Wall Street Breakfast: Must-Know News

• Oil, stocks see red. For a change, stocks and oil fell in tandem Tuesday; the Dow dropped 1.1% to 11,651 while oil was off 0.97% to $113.32. Financials led the way down: JPMorgan (JPM) lost 9.5% after it took a $1.5B writedown on mortgage-backed assets, and warned conditions had substantially deteriorated. Goldman Sachs (GS) dropped 6% after a number of analysts expressed concern over its above-average exposure to global equity markets. Bankers say July was the worst month for mortgage-backed bonds since the crisis began. Financials singlehandedly accounted for two-thirds of the S&P 500's 1.2% decline.
• Gone but not forgotten. Despite having sold billions of dollars in leveraged buyout debt in recent months, Citigroup (C) and Deutsche Bank (DB) are still at risk, FT reports. "The sales were cheered by the investors as a sign the banks were cleaning up their balance sheets. But the banks' remaining exposure to the loans is less well understood..." Basically, the banks sold LBO debt at about $0.85 on the dollar, but also loaned their private-equity buyers about $0.80 on each dollar of debt bought. If the LBO debt goes bad, the buyers will lose $0.20 or so on the dollar, but losses over and above that...
• Toll's Q3 beats; sees pent up demand. Toll Brothers (TOL) posted better-than-expected FQ3 revenue, although it plunged 34% from year ago levels. CEO Robert Toll said the luxury homebuild sees "growing pent-up demand" as prospective buyers have been delaying their decisions for as many as three years. Toll now owns about 48.5K lots, down 47% from two years ago. It expects $100-200M in land-related writedowns this quarter.
• CVS goes long on Longs. for CVS Caremark (CVS) is acquiring Longs Drug Stores (LDG) for $71.50/share cash, a 32% to Tuesday's close of $54.04. The deal gives CVS more stores in fast-growing markets such as California, Nevada, Arizona and Hawaii. The total deal is worth $2.9B, including assumption of debt. CVS was down 3.5% in extended trading; LDG was up 29.9% to $70.20.
• H&R Block returns to its roots. Ameriprise Financial (AMP) is buying H&R Block Financial Advisors from H&R Block (HRB) for $315M in cash. HRBA employs 900 advisors in 135 locations. H&R Block said it lacks the size and scale to successfully operate a securities brokerage; the sale marks a return to its core focus on tax-filing.
• Citigroup bond sale scares some. Shares of Citigroup (C) fell 6.5% Tuesday after reports it is raising $3B through a senior unsecured bond issue. Demand for the bonds was fairly strong, sources say (there are even reports that the sale was partly driven by investor demand), but Citi still had to offer a yield of over 6% to entice investors. "Buyers are still demanding a fairly large concession for new issues in this sector based on continued write-downs, [and] headline risks," ACA's Lindsey Spink said.
• Tax tangle could derail exchange merger. With just a week to go before shareholders vote on the proposed $8.3B CME Group (CME) buyout of Nymex (NMX), the deal is being threatened by a decision to tax Nymex seatholders $750K payout (upped from a previous $612K to appease them) as regular income, meaning those in the highest tax bracket will net just $472K. 75% of Nymex's 816 members must rubber-stamp the deal for it to pass.
• Dark clouds over business property. Commercial-real-estate executives are painting an increasingly bleak picture, despite still low delinquencies in the sector. More than 80% said in a recent survey the market has worsened, and that the availability of credit is 'much worse' than it was a year ago. "Even though loan delinquencies to the sector are very low, the ongoing lack of credit for real estate has led to weaker property values and has stalled transactions," Real Estate Roundtable president Jeffrey DeBoer says. Still, 66% expect the debt market will improve during the coming year.
• Central banks can't satisfy demand. The Fed's newest liquidity-boosting innovation, 84-day loans, prove popular. $25B offered, bids for $54.8B. That's up from 28-day loans, which used to be loaned for only a sleepover. The Fed wasn't the only CB whose auction was oversubscribed: ECB's $10B auction attracted $38.5B in bids, and the Swiss National Bank's $2B drew $9.8B. "There’s more severe credit problems out there. The banking sector just can’t get one foot in front of the other," Jefferies' Tom di Galoma says. "These facilities are working," he said, "but the problems are too great to work themselves out immediately."
• Freddie Mac skirts NY subprime. Freddie Mac (FRE) said Tuesday a NY State law that creates a new category of subprime mortgages makes it too risky for it to continue buying subprime debt in the state. Scaling back its purchases could mean higher borrowing costs, and potentially a frozen market if enough players lose confidence in the mortgage debt market - which, ironically, would further damage FRE.
• Moody's talks tough to the Times. NY Times (NYT) fell 6% after Moody's said it may have to slash its $132M/year dividend - or risk descending to junk. Easier said than done, considering about $25M of that goes to the Sulzberger family.
