Wall Street Breakfast: Must-Know News

• Dragged down by the banks. Bank shares dragged U.S. markets down Monday, and are doing more of the same Tuesday in Asia and Europe - prompted by Friday's regulatory seizure of IndyMac (IMB). "It's the cockroach theory. You don't just have one bank failure -- when you have a big bank go under, there's always more than one," a hedge fund manager said. WaMu (WM) and National City (NCC) were the worst hit Monday, falling 35% and 15% respectively. Private-equity firm TPG, which injected $7B into WaMu in April at a discount, has seen two-thirds of its investment evaporate.
• Lehman mulls going private. Lehman (LEH) CEO Richard Fuld is looking hard at taking the Wall Street I-bank private - and out of the public eye - sources say. "The idea is why sell to someone else at so cheap a price when they could buy themselves." On Monday, Fox-Pitt analyst David Trone suggested Lehman go private at a 25% premium in order to stem its bleeding.
• GM pre-announces cutbacks. GM (GM) said late yesterday it will announce this morning "actions to align business to current market conditions." Namely: firings, capacity reductions, cash raising and possibly dividend cuts.
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• IndyMac halts foreclosures. The FDIC has temporarily halted foreclosures on IndyMac's (IMB) $15B bank-owned mortgage loan portfolio. FDIC Chairman Sheila Bair says the agency is "really focused" on keeping borrowers in their homes - a move that could be beneficial to both homeowners and IndyMac. Bair is looking to sell the bank and its assets within 90 days; still, the respite could help many homeowners rework their loan terms.
• Mortgage reworks: postponing the inevitable? A full 42% of subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, new research from Moody's shows. Still, even with the high re-default rate, Moody's says the "increase in proactive efforts by servicers to modify subprime mortgage loans may modestly lower cumulative losses incurred by securitization pools."
• Mortgage insurers twist noose. Mortgage insurers (RDN, MTG, AIG) are dramatically tightening their standards amid widespread fear of borrower default, making it even more difficult for homebuyers to obtain credit. "Clearly, the pendulum had swung a little too far in terms of flexibility in underwriting," AIG's Len Sweeney says. "Some of the movement we've made of late is back to a more prudent approach." Insurers are now often requiring 10% downpayments (vs. a previous 3-5%), and premiums are rising.
• Credit crisis hits Hollywood. A $450M movie-financing deal between Viacom's (VIA) Paramount Pictures and Deutsche Bank (DB), that would have funded as many as 30 feature films, fell through.
• Genentech (DNA): EPS of $0.82 misses by $0.04. Revenue of $3.24B (+7.7%) in-line. Sees full-year EPS of $3.40-3.50 vs. consensus of $3.43. Sales of best-seller Rituxan were $651M vs. $629 consensus. [PR]
• Kimberly-Clark (KMB) -7.5%. Preliminary Q2 EPS of $1.03 is $0.06 short of consensus. Sees Q3 EPS of $0.98-1.03 vs. $1.16 consensus, and full-year EPS of $4.20-4.30 vs. $4.52. [PR]
• E*Trade sells Canada unit for $450M. E*Trade (ETFC) is selling E*Trade Canada to Scotiabank (BNS) for $442M in cash. After capital returns, the deal will generate just over $500M for ETFC. "This transaction generates capital for E*Trade at a very low implied cost," CEO Donald Layton said. Shares +5% in pre-market.
• Paulson should put Freddie, Fannie into receivership. The WSJ says that U.S. Treasury Secretary Henry Paulson could make more progress toward a safer financial system by putting Fannie (FNM) and Freddie (FRE) into federal receivership, instead of his current plan to give the government more power over the companies, including a possible capital injection. "This is progress, but it's not aggressive enough given the risks. He could make more progress more rapidly toward a safer financial system by putting the companies in federal receivership," and appoint a bipartisan financial figure as a receivership czar - whose main mission would be to protect taxpayer interests.
• SEC looks at hedge fund advisers. The SEC subpoenaed over 50 hedge-fund advisers in its effort to determine if false rumors were spread to drive down share prices of now defunct Bear Stearns and Lehman (LEH).
• UK inflation worse than expected. U.K. inflation was worse than expected in June: 3.8% vs. a consensus of 3.6%. Yesterday Bank of England Governor Mervyn King said that inflation will overshoot his target - staying well above 4% into next year - and there's very little he can do about it because an interest rate hike would devastate the economy. Still, even without rate hikes, King says financial market turmoil makes it likely inflation will fall below 2% over the medium-term - just as much a problem as the current situation.

Today's Markets

• Asia markets fell hard Tuesday. Nikkei -2% to 12,755. Hang Seng -3.8% to 21,175. Shanghai -3.4% to 2,779. BSE -4.9% to 12,676.
• In Europe, markets are down sharply at midday. London -2.65%. Paris -2.2%. Frankfurt -2.6%.
• U.S. futures: Dow -1.2%. S&P -1.2%. Nasdaq -1.1%. Crude +0.5%. Gold +1.1%.

