Wall Street Breakfast: Must-Know News

• GM hopes the worst is over. GM lost a stinging $15.5B in Q2, including $9.1B in charges and write-downs. "As our recent product, capacity and liquidity actions clearly demonstrate, we are reacting rapidly to the challenges facing the U.S. economy and auto market, and we continue to take the aggressive steps necessary to transform our U.S. operations." CEO Wagoner, talking on CNBC, says he's hopeful this is the worst it gets. Wagoner is still comfortable with GM's liquidity plans, he says. It will take a while to swing a deal for Hummer, but they are moving as quickly as possible.
• Schering-Plough slides. Shares of Schering-Plough (SGP) are down 5.1% in pre-market trading after it says it received a 'surprising and disappointing' non-approvable letter from the FDA for its post-surgery muscle relaxant sugammadex. The treatment received unanimous support from an FDA advisory panel in March, and was "the first major pharmaceutical innovation in the field of anesthesia in two decades," research chief Thomas Koestler said.
• Mittal may crash Cleveland party. ArcelorMittal (MT) is considering whether to disrupt the $8.8B takeover of Alpha Natural Resources (ANR) by Cleveland-Cliffs (CLF) with a counter-bid. It may also sit on the sidelines until the deal closes, and then make a move for the combo. Sources say MT indicated it was willing to make an all-cash offer of about $110/share for ANR in June, prompting it to seek other bids. CLF's offer is worth about $128/share; ANR closed Thursday at $98.95.
• Lehman shops stigmatized assets. Lehman CEO (LEH) Dick Fuld is trying to shop tens of billions of dollars in mortgage-based securities in order to reduce its leverage and prop up its balance sheet. Preliminary talks see LEH selling some of its risky assets to a domestic or foreign entity, and potentially providing funding for the sale. There is speculation Lazard (LAZ) has been hired to advise Lehman.
• Lilly trained sales force to downplay risks. Eli Lilly (LLY) trained its sales force to downplay the risks of Zyprexa and to encourage doctors to prescribe the drug beyond approved uses for schizophrenia and bipolar disorder, court documents reveal. Lilly's research shows some patients gained as much as 80 pounds while under treatment, and that the incidence of high blood-sugar at diabetes levels was 3.5x more than for placebos.
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• 30-year mortgage rates fell to 6.52% this week, down from 6.63% last week. "A drop in commodity prices eased market concerns over inflation pressures," Freddie Mac economist Frank Nothaft says. "For instance, the Department of Energy reported that gasoline prices were the lowest since the end of May, and oil prices were at levels not seen since early May." 15-year mortgages fell to 6.07% from 6.16%.
• Initial Q2 GDP estimates of +1.9% fell well short of the +2.3% consensus, although it was still more than double last quarter's 0.9%. 2007 annual growth was revised up 1.0% to 4.8%, while Q4 GDP growth was revised down 0.8% to -0.2% - prompting further speculation that may have been the launching pad of a U.S. recession.
• Q2 Personal Consumption rose 1.5%, just short of the +1.7% consensus. Core PCE +2.2% vs. +2% consensus.
• Initial Jobless Claims came in much higher than expected - 448,000 vs. 393,000 consensus. The 4-week average jumped to 393K from 382K.
• NYC Business Activity declined at a faster pace in July, with the NAPM's index falling to 38.5. Future optimism turned abruptly to pessimism. Business impediments: 1) Financial concerns - "credit crisis, credit markets, market conditions, market slowdown, market uncertainty, market volatility;" 2) Growth concerns - "consumer spending, current economic conditions, decreasing revenue;" 3) Inflation concerns - "energy/fuel, high energy costs, price increases across the board, rising raw materials costs."
• Chicago Business Barometer rose for first time in five months - to 50.8 vs. 49 consensus - signalling modest growth "in spite of a consistent drum-beat from those seeking to establish a recession.
• Employment costs rose 0.7% in Q2, the same as Q1 and in-line with estimates. The increase extends the moderation in labor compensation; labor costs have been in a downtrend since Sep. 2006.
• Greenspan sees us on the brink of recession. Former Fed chief Alan Greenspan says the U.S. economy is "right on the brink" of a recession despite its surprising strength thus far. "Given the extraordinary pressures coming from the financial sector... the American economy is holding up rather well," Greenspan said on a CNBC interview Thursday, noting current data don't suggest recession. Still, "I think we're probably likely to go there, we're right on the brink," he said. "I would be more surprised if we didn't than if we did, given the financial state." He also noted the housing market is "still nowhere near the bottom" in terms of pricing. He called Fannie Mae (FNM) and Freddie Mac (FRE) "an accident waiting to happen," and suggests the government nationalize the GSEs, restructure them, give them more capital, split them into five or ten entities, and sell them back to the market.
• UK manufacturing contracts, prices soar. U.K. manufacturing shrunk by the most in a decade, while prices charged rose to nine-year highs. "Recession, here we come," BNP Paribas's Alan Clarke reacted. "The Bank of England's dilemma isn't changing but the extremes are fanning out and getting much worse."
• China loosens up. China watchers say Beijing has moved noticeably toward loosening commercial banks' credit quotas over the last week. The easing of the quotas, imposed on banks earlier this year as a key part of China's monetary tightening, show Beijing is quickly acting on its decision last week that maintaining steady economic growth is as vital as curbing inflation. [DJ]