• Lacker frets inflation, not growth. Richmond Fed president Jeffrey Lacker said that although economic growth risks persist, he's far more concerned about inflation, compounded by the surge in energy and commodity prices which may or may not be moderating. "For us to lose substantial ground on inflation would be much more costly for us to remedy than for us to have to face a more substantial slowdown in growth than we've seen so far." He said financial markets have weathered economic storms admirably, and believes the Fed's monetary policy is due some credit. "A 2% federal-funds rate with overall inflation running at 4% is an exceptionally low real interest rate -- lower than we've had in the post-war record."
• No rush to raise rates - Stern. Speaking on CNBC, Minneapolis Fed president Gary Stern said it remains a close call whether the current slowdown will ultimately be defined as a recession. He hopes the Fed will be patient in waiting to hike interest rates, but acknowledged it's not always possible to wait for the economy to heal: "If you wait until you have conclusive evidence, you run the risk of waiting too long. And so the real message is you've got to be willing at some point along the way to say, 'You know, I have enough confidence in my outlook that it is time to go.'"
• Small business feeling crunch. The National Federation of Independent Business said Tuesday small-business optimism fell 1 point to a recessionary 88.2, vs. an average of about 95 in 2007. Ominously, capital spending plans dropped to the lowest level since 1975 - which accounted for half on the drop. "All in all, not a very positive environment for capital spending. With gloom and doom dominating the media and profits and sales weakening, who's going to buy new equipment or expand?"
• Companies to pay less for health-care. Employee health-care costs will rise just 10.6% over the coming year, the lowest rate of increase in seven years, according to an Aon survey. "While the medical trend rate is still more than twice the consumer price index, it is encouraging to see that health care cost rate increases are continuing to slow down. This is a step in the right direction for companies nationwide that continue to feel significant health care price pressures." Meanwhile, a separate survey found consumers are cutting back on doctor visits and prescription drug usage to save money. Most, however, are not doing away with health, auto, homeowners or life insurance.
• Hedge funds had tough July on falling commodity prices. Hedge funds experienced a rough July, betting wrongly that commodity prices would continue to rise and financials would continue to fall. Instead, a strengthening dollar and U.S. banking troubles helped push commodity prices down, while financials showed signs of life after the U.S. government stood by Fannie Mae (FNM) and Freddie Mac (FMC). The Morningstar 1000 Hedge Fund Index fell 3.07%, its worst monthly performance ever.
• The Philly Fed's Forecasters Survey sees Q3 GDP growth of just 1.2%/year, down from 1.7%. On a yearly basis, they see 1.7% growth in 2008 and 1.5% in 2009 - the latter down from a previous 2.2%. Forecasters see in increased risk of possible negative GDP growth, but say headline inflation will stay steady at 2.6% over the next five years.
• MBA Mortgage Applications fell 1.5%; last week they were up 2.8%.
• The U.S. trade gap narrowed 4.1% to an unexpected $56.8B in June, the smallest in three months, far better than the $61.5B shortfall economists expected.
• June's Treasury Budget deficit soared to $102.8B on stimulus payments and $15B to protect bank deposits, worse than the $97B economists warned of.
• Crop production. 2008 could yield the second-largest corn and fourth-largest soybean crops in history. USDA expects 12.3B bushels of corn, up sharply from a previous 11.7B estimate. It also lowered its forecast for corn, soybean and wheat prices. Ethanol producers (ADM, VSE, PEIX) were up Tuesday; cheaper corn means fatter margins and increased demand.
• Hiring activity stayed at 3.1% in June. Job openings were unchanged at 2.6% and employment terminations were slightly down at 3.1%.
• ISCS said retail sales fell 1.1% from a week ago, but remain up 2.6% from the same week last year. Sales were held back by cautious back-to-school spending. Redbook said sales fell 1.9% vs. the same period in July, but rose 1.5% vs. last year.
• UK's two-sided crunch. Risks to both inflation and growth have grown over the past three months, the Bank of England says. Lower real income, higher retail prices, soft employment, housing price declines and a lack of business investment are all squeezing the economy. Meanwhile, July's CPI was 4.4%, though the BoE expects it to fall to 2% in the medium term.
• China's retail sales rise 23.3% in July, the fastest pace in nine years. Coupled with last month's surge in exports, China's economy looks strong even as Japan slides towards recession and global growth slows.

