets where Zentiva operates. The intended acquisition of the control of Zentiva carries a strong strategic rationale," it said. Zentiva dominates the generic drug markets of the Czech Republic and Slovakia and has subsidiaries in Romania and Turkey.
• InBev talks tough. InBev CEO Carlos Brito says its $65/share Anheuser-Busch (BUD +1.1%) offer is fair and final. "That's it," he told Missouri reporters.
• Best Buy beats, falls. Best Buy (BBY -5.3%) posted FQ1 EPS of $0.43, beating estimates by $0.06. Revenue of $8.99B (+13.4%) was better than the $8.57B consensus. Looking ahead, it sees full-year EPS of $3.25-3.40 vs. a $3.26 consensus. Despite all the cheer, shares dropped. One possible reason: EPS was up by $0.04 from last year, but net earnings fell 7% - calling its earnings quality into question. "It is very early in what we still expect to be a volatile year for the consumer," CFO Jim Meuhlbauer said (earnings call transcript).
• AIG pulls out of mortgages; mulls breaking up. AIG (AIG -5.1%) said its mortgage-lending unit, Wilimington Finance, will stop lending through brokers, and reduce direct loans. "The current [mortgage market] climate is unlikely to improve significantly in the foreseeable future." Meanwhile, a well-informed source says AIG's new CEO, Robert Willumstad, has put previously vetoed divestitures - such as airplane leasing, capital markets, credit derivatives, asset management and consumer finance - back on the table.
• France Telecom may boost Telia bid after all. France Telecom (FTE) is considering sweetening the cash element of its 55 krona/share ($41.3B) offer for Sweden's TeliaSonera, despite having said it would not consider increasing the June 5 bid until it has sat with the company. Assuming Telia wants 60 krona per share, FTE would be forced to violate its 2.5x debt-to-Ebitda ratio.
• Panera bakes up a surprise. Panera Bread (PNRA) raised its Q2 EPS to $0.48-0.50, well ahead of the $0.42 consensus. It sees better-than-expected margins and surprisingly strong same-store sales growth, despite the impact of more expensive gasoline on shoppers.
• Online ad growth slows. For the first time in three years, online ad revenue fell sequentially. Q1 internet ad revenue hit $5.8B, up 18.7% from last year, but down from $5.9B in Q4. Other data points to a similar slowdown: ad impressions grew 14.9% vs. 31.9% growth a year ago; newspaper ad revenue grew just 7.2% vs. 22% growth last year; and display ad dollars rose 8.5%, down from 16.7% growth in 2007.
• Southwest hopes to grab rivals' business. Southwest Air (LUV +2.1%) said it will likely expand its fleet by 14 planes in 2009, even as rivals cut back. LUV is paying just $51/barrel for its oil this year, due to its aggressive hedging. "We're all curious to see what the effects of the cutbacks in the fourth quarter will be on traffic nationwide, and certainly for the impact on Southwest," CEO Gary Kelly said. Rival Northwest (NWA) said Tuesday it was retiring 47 planes and dropping unprofitable flights.
• It's a wash. Sources say Unilever (UL) is in late-stage talks to sell its North American laundry business (All, Snuggle, Wisk, Surf) to Huish Detergents for about $1B. A deal could be done by month-end. Unilever (UL) selling its detergents to Huish would make it the undisputed #2 player in North American laundry - and a formidable challenger to P&G's (PG) premium-brands. Huish would be the first major private-label manufacturer to become a premium-brand player.
• BCE verdict on hold. Quebec courts adjourned the BCE (BCE +5%) hearing and have reserved judgement on its private-equity buyout. No indication of when they may render a much-awaited ruling as to whether the consortium bidding for the company can take it private against the wishes of its bondholders. Sources say its #1 shareholder, the Ontario Teachers' Pension Plan, has a Plan B should the courts overturn the merger: It will pressure the board to adopt its 100-day overhaul proposal regardless.
• EA extends offer, Take-Two yawns. Electronic Arts (ERTS) extended the expiration date of its $25.74/share tender offer for Take-Two (TTWO) for the fourth time, to July 18. Take-Two was unimpressed: "The latest extension... does not alter the fact that their proposal still significantly undervalues Take-Two, a fact that is reflected in the overwhelming number of stockholders who still have not tendered their shares."
• Microsoft's next frontier: TV ads. Microsoft (MSFT) announced late Tuesday it was buying Navic Networks, which develops technology for targeted, interactive TV ads. It marks Microsoft's first serious move away from computers. "My personal feeling is this is going to be really important, and the fact that Microsoft is buying Navic shows that they must think it is, too," Forrester Research's David Graves says. Advertisers spent $71.3B on TV in 2007, vs. $21.2B online and $48.5B on newspapers. One lucrative possibility is to target ad time slots, rather than specific shows.
• Staples cleared to buy CE. Staples (SPLS) got the go-ahead from the European Commission to buy Corporate Express. U.S. and Canada authorities already signed off on the deal.
• LinkedIn inks $53M funding round. Professional social networking site LinkedIn announced a 5%, $53M funding round by private-equity firms Bain, Bessemer, Sequoia, and Greylock - which values the company at just over $1B. According to Nielsen, LinkedIn attracted 7.7M unique visitors in May, up 146%. It is on track to book $100M in sales this year, and is considering an IPO in 2009.
• U.S. to clamp down on overseas oil trading. The CFTC will require foreign exchanges trading U.S. oil (West Texas crude) to adopt the same position limits used in the U.S., and to disclose to American authorities daily trading data and any violations. IntercontinentalExchange (ICE), the parent of ICE Futures Europe, will comply with the guidelines, which aim to prevent manipulation. Still, commission chairman Walter Lukken believes oil prices are in tune with market fundamentals. Others beg to differ: "If you don’t have the foggiest idea what percentage of total contracts you are regulating, you wouldn’t have a clue whether there is excessive speculation in the markets," Senator Byron Dorgan quipped.
• Panel itching to release psoriasis drug. An FDA panel recommended approval on J&J's (JNJ) psoriasis treatment, ustekinumab, even though more data is needed to determine whether the drug increases cancer risks. About 1M of the 7M psoriasis sufferers are classified as moderate-to severe. "This drug has the potential to be so helpful for patients, and I think it raises an ethical question if we keep it from them," a panel member said. The FDA usually follows its panels' recommendations.
• Air tanker battle nearing climax. Boeing (BA) says if it loses its protest of the Air Force buying $40B+ of tankers from Northrop (NOC), it may not be able to produce its own tanker due to lack of economy of scale. Boeing says the Air Force admits it mistakenly calculated the rivalling bids; Northrop and its partner EADS say the error was immaterial. A ruling may come as early as today.
• Industrial production was -0.2%, worse than forecasts of +0.1%. Still, down just 0.1% from a year ago, it's a far cry from the consistent declines of the 2001 recession. Manufacturing was unchanged; utilities output shrank 1.8%. Factory utilization fell 0.2% to 79.4%, below its average of 81%. Slack in factory utilization can be a signal of building inflationary pressures.
• Wholesale prices rose an adjusted 1.4% in May, more than the 0.9% consensus. Over the past year, PPI is up 7.2%. Core PPI was in-line at +0.2%; it's up 3% over the past year. Wholesalers paid 6.2% more for energy in May, including 13.1% more for crude; and 4.5% for durables materials. Foods and feeds were up 3.2%. With core PPI at 3% and core CPI at just 2.3%, higher retail prices may be on the horizon, but not necessarily.
• May housing starts of 975K were just below the 980K expected. Building permits of 969K exceeded consensus of 960K. April starts were revised down to 1.008M from 1.032M.
• The U.S. current account deficit widened to $176.4B in Q1 from $167.2B in Q4. Net inflows were $124.3B, down from $213.4B last quarter. Net U.S. purchases of foreign securities were $38.8B, up from $4.2B in Q4. U.S. purchases of foreign bonds were $10.8B, down from $13.5B. Foreigners did not dump Treasurys: Net foreign purchases of U.S. Treasurys were $68.9B, up from $60.1B in Q4.