Earnings: Friday Before Open

• Boyd Gaming (BYD): Q2 EPS of $0.30 beats by $0.03. Revenue of $461M (-9.9%) in-line. Shares +5.6%. [PR]
• Cigna (CI): Q2 EPS of $1.08 beats by $0.11. Revenue of $4.86B (+11%) vs. $4.76B. [PR]
• GM (GM): Q2 EPS of -$11.21 vs. consensus of -$2.62. It shed $15.5B on the quarter. Revenue of $38.16B (-18.3%) vs. $44.57B. Shares -8.3%. [PR]
• Ingersoll-Rand (IR): Q2 EPS of $1.03 beats by $0.14. Revenue of $3.08B (+6.6%) in-line. Sees full-year EPS of $3.80-3.90 vs. $3.71. Shares +3%. [PR]
• KBR Inc. (KBR): Q2 EPS of $0.46 beats by $0.10. Revenue of $2.66B (+23.5%) vs. $2.32B. [PR]
• Nissan (NSANY): FQ1 net profit of ¥52.8B ($491M) fell 43% on the stronger yen. Sales fell 4.1% to ¥2.347T. U.S. sales fell 1.5% to 253K (vs. a 12% market decline); Japan -2.2% to 148K; Europe flat. "Nissan remains resilient but cautious on the outlook for our industry." [WSJ]
• NYSE Euronext (NYX): Q2 EPS of $0.75 misses by $0.03. Revenue of $1.11B (+14.1%) vs. $810M. Shares -1.1% in Paris. [PR]
• Nortel (NT): Q2 EPS of -$0.23 vs. consensus of -$0.04 (?). Revenue of $2.62B (+2.3%) vs. $2.5B. Shares -1.7%. [PR]
• Oshkosh Truck (OSK): FQ3 EPS of $1.19 beats by $0.14. Revenue of $1.97B (+6.6%) vs. $1.89B. Sees FQ4 EPS of $0.50-0.65 vs. $0.92. [PR]
• SCANA (SCG): Q2 EPS of $0.48 beats by $0.03. Revenue of $1.22B (+21%) vs. $0.98B. [PR]
• Sun Microsystems (JAVA): FQ4 EPS of $0.11 vs. consensus of $0.25 (?). Revenue of $3.78B (-1.4%) in-line. Authorizes $1B share buyback. Shares +3.5%. [PR I, II]
• Total (TOT): Adjusted profit of €3.72B beats by €0.1B. Sales increased 23% to €48.2B. Shares -1.9% in Paris. They're -9% over the past three months, as a U.S. slowdown has investors concerned oil prices will drop sharply. [WSJ]

