Wall Street Breakfast

by: SA Editors
SA Editors
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Citigroup Receives $7.5 Billion Capital Infusion from Abu Dhabi

The Abu Dhabi Investment Authority [ADIA] will purchase up to 4.9% of Citigroup Inc. for $7.5 billion, the bank announced Monday. "This investment reflects our confidence in Citi's potential to build shareholder value," said ADIA MD Sheikh Ahmed bin Zayed al-Nahyan in a joint statement. The infusion will help Citigroup rebuild its capital base following record mortgage losses that led to the departure of Chairman and CEO Chuck Prince. The fund, which will take no role in Citi's management, will buy securities that convert into 235.6 million shares starting in 2010 and yield 11% in the meantime -- almost double the bank's normal bond yield, and 4% higher than its shares' current dividend yield. Between March 15, 2010 and Sept. 15, 2011, the securities will convert to Citigroup shares within a $31.83-37.24 price range. "The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83," said George Nikas of Deutsche Bank. "Clearly, Citi has a problem with capital adequacy after the subprime crisis," said Giyas Gokkent, head of research for National Bank of Abu Dhabi. "ADIA is effectively Abu Dhabi's fund for future generations, so they've seen an opportunity to get cheaply into a blue-chip stock they believe in long-term." Some analysts suggest the purchase could signal an end to the steep plunge in the financial sector. "Citi is big, it's widely followed, and when people see confidence in it, it should mean something," said Bo Brownstein, a finance sector analyst at Cambiar Investors. Following the announcement, equity futures were up sharply in overnight trading, while two-year Tresury notes fell the most in almost a month.

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Schumer Urges Probe Into Countrywide's Borrowing; Shares Tumble

Shares of Countrywide Financial fell 10.7% to close at $8.62 Monday after Sen. Charles Schumer (D-NY) urged federal regulators to investigate the huge advances made by the Federal Home Loan Bank of Atlanta to the mortgage lender. "Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Schumer said in a statement. "At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk." In a letter to Chairman Ronald Rosenfeld of the Federal Housing Finance Board, Schumer said he fears the $62.4 billion in loans Countrywide has put up as collateral on $51.4 billion in advances it has received from FHLB Atlanta "may pose a risk to the safety and soundness of the FHLB system as a whole," which includes 12 home loan banks. Countrywide has received 37% of FHLB Atlanta's total outstanding advances, and the loans it is using as collateral represent 78% of its total mortgage holdings. "I find these numbers alarming as reports continue to emerge about how Countrywide's reckless and predatory lending practices were a leading contributor to today's foreclosure crisis," Schumer wrote. Schumer, who is chairman of the congressional Joint Economic Committee, held a press conference in August to rebuke Countrywide for using high commissions to reward brokers who guide borrowers toward expensive loans. Schumer's letter may have contributed to Monday's sell-off (full story), which saw the yield on U.S. 2-year notes drop to 2.88% and the yield on 10-year notes to 3.79%, their lowest points since December 2004 and March 2004, respectively. "You had Schumer talking about Countrywide, and doing all this funding through the home loan banks," said John Roberts, MD at Barclays Capital Inc. "The combination seemed to light the market. It just took off."

More Job Cuts at Citigroup Ahead - CNBC

Citigroup is planning large job cuts in the near future, according to CNBC. The report on CNBC said Monday that a number has not been set yet, but the lay-offs have already begun. It is estimated that the total number of cuts will range from 17,000-45,000 and will occur over the next few months. The cuts will be Citi's second major restructuring in the last year after the company dropped 5% of its workforce in April. Shares of Citigroup hit a four and a half year low last Thursday of $30.50. In Monday trading, Citi shares fell 3.1% to $30.70. Shares are up in pre-market trading Tuesday after the bank told investors the Abu Dhabi Investment Authority is taking a $7.5 billion stake in the company (full story).

Sources: CNBC Report (Video), Reuters
Commentary: Why The Safest Banks Saw the Biggest LossesCiti at Record Lows; Expecting 30% Growth This Year
Stocks to watch: C. Competitors: MER, GS, LEH.ETFs: XLF,KCE
Earnings call transcript: Citigroup Q3 2007

Barclays Reaffirms Q4 Outlook Despite Shaky Markets

U.K. number-three bank Barclays (NYSE:BCS) said Tuesday it expects its full-year earnings to be broadly in-line with consensus estimates despite current market uncertainties. Barclays told investors profits at its credit card unit grew strongly, and that its retail banking unit has delivered solid growth. Earlier this month, Barclays said it would take a writedown of about £1.3 billion ($2.7 billion) on mortgage-backed investments, a figure lower than some had expected (full story). Barclays' current forecast is for 2007 pretax profits of £7.1 billion, up 4% from last year's £6.8 billion. "What we've had today is a reassuring update -- earnings and capital are in line with consensus," BNP Paribas analyst Ian Gordon said. Shares gained 4.5% in London trading.