Earnings: Wednesday Before Open

• Brocade Communications Systems (BRCD): FQ3 EPS of $0.16 beats by $0.02. Revenue of $366M (+11.7%) vs. $352M. Shares +6.5%. [PR]
• Canadian Solar (CSIQ): Q2 EPS of $0.78 beats by $0.31. Revenue of $213M (+24.2%) vs. $207M. [PR]
• Deere (DE): FQ3 EPS of $1.32 misses by $0.04. Revenue of $7.07B (+18.1%) vs. $7.23B. [PR]
• Dr Pepper Snapple Group (DPS): Q2 EPS of $0.60 beats by $0.05. Revenue of $1.56B (+0.9%) in-line. [PR]
• Gildan Activewear (GIL): FQ3 EPS of $0.46 beats by $0.01. Revenue of $381M (+30.6%) vs. $356M. [PR]
• Liz Claiborne (LIZ): Q2 EPS of $0.09 beats by $0.09. Revenue of $974M (-7.1%) vs. $970M. Sees Q3 EPS of $0.37-0.42 vs. $0.58. Shares -0.7%. [PR]
• Macy's (M): Q2 EPS of $0.29 beats by $0.10. Revenue of $5.72B (-3%) in-line. Sees full-year EPS of $1.70-1.85 vs. $1.86. Shares -1.3%. [PR]
• Toll Brothers (TOL): FQ3 revenue of $796.5M vs. $746M consensus. Net signed contracts were down 35% to $469.5M; Q3 backlog fell 52% to $1.75B; cancellations of 195 were the lowest in over two years (19.4% down from 23.8%). [PR]

Earnings: Tuesday After Close

• Applied Materials (AMAT): FQ3 EPS of $0.17 beats by $0.03. Revenue of $1.85B in-line. Shares +1.25%. [PR]
• Limelight Networks (LLNW): Q2 EPS of -$0.02 beats by $0.01. Revenue of $30.3M (+29.5%) vs. $28.9M. Shares -0.7%. [PR]
• Nvidia (NVDA): Q2 EPS of $0.13 beats by $0.01. Revenue of $893M vs. $908M. Increases stock buyback program by $1B to $2.7B. Shares +9%. [PR]
• Tween Brands (TWB): Q2 EPS of -$0.27 misses by $0.26. Revenue of $223M vs. $245M. Announces restructuring. Shares -16.6%. [PR]

Today's Markets

• Asian markets close down on Wednesday. Nikkei -2.1% to 13,023. Hang Seng -1.6% to 21,293. Shanghai -0.4% to 2,446. BSE -0.9% to 15,069.
• In Europe, bourses are down at midday. London -0.6%. Paris -0.9%. Frankfurt -0.6%.
• U.S. futures are flat at 7:15 AM. Dow -0.09%. S&P -0.21%. Nasdaq +0.08%. Crude +0.23% to $113.27. Gold +0.9% to $821.90.

Wednesday's Economic Calendar

• 7:00 MBA Mortgage Applications
  8:30 Import/Export Prices
  8:30 Retail Sales
  10:00 Business Inventories
  10:35 EIA Petroleum Status Report
• Notable pre-open earnings: BRCD, CSIQ, DE, GIL, LIZ, M, TOL
• Notable post-close earnings: CTRP, IPI, NTAP, NTES

Seeking Alpha editor Rachael Granby contributed to this post.

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Comments

[fatcat:]

Eli,the new page design is great..one suggestion,add author name and date in the Dashboard section...Thanks

2008 Aug 13 09:02 AM

[kkin365:]

Suggest you add crude oil price at the time of your posting your daily news. You have provided a most valuable service.

2008 Aug 13 09:16 AM