Earnings: Thursday After Close

• Chemtura (CEM): Q2 EPS of $0.18 in-line. Revenue of $1.02B (-1.4%) in-line. [PR]
• Chesapeake Energy (CHK): Q2 EPS of $0.89 beats by $0.01. Revenue of $2.23B (+86.2%) in-line. Shares -2.3%. [PR]
• Chiquita (CQB): Q2 EPS of $1.18 beats by $0.09. Revenue of $995M (+6.5%) vs. $1.32B. [PR]
• Cognizant Technology Solutions (CTSH): Q2 EPS of $0.35 in-line. Revenue of $685M (+32.7%) in-line. Sees full-year EPS of $1.44 vs. $1.48. Shares -2.9%. [PR]
• Kindred Healthcare (KND): Q2 EPS of $0.33 in-line. Revenue of $1.05B (-4.2%) in-line. [PR]
• McAfee (MFE): Q2 EPS of $0.52 beats by $0.07. Revenue of $397M vs. $369M. Sees full-year EPS of $1.90-2.00 vs. $1.91. Shares +1.1%. [PR]
• Monster Worldwide (MNST): Q2 EPS of $0.40 beats by $0.03. Revenue of $323M (+14.9%) vs. $361M. Shares +1.5%. [PR]
• RealNetworks (RNWK): Q2 EPS of -$0.01 beats by $0.01. Revenue of $153M (+12%) in-line. Sees full-year EPS of -$0.06 to -$0.02 vs. -$0.01. Shares +0.5%. [PR]
• ValueClick (VCLK): Q2 EPS of $0.17 in-line. Revenue of $164M (+10.2%) in-line. Sees full-year EPS of $0.69-0.71 vs. $0.74. [PR]
• VistaPrint (VPRT): FQ4 EPS of $0.32 beats by $0.02. Revenue of $110M (+52.3%) vs. $107M. Shares +9.4%. [PR]

Today's Markets

• Asia was mixed Friday. Nikkei -2.11% to 13,095. Hang Seng +0.58% to 22,863. Shanghai +0.94% to 2,802. BSE +2.1% to 14,657.
• Europe is lower at midday: London -0.1%. Paris -0.7%. Frankfurt -0.5%.
• U.S. futures at 7:05am. Dow +0.24%. S&P +0.14%. Nasdaq -0.24%. Crude -0.43% to $123.55. Gold -0.16% to $921.20.
• Friday's economic calendar:
  8:30 Non-farm payrolls (consensus -72K jobs, 5.6% unemployment)
  10:00 Construction Spending (cons. -0.4%)
  10:00 ISM Manufacturing Index (cons. 49.2)
  10:30 ERCI Leading Index
  11:10 ERCI Future Inflation Gauge
  12:00 PM Auto sales
• Notable earnings before Friday's open: AEE, AIV, BYD, CI, CLX, CVX, EQT, FE, GM, HTV, IR, JAVA, KBR, NT, NXG, NYX, OSK, PEG, PPK, STO, TDW, TOT, WPO

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Comments

[David White:]

Looks like very bad news for GM. This should point out to our lawmakers in Congress just how important it is for the US to increase production of oil and decrease use of oil. We are losing carmaker share because we as a nation have ignored oil costs far too long. GM needs to almost completely retool for the new millenium cars and trucks it will need to stay in business.

The market pretty clearly wants to go down today. No doubt it will do exactly this if the payrolls number is bad. If the payrolls number is good, the entire market may turn the other way. This will include oil and commodities also, as a good payrolls number will indicate a healthier than expected US economy. Oil/gas, financials, and fertilizer stocks stand to be the most swayed by this result. I am hoping for a good result. Ditto from the ISM. We can only wait and see.

2008 Aug 01 08:07 AM

[ajhough:]

The market is going down but I don't know when and how much. One can buy pretty good 'blue chip" stocks with PE's below the historical market average. However, most will hold on to cash to see what the market will look like in the next years.

