Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.


Homebuilder Confidence At Record Low For Second Month Straight

Homebuilder stocks took a hit Monday after an index was released showing that builder confidence has not risen in November from its October level -- which was the worst since the index was started in January 1985. The National Association of Home Builders/Wells Fargo Housing Market Index posted a confidence index for November of 19, unchanged from the upwardly revised October figure. The index measuring builders' view of buyer traffic ticked up to 17 from 15 in October, but the subindex measuring the way builders see the market six months from now dropped to a record low 25 from 26 last month. Fifty-seven percent of builders surveyed expect the market to remain poor at that point versus 5.7% with a more optimistic view. "The homebuilding industry is certainly picking up the impact of the credit crunch," said Scott Anderson, senior economist at Wells Fargo. "Inventories remain too high, and builders will be cutting back on construction in the months ahead." On Tuesday, D.R. Horton will report fiscal Q4 results and the U.S. Census Bureau will release housing starts data. Economists are forecasting a 2% drop in starts from last year to 1.175 million. Following Monday's report, the S&P supercomposite index covering 15 of the largest homebuilders fell 6.5%. Lennar shed 8.7% to close at $17.57, Pulte Homes 8.1% to $11.80, and the Ryland Group 7.2% to $24.11.

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HP Beats Estimates, Solid Outlook, Shares Up 1.6

%PC maker and hardware giant Hewlett Packard (NYSE:HPQ) posted FQ4 earnings and revenue that came in ahead of analyst estimates, as did its Q1 and full-year 2008 guidance (full story). Q4 profit jumped 38% to $2.6 billion ($0.81/share), up from $1.7 billion ($0.60/share) a year ago. Adjusted earnings per share were $0.86, up from $0.68 and beating analyst estimates of $0.82. Revenue climbed 15% to $28.3 billion, from $24.6 billion last year. Analyst consensus estimates were for revenue of $27.44 billion. Revenue from HP's PC Group grew 30% to $10.1 billion; unit shipments jumped 31%. Server revenue was up 10% to $5.2 billion, while its camera and printer division saw just 4% revenue growth to $7.6 billion. Services revenue was up 7% to $4.4 billion, while its software unit doubled sales to $698 billion. Operating margin climbed 90 basis points to 9.9%. Looking ahead, HP estimates FQ1 2008 adjusted earnings per share of $0.80 on revenue of $27.4 billion to $27.5 billion; analysts polled by Reuters had estimated EPS of $0.77 on revenue of $27.04 billion. For 2008, the company sees adjusted EPS of $3.32 to $3.37 on revenue of $111.5 billion, vs. consensus estimates of $2.87 on revenue of $103.4 billion. HP said Monday its board approved $8 billion in share repurchases. "Strong performance across our businesses was highlighted by sharp improvement in our software segment," CEO Mark Hurd said. "We have added over $12 billion of new revenue this year. While we still have more work to do, HP is well positioned to make further progress in the marketplace," (full earnings call transcript). HP shares fell 2.6% Monday in an overall weak market, but gained 1.4% back in after-hours trading (press release).


EchoStar Tumbles After WSJ Nixes Deal Speculation

EchoStar shares surged 19.3% to close at $47.50 Monday on rumors that a deal was imminent between the satellite network and AT&T (full story), but declined 6.53% to $44.40 after hours when the Wall Street Journal reported no such deal is in the works. An unidentified source close to AT&T told WSJ's Deal Journal that the two sides are not even in talks; nor is it clear that bankers have indeed been hired, as had been reported (full story). The source said it is not yet known whether AT&T will "go after" EchoStar or its rival DirecTV. Deal Journal notes that Charlie Ergen, EchoStar’s chairman and controlling shareholder, is believed to be less eager to sell following EchoStar's poor earnings report two weeks ago and the subsequent drop in the stock price. Neither company has commented on the speculation.


