Wall Street Breakfast: Must-Know News

• Credit crunch: More to come. Debt markets indicate bankers still have grave concerns, and are avoiding all but the most liquid assets. Last week, the premium banks charge each other for lending short-term cash climbed to 0.77% more than the Fed's anticipated effective target rate over the coming three months; it's up from just 0.24% in January, and looks set to climb to 0.85% by mid-December - when banks have to refinance about $88B in debt. "The suspicion is that banks are still hiding losses. The banking system relies on trust and at the minute there quite simply isn't any," money manager Stuart Thomson says. In June, Fed chief Bernanke said narrowing the spread to 0.25% would be a sign markets had returned to normal.
• Sinopec hit hard on crude costs, government caps. China Petroleum & Chemical Corp [Sinopec] (SNP), Asia's biggest oil refiner, recorded an 87% drop in Q2 profit as government caps on fuel prices prevented Sinopec from passing on record high crude oil costs to consumers. Net income fell to $320M from last year's $2.45B. The company warned that profit in the first three quarters may fall by more than 50%. Analysts expect the second half of the year to be slightly kinder to the oil refiner, as crude oil costs level off, and the Chinese government may allow an increase in fuel prices.
After you finish reading Wall Street BreakfastSeeking Alpha's Market Currentswill keep you current all day long.
• Precision Drilling to buy Grey Wolf for $2B. Canadian oil and natural-gas driller Precision Drilling Trust (PDS) will buy U.S. drilling company Grey Wolf (GW) for about $2B in cash and stock. The deal comes several weeks after Grey Wolf shareholders voted against a merger with Basic Energy Services (BAS) and after Precision made a series of unsolicited bids for Grey Wolf. Precision's latest offer, which sources say both company boards have approved, values Grey Wolf at $9.02 per share, a 5% premium over Friday's closing price. The deal is expected to be announced on Monday before the markets open.
• Big Three auto makers ask Washington for more money. Ford (F), General Motors (GM), and Chrysler are set to receive $25B from Washington in government-backed loans. With high gas prices and weakened earnings, the Big Three are now asking for more. The companies themselves have not yet cited specific figures, but various reports put the new total between $40-50B. David Cole, president of the Center of Automotive Research, says, "This is not really a bailout. This is actually more like the government acting like a banker as it begins to look at the major consequences of a major failure in the auto industry." Ok, so what's a bailout?
• Bernanke suggests need for new regulatory approach. Fed Chairman Ben Bernanke suggests that financial supervision should be revamped to take into account how the system as a whole is functioning. "Supervisors often focus on institutions in isolation," Bernanke says, but an alternative, system-wide approach would take into account "consideration of potential systemic risks and weaknesses as well." The suggestion could bring benefits, but might be a difficult concept to execute on a practical level, and broader authority could endanger the Fed's political independence. Any regulatory overhaul is unlikely to take place before the next President is inaugurated in January.
• Lenders stand in line to underwrite IPOs. With the IPO market all but frozen, banks are jostling to underwrite the few that remain. "Ten years ago, the question was who was going to be at the top of the list," one IPO-watcher says. Today even small IPOs can attract as many as four managing underwriters.
• Sickly healthcare ETFs terminated. XShares will close 15 of its 19 healthcare sector ETFs, another sign ETF issuers may have expanded too rapidly. The 15 drew only $50M in assets, leading XShares to conclude the "didn't resonate" with investors. "We believe that dividing health care, which is a $2T sector of American GDP into subsectors still makes sense, and should be attractive investment opportunities for a wide range of investors. Obviously, the market thought otherwise." Morningstar now tracks 726 ETFs with about $593B in assets.
• KDB unlikely to make near-term bid for Lehman. Lehman Brothers' (LEH) share price jumped as much as 16% on Friday on news that Korea Development Bank [KDB] was interested in acquiring the struggling investment bank. A KDB spokesman on Friday had said the state-run bank is "open to all possibilities, which could include [buying] Lehman." However, KDB later back-pedaled and played down the likelihood of any immediate action on Lehman. News that KDB was only exploring its expansion options caused Lehman stock to lose its early gains, closing the day up 5%.
• Union rejects Boeing's wage offer. In ongoing strike-prevention talks with its largest workers' union, Boeing (BA) offered to raise pay 2.5% in the first year and 2% in each of the following two years, and to expand workers' benefits. Union leaders called the offer inadequate and said they were seeking a gain of 9-13% spread out over the term of the contract. The union workers will vote on September 3 whether to accept the new contract or to go on strike. A strike would shut down Boeing's aircraft production lines and could seriously delay the already-late 787 Dreamliner.
• Euro-zone factory orders fall in June. June Euro-zone factory orders fell at the fastest rate since December 2001 and for the second month in a row in the face of steep drops in demand for textiles and transportation equipment. New industrial orders fell 7.4% in June on the previous year, compared to economists' expectations of a 6.7% drop. In a separate announcement, the ECB said exports rose in June, indicating that the euro zone's primary economic weakness is coming from slowing domestic demand.