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Comments

[Mathman Pro...:]

SEC is investigating 'false rumors' -- isn't that an oxymoron? Besides, rumors are inherently dubious, and should not be taken at face value.

Still, it's a common fact that Bear Stearns collapsed because it was a horrible counter party that refused and negotiated liquidity requests. As a result of their subpar business practices, no one wanted to do business with them and demanded their money, which was the final nail in the coffin.

2008 Jul 15 09:24 AM

[secmaven:]

CAnne's refusal to play ball with the Street in the Long Term Capital Management bail out was not forgotten.

2008 Jul 15 10:16 AM

[MoneyWatcher:]

I think Mathman needs to look up the word oxymoron. That's two words that don't make sense together. Under his argument, "false rumors" is simply repetitive. He also needs to look up dubious. While rumors should be evaluated with a dubious eye, rumors may be false or may be true. The SEC is not concerned about people spreading true rumors, even if the truth is spread to make money.

They are concerned about spreading false rumors or lying.

The SEC needs to be given power to oversee hedge funds. The classic argument against this of course is that the investors in hedge funds are sophisticated individuals and institutions who do not need to be protected.

The problem is, who is going to protect the markets against hedge funds?

2008 Jul 15 01:24 PM

[nibbs17:]

With 435 lame brains continually mucking up our economic system and 5 out of 9 'geniuses' on the Supreme Court approving, our country and its people will suffer until the people wake up!

2008 Jul 15 02:09 PM

[bbowen7:]

Unfortunately, over the next several years we will need to work through two economic realities:
1. We will need to export as much as we import. The dollary must decline.
2. We are major debtors at personal and governmental levels. Thankfully corporate balance sheets (ex banks) are fine.

Aside from the level of pain and the duration, a big question will be whether we stay as committed to free market capitalism. Pessimists would say - not in a democracy.

2008 Jul 15 04:56 PM

[oregonduck:]

Naked short selling is history as of opening bell tomorrow. As my suspicions tell me that Etrade, as well as other financials, have been victimized by "Naked" short selling, we may see some releif.

news.yahoo.com/s/nm/20...




On Jul 15 04:56 PM RightinSanFr ancisco wrote:

> Unfortunately, over the next several years we will need to work through
> two economic realities:
> 1. We will need to export as much as we import. The dollary must
> decline.
> 2. We are major debtors at personal and governmental levels. Thankfully
> corporate balance sheets (ex banks) are fine.
>
> Aside from the level of pain and the duration, a big question will
> be whether we stay as committed to free market capitalism. Pessimists
> would say - not in a democracy.

2008 Jul 15 06:23 PM

[oregonduck:]

This article indicates that the SEC will even implement more stringent rules regarding Naked short selling for the broader market, not just certain stocks. I think that this will really help turn the tide and give the longs some traction.

www.ft.com/cms/s/d28fc...

2008 Jul 15 07:12 PM

[messy:]

Would someone please explain the difference between....selling short and NAKED SELLING SHORT. The only explanation i hear is "naked selling of a stock" is more shorts than the total shares outstanding. How would an investor know that or even care if it does occur, as I believe it happens all the time in GOLD BULLION.

2008 Jul 16 01:13 PM

[Fish Gone Bad:]

In short selling, a person has his "market maker" borrow the stock from a margin account, and sells it. Eventually the person will have to buy the stock back to replace the borrowed stock.

In naked short selling, a "market maker" (whatever the newest definition of market maker has become), sells a stock and makes an electronic entry to find and borrow the stock from a margin account in three days to give to whomever bought the shares that were sold short. The problem that has been occurring is that the stock is not being located. There are just electronic entries that say, so-and-so bought some stock. This is equivalent to counterfeiting stock certificates. So what is to stop a "market maker" from naked short selling 10% of a company's stock? Nothing. What about 100% of a company's stock? Nothing. Sure there is an electronic entry, but the short is never properly followed through on, and no one apparently gets in trouble for the counterfeiting.

So why on earth would any "market maker" EVER want to risk getting caught for not following up on keeping the books correctly? It all boils down to collecting transaction fees and not getting caught because everyone else is doing it too.

I hope this helps,

Clark Jenkins
FishGoneBad.com


On Jul 16 01:13 PM messy wrote:

>
> Would someone please explain the difference between....selling short
> and NAKED SELLING SHORT. The only explanation i hear is "naked selling
> of a stock" is more shorts than the total shares outstanding. How
> would an investor know that or even care if it does occur, as I believe
> it happens all the time in GOLD BULLION.

2008 Aug 02 03:47 PM