Wall Street Breakfast: Must-Know News

• Bailout bill 2.0. The Senate easily passed (74 to 25) a much-modified bailout bill (.pdf), but its numerous provisions may complicate the $700B package's trip through the House. Additions include an increase in FDIC bank deposit insurance (to $250K from $100K); a suspension of mark-to-market accounting which pegs companies' assets to their current market value; and an unrelated $150B tax-cut package. From an original three pages, the proposal is now a bulging 400+. Senators and House leaders were cautiously optimistic the bill would gain House approval on Thursday or Friday.
• Buffett backs GE. Shares of GE (GE) closed down 3.9% Wednesday to $24.50, giving back most of a mid-day surge after it announced Warren Buffett's Berkshire Hathaway (BRK.A) was taking a $3B stake in the struggling conglomerate. GE sold Buffett $3B in perpetual preferred stock with a dividend of 10%, callable after three years at a 10% premium. Berkshire also gets warrants to buy $3B in GE shares at $22.25 any time during the next five years. Buffett said he's "confident that GE will continue to be successful in the years to come." Concurrently, GE announced a public stock offering of at least $12B. Bespoke compares Buffett's GE stake with his recent investment in Goldman Sachs (GS).
• UBS turns a profit. Full earnings aren't scheduled until Nov. 4, but UBS (UBS) released an early statement today showing it will record a small net profit for Q3 despite "extremely volatile" market conditions. UBS also reassured investors that it is working to maintain a solid capital base. Chairman Peter Kurer said the bank, which had posted net losses in four consecutive quarters, will be profitable overall in 2009. Shares gained 8.6% in Zurich.
• Car sales slump, again. U.S. car sales fell 27% in September to 965K - a 15-year low. Seasonally adjusted, annual sales stand at just 12.5M, down from 16.19M a year ago. Of note was the weak performance by Japanese firms, until now somewhat shielded from the U.S. carnage: Toyota's (TM) sales fell 32.3%, Honda's (HMC) dropped 24% and Nissan's (NSANY) plunged 37%. Among Detroit's Big Three, Ford's (F) sales fell 34%, Chrysler's 33%, while GM (GM) fared the best, losing just 15.8% - possibly a result of aggressive incentives and a move to boost less-profitable fleet sales. GM's sales chief Mark LaNeve was realistic about the firm's 'standout' performance: "A few years ago I would have jumped out the window with these numbers, and we're on the 39th floor here." Asia carmaker shares sagged Thursday: TM -3.4%. HMC -4.5%. NSANY -4%.
• Lilly lusts ImClone. Sources say Eli Lilly (LLY) is ImClone's mysterious "large pharma" suitor, and is in advanced talks to acquire ImClone for $70/share - or $6.1B. IMCL Chairman Carl Icahn says the nameless firm has completed due diligence, and made a proposal not subject to financing. A formal offer could prompt 17% stakeholder Bristol-Myers (BMY) to increase its unsolicited $62/share bid for ImClone.
• SEC stretches short-selling ban. The SEC, while conceding "short selling plays an important role in the market for a variety of reasons" - extended its short-selling ban to Oct. 17. It hopes to have permanent legislation in place by the time the extension expires.
• Fed weighs further rate cuts. The Fed is considering more interest-rate cuts, even if Congress passes a $700B rescue plan, in the face of a deteriorating economic outlook - WSJ reports. The risk of a catastrophic severe recession, while small, has re-emerged in recent weeks - as witnessed by yesterday's weak auto sales and factory numbers (see above, below). Earlier this year, Fed officials had believed such a threat had dissipated.
• Sigma sinking. The $27B London-based investment fund Sigma Finance Corp. is facing imminent liquidation after a sharp fall in the value of its investments, which included Lehman Brothers debt. Forced to default on its borrowing agreements because of the drop in value, investors in the fund's debt holding paper could be left with as little as $0.15 on the dollar, and banks that lent to Sigma will be able to sell $25B in collateral, adding to credit market pain. A list of Sigma assets has already circulated amongst potential buyers to start getting a sense of their worth. Sigma is the last major survivor of the structured investment vehicles breed of investment funds.
• Modest rise in job recruitment. Monster's Employment Index edged up to 160 from 159. It is the second consecutive month of slight growth, but there is little to suggest a change in underlying soft demand. "The modest rise... reflects the typical pick up seen in overall recruitment activity during the outset of the fall hiring season," it said. "Although the index is down 14% Y/Y, there are some bright spots, including increased online demand for occupations in public administration and healthcare."
• Roche readies to prove M&A still alive and well. Despite recent market turmoil and tight credit markets, Roche Holding (RHHBY.PK) is still confident it can raise the financing for its bid for Genentech (DNA), a total of $43.7B for the 44% of the biotech giant it doesn't already own. Although Genentech's shares closed yesterday at $86.50, beneath the $89/share offer, a spokesman said the offer "undervalues the company." No news from Roche about whether it plans to raise its offer or keep it unchanged. Even if Roche's offer is ultimately rejected, its ability to successfully fund its bid would provide a critical sign of life for mergers and acquisitions outside the financial sector.
• Manufacturing plunges. The ISM's index of factory activity fell to 43.5 in September, compared with 49.9 in August and 50.0 in July, well below consensus forecasts of 49.5. A reading below 50 indicates contracting economic activity; September's is the lowest since Oct. 2001. The index "indicates a significantly faster rate of decline in manufacturing during September, marking a departure from the 2008 trend toward negligible growth or contraction each month," ISM said. Price inflation also slowed, to just 53.5 vs. 77 in August and 88.5 in July.
• Construction spending surprises. Construction spending was flat in September, slightly better than the 0.5% decline forecast. Residential construction is down 27.9% from a year ago.
• Mortgage demand dives. Mortgage applications dropped by 23% over the last week, MBA said. Refinancing plummeted by 34.7%. 30-year fixed rate mortgages were essentially flat at 6.07%.