Earnings: Monday Before Open

• China Netcom (CN): H1 net income fell 5.2% to ¥6.38B ($932M) vs. ¥6.73B a year ago. Analysts expected ¥5.99B. Revenue was ¥41.13B, down 1% from ¥41.54B. [MW]
• China Life Insurance Company (LFC): H1 net profit fell 32% to ¥15.84B ($2.48 billion), beating consensus estimates of ¥10.42B. "In the first half, the deep downturn of the capital market put huge pressure on the company's investment," it said. [Reuters]
• China Unicom (CHU): Q2 net profit of ¥2.4B ($351M) beats ¥2.16B consensus. H1 net profit of ¥4.42B vs. ¥4.18B. H1 revenue rose 4.1% to ¥35.14B. [AP]
• LDK Solar (LDK): Sees 2009 revenue of $2.8-3B vs. consensus of $2.43B. [PR]

Today's Markets

• Asia markets closed higher Monday. Nikkei +1.68% to 12,879. Hang Seng +3.5% to 21,104. Shanghai +0.34% to 2,413. BSE Sensex +0.34% to 14,450.
• In Europe at midday, London is closed. Paris -0.4%. Frankfurt -0.2%.
• U.S. futures are lower. Dow -0.16%. S&P -0.27%. Nasdaq -0.21%. Crude +0.77% to $115.45. Gold -0.58% to $828.70.

Monday's Economic Calendar

• 8:30 The Chicago Fed National Activity Index
  10:00 Existing Home Sales
• Notable earnings before Monday's open: APWR, SNP

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[msoubra]

no one institution even one institution has been transparent in declaration of their loss in the housing market.

[The Fitzman]

What a country. Congress for years refused to pass higher CAFE standards and instead voted for small business tax breaks to those buying Hummer and other SUV's. Now that the US auto makers have become un-competitive due to these policies, the middle class taxpayers are being asked to bail them out at the same time they move their jobs overseas. Are we hosed or what? I mean, where is the money going to come from after the Bush administration doubled the deficit the last 8 years? The US dollar has got to return to a steady down trend....

[David White]

The Euro-zone factory orders and the negative news about the KDB views on buying Lehman should turn the market negative today. The Chicago PMI data was also bad. The SPY is already down $0.91 today. It seems likely we will have another 200+ down day on the DJIA.

Rachael Granby: Good article, but great smile.

[KSengineer]

"Bernanke suggests need for new regulatory approach"

II have a sneaky suspicion that if Fanny and Freddie would have held their standards at the expected level all along, our current problems would be much smaller and confined to the private sector where the risk/reward equation could be working it’s magic without bringing the entire system down.

What I mean is if Fanny and Freddie would not have purchased those innovative investments, like CDO’s, which contained non-conforming loans and would have limited themselves to purchasing investment paper that conformed to the same risk level as CONFORMING loans are supposed to represent, my guess is this contagion would have been greatly limited. But they set the tone by purchasing high risk investments.

So, it seems to me we already have the regulations in place. What we don’t have is the discipline to live by them. The government set the bad example and now they want to regulate more. Someone needs to bring some sanity to the system. Unfortunately, I don’t’ have much hope that will ever happen since greed and self-interest is carrying the day in the USA.

[MSmailbox]

This is the buying opportunity of the decade, for select regional banks... There is an atmosphere that nothing (financial) is any good and nothing could be furthur from the truth... There is at least one regional, that is responsibly, plugging along, just as it always has. It's a "baby," which was "thrown out with the bathwater." I wouldn't doubt it, if this growing bank were to purchase some of the others, at pennies on the dollar and be huge, within 5 years! The name of this bank is... Gee, I seem to have momentarily forgotten, but I'm absolutely certain, that it will come back to me. :-)

[David White]

Sorry. I meant the Chicago Fed National Activity Index. It was lower for July than June.

[David White]

MSmailbox: Bad joke! I am sure there are some good regional banks which are in fact good buys at the moment.

With the economic weakness starting to show in Europe, it seems likely that the ECB will not raise rates anytime soon (or may even lower rates). This makes the rise of the dollar more likely. Barring huge oil price increases, which favor the Euro over the US Dollar, it seems likely the dollar will rise over the next several months. This might just make US equities markets a good place to be (at least in good stocks).

