- Three more banks reach ARS settlements. In separate settlements reached with state regulators, Merrill Lynch (MER), Goldman Sachs (GS), and Deutsche Bank (DB) will buy back at least $12.5B ($10B, $1.5B and $1B respectively) of auction-rate securities [ARS] and will pay $162.5M in fines. The three settlements are the latest in a string of ARS-related buybacks and fines: Citigroup (C), JPMorgan Chase (JPM), Morgan Stanley (MS), UBS (UBS) and Wachovia have agreed to $35B in buybacks and over $360M in fines. Other firms, including Bank of America (BAC), are negotiating deals.
- Freddie coming up short in search for cash. Freddie Mac (FRE) executives are quietly speaking to potential investors about the possibility of buying new common or preferred shares in the mortgage company. FRE has pledged to regulators to raise $5.5B of capital given appropriate market conditions, but investors aren't biting, concerned that any money invested now in Freddie or Fannie Mae (FNM) will be lost later if the U.S. Treasury purchases equity in a bail-out.
- Lehman may be ripe for hostile takeover. Lehman Brothers'(LEH) struggling financials and failure to sell a large stake to Asian investors could leave it open to a hostile takeover, says Ladenburg Thalmann analyst Richard Bove. He adds that the potential of a takeover makes the investment bank's shares worth buying, sending the company's shares up 7%. State-run Korea Development Bank said on Friday that it was considering a possible acquisition of Lehman, reviving expectations the troubled I-bank may yet snag a large investor.
- Verizon, Google near mobile search deal. Verizon (VZ) is close to a deal with Google (GOOG) on a wide-ranging partnership that could bring new life to the mobile search business. The deal would make Google the default search provider for Verizon devices, simplifying the confusing set of search options currently facing mobile phone users. Both companies would receive ad revenue generated from user searches. Other telecom companies that have turned to web giants for search help include Sprint (S) and AT&T (T).
- Investment-grade bonds see unprecedented stress. Corporate debt spreads (the gap between their yields and those of Treasurys) have climbed to multidecade highs of 3.11% in recent days, exceeding their March peak of 3.05%. Junk-bond spreads are also widening, but at 8.3% they are still short of their 8.6% March mark and the 11% seen in 2002. Spreads on the debt of financials, now at 3.75%, are growing the fastest. "I don't have an appetite for financial institution debt at all," money manager Tom Atteberry says. "They are still early in the process of deleveraging."
- Oil climbs on geopolitical concerns. Oil climbed more than 5% Thursday to above $121 on a weakening dollar and mounting tensions between the U.S. and Russia. Traders are also concerned about a possible cut in OPEC production and Tropical Storm Fay, which might re-enter the Gulf of Mexico over the weekend. Oil prices are up more than $9 from last Friday's four-month low.
- Boeing threatens to withdraw from tanker bid. In the ongoing tanker saga, Boeing (BA) threatens to walk away from a bid on a $40B contract to build U.S. Air Force aerial refueling tankers unless the Pentagon agrees to give it six months to submit a new bid. The Pentagon is leaning towards adding 15 days for Boeing and rival Northrop Grumman (NOC), bringing the proposal-submission period to 60 days. Boeing's threat is the biggest weapon at its disposal, since it would leave the government with no competition for a high-profile defense contract.
- BofA latest to cut I-bank outlooks. Banc of America Securities analyst Michael Hecht cut EPS estimates on Goldman Sachs (GS) (to $2.50 from $3.98) and Morgan Stanley (MS) (to $0.85 from $1.02) to reflect a tough trading and brokerage environment. "We still believe Goldman and Morgan Stanley stand to benefit from stronger customer flow activity as other firms face more substantial de-leveraging pressures," he says, "but still not enough to offset recent cyclical and seasonal pressures across most capital markets businesses the last three months." He joins analysts from Merrill, Fox-Pitt, Bernstein, Citigroup and Lehman.
- Gap earnings beat expectations. Gap Inc. (GPS) beat forecasts with a better-than-expected FQ2 profit. Earnings per share were up at $0.32 (vs. $0.30 consensus), despite a 5% drop in sales. Gap announced a new president for its Old Navy division, for which it plans to roll out new lines that emphasize 'fun' and 'fashion' beginning October. It will continue to focus on cost-cutting.
- No formal talks to sell GM's Hummer - yet. Contrary to initial reports, General Motors (GM) hasn't had formal talks to sell its Hummer brand - yet. CEO Rick Wagoner says, "We haven't really fired the starting gun, but I hope to do so soon."
- Apartments start to feel pinch. Apartment rentals are starting to suffer as job losses affect potential-renters, causing more people to move in with friends or family. Apartment rentals had previously enjoyed a boost as people forced out of their homes by foreclosures or the credit crunch turned to renting.