Treasury Yields Climb on Citigroup Stake, Fed Action

Two-year Treasury notes fell the most in almost a month overnight after the Abu Dhabi Investment Authority said it would take a $7.5 billion, 4.9% stake in troubled U.S. banking giant Citigroup (full story), and the Federal Reserve said it would offer at least $8 billion in loans for triple the normal time period. "Treasurys are getting whacked," bond broker Kenny Borowicz said. "It may restore investor confidence in Citigroup and perhaps in the banking sector and the economy in general." After falling to 2.87% Monday, the two-year Treasury yield was back up to 3.03% in early London trading. Two-year yields, among the most sensitive to interest rate speculation, have plummeted more than 2% since June as investors shun anything less than government-guaranteed debt. The drop in overnight Treasury prices, coupled with a strong climb in equity futures, signal investors are initially encouraged by the Abu Dhabi vote-of-confidence and the Fed move. The Fed said Monday it would inject at least $8 billion into deflated capital markets through six-week loans maturing on Jan. 10; ordinary repos usually max out at two weeks. "The timing and amounts of subsequent term operations spanning the year end will be influenced by market and reserve developments," the New York Fed said in a statement. Ameristock's Two-Year Treasury ETF (GKA) and iShares' 1-3 Year Treasury ETF (NYSEARCA:SHY) are exchange-traded vehicles that offer exposure to Treasury movements.

Pulte Homes Backs Q4 Guidance

Pulte Homes reaffirmed its Q4 guidance Monday despite poor demand and elevated supply levels. A month ago, the homebuilder stood by its earlier forecast of income from continuing operations in the range of $0.10 per share to breakeven. "[W]e remain committed to our previous guidance for fourth quarter pre-impairment earnings and cash position, and we continue to improve our already strong balance sheet," said Pulte CEO Richard J. Dugas, Jr. in a release. "Our teams continue to do an outstanding job selling and closing standing inventory and lowering overall land investment levels, all in an effort to generate cash and give Pulte maximum flexibility entering 2008." Pulte Homes shares closed down 4.9% at $9.16 Monday but then rebounded 4.8% to $9.60 in AH trading following the statement.

Sources: Press release, Reuters, MarketWatch, AP
Commentary: Caveat Emptor: The Tumbling Housing MarketNo Point in Bottom-Fishing the Homebuilders
Stocks to watch: PHM. Competitors: CTX, DHI, LEN. ETFs: ITB
Earnings call transcript: Pulte Homes Q3 2007


Activision Boosts Q3, Full Year Outlook After Strong Thanksgiving

Video-game publisher Activision (NASDAQ:ATVI) boosted its full-year earnings and revenue targets early Tuesday, citing "better-than-expected response to its holiday slate worldwide," driven by number-one seller Guitar Hero III: Legends of Rock. For FQ3 2008, Activision expects record net revenue of $1.225 billion and adjusted EPS of $0.70, up sharply from previous estimates of $0.55/share on revenue of $1.05 billion. For full fiscal year 2008, Activision expects net revenues of $2.30 billion and adjusted EPS of $0.85, compared to a previous outlook of net revenues of $0.65/share on revenue of $2.07 billion. The strong numbers were well ahead of analyst projections. Analysts polled by Reuters had been expecting Q3 EPS of $0.57 on revenue of $1.06 billion, and full-year earnings of $0.69/share on revenue of $2.1 billion. "Due to the strong consumer response to our slate through October and strong retail sales over the Thanksgiving weekend, we are raising our financial outlook for the December quarter and the fiscal year," CEO Robert Kotick said in a press release.