2008 Aug 01 08:14 AM

[David White:]

My reading of the CHK result seems to tell me that the company did not actually lose money. In fact it beat estimates slightly. I think I understand the accounting jargon to mean they took an accounting loss based on the market value of the gas they sold compared to the hedged value. Apparently CHK has hedged around $8.90 for Q3. I think in Q2 CHK lost the difference in the price they got for their gas and the then current market value of the gas (or the value of the part of the reserves they were selling). If I am readin everything correctly CHK did not actually lose any money at all. Their hedging on the gas prices simply caused them not to make as much money as they would have if they hadn't hedged. If prices had gone down instead of up, CHK would have looked brilliant. I don't think many people are looking brilliant right now. CHK still looks like a great stock. It will likely now fluctuate with the price of oil and gas (at least for the near term).

2008 Aug 01 08:27 AM

[David White:]

UBS re-iterated its buy rating on CHK, but it lowered its FY earnings estimates (now $9.65 vs. previously expected $10.45). UBS also lowered its price target from $90 to $86. Still the price of the stock is still below $50 as I write. It still looks like a great bargain, if you don't expect natural gas price to go through the floor soon. Current predictions are that they will not. If you look at how much money CHK could have made in Q2, you should really be encouraged. Even if CHK has hedged a ways in advance, they will eventuatlly benefit from higher natural gas prices, if those prices stay high.

2008 Aug 01 08:54 AM

[David White:]

If you think the natural gas market may go lower temporarily with the weak economy, CHK's hedging of its natural gas sales prices should make you feel better. This basically guarantees that CHK will get a good price for their gas. It doesn't look like short term falling gas prices should have much effect on CHK's near term earnings.

2008 Aug 01 09:15 AM

[notsosmart:]

natural gas is energy.these short term fluctuations ar meaningless. a real cold northern winter & all changes.

2008 Aug 01 09:23 AM

[Kelly Liebe...:]

First of all, the only ones to blaim for GM's issues are GM, the "Oil bugs", the Oil lobbyists and the Republican "Oil Guard". GM has seen this coming along with the others and they decided to keep the status quo as long as possible while we waged dirty wars and American lives have been lost to keep our foot mired in the black fools gold.
With some foresight, and some small sacrifices that some very rich oil players decided not to take, we have made ourselves so dependent on foreign oil that we are at the mercy of the very countries who burn our flag in their streets.
McCain and his cronies now want to blame Obama(!) for his reluctance to pollute the oceans on this planet while they have done NOTHING for a decade to look into alternative energy.
Poor GM, they need to retool. Yes, they do. They knew it 20 years ago and have not done anything about it. They built their massive oil guzzing Hummer plants despite warnings from global warming experts and concentrated on short term profits. Well, let this be a lesson to everyone that the "eventually" is now playing out and the piper will be paid.

2008 Aug 01 09:30 AM

[Daniel Haszard:]

Zyprexa has generated a lot of bad press for Eli Lilly and they still have unresolved Zyprexa settlement claims.
Eli Lilly is 'reaping the whirlwind' for aggressive marketing of Zyprexa that has caused suffering and deaths.
Zyprexa is being avoided by doctors they aren't prescribing it for new patients at all anymore.
--
Daniel Haszard 4 year Zyprexa patient who got diabetes from it. www.zyprexa-victims.co...

2008 Aug 01 09:30 AM

[long_on_oil:]

GM's catering to the Unions which eventually lead to $ 190 billion in pension fund liabilities via the health insurance and retirement income paid to retirees is what has GM in the toilet. You are right about the fact that GM can not react fast enough but that is because they don't have the resources to react.
This should end once and for all that the car companies are in bed with the oil companies. The car companies are going belly up while the oil companies are making record profits.
The labor unions have never gotten it, there is no such thing as it is us against the company. Us is the company so when the company dies so does us. If the company prospers so does us. Labor unions have never understood short term sacrifice for long term gain. It has always been give it to me now and the hell with tomorrow.
Labor unions destroyed GM, Ford and Chrysler because management let them so in the end the failure of american car companies can be blamed on both parties plus the american public for putting up with the negotiation process.