High Energy Costs Could Rein In Holiday Spending - Survey

A new survey says 35% of consumers expect to spend less than usual on holiday shopping this year, the highest figure in the survey's eight-year history. The survey was conducted by the Consumer Federation of America and Credit Union National Association. "The bottom will not fall out of retail but it will be softer," said Bill Hampel, chief economist at CUNA. The high cost of gasoline and home heating appears to be the main contributing factor. Of the 1,000 people polled, 38% said high fuel expenditures will reduce the money available for gift-buying, topping last year's 32% figure. Gasoline is about $1 more expensive per gallon this year than it was last, and Hampel said any further widening of that spread could have an "outsized effect" on spending. "You're going to take fewer trips to the mall if you're paying $3 or more a gallon," said Stephen Brobeck, executive director of the CFA. Other respondents cited the high price of gifts as a factor. Forty-two percent of households with incomes in the $25,000-50,000 range say they will probably cut back on holiday spending this season, but apprehension appears to be cutting across income lines. "We have high-income consumers that are a little nervous about spending money because of volatility in the stock market. The middle class are freaked out about the value of their homes, and then the lower-income consumer is strongly affected by gas and energy costs," said consumer psychologist Kit Yarrow. Retailers are throwing all manner of sales and promotions at consumers to lure them into stores. "They are kind of like desperate lovers courting the consumer," Yarrow said.

Sears Discloses 13.7% Stake in Restoration Hardware, Mulls Acquisition

Shares of Restoration Hardware jumped 18.5% in after-hours trading Monday after Sears Holdings Corporation disclosed it had purchased a 13.7% stake in the specialty home retailer, while adding it was considering "proposing an acquisition." In a 13D filing Sears reported paying $30.2 million in cash for 5.3 million RSTO shares, at an average price of $5.698 (shares closed Monday at $6.33 and jumped to $7.50 after hours). Sears said it is mulling making another offer for Restoration. Sears' previous offer of $4.00 a share in late October was rejected. Then, on November 8, Restoration accepted a buyout offer of $6.70 a share from a collection of private equity led by an affiliate of Catterton Partners. With the deal, Restoration was given a 35-day period to accept a higher offer, giving Sears until December 13 to top the current offer.

Nordstrom Rises on Strong Earnings

Shares of Nordstrom jumped more than 10% on strong quarterly results released after the bell Monday. Net income came in at $165.7 million ($0.68/share), up from $135.7 million ($0.52/share) last year. Earnings for the third quarter included a $0.07/share gain from Nordstrom selling its Faconnable chain. Revenue climbed 5.3% to $1.97 billion. Excluding the gain and other items, the company earned $0.57/share, beating the $0.52/share analysts were expecting; revenue came in right in-line. Same-store sales increased 2.2% in the quarter. For the fiscal year, the company expects to earn $2.87-$2.91/share, including a $0.09/share gain because of Nordstrom's sale of Faconnable. Analysts, who usually do not include items like the sale of Faconnable, had been expecting $2.78/share according to Thomson. Shares of Nordstrom, which were down 6.1% in the day session Monday, rebounded on the report, and traded 10.4% higher to $33.70 in after-hours trading.

Sources: Press release, MarketWatch
Commentary: Are Retail Stocks Bargains?October Same-Store Sales: Comprehensive Roundup
Stocks to watch: JWN. Competitors: M, TGT, SKS. ETFs: RTH, XRT

Tyson Loses Right To Label Chicken 'Antiobiotic Free'

The U.S. Department of Agriculture [USDA] reversed an earlier decision to allow poultry producer Tyson Foods to label its chicken products "raised without antibiotics." The reversal was sent to Tyson in a November 6 letter. Tyson has spent millions of dollars since June in advertising, promoting itself as the "first major poultry company to offer fresh chicken raised without antibiotics on a large-scale basis." The USDA's reversal came after the agency discovered Tyson uses ionophores, a common chicken feed additive designed to prevent an intestinal colonization by coccidia that causes weight loss (and occasionally death) in poultry. Tyson argues ionophores are an antimicrobial, not an antibiotic, and thus they should be allowed to continue labeling their poultry "raised without antibiotics." Tyson shares are down 32% since receiving "antibiotic free" label approval earlier this year.