Earnings: Thursday Before Open

• Marriott International (MAR): Q3 EPS of $0.34 beats by $0.02. Revenue of $2.96B (+0.7%) in-line. [PR]

Earnings: Wednesday After Close

• Micron Technology (MU): FQ4 EPS of -$0.27 misses by $0.05. Revenue of $1.45B (+0.9%) vs. $1.55B. Shares -4.65%. [PR]

Today's Markets

• Asian markets closed mixed: Nikkei -1.88% to 11,155. Hang Seng +1.08% to 18,211. Shanghai -0.16% to 2,294. BSE Sensex closed.
• Europe is higher at midday. London +1.6%. Paris +1.1%. Frankfurt +0.7%.
• U.S. futures are under pressure. Dow -0.6%. S&P -0.71%. Nasdaq -0.16%. Crude -1.22% to $97.33. Gold -1.71% to $872.60.

Thursday's Economic Calendar

• 6:00 Monster Employment Index
  
• 7:45 ECB Announcement
  
• 8:30 Jobless Claims
  
• 10:00 Factory Orders
  
• 10:35 EIA Natural Gas Report
  
• 4:30 PM Money Supply
• Notable earnings before Thursday's open: MAR, STX
• Notable earnings after Thursday's close: LWSN

Seeking Alpha editor Rachael Granby contributed to this post.

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Comments

[Manistee:]

With the Fed and our Government eager to hand out money to anyone claiming a problem, I can't understand how the dollar can be so strong against a basket of world currencies! A clear explanation would be appreciated. Certainly the average country can't be in even worse shape than the U.S. Is this a coordinated effort to artificially support the dollar when it should be falling?

2008 Oct 02 08:20 AM

[montyman:]

Well Manistee, world currencies aren't doing so great either. The Euro is in trouble.... The real question is why gold isn't exploding to the upside.

2008 Oct 02 08:40 AM

[Beefcake:]

Mazel Tov Eli! Did you have a good new year?

User273569 you have to realize that this is not just a US crisis going on. This is a global issue. You have Europe in a ression with high inflation. Many other countries had significat amounts of money invested in the US and the losses they have faced continues to put pressure on their currency as well. Additionally there are many speculators in FOREX.

2008 Oct 02 08:41 AM

[leh:]

The real question IMO is why gold isn't surging given the global nature of this crises.

2008 Oct 02 08:41 AM

[pockyclips ...:]

The real price tag on Bailout 2.0 is now approaching $900 B, assuming
FDIC doesn't actually have to pay out on those $250 K deposits!
Coupled with the rumored interest rate cut, I see us turning Japanese
and everything won't be all right.

2008 Oct 02 08:45 AM

[captainjohann:]

What the chinese are doing with $ 1 trillion of US paper?

2008 Oct 02 09:39 AM

[sieraromero:]

Anybody try to by some silver lately? You have to buy it at several dollars above spot price if the dealers can get it at all. [physical possesion of it] Yet the spot price is going down,the producers stock prices are going down and the market as a whole makes no sense. It is being manipulated by someone or something. Why is the federal reserve making JPM rich at the expense of others. The federal reserve needs to be abolished! Our country needs a free market system instead of the government, the federal reserve and the big money people manipulating at their given whim to dictate who makes money and who loses money in this rigged market.

2008 Oct 02 10:42 AM

[Econ 101:]

sierrarommero,

You are right it is a manipulated market and those part of Paulsons cabal will get rich while the rest of us go hungry. Nancy Pelosi and her corrupt friends are being bought off cheap in this too. At least in a South American banana republic you know who the crooks are.

2008 Oct 02 10:59 AM

[woodsey:]

Witness bear raid on Thornberg; Bear St. was there too.

2008 Oct 02 01:21 PM

[zanardm:]

Appropriation bills start in the House; not in the Senate. The House has already voted on a bailout of hedge funds/Wall st. Why should the House consider constructing a new bailout bill? Credit tightness is handled by central banks; not by bailouts. Why wouldn't hedge funds unload toxic high risk debt to other firms, and then to the U.S. tax payer? National debt is at $15 trillion currently and dollar is at -30% compared to all other major currencies. So a we pay a 30% premium on oil. Let the markets mark to market to give a current value to any underlying actual assets. Also the House doesn't take orders from the Senate. The House has already voted and done it's work; House adjoined.

2008 Oct 02 05:25 PM