Wall Street Breakfast: Must-Know News

Dear reader: There will be no Wall Street Breakfast on Thursday. We return on Friday.

• Federal Reserve and other central banks announce reductions in policy interest rates. The Fed cut its key lending rate by 50 BPs to 1.5%. In a coordinated effort, ECB and Bank of England each drop their key rates by 0.5%, to 3.75% and 4.5% respectively. "Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted."
• Down, down and down. U.S. markets plunged more than 5% Tuesday, their fifth straight day in the red, completely unmoved by a new Fed apparatus to buy commerical paper (secured and unsecured) and a Bernanke hint at lower interest rates. The Dow's five-day drop of 13% is its worst since post 9/11. The S&P 500 closed below 1,000 for the first time since Sept. 2004, and its five-day drop of 14.6% is the biggest since Oct. 1987. Based on the orderliness of the decline, traders think it's being led by small investors throwing in the towel. Market are acting as if they wanted the rescue "plans instituted a month ago," strategist Michael O'Rourke said. "The things driving sellers are worries - not an analysis of where these programs will take us in the next three to six months." Overnight, futures trading was erratic, and momentum was to the downside (see Market Currents).
• U.K. bank bailout. In an unprecedented move to prevent a collapse of the U.K. banking system, and in one of the broadest bailouts in the global financial crisis, the U.K. government will invest £50B ($87B) in the country's banks, while Bank of England unveiled a 'Special Liquidity Scheme' to make up to £200B ($348B) available for banks to borrow. The government will also provide a guarantee of about £250B ($435B) to help refinance debt. Major U.K. banks (including LYG, RBS, BCS) and the largest U.K. building society will participate in a government-supported recapitalization scheme. Unlike the U.S. bailout, which aims at taking over toxic assets, the U.K. plan will try to raise banks' capital to re-start lending, but analysts remain doubtful whether the rescue will restore enough confidence in the financial system to get interbank lending going again. (official statement)
• Costco outshines peers. Costco's (COST) FQ4 bottom line rose by nearly 7% to $398M, beating analyst consensus (see below). Analysts had trimmed their estimates after Costco said in July Q4 would fall short, hurt by its strategy to hold prices steady despite rising input costs to lure shoppers. Recent drops in energy and commodity prices should benefit the company - which continues to outperform many retailers as bargain-hunting remains shopping's overriding theme. Same-store sales rose 7% in September, short of the 7.5% consensus.
• Alcoa punts. In what one hopes won't be an omen for the Q3 earnings season, Alcoa (AA) kicked things off by announcing profits fell 52% amid soft demand, falling aluminum prices, and higher costs. "The report is grim news for other mining and metal manufacturers, as Alcoa, the first blue-chip to release quarterly results, is considered a bellwether of earnings to come." Basic metal prices have plummeted over the last month; miners and metal makers are trying to gauge how deep and how long the price trough will be. "Given the sharp decline in metal prices and increasingly soft demand in our key markets, we are stopping all non-critical capital projects, making targeted reductions to match market conditions, and are adjusting our manufacturing capacity to meet demand in rapidly changing upstream and downstream markets," CEO Klaus Kleinfeld said. He also suspended Alcoa's share-buyback program.
• Citi seeks rich ally. Citigroup (C) has approached potential partners to join its bid for Wachovia (WB) as it continues to struggle against Wells Fargo's (WFC) more-lucrative counterbid. It's not clear who's been approached or how a potential deal might look. Currently, the most likely scenario would give Wells Fargo 75-80% of Wachovia's deposit base and most of its assets, including more toxic option-pay mortgages. Some contend that by continuing to push its inferior bid, notwithstanding its legal position, Citi could destroy its public image. The trio have been working around the clock to reach an agreement before a legal standstill expires today at noon; sources say that now appears unlikely.
