Wall Street Breakfast: Must-Know News

• Saving Fannie and Freddie. Senior Bush officials are weighing a plan to takeover one or both of stressed mortgage financers Freddie Mac (FRE) and Fannie Mae (FNM). Under the proposed conservatorship, shares would be worth little or nothing. Losses on the $5T of mortgages they own or guarantee - which could be staggering - would be picked up by always liquid taxpayers. Another option is to explicitly guarantee their debt - a move that would effectively double the size of the public debt. The debt markets have meanwhile pushed up their cost of borrowing. If unable to borrow, it could become difficult or impossible for homebuyers to obtain credit. Despite repeated assurances from regulators about the two firms' financial soundness, markets have concluded they are deeply troubled.
• InBev and BUD get friendly. Sources say Anheuser-Busch (BUD) has changed its course, and is now in active 'friendly' talks with suitor InBev, which is thought to be willing to increase its $65/share bid. Helping move things along was an indication BUD's biggest shareholders, including Warren Buffett, favored an InBev combo. Update: Sources say InBev has boosted its offer to $70/share.
• GE Money sells Japan operations. Japan's Shinsei Bank is buying GE Money's (GE) Japanese consumer finance unit, GE Consumer Finance, for $5.4B. The unit includes a personal lender (Lake), credit-cards, and a mortgage lender. GE says it will redeploy its capital "to areas which will generate strong sustainable long-term growth and returns."
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• Citi exits Germany. Citigroup (C) is selling its German retail business to French bank Credit Mutuel for €4.9B ($7.75B), which likely outbid Deutsche Bank (DB). Citi has numerous units on the selling block to raise cash need to shore up its balance sheet.
• Ashland picks up Hercules on the cheap. In the second major chemical deal in as many days, Ashland (ASH) is buying Hercules (HPC) for $2.6B. Hercules shares have fallen by 25% over the past five weeks after it warned it is facing some key raw materials shortages. The cash and stock $23.01/share deal is a 38% premium to HPC's Thursday close.
• Weak volume growth undoes INFY earnings beat. India's IT outsourcing provider Infosys (INFY) posted FQ1 EPS and a full-year outlook that exceeded Street forecasts [see below], but shares fell 5.3% in Mumbai due to its weak volume growth. Analyst Harit Shah said INFY's 0.4% sequential volume growth was "fairly slothful... a clear reflection of the fact that the strong growth in top-line was entirely on account of the rupee depreciation." Peers fell in sympathy, including Satyam (SAY) -5.6%.
• Lehman's ok; shares aren't. Shares of 'Wall Street's favorite punching bag' Lehman (LEH) fell another 12% amid false rumors bond trading giant Pimco and hedge fund SAC Capital had reduced their relationship with LEH. Spreads on insuring Lehman's debt (credit-default swaps) widened to the levels seen during the Bear Stearns collapse. Bernstein analyst Brad Hintz says he doubts LEH can fail now that the Fed is lending to dealer-brokers, an opinion Pimco chief Bill Gross shares. "The shorts are going after anyone who is levered and doesn’t have an exit plan," one trader said.
• Xbox 360 getting cheaper. Microsoft (MSFT) plans to cut the price on the Xbox 360 game console by $50 to $299 for the 20 GB model as early as Sunday, sources say. Sony's (SNE) $399 PS3, which initially lagged the Xbox, has picked up momentum and is now beating or equalling MSFT's console on monthly sales. Sony said this morning it has no plans to cut PS3 prices. "For the back half of this year, a lot of people, myself included, think Sony has a better lineup of exclusive titles," UBS analyst Ben Schachter says. "Sony clearly has more momentum."
• GM CEO dismisses bankruptcy. GM (GM) CEO Richard Wagoner refuted rumors the troubled automaker will file for bankruptcy. He went further, saying GM has no plans to sell or shut down any of its brands. "Under any scenario we can imagine, our financial position, or cash position, will remain robust through the rest of this year," he said, adding the company has plenty of options to bolster its balance sheet beyond 2008 - but didn't say what they might be. GM fell 6.2% to $9.69 Thursday.
• Mixed blessing. Chevron (CVX) said it expects Q2 profits to get a lift from record oil and NG prices, but noted that the same factor is eating into its earnings from its refining and marketing units - whose profits it expects to fall $500M from Q1. Shares were down 0.5% in AH trading.
• Fed chief Bernanke pleaded with Congress for more power to oversee and set standards (capital, liquidity, risk management) for I-banks.

Earnings: Friday Before Open

• GE (GE): Q2 EPS of $0.54 were in-line. Revenue of $46.9B vs. $45.3B consensus. Sees 2008 EPS of $2.20-2.30 vs. $2.22 consensus. Shares +1.7%. [PR]
• IT provider Infosys (INFY): FQ1 EPS of $0.54 beat by $0.03. Revenue of $1.16B (+24.5%) in line. Sees 2009 EPS of $2.32-2.36, better than $2.31 consensus. Shares -5.3% in Mumbai. [PR]
• Good June, for some retailers. Discounters (WMT, COST, BJ) and teen retailers (ARO, PLCE, PSUN) were among the standouts in June same-store sales growth.

Today's Markets

• Asia: Japan's Nikkei closed down 0.2% to 13,040. Shanghai was down 0.65% to 2,857. Hang Seng closed up 1.7% to 22,185. BSE Sensex was down 3.3% to 13,470.
• Europe at midday: London -0.9%. Paris -1.4%. Frankfurt -1.4%.
• U.S. futures at 7:15: Dow -0.8%. S&P -1%. Nasdaq -0.8%. Crude +2.5% to $145.16. Gold +0.8% to $949.30.

• Friday's economic calendar:
  8:30 OECD Leading Indicators
  8:30 Trade Balance
  8:30 Import/Export Prices
  10:00 Manufacturers Alliance Survey
  10:00 UofM Consumer Confidence
  10:30 ERCI Leading Index
  2:00 PM Treasury Budget

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Comments

[secmaven]

If Congress does not act Big Ben can always blame them for the ultimate meltdown in the I bank structure. This is just gamesmanship. Any "standards" would have to be phased in very slowly and thus have no effect on the current situation. The I banks have so much bad debt they will melt with or without FRB oversight.

[AJHOUGH]

In an administration that has prided itself in not overseeing anything, we now are pleading for oversight. What a joke this bunch of blind men is. Does anyone believe that we need more Enrons, World Coms, and now the entire financial system. Please plea for them to just put their heads in the sand and await someone to comein and straighten out this mess. It is Iraq all over again.

[creditderivativesguru]

why guaranty the old debt and bail out the street/CDS sellers -- just expand FHA/ginnie mae so new mortgages will be made!

[notsosmart]

wow-conservative socialism.can i take credit for a new phrase?

[User 148443]

Anyone have any opinion on the FNM and FRE Preferreds? They're getting hammered.

[jlounsbury59]

Preferred stock is senior to common stock and junior to bonds. If the government takes over Fannie and Freddie, the common will almost certainly go to zero, very likely that preferred stock will do the same. Bond holders will likely remain whole and, in effect, hold treasuries.

What a disaster for capitalism. National debt will instantaneously double. Will the value of the dollar be cut in half? Almost certainly no, but it will fall further immediately.

[Did U ThinkThe PonziSchemeWould Last?]

The dollar, like all other fiat currencies that have ever been invented, has a useful lifecycle less than infinity. It is created, used properly for awhile, eventually taken advantage of through debasement and ultimately abandoned and reviled. We are now at the end of the take advantage of via debasement portion of the cycle. Buy physical gold if you have even a lick of common sense. Buy some silver too.