Today's Markets

• Shares in Asia climbed for the fourth straight day, led by China. Nikkei +0.73% to 14,453. Hang Seng +1.5% to 23,403. Shanghai +4.47% to 2,920. BSE Sensex -1.75% to 15,422.
• Europe bourses are down sharply at midday: London -1.41%. Paris -1.28%. Frankfurt -0.62%
• Equity futures have fallen sharply in the last hour. Dow -0.44%. S&P -0.52%. Nasdaq -0.4%. Crude +0.34% to $134.44. Gold -0.05% to $886.30.

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Comments

[PaulRodrigues]

Typo: LinkedIn's raise was $53M, not $53B as mentioned in the title.

[SA EditorEli Hoffmann]

Thanks Paul. Fixed.

[RightinSanFrancisco]

"Slack in factory utilization can be a signal of building inflationary pressures." ? I would expect that lower utilization rates for labor or industrial capacity would reduce inflationary pressure. Unfortunately, our current inflationary pressure comes from the weakness of the dollar (due to our consuming more than we produce as a country), and from commodities, given growth in Asia.

[TRUCKERBLUES]

Mr. Hoffmann, if I may ask you a question, what do you think of YRCW
2nd-qtr guidance report, do you think Bill Zollars is on the money when he says the economy has stabalized? Thank you.

[Ronmci]

Re: BCE - it was the Supreme Court of Canada. The top court in Canada not "Quebec courts".