Sources: Press release


Yahoo Shopping Crashes on Cyber Monday

Merchant Solutions, Yahoo's hosted shopping service, suffered severe outages on "Cyber Monday," resulting in frustrated shoppers and irate merchants on one of the biggest Internet shopping days of the year. Cyber Monday is the first business day after the long Thanksgiving weekend and consumers' first opportunity to buy online what they were unable to find in stores. At 5:30 a.m. EST Monday, Yahoo Shopping started kicking out "system unavailable" error messages to consumers trying to make purchases at some of the 40,000 participating online merchants, most of which are small to medium-sized. John DiFrenna of sandboxcouture.com, whose sales via Yahoo Shopping shut down completely at 6:00 a.m., called the situation "very frustrating," particularly since the error message did not explain that the problem was with Yahoo rather than the store's site. "[Customers are] just thinking when it doesn't work, we don't have our act together," he said. "[I]f their first experience is they can't access our site, they're not coming back." Search engine optimization consultant Catherine Seven said all 22 of her clients on Yahoo Shopping experienced total shutdowns on Monday. "For all these mom-and-pop shops, this is what they wait for so they can buy their kids Christmas presents," she said. Prior to the shutdown, ComScore estimated Cyber Monday 2007 could set a sales record above $700 million (full story). A Yahoo spokeswoman attributed the failure to "heavy holiday traffic" and said the company was "working toward a solution" without giving details. Yahoo shares closed down 3.5% at $25.21.

Google Readying for 'GDrive' Launch - WSJ

Google is reportedly preparing to roll out its previously-dubbed "GDrive" online storage service in as early as a few months, according to sources cited in a Wall Street Journal report. While online storage services are already available from third-parties (including from rivals Microsoft and Yahoo!), Google's potential offering is of interest because of high expectations the company can offer a simplified, reliable service with tie-ins to its Apps suite. However, Google faces a number of obstacles in creating a service that meaningfully challenges Microsoft's long dominance of the way people access and store files. Key concerns are privacy, which is partially related to whether advertisements will be displayed as a part of using the service, and copyright issues related to the capability of sharing files, including media files. Also of importance is the reliability of the service and it having a simple on/offline user interface, which makes using the storage similar to accessing a local hard drive. A Google spokeswoman declined to comment on specifics, but said in a statement that "storage is an important component of making Web [applications] fit easily into consumers' and business users' lives." Sources didn't know about pricing, but said Google plans to offer both free and fee-based storage allotments. Shares of Google lost 1.6% to $666 on Monday.

Local Alliances Will Determine Google's China Success - Reuters

In order to gain market share in China, internet giant Google must learn from the mistakes of peers Yahoo and eBay who failed to understand the Chinese consumer, Reuters says. Instead of forging into China on its own, Google's success will hinge on its abilities to lasso strategic partners with knowledge of and ties in the Chinese marketplace. "Google definitely has made very good strategic decisions, because they selected partners instead of going in by themselves," analyst Edward Yu said. Baidu.com dominates the domestic market due to its familiarity with the landscape, and due to it being less regulated than outsiders. "Google is bound to be more restricted by regulations than a local firm. It probably won't be able to directly import its more sensitive products, such as Google News, and will have to develop domestic services," analyst Liu Bin said. Google already has approval to provide online content in China, but unlike Baidu, none of its content may be produced in-house. Another hurdle is Google's inability to provide search for free music files, one of Chinese search engines' most popular functions, due to international copyright laws, researcher Shaun Rein said. Its China unit also lacks managerial independence. Google entered China in 2005. Since then, it took a stake in social networking site Tianya.cn, downloading service Xunlei, and partnered with portal SINA. In order to avoid China's regulatory hurdles, Google will have to continue making friends in the right places, Yu said.

Sources: Reuters
Commentary: Has Google Failed in China?Google Looks Good, But Chinese Growth Would Help
Stocks to watch: GOOG, SINA, SOHU, BIDU, YHOO, EBAY
Earnings call transcript: Google Q3 2007


NBC First to Buy TiVo Demographic Data to Improve Ad Effectiveness

GE-owned TV Network NBC Universal will announce as soon as Tuesday it will be the first company to pay TiVo for its proprietary TV viewership research and interactive advertising products, The Wall Street Journal reported. The deal comes on the heels of TiVo's announcement earlier this month that it was enhancing the data it collects and sells to advertisers on the viewing habits of its subscribers (full summary). Among the ad targeting services being offered by TiVo are second-by-second ratings of programs and commercials, as well as viewer demographic data such as gender, age, income, marital status and ethnicity. Last month, Google announced it was buying TV-viewing demographics information from television ratings agency Nielsen(full summary), as it attempts to enter the TV advertising sales market. Ironically, TV program recording services like the one offered by TiVo have forced networks like NBC to look for ways to improve advertiser effectiveness, as viewers can easily digitally record programs and fast-forward through ads. Says NBC's Mike Pilot: "Advertisers have been asking us to help them find new ways to make TV advertising more effective. This partnership gives us the data, the research and the tools to try a bunch of new advertising formats and test their performance." Through the deal, NBC will also sell TiVo advertising products like 'interactive tags' which allow users to click an advertiser's on-screen tag for more information, while 'forcing' viewers to view advertisers' logos even when 'zapping' through an ad.