• BofA prices share offer way below target. Perhaps not surprisingly, Bank of America (BAC) struggled to find takers for its $10B stock offering. Analysts say investors were spooked by its inability to price the deal, announced after Monday's close, before Tuesday's open. Traders scoffed at BofA's hopes to price at $28, sending shares down 26% to $23.77. After the close, it said it sold 455M shares for $22. In hindsight, it might have been better to launch the share offer together with its $44B buyout of Merrill on Sept. 15. Hindsight's always 20/20.
• MetLife wants $2.8B to bargain shop. MetLife (MET) preannounced Q3 EPS that was in line with estimates (see below), and said it would raise $2.8B in a common share offering. Shares, which fell 16.8% Tuesday, were up 3.1% after hours. CEO Robert Henrikson said MetLife has liquidity to meet its obligations, and that the capital raise was to enable the company "to take advantage of potential opportunities," likely meaning a fire-sale of AIG's (AIG) assets.
• Treasury mulls 'seller financing.' Once the government starts using the $700B rescue plan to buy toxic assets, the Treasury is considering re-packaging the debt into large units to be sold to ventures owned jointly by private investors and the government. Modeled on similar deals from the last real-estate collapse, the so-called equity partnerships would allow the government to get back some of its capital immediately, but would also let taxpayers share in potential profits. The move would also allow assets to be sold quickly, as the Treasury would essentially finance the partnership. In other words, for a $5B package of assets, private investors might put up $1B while the Treasury would essentially lend the venture the other $4B.
• Mortgage mess. With home prices continuing to fall, almost one in six U.S. homeowners owe more on their mortgage than their house is worth. Figures are even worse for those who bought houses in the last five years, with 29% under water on their mortgages. The situation makes defaults and foreclosures more likely, which further depresses property values. Homeowners, feeling the strain, are less inclined to go shopping, which puts further strain on the slowing economy.
• Citigroup to abandon wholesale mortgages, finally. Sources say Citigroup (C) will largely exit the wholesale mortgage business, shearing the number of outside mortgage brokers it deals with to 1,000 from 9,500, and laying off 500 workers from its CitiMortgage division. Many banks have moved on from wholesale mortgages, whose loans tend to be inferior.
• Pfizer accused of drug cover up. A lawsuit against Pfizer (PFE) alleges the drugmaker tried to cover up unfavorable studies about Neurontin, one of the company's big-selling drugs. The lawsuit, which takes aim at Pfizer's marketing of the drug's scientific record, consolidates multiple suits brought by health insurers and consumers looking for refunds for their Neurontin expenditures. Plaintiffs are asking for $4.9B.
• Ford slims down. Facing weakening demand, Ford Motor (F) deepened its planned job cuts at its Volvo subsidiary to 6,000 positions worldwide. The layoffs will affect around 4,800 employees and 1,200 consultants.
• Morgan dispels rumors, shares punished anyway. Shares of Morgan Stanley (MS) fell 25% Tuesday even though it told investors rumors its $9B cash infusion from MUFG (MTU) was falling apart are untrue. Overnight, MUFG issued a statement saying the investment was on schedule, held back only by a regulatory delay.
• Candidates put crisis front and center. With the presidential elections rapidly approaching, the economic crisis has taken center stage in the face off between Sen. John McCain and Sen. Barack Obama. Market turmoil has largely benefited Obama politically, pushing McCain to use the opportunity of the second presidential debate to argue for a $300B plan to allow the government to buy mortgages from homeowners unable to meet their monthly payments. Each candidate has attacked the policies of the other as leading to the financial crisis.
• Saks sale seems unlikely. The credit crunch may scuttle plans by Icelandic businessman Jon Asgeir Johannesson to acquire Saks (SKS). Johannesson planned to raise cash for the deal by selling a stake in a European retailer he owns to Stodir, an Icelandic investment firm he also controls. But Stodir went bankrupt last week after Iceland nationalized a bank in which the firm has a stake.
• U.S.'s newly-prudent consumer. Consumer credit fell by $7.9B in August, a contrast to the $5B increase expected by economists. For the first time in almost 11 years, Americans paid off more debt than they spent. It's the largest drop since they began keeping statistics in 1943.
• Chain-store sales rose 1.3% last week vs. a year ago and 0.1% vs. the week before, the ICSC said. Notably strong were discounters, department stores and apparel.