2008 Aug 01 12:34 PM

[John Lounsbury:]

long_on_oil

The reason that GM was "forced" to abandon future planning for high oil prices was unions? Certainly that is part of the equation, but it is disingenuous not to recognize also that trying to maximize income statements quarter to quarter is a major factor in the lack of proper longer term strategy.

Maximizing quarterly income results works great when the existing strategy is good for the long haul but can lead to disaster when the current strategy is short-sighted.

2008 Aug 01 01:03 PM

[joes:]

Splitting up SM and FM into private units to sell to the private markets assumes that there will be somebody to serve the tax payers best interest during the process. There has been a real shortage of concern for the tax payers during this debacle. Having Paulson, one of the true robber barons of our time heading the deal could be a reason. Having a group of entitled Ivy types telling us what they need to do to save us from what they were responsible for in the first place could be another problem.

2008 Aug 01 02:01 PM

[jackooo:]

I worked for TWA and was a union member for 34 yrs. TWA went thru 2 bankruptcies. The I.A.M. slept with TWA. Unions are a waste at this time. They were great in the beginning but useless now.
If you fly straight you don't need them. If you have problems there is the Labor Board.

2008 Aug 01 03:36 PM

[theblueamer...:]

It isn't the unions that has caused the downfall of GM. It is healthcare costs for retirees. GM can compete against Toyota. It cannot compete against Japan. If we had universal health care coverage in this country and American companies could get out of having to offer healthcare benefits to it's employees then GM would be in better shape. And before someone starts screaming about socialized medicine let me state a few observations. Healthcare is not free. It costs money to provide good healthcare and money is a finite resource. Everyone has an obligation to take care of themselves by eating right, exercising and not smoking. (Tobacco companies use to get government subsidies, why shouldn't lung cancer patients) But every American citizen has a right to decent healthcare. One of the things that made America great was the availability of a free education to everyone, just not for the rich. Modern medical technology is expensive. Some CEO shouldn't get rich by saying no to the insurance company saying no to my medical care. Why would you want to be part of a society that put greed above the well being of it's citizens regardless of economic class. Let's have compassionate capitalism in America. Money isn't isn't evil but the love of money is or so they say.

2008 Aug 01 07:24 PM

[MustangMatt:]

Healthcare and legacy costs are partially to blame, but the UAW is, in my opinion, more of the culprit. I worked for Ford and experienced the ridiculousness of all of the red tape first hand. The UAW is nothing more than a leech. From the union reps who do nothimg more than walk the floor and shake hands, to the stupid rules pertaining to job classification, unions are a big reason why AMerican car makers are struggling. Hell, in my plant (Sterling Heights plant on Mound road for Ford) we had a guy making over 100k a year and he was a damn floor cleaner!


On Aug 01 07:24 PM brian58 wrote:

> It isn't the unions that has caused the downfall of GM. It is healthcare
> costs for retirees. GM can compete against Toyota. It cannot compete
> against Japan. If we had universal health care coverage in this country
> and American companies could get out of having to offer healthcare
> benefits to it's employees then GM would be in better shape. And
> before someone starts screaming about socialized medicine let me
> state a few observations. Healthcare is not free. It costs money
> to provide good healthcare and money is a finite resource. Everyone
> has an obligation to take care of themselves by eating right, exercising
> and not smoking. (Tobacco companies use to get government subsidies,
> why shouldn't lung cancer patients) But every American citizen has
> a right to decent healthcare. One of the things that made America
> great was the availability of a free education to everyone, just
> not for the rich. Modern medical technology is expensive. Some CEO
> shouldn't get rich by saying no to the insurance company saying no
> to my medical care. Why would you want to be part of a society that
> put greed above the well being of it's citizens regardless of economic
> class. Let's have compassionate capitalism in America. Money isn't
> isn't evil but the love of money is or so they say.

2008 Aug 21 01:23 AM