Wall Street Breakfast: Must-Know News

• Swiss CB says CS, UBS must hoard more money. The Swiss central bank is demanding (report (.pdf)) UBS (UBS) and Credit Suisse (CS) beef up their reserves in order to prevent a repeat of the subprime fiasco - especially in light of the big banks' dominance in the country. Switzerland, whose economy depends on banking with the world's elite, is still reeling from UBS's $37B writedown. Clients also appear nervous: money flows into UBS's wealth management unit were anemic in Q1. UBS is down 3.7% in pre-market trading.
• Bad hedges to prove costly. Analysts at Cazenove say European I-banks, including Credit Suisse (CS) and Deutsche Bank (DB), will take Q2 losses of $726M and $916M respectively due to ineffective hedging strategies. The derivatives used to hedge cash positions don't always move in step with the underlying assets.
• Crash... Analysts at RBS sounded the global crash siren, telling clients to prepare for one of the worst crashes in 100 years in global stock and credit markets as inflation paralyzes central banks. It expects the S&P 500 index to fall by more than 300 points to around 1,050 by September. Here's what the markets will look like if they're right (chart). Just last week, RBS CEO Fred Goodwin said the current 'correction' would not be the end of the world, nor inordinately painful.
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• HP downsizing printing business. Hewlett-Packard (HPQ) is downsizing its printer division from five to three units - an effort to increase efficiency as businesses rely more on digital documents and less on hard copies. Division chief Vyomesh Joshi calls the changes disruptive, but necessary.
• Morgan beats, but earnings plunge. Morgan Stanley (MS +0.25%) posted Q2 earnings of $1.03B, 50% lower than a year ago, but its EPS of $0.95 were $0.03 better than consensus estimates. Revenue fell 38% to $6.51B. The beat included a $698M gain from selling a Spanish unit, leading one analyst to quip: "If you have to go all the way to Spain to make numbers, it's not good. How many more rabbits do they have in their hat? What's going to be the driver of earnings growth going forward?" It took an unspecified loss on short bets in oil trading. Also yesterday, MS suspended a credit trader and took a $120M negative adjustment on misvaluations of his positions.
• FedEx's fearful outlook. FedEx (FDX -2.05%) said it earned an adjusted $1.45/share, just short of consensus estimates of $1.47. Looking ahead, FedEx was bleak about its prospects in 2009: It sees EPS of $4.75-5.25, well below its original goal of 10-15% growth. Total package volume increased just 1% during the quarter. "The shocking part is the guidance," portfolio manager Al Meyers said. "This is all based on energy prices and it's simply shocking."
• Healthcare anything but healthy. Coventry Health Care (CVH) slashed its Q2 and full-year earnings guidance due to increasing cost pressures. It now sees full-year EPS of $3.65-3.75, down from an already-reduced $4.39-4.50. Shares fell 17% in AH trading. Peers were down heavily: AET -10.1%. WLP -6.3%. HUM -5%.
• Ackman sees more monoline fallout. Bill Ackman, famous for his big bets against bond insurers Ambac (ABK) and MBIA (MBI), says the two could become insolvent, wiping out the value of CDO insurance for the $2T of debt they guarantee. "Given the volume of credit-default swap contracts the industry has written, there is a real element of a ratings cliff across the bond insurance sector," Fitch managing director Thomas Abruzzo said. Ambac and MBIA have asked Fitch to stop assigning them a financial-strength rating.
• GAO gooses Boeing. The Government Accountability Office sustained Boeing's (BA) protest. It want the Air Force to reopen the bidding for the $40B+ air-tanker contract, which it awarded to Northrop Grumman (NOC) based on a calculational error. Boeing gained 1.2% Wednesday; Northrop slipped by 2%.
• Delta downsizing. Delta (DAL -4.9%) said it is reducing its domestic capacity by 13% in the second half, more than the previous 10% announced, due to rising fuel costs.
• What you don't see can hurt you. WSJ says banks are becoming increasingly creative at masking loan losses, by doing things such as lengthening the time thresholds at which point debt is considered troubled, and moving toxic assets over to non-balance-sheet subsidiaries. "Spending all the time gaming the system rather than addressing the problems doesn't reflect well on the institutions," Moody's David Fanger says. Banks cited include AF, BBX, WB, WM and CNB.
• Big betters foretell gloom. Merrill Lynch said its monthly poll of 204 fund managers showed the most negativity to stocks it has seen in 10 years. 87% are worried about stagflation (above-trend inflation and below-trend growth); 75% see the global economy slowing over the next year; 51% said they're overweight in cash (vs. 44% last month); and 42% were overweight emerging market stocks.
• Crude inventories fell by 1.24M, less than an expected draw of 1.75M barrels. Gasoline inventories fell 1.18M vs. consensus of +0.85M. Distillate inventories were up 2.62M vs. a consensus of +1.8M. Initially, July crude futures dropped to below $132; they later rebounded and finished the day above $136.
• DISH dives. Old rumors that AT&T (T) might eventually buy DISH (DISH -6.5%) took a blow after DISH disclosed AT&T is requiring it to pay back a $500M note due in 2010. As Bernstein analyst Craig Moffett notes, "Invoking the pre-nup is rarely a prelude to love."
• An ETF to ruffle your sails. First Trust Advisors' FAN - the first wind-energy ETF - launched Wednesday.