Earnings: Wednesday Before Open

• Costco (COST): FQ4 EPS of $0.97 beats by $0.04. Revenue of $23.1B (+12.8%) vs. $22.95B. [PR]
• LDK Solar (LDK): Sees Q3 revenue of $530-540M vs. $491M consensus. Wafter shipments of 230-240 MW vs. previous guidance of 210-220 MW. [PR]

Earnings: Tuesday After Close

• Alcoa (AA): Q3 EPS of $0.37 misses by $0.17. Revenue of $7.2B vs. $7.23B. Suspends share repurchases. Says recent margin squeeze (falling prices/soft demand) will have greater impact going forward. Shares -8.9%. [PR]
• MetLife (MET): Sees Q3 EPS of $1.38-1.58 (mid-range = $1.48) vs. $1.44 consensus. Sees revenue of $8.6B vs. $13.73B. Plans to raise $2.8B through a common stock sale. [PR]
• Sealy (ZZ): Q3 EPS of $0.12 beats by $0.04. Revenue of $405M (-9.3%) vs. $399M. Shares +9.1%. [PR]
• Yum! Brands (YUM): Q3 EPS of $0.58 beats by $0.04. Revenue of $2.84B vs. $2.78B. Shares +2.6%. [PR]

Today's Markets

• Another ugly day overseas. Nikkei -9.38% to 9,203. Shanghai -3.04% to 2,092. Hang Seng -8.17% to 15,431. BSE Sensex -3.14% to 11,328.
• London at midday -2.75%. Paris -4.2%. Frankfurt -4.6%.
• Dow futures soared after central banks announced a coordinated 50 BPs rate cut. Dow +0.61% to 9,596. S&P +1.37%. Nasdaq +1%.
• Crude -1.08% to $89.15. Gold +3.04% to $908.50.

Wednesday's Economic Calendar

• 5:00 Euro-Zone GDP
  7:00 MBA Mortgage Applications
  7:45 Fed's Plosser speaks on central banking
  10:00 Pending Home Sales
  10:35 EIA Petroleum Status
• Notable earnings before Wednesday's open: COST, MON

Seeking Alpha editor Rachael Granby contributed to this post.

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Comments

[axelrod608:]

Upside down nation. Underwater. And it looks like the corporate-run government is doing everything it can to preserve the jobs of the casino gamblers masquerading as financiers and not lifting a finger to keep the solvent citizens afloat. No good deed goes unpunished.

The nation will not recover without significant change. We need savings. Time to declare an end to taxes on interest and dividends. Time to tax debt. Really. The only way out of this mess is to require sound economic principles.

And then there's our "government". Trying to spend our way out of this mess is as futuile as trying to drill our way out of the "energy crisis".

Finally, having watched this begin, noting all the dumb deregulation by both major parties that caused it all, how can any thinking American go to the polls and vote for a Republicrat ? The only truly insoluble problem in this country is the two parties in charge.

No leadership. no morals, no ethics, no principles, and bad judgement. Just keep those campaign contributions coming from corporate America. If we do not fundamentally change our election process we will not survive. Campaigns MUST be 100% government funded with NO outside ads.

We either get the lobbyists out of DC or we turn over the government to them. If we haven't already.....

2008 Oct 08 09:34 AM

[John Lounsbury:]

Under water? It has happened before. I built my "dream home" in 1972. I owned the land and was able to finance the construction 100%, using the land value as equity. Within a few years, I am sure that the market value of the property was less than my mortgage, if I could have sold it, which was debatable .

Because of the oil crisis I was having trouble meeting living expenses. The cost of driving to work and the cost for heating my home approximately tripled in a short period of time. All other costs increased dramatically. Inflation rates in the 70's moved well into the teens. My income did not keep pace.

My family wore used clothes. We drove very little and had an old car. We went in the woods and dragged home firewood (by hand) so that we could use less heating oil. There were no vacations for five years. But never once did we consider foreclosure. We had a place to live and sacrificed everything else to protect it.

I sold that home in 2004 for ten times the original cost.