[David White]

Of course, many, many people are predicting at least one more big downward movement. The overriding reason there is still the precarious loan problem. The news Friday was that a much higher percentage of loans were becoming delinquent (results for July vs. June and 1 year ago).

[axelrod608]

The criteria for getting any and all Fed subsidies should include removing the officers and directors who got the company into trouble and requiring repayment of any bonuses paid in the past, say, three years.

It is the height of insanity to reward the very same people who pursued the disastrous policies that put their companies in jeopardy.

[leh]

I had the same response to the big automakers self-created plight as Fitz--it's outrageous that the same companies that fought CAFE standards tooth and nail for years now come begging for loans to, yeah, you guessed it, make their cars more fuel efficient! Would love to know how many millions were spent over the years by the Big Three on lobbyists to fight these very standards they're now embracing out of economic necessity. Toyota OTOH had the street smarts and market prescience to develop the Prius over 10 years ago when crude was dirt cheap, while GM was crushing its EV1's and turning that same production line over to the then new Hummer line.

[ccerenz2]

Fitzman,
Don't try to politicize a problem that has existed for decades...our auto companies are over regulated, taxed, and encumbered by uncompetitive labor costs, especially when you look at the wrap rate including benefits. Legacy costs are almost impossible to meet, and there is no relief on the horizon. When people like you figure out the real problems in this country, perhaps then we will collectlvely conclude the current systems we have in place needsto be overhauled. Making the president a dem doesn't change that.

[moneysurf]

Oil sector making loss is inline with the expectation in the light of current circumstances I would say this is a good opportunity to buy oil related stock!

[notsosmart]

folks- its a ll a game run by the same power elite for themselves.when are you going to comprehend this? no matter how bad a job is done there is no accountability except for down the ladder jerks who will get pink slipped while the ceo gets raises or infrequently a golden parachute only to pop up in another co. to ruin them.in any system a certain amount of honesty & ethics have to prevail.you cant have a law for everything.sadly this system is beginning to rot from the inside.no-im not a communist,socialist,un... or doom & gloom guy.just a realist as i see the financials trotting out their losses slower & slower instead of the transparancy they owe their stockholders(suckerhol... as i call them).

[secmaven]

One more big decline in the market coming? It took two years for the tech bubble burst to be dealt with by the market and only a few million investors were affected. Now every consumer is being killed by inflation and wage stagnation and every homeowner is hit by a decline in their equity and limitation on HELOC borrowing, the real underpinning of the "prosperity" over the last several years. And this this bear leg in the current market, not yet one year young, will be over shortly with just one more decline? What are you smoking?

[kkin365]

Adding source to earnings report is very appreciated. Enjoyed the daily summary.

[David White]

Today the VIX has made the start of what could be a big move upward. It has apparently bounced off its support level of about 18.50. If it continues to go up from here to 30 or more, we could see a large near term drop in the SPY and DJIA. The last move upward translated into an approximate 17 point drop in the SPY and about an 1800 point drop in the DJIA. That certainly sounds bleak to me.

[MSmailbox]

David, I'm sorry, that was a bad joke... I was referring to Marshall & Isley (MI). I have my money market and a large CD, there. I like the fact that they sold their data-processing unit last year, in order to raise capital. They didn't wait for a crisis to develop, as some others have. Also, they raised their dividend to $0.32 qtrly and insiders have been making large puchases, as recently as last week.

[MSmailbox]

It's entirely possible, that we will see some more downside, before the regional banks start up. However, their share prices ought to reflect their future potential. To me, I see capitulation in the share prices of these banks... Everyone who was going to sell has had ample opportunity to get out. Now, I see buying by Directors and other people who have a vested interest in the success of these banks, as well as our country, in general. These are not just speculators, like myself.

[Lex Luz]

CCerenz - Our auto companies are uncompetitive because they are run by fat, lazy bureaucrats with no market savvy and neither the ability nor the willingness to innovate given their knowledge that no matter what happens, they will be bailed out by Uncle Sam as is happening now. Yes, they have high labor and legacy costs. This too is a reflection of poor management. Everyone loves to pile on to the unions and they certainly bear their share of the blame but at the end of the day there is SOMEONE running the company who must set strategy and execute against it. When that strategy fails, the CEO should either adjust or accept failure. Instead, American auto company CEOs go crying hat in hand to Congress and whip up a spectacular frenzy among the deluded that it's all the fault of someone else. Nonsense. We are a nation of whiners indeed - and there are no greater whiners than those who've led once-great businesses into the sewer.