Newell Rubbermaid Lowers Sales Forecasts

Shares of Newell Rubbermaid fell sharply Monday on news the company was trimming its fourth-quarter and full-year sales targets. The company now sees fourth-quarter sales growth coming in flat, down from the 2% increase previously expected, and full-year sales increasing only 3.0-3.5% instead of the previous 4.0% target. Despite the anticipated softer sales, the company maintained its previous EPS guidance, apparently signalling it will continue to repurchase its shares. Weak North American office product demand and the inventory reductions at key large retailers were the main reasons for the lower sales outlook. "While this inventory correction by North American office retailers poses a near-term challenge, we remain confident in our ability to drive long-term sales growth," said CEO Mark Ketchum. Newell Rubbermaid raised the lower-end of their gross-margin expansion guidance to 2-2.25% from 1.75-2.25%, the upside being driven by an improved product mix. Citigroup analyst Wendy Nicholson was positive about the announcement: "While some might be discouraged by NWL’s revision this morning, we are in fact encouraged that NWL is able to offset pressure to their top line through cost savings initiatives and a positive mix shift that are allowing the company to deliver on the bottom line," she told investors, adding shares are, in her opinion, undervalued. Shares of the company fell 7.d% to $26.55 Monday.

Sources: Press release, MarketWatch
Commentary: Newell Rubbermaid: New Initiatives Should Propel Growth
Stocks to watch: NWL. Competitors: AVY, FO

Sears Holding Trumps Previous Offer for Restoration Hardware

Sears Holding Corp is prepared to offer $6.75/share in cash for Restoration Hardware Inc., according to a regulatory filing on Monday. The bid tops the management-led buyout proposal of $6.70/share or $267 million. The filing also showed that Sears was denied confidential information it requested to create a takeover proposal for Restoration Hardware by a special committee made up of Restoration board members. The $6.75 bid was solely based on "public information currently available," the letter specifically stated. The previous $6.70 bid had already been accepted by Restoration Hardware, but as part of the deal, members of the board agreed to solicit other bids for a 35-day span, ending December 13th. Sears had bid for the Restoration in October, and had been expected to make another play for Restoration after revealing it already had a 13.7% stake in the company. Shares of Sears Holding fell 4.3% to $107.77, while Restoration Hardware stock fell 0.8% to $7.00 Monday.

Office Depot Forecasts Rough Ride Ahead

Office Depot described Black Friday's sales as "okay," and said an earnings decline is likely in the current quarter in an SEC filing Monday. The company said to date, fourth quarter sales have been softer than the previous quarter, and referred to the holiday retail outlook as "uncertain." Office Depot went on to say it expects the first quarter of 2008 to remain challenging. In its international unit, the office supplier also sees sales growing at a slower rate, while operating margins are expected to decline year-over-year. The company plans on reducing spending and controlling costs to help improve international margins. Office Depot released the outlook as part of an investor relations presentation it will present to shareholders later in the quarter. Shares of Office Depot finished down 5.5% to $16.54 Monday.

Sources: Associated Press
Commentary: Leading Hedge Funds' Best IdeasThe Weak Housing Market Hits... Office Depot?
Stocks to watch: ODP. Competitors: OMX, SPLS. ETFs: XRT
Earnings call transcript: Office Depot, Inc. Q3 2007


Bear Stearns Ups Targets on Crude, Refiners

Bear Stearns lifted its 2008 target price for West Texas Intermediate crude oil to $75 from a previous $60, while upgrading refiners BP (NYSE:BP), Chevron (NYSE:CVX) and Marathon (NYSE:MRO). Bear Stearns also boosted its price targets on Total (NYSE:TOT) and Murphy Oil (NYSE:MUR). "Our new forecast reflects the recent rise in oil prices, and our view that, while moderating fundamentals will continue to push oil prices lower, prices will be supported at a higher level than our previous estimates by ongoing geopolitical factors, cost inflation, a weaker U.S. dollar, and speculative interest in the commodity," analysts wrote in a note to investors. "We believe the international integrated oils are attractively valued, and our outlook for higher oil prices casts a compelling light on the group."

Sources: MarketWatch


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