The current situation will also pass. We will come out the other side stronger. The pain may last for years. Government action may or may not help. Washing out the effects of shocks, in this case a credit bubble bursting, take time. Just remember, you don't hang the wash out to dry until all the detergent has been rinsed out.

2008 Oct 08 10:07 AM

[axelrod608:]

J........59 Look how you dealt with the situation - you cut back, made do with less and responsibly dealt with the situation. At one point in my life I would have been homeless except for monthly checks from my father who was then in his 80's. It has been a long road back.

Look how the government is dealing with the problem - throwing massive amounts of money in every direction. What do we know about the results of that ? World Bank economists studied every national financial crisis over a 30 year period. Their conclusion was that the length and depth of the ensuing recession was directly correlated with the mount of money the government threw at the problem to try to fix it. 100% of the time. No exceptions.

20 years ago, the most expensive stock and real estate in the world was in Japan. They intervened in their financial crisis and bailed out all the banks. Today, 19 years later, you can still buy stocks and real estate at half - or less - than 20 years ago.

Anyone who thinks the markets and real estate wll turn around in a few months and everything will be rosy again is just not paying attention to the lessons history teaches those who pay attention.

And NOBODY in DC is paying attention.

2008 Oct 08 10:46 AM

[daytrader:]

first off.jlounsbury 59.that is the type of person who i have the utmost respect for!this man knows what hard work is.so do i.i rather break bread with this gentleman,if a lady please excuse me,then rich people who were born with silver spoons in their mouth.it took me 16 years;i did a total of over 28 years,working nights at ups,doing physical work,just to get the down payment on my modest condo.i salute you jlounsbury 59!

second thing.with all the problems you listed eli,i believe this will be the longest&nastiest bear market of them all.

just my opinion.the "experts" are on wall street&washington d.c.

2008 Oct 08 12:19 PM

[hanson001:]

For it is written, I will destroy the wisdom of the wise, and will bring to nothing the understanding of the prudent. Where is the wise? where is the scribe? where is the disputer of this world? hath not God made foolish the wisdom of this world?

I Corinthians 1:19-20

Yes sir, over and over again.

2008 Oct 08 12:58 PM

[pkscottx:]

I paid 25% down on my house and bought within my means.

I pay my mortgage and my bills and save what I can. Who's going to "rescue" me from the bailout?

Do not believe for one second that this is caused by the evil sub-prime borrower. There is a root cause for all of this and it is DEREGULATION, which like it or not is a Republican mantra. There is however, enough blame to go around.

The thing they are just now starting to talk about that has the Big Boyz soiling themselves are "Derivatives." These are "complex financial instruments" created out of smoke and mirrors by WALL STREET.

You need to know these things. Derivatives have ZERO underlying assets. They have a notional "value" of tens of TRILLIONS or HUNDREDS of trillions of dollars. Nobody knows for sure because they were completly UNREGULATED and they are opaque as MUD.

It wasn't the collapse of the Securities backed by sub prime mortgages (bad as that was) that brought down Banks and AIG, it was the failure by said intitutions to reserve enough capital to pay off if these "side bets" went bad. Nobody knows how much or who holds the liability but ALL the financial institutions, some insurance companies, and most all the hedge funds have a MOUNTAIN of this toxic garbage swept under the rug. That is the "counterparty risk" everyone keeps yacking about.

THIS is what has banks hoarding cash and eying each other with distrust.

Even if you take the lowest estimate of 50 trillion (or 50 thousand billion) you can see that the "bailout" of $700 billion is like trying to bail out the ocean with a soup spoon.

If you take the higher estimates of hundreds of trillions, you are talking about more than the entire annual GDP of the entire freaking planet!

Lest you think I exagerate, look at Iceland. Ponder on the fact that some nations in Europe have guaranteed all deposits in their banks, to the tune of 3 times their annual GDP.

Either we let the institutions and the investors who took the risks fail and go bankrupt or we bankrupt the whole planet.

2008 Oct 08 01:01 PM

[pkscottx:]

Here's a link that explains derivatives in plain english:
cbsnews.com/stories/20...

2008 Oct 08 01:05 PM

[poncawolf:]

10x10 - Golden Calf Builders - It's so compulucated - We just knew how to steal.