- Commercial real-estate: No shoe-in. Hopes commercial real-estate loans would be spared market turmoil appear ready to be dashed. Last week a large Harlem apartment complex warned it might not be able to make good on a $225M mortgage payment by September. Wall Street banks, who hold $100B in commercial mortgage-backed securities, are worried a deterioration could lead to another round of writedowns. "The fear is the next shoe to drop may be commercial real estate," Sandler O'Neil's Jeffrey Harte says. "When consumer credit goes south, commercial will follow."
- Inflation hits U.S. workers harder. Euro-zone salaries rose 3.4% in Q1, matching their rate of inflation - a product of union contract negotiations that index wages to inflation. In the U.S. where unions are weaker, consumer prices rose 4.1% in Q1 while salaries climbed a meeker 3.3%. So far in Q2, prices have continued to soar while compensation growth has slowed. Conversely, what's good for workers may wreak havoc on the economy, as rising wages can easily trigger price increases, leading to a so-called inflationary spiral.
- Pimco bets on mortgage-backed bonds. Pimco's Steve Rodosky, head of Treasury and derivatives trading, says the company prefers agency mortgage-backed securities [MBS] over Treasurys because they provide a more attractive yield. Pimco's flagship $129.6B Total Return Fund increased its MBS holdings last month to 65% from 61% in June and shed Treasurys for the seventh month in a row.
- Home Depot, Lowe's skip big promotions. As some retailers hawk discounts, Home Depot (HD) and Lowe's (LOW) are holding back on major back-to-school promotions in an effort to protect profit margins. Facing the weakest demand environment in decades, the two companies are refocusing on offering their lowest prices every day. The move reflects retailer expectations that it could be several quarters before demand picks up.
- Jobless claims fall but remain high. Jobless claims fell for the second week in a row but continue to show signs of a weakening labor market. Jobless claims were down 13,000 to a seasonally adjusted 432K, well below the 443K economists had expected. Economists consider weekly claims above 400K to be a sign of a deteriorating labor market.
- Manufacturing continues to contract. The Federal Reserve Bank of Philadelphia released a report showing manufacturing contracting in August for the ninth consecutive month. The general economic index rose to -12.7 (vs. an expected -12.6) from -16.3 in July, but is still a long way off from last year's 5.1. Sagging orders and falling sales contributed to the negative reading.
- U.K. GDP growth was flat in Q2, surprising economists who expected weak growth of +0.1% and the government's forecast of +0.2%. Yearly growth slows to 1.4% - a 16-year low. The report adds pressure on the BoE to cut interest rates despite inflation concerns.
Earnings: Friday Before Open
- China Sunergy (CSUN): Q2 EPS of $0.08 beats by $0.05. Revenue of $112M (+44.9%) vs. $95M. [PR]
- DryShips (DRYS): Q2 EPS of $3.60 misses by $0.97. Revenue of $259M (+130.1%) vs. $274M. Shares -4%. [PR]
Earnings: Thursday After Close
- Aeropostale (ARO): Q2 EPS of $0.31 in-line. Revenue of $377M (+21.2%) in-line. Shares -1.4%. [PR]
- bebe stores (BEBE): FQ4 EPS of $0.18 beats by $0.01. Revenue of $171.5M vs. $167.5M. Shares -1.4%. [PR]
- First Marblehead (FMD): FQ4 EPS of -$0.57 misses by $0.18. Revenue of -$34M (-116.9%) in-line. Shares -7.8%. [PR]
- Foot Locker (FL): Q2 EPS of $0.25 beats by $0.23. Revenue of $1.3B (+1.5%) in-line. Shares +7%. [PR]
- Gap (GPS): Q2 EPS of $0.32 beats by $0.02. Revenue of $3.52B in-line. Shares +3.7%. [PR]
- Intuit (INTU): FQ4 EPS of -$0.08 in-line. Revenue of $478M (+10.5%) vs. $470M. Shares -2.4%. Shares -1.6%. [PR]
- Pacific Sunwear (PSUN): Q2 EPS of $0.06 in-line. Revenue of $313M (+0.3%) vs. $310M. Shares -23.5%. [PR]
- Wet Seal (WTSLA): Q2 EPS of $0.12 beats by $0.02. Revenue of $149M (+4%) in-line. Shares +2.5%. [PR]
- Zumiez (ZUMZ): Q2 EPS of $0.09 beats by $0.02. Revenue of $92.3M (+12.6%) in-line. Shares -5.9%. [PR]
- Asia markets were mixed Friday. Nikkei -0.68% to 12,666. Hang Seng closed due to storm warning. BSE +1.11% to 14,401. Shanghai -1.09% to 2,405.
- Europe is higher at midday. London +1%. Paris +0.6%. Frankfurt +0.6%.
- U.S. futures are up a bit. Dow +0.13% S&P +0.16%. Nasdaq +0.21%. Crude -0.65% to $120.40. Gold -0.29% to $836.50.
- U.S. dollar is +0.78% vs. the pound. +0.61% vs. the yen. +0.11% vs. the euro. -0.12% vs. the $Cdn.
Seeking Alpha editor Eli Hoffmann contributed to this post.
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