Rio to Propose Joint Ventures With BHP In Lieu of Takeout

Mining giant Rio Tinto is considering joint ventures with BHP Billiton as an alternative to the proposed merger of the two companies, the Daily Telegraph said on Tuesday. BHP, which Nov. 8 made a $122 billion three-for-one share offer for Rio (full story), already has several joint ventures with the third-ranked miner, including the Escondida copper mine in Chile. Rio has a preliminary defense plan to be unveiled next Monday called Project Manchester that will highlight both its own undervalued share price after its acquisition of aluminum miner Alcan and its strong pipeline, and Rio's contention that BHP stock is overvalued. As an alternative to a merger, Rio would be offer BHP further tie-ups like Pilbara, in Australia, where both companies have separate iron ore mining reserves and operations. BHP CEO Marius Kloppers told Reuters a merger could mean $3.7 billion in annual savings after seven years through synergies in iron ore, coal and other activities. The International Iron and Steel Institute said a combination of Rio and BHP would create a "virtual monopoly." A combined BHP and Rio would have a 38% market share in the global seaborne iron ore trade, similar to the market position of Brazil's CVRD.


Goldman Slaps Citi With a ‘Sell’

Goldman Sachs downgraded Citigroup Monday to Sell from Neutral, saying the bank may have to book $15 billion in CDO [collateralized debt obligation] writedowns over the next two quarters, related to its $43 billion exposure. Citigroup has already said it expects an $8-11 billion loss. Goldman analyst William Tanona said that Citi's problems are likely to spread to its consumer business, such as credit cards and retail banking. "The lack of leadership at this point in Citi's storied history could not have come at a worse time. With deteriorating consumer and housing metrics, Citigroup is facing mounting pressure across many businesses," Tanona said. After Chuck Prince left the company, Citi's Chairman of European operations, Sir Win Bischoff, was appointed interim CEO (full story). "We do not expect there will be a 'quick fix' to some of Citigroup's issues and it will likely take the new CEO some time before he/she decides on the appropriate course of action to take," he wrote. The report also discussed Citi's weakened financial strength. The bank may have to lower its dividend, sell stock, or divest assets to raise money. "Citigroup is trading at a 10-year low price to book multiple of 1.3 times. While this has traditionally been a time we would get much more positive, the firm is facing a number of major issues that precludes us from taking that step, and rather, we are getting increasingly uncomfortable with its near-term prospects." Citigroup fell 5.8% to $32.02 Monday.

Sources: MarketWatch, Reuters
Commentary: Did Anyone Other Than Citigroup Have Liquidity Puts?Greatest Valuation Changes Since 10/9 Peak
Stocks to watch: C, GS. Competitors: MER, DB, LEH. ETFs: IAI, XLF
Earnings call transcript: Citigroup Q3 2007

Marshall & Ilsley Reveals $282M Exposure to Troubled Lender

Milwaukee-based bank Marshall & Ilsley (NYSE:MI) said Monday it has a $282 million exposure to troubled residential mortgage lender Franklin Credit Management Corp. (NASDAQ:FCMC), sending its shares down 2.8%. Last week Franklin announced it would delay its Q3 earnings report until after it reviewed and assessed the reserves for its portfolio of acquired loans, especially second-lien mortgages, due to the rapidly deteriorating real estate and mortgage origination credit market and resulting industry-wide increase in delinquencies involving mortgages originated in the years 2005 and 2006. Franklin shares fell from $2.50 to about $0.50 on the news. Marshall & Ilsley said Monday it did not expect any potential losses on the mortgages to be material to the $8B company's financial results (press release), a view that was later endorsed by Standard & Poors: "We expect the loss content to be low," it told investors. "The loans are backed by pools of first- and second-lien mortgages, the majority of which were either originated prior to 2005 or continue to perform within original projections. Even if the loss content was higher than we expect, such losses could be absorbed by the gains from M&I's divestiture of Metavante." It ended its note saying, "The outlook on the company remains negative, reflecting our concerns about capital management and financial policies post-Metavante."