10x10 Stockes - Evey Law of the God's Covenant was broken - Just like the Golden Calf Builders of Before.

The Old Man suffers long with his People - But he does not hold his wrate forever.

To Complicated for you - But not for Him.

2008 Oct 08 05:11 PM

[bbowen7:]

This is a fascinating time. You get ranting pupulism, political finger pointing, and even some religion. jlounsbury makes more sense than anybody. One of the best data points in Eli's summary is that consumer debt fell $7.9 billion in August- the largest decline since they started keeping statistics in 1943. The good point is that the government didn't have to tell anybody to do this.

2008 Oct 08 05:12 PM

[I weep for ...:]

I can't believe all of this nonsense over AIG. IS EVERYONE STUPID! The FED now owns AIG, even after AIG pays back the 100 plus billion dollar loan, the FED owns them. Why are we mad about a conference where 100 of their biggest clients were wined and dined by a 10 AIG employees. That is standard practice. The insurance company has a billion dollar marketing budget and needs now more than ever to keep their huge clients. The better AIG does the better tax payers will be when the FED sells the 79 percent interest. Piling on against AIG is actually against every taxpayers best interest. We want them to thrive not go bankrupt you CLONES!

2008 Oct 09 07:11 AM

[I weep for ...:]

Oct 09 07:11 AM
I can't believe all of this nonsense over AIG. IS EVERYONE STUPID! Obama made damaging reckless comments and didn't even look into the issue. The conference was set a year in advance and paid for by the marketing budget of the insurance companies which can not be tapped to pay back the loan from the FED and the FED loan money is not going into the insurance companies budget at all! Plus, the FED now owns AIG, even after AIG pays back the 100 plus billion dollar loan, the FED owns them. Why are we mad about a conference where 100 of their biggest clients were wined and dined by a 10 AIG employees that was paid for by the insurance companies? That is standard practice. The insurance company has a billion dollar marketing budget and needs now more than ever to keep their huge clients. The better AIG does the better tax payers will be when the FED sells the 79 percent interest later. Piling on against AIG is actually against every taxpayers best interest. We want them to thrive not go bankrupt you IDIOTS!

2008 Oct 09 07:16 AM

[Repsonsible...:]

The World goes Down the drain , and the Crew at CNBC sits and LAUGHS and Jokes and has a Gay old time. Their Set, Milllion Dolllar Jobs, Big Homes upstate , in Florida too They LOVE THIS its Great for Ratings they'll get huge raises this year. Bill and Sue and Michaele they can hardly stop smiling and laughing . They Make me sick , there NOT Patriotic in fact there probably in the HATE America Club and everyone them Supports OBAMA , its a Job requirment !

2008 Oct 09 01:36 PM

[bzshadow:]

actually almost everyone on cnbc are supply side republicans following larry kudlow. they parrot his drivel all the time.


On Oct 09 01:36 PM Repsonsible Citizen wrote:

> The World goes Down the drain , and the Crew at CNBC sits and LAUGHS
> and Jokes and has a Gay old time. Their Set, Milllion Dolllar Jobs,
> Big Homes upstate , in Florida too They LOVE THIS its Great for Ratings
> they'll get huge raises this year. Bill and Sue and Michaele they
> can hardly stop smiling and laughing . They Make me sick , there
> NOT Patriotic in fact there probably in the HATE America Club
> and everyone them Supports OBAMA , its a Job requirment !

2008 Oct 09 02:54 PM

[daytrader:]

to Responsible Citizen

YOU ARE 100% RIGHT!!!

coincidentally.i was just saying the same thing the other days to the guys in the gym.they live in a fool's paradise.i am not jealous of them,and as sure as hell do not want to be like them!the dow now is 58 points from droping under 9000&you are right.they're laughing.

p.s. i am like you.i'm voting for the american!

2008 Oct 09 02:54 PM

[byrnemm:]

i do all my apocalyptic economic prophesizing at the gym too.

something about sweat and yoga pants really gets me going on the spider-over-flame Jonathan Edwards imagery.

2008 Oct 10 05:07 PM