Today's Markets

• Asia markets broke their four-day uptrend, lead by a huge drop in China. Nikkei -2.23% to 14,130. Hang Seng -1.61% to 22,956. Shanghai -6.54% to 2,749. BSE Sensex -2.17% to 15,088.
• Europe at midday: London -0.11%. Paris -0.14%. Frankfurt -0.22%.
• Futures are trading near the top of their overnight range at 7:15. Dow +0.15%. S&P +0.11%. Nasdaq -0.09%.
• Oil -0.73% to $135.65. Gold -0.31% to $890.80.

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Comments

[Ishortyou]

In respect to Ambac and MBIA, they need to keep and save their cash they already have and any cash coming into their coffers, deleverage from annoying debts, obligations and risks, stop paying dividends to increase their book value and once their book value is adequate and sound reinstate their triple A ratings again to start writing down new public bonds insurance only in low risk areas of the market. This strategy in itself is the best advertisement to recruit new business because the new clients will precieve that " if these folks were able to survive the credit crisis then they can survive anything".

AMBAC and MBIA are already doing this strategy, so now its a matter of time for their book value to appreciate quarter by quarter to reinstate their triple A again, you dont have to be a rocket science to figure this out.

[nukldrager]

Going back to a comment by Matt Blackman from his article,
Back to the Future in the Credit Derivative Time Machine, SA March 10

"As Jim Grant said in his March 2007 interview, the CDO creators and rating agencies built their models that basically discounted the probability for a real estate price meltdown (since median prices had not dropped significantly since the Great Depression). There were no contingencies for such an event as evidenced by the fact that a large number of SIVs did not have accompanying mortgage documents (which is now rendering them unenforceable in the courts). In other words, such an outcome was considered a black swan event when such events were determined to be near impossibilities.

My contention is that mortgages represent a relatively small part of the total $530 trillion derivatives market that has been built on similar assumptions. Like a black hole, few have any idea how these instruments work and what will happen when the unexpected happens."
Looks like we are beginning to see how they work.

[RichardSchweitzer]

Real good today Eli.

[MathmanProphecy]

Ishortyou,

"Ambac and MBIA have asked Fitch to stop assigning them a financial-strength rating." Why do you think that is? With the downgrade from thier AAA credit rating, they can kiss new business goodbye. Just wait until the muni bonds they insure start going belly-up. These companies are facing a perfect storm of problems -- anyone going long on these stocks are speculators at best, and gamblers at worst.

[notsosmart]

a bubble before it bursts is hollow inside. all this was based on a hollow inside(nothing). now that it has burst & all those phony papers with the alphabet names are mostly worthless where are the future financial profits coming from?

[Ishortyou]

they keep and save the cash as they deleverage, the books will appreciate by default, it's just a matter of time before those books are sound enough again to reinstate their triple A, not a brainer really.

[commonsense1]

I keep reading everywhere about the looming dangers of the "530 Trillion Derivative Market" but it seems to me that everyone is turning away from this problem and not addressing it in a clear and forthcoming manner. I ask myself the following question "if the unfolding of this Derivate phenomenon may cause untold financial hardship, why is it that is no being properly addressed by anyone, by anyone I mean finacial regulators or Government officials?" I think it is clear that no one wants to look directly into the eyes of this monster for fear of what they may encounter; how long can this possible finacial catastrophe be ignored? has anyone quantified the economic effects at all levels of the economy once the derivates become exposed? I appreciate all input to my inquiry.

[byrd]

I read this every day and it helps with my daily decisions about stock buys or sells.

[RightinSanFrancisco]

How time have changed - re the Merrill Lynch survey. Stagflation; slowing world economy; heavy in cash; yet also heavy in emerging markets. The "expert practitioners" must really believe that the world economy has reached a point of development where it is better, not worse, than the US economy during downturns.

[Ishortyou]

Commonsense1, this issue of derivatives is now been addressed more directly by Goldman Sacs, they are going to put in auction SIV's structured investments derivatives currently value at 7 billion, so the market will decide for the first time how much are these papers worth and allow a working price for these and other kind of derivatives in the future...so no more second guesses... the market will tell how much they are worth just like in a common stock.