Fears of Further Writedowns Push Up Financial Sector Credit-Default Swaps

A surge in credit-default swaps in the banking sector suggests that the risk of default among big banks and securities firms is perceived to be rising as analysts boost their estimates of the banks' subprime losses, Bloomberg reported Tuesday. Citigroup contracts rose 12 basis points to 91 basis points Monday, their sixth record high this month. Contracts on Bear Stearns shot up 23 basis points to a six-year peak at 173 basis points. The rises coincide with new forecasts among analysts that subprime writedowns at banks and brokerages will grow beyond the current $50 billion. Goldman Sachs forecasts that Citigroup's losses will grow to $15 billion in the next two quarters (full story), and CreditSights estimates that UBS AG may have lost up to $9 billion on CDOs (full story). Goldman Sachs economists also said the credit crunch could force banks to cut lending by $2 trillion, a prospect that raises the specter of a broad economic downturn as delinquencies rise among home borrowers with poor credit. "There's still a lot more uncertainty to come," said Tim Backshall, chief strategist at Credit Derivatives Research. "We understand the risks now, but we don't know how to measure them yet." Nine out of 50 economists polled by the National Association for Business Economics in late October place the odds of an economic contraction within the next 12 months at 50% or higher. In September, five out of 46 made that forecast. "Third-quarter results were supposed to settle the markets as banks came clean about their risk exposures, but the opposite was true, as the markets fretted that writedowns were not sufficient," CreditSights wrote in a November 18 report.


Medtronic Posts FQ2 Earnings Beat; Defibrillator Recall Hit Less Than Expected

Medical device maker Medtronic Inc. late Monday announced financial results for FQ2 2008, recording revenue of $3.12 billion, a 2% increase over the $3.07 billion reported in Q2 of fiscal year 2007. Net earnings for the quarter were $666 million ($0.58/share), down 2.2% from $681 million ($0.59/share) from Q2 in 2007, as sales of high-margin cardiac rhythm disease management products dropped 8% to $1.15 billion and sales of defibrillators (ICDs) fell 16% to $639 million. Analysts surveyed by Thomson Financial had estimated earnings of $0.56/share based on revenue of $3.1 billion. Medtronic reported inventory write-offs and other expenses of $31 million following the Oct. 15 Fidelis Sprint defibrillator leads recall (full story). Medtronic had said earlier this would lower the company's revenue. During a conference call, Medtronic executives said costs from the recall, and its effect on sales, reduced Q2 profit by $0.09-0.10/share. "The recall impact was less than expected, but ICD sales were still weak," Gabelli Securities Inc. analyst Jeff Jonas, said. "I don't think it was as bad as many people feared." Shares gained 2.8% in extended trading.


Chinese Telecom Stocks Rally

Hong Kong-listed shares of fixed-line operators China Netcom and China Telecom jumped 11% and 8%, respectively, despite both firms reporting heavy declines in subscribers, following a media report saying the government will grant the telecoms 3G licenses "at an early date." Separately, shares of China Mobile rose 2%, as the company said it added a record 6.6 million new subscribers in October, increasing its total subscribership to 356.3M. China Unicom also reported an increase in subscribers, adding nearly 1.5M for a total of 117.1M. Its shares rose 3%. China Telecom said it lost 880,000 subscribers due to "intensified market competition, especially from mobile operators' free incoming call packages." The telecom now has 222.6M subscribers. China Netcom reported a decline of 370,000 subscribers to 114.1M. The fixed-line operators have increasingly struggled to drive subscriber growth because of wireless competition and particularly since fees on incoming wireless calls were dropped from the start of the new year. A Hong Kong-based Daiwa Institute of Research analyst commented, "Mobile substitution is the trend, and there's not much the fixed-line operators can do. Getting mobile licenses is the only solution." China Mobile's ADRs lost 5.1% to $81.80 on Monday and China Unicom fell 4.3% to $18.85, while China Netcom gained 2.8% to $54.00 and China Telecom rose 1.1% to $67.55.


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