- 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]
- 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.
Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.