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Citigroup (NYSE: C) will report full 3Q EPS on 10/15.
On 10/1 Citigroup announced that mortgage-backed securities, credit markets and deterioration in the consumer credit environment are expected to have an adverse impact on third quarter financial results.
C is recently up 86 cents to $47.99.
C October option implied volatility is at 25, November is at 24, above its 26-week average of 22 according to Track Data, suggesting larger risk.
Hasbro (NYSE: HAS) is expected to report EPS on 10/22.
HAS is recently trading at $29.63.
BMO Capital Marketes rates HAS at Underperform with a $26 price target.
HAS November option implied volatility of 32 is above its 26-week average of 27 according to Track Data, suggesting slightly more risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
You may think the subprime mortgage mess is huge. Well just around the corner a larger elephant is looming and its impact may be even more devastating than the current credit crisis.
While it sounded like good news when banks sold $30 billion of loans for leveraged buyouts last week -- $26.4 billion of that was for the First Data buyout. That sale came with a big price tag -- banks agreed to sell the debt at 96 cents on the dollar, which means they locked in losses after their fees.
And then there was the problem of what to do with the other 90% of LBO loans in the pipeline.
The Wall Street Journal(subscription required) reported today that Citigroup Inc. (NYSE: C), Credit Suisse Group and J.P. Morgan Chase & Co. (NYSE: JPM) hold $400 billion in debt they promised for financing purchases private equity firms have in the works globally. If they can't sell the debt, they're left holding the bag, which means a lot less money for other loans. If the economy slows as expected and corporate profits weaken, the only way the banks will be able to unload the debt they're holding will be a fire sale on that debt at even deeper discounts then the First Data deal.
More than ever, Wall Street cares about you. Not you personally but average folks who don't have multi-billion dollar bonuses, pay obscene rents to live in a refrigerator-box sized apartments or have to write essays to get their children admitted to nursery schools that are more selective than some universities.
Believe it or not, you with your 2.5 kids, house in the suburbs and job with your annoying boss are very much on the minds on Wall Street heading into the third quarter. Your pessimism about the economy perplexes pundits and politicians who continually argue that the economy is strong. A recent ABC News/Washington Post poll showed that 35% of Americans rate the economy as excellent or good.
So who's right, Wall Street or Main Street?
So far, it depends on the neighborhood where the consumer lives. Costco Wholesale Corp. (NASDAQ: COST), whose customers tend to be well-heeled, today reported fiscal fourth quarter results that while not great, beat Wall Street's expectations. Meanwhile, Petsmart Inc. (NASDAQ: PETM) shares are tanking after the pet supply retailer cut its third quarter and 2007 profit forecast, citing weak consumer spending. So, consumers are confident enough to buy huge bags of pet food but worried about buying regular sized bags of Alpo.
MarketWatch's David Weidner got a nice quote from Punk Ziegal & Co.'s Dick Bove that pretty much sums up my reaction to the recent round of subprime write-offs, and Wall Street's reaction:
"This is a reason to sell not buy. The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace."
Yes! Exactly! Another thing that investors should be wary of is the possibility that some of these firms are engaging in cookie jar accounting: taking aggressive write-offs so that they can book windfall profits when the securities in question rebound. Given that Wall Street is rewarding terrible results from the big banks this quarter, this would have to be tempting.
In just a few months, an interesting shift has taken place in terms of how investors are viewing these write-offs. First, everyone was whispering that the banks weren't going to take big enough write-downs for fear of seeing their stocks get pummeled by big losses. Then, when this rumor had circulated, the banks responded with huge write-offs -- and the the Street cheered their honesty. But now we're wondering just how honest they were really being.
This is certainly a race Merrill Lynch did not want to win and it's been hit hard. MER is dropping fast and is now down $18.21, 19.6% from its high of $92.86 on May 29. At 11:30, MER was selling at $74.65. Why is MER being hit so hard? Well it told investors just three months ago that its "exposure was 'limited' and 'contained,'" according to a report in the Wall Street Journal.
Heads did roll on this miscalculation. Merrill Lynch fired its top credit-market executives, Osman Semerci and Dale Lattanzio on Friday, the Journal reported. The Journal says CEO E. Stanley O'Neal told employees he shared the blame for Merrill's problems and said, "While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages." And he added, "I missed it."
Boy did he miss it, as did many others in the financial world. The big question yet to be answered is what will happen to the investors who hold mutual funds or money market funds whose assets include these mortgage securities. I haven't seen any analysis discussing the impact on investors' holdings, but I'm sure there's nothing good to report.
A study by research firm Sanford Bernstein quoted in the FT says that Bank of America (NYSE: BAC) and JPMorgan (NYSE: JPM) face write-offs similar to those taken by Citigroup (NYSE: C). The report says that JPMorgan will have mark-to-market losses on leveraged loans of about $1.4 billion and another $700 million of write-downs on mortgages and mortgage-backed securities. "For Bank of America, Bernstien estimates leveraged loan losses will be $700 million and the mortgage write-downs $300 million," the paper says.
The news really should come as no surprise. JP Morgan and Bank of American were anxious to make hundreds of millions of dollars on leveraged loans and mortgage-based securities the same as their peers.
Concerns about the big financial institutions should not dissipate with the news. The write-downs may handle current estimates of what some of these loans and financial instruments are worth, but if the private equity environment and housing situations get worse more write-offs could follow.
It may be the beginning of the end for bad news from banks, but it is almost certainly not the end.
The blind leading the blind. U.K. mortgage bank Northern Rock has almost gone under. If it were not for funds provided by the government, it might be gone already. But Northern Rock is still looking for help. In a twist of irony, that aid may come from Citigroup (NYSE: C), which has its own problems with mortgage instruments. The big U.S. bank said its earnings would drop 60% for the last quarter, some due to mortgage securities to write-downs.
According to a report in The Telegraph, there are several options being weighed to save Northern Rock. "One possibility being discussed by the Government and the company would see Citigroup, the U.S. bank advising Northern Rock, provide a funding line of up to £10bn to enable the board to run it for the long term."
The British government could also encourage a sale of the mortgage company to a hedge fund. U.S. hedge funds JC Flowers and Cerberus have expressed interest. But, a buyout from one of these firms is likely to be at a very low price that could wipe out public shareholders and some of the companies bonds.
If Citi does make the loan, it will be profiting from the mortgage problems of another company after taking a beating in the same market on its own. It would be a perverse twist of fate.
The New York Times [registration required] makes a compelling case that it's time for Citigroup's (NYSE: C) directors to can its long-suffering and persistently incompetent CEO. Here are the six reasons why it's time for Prince to go:
Citigroup stock is stuck. At $48 the stock is roughly where it was when Prince took over in 2003.
Citigroup has had five significant blow ups since Prince took over. On Monday, Citigroup warned that it planned to take a $5.9 billion write-down in the third quarter -- causing a 60% profit plunge. This was the fifth time since becoming CEO that Prince had to disclose a major problem to his board.
Citigroup's corporate strategy is not working. The idea behind predecessor Sanford Weill's acquisition strategy was to create an organization which would be able to earn consistently high profits because when one business unit was doing poorly, another one would take up the slack. But the latest earnings miss shows otherwise -- problems in the mortgage market hurt Citigroup's consumer and fixed income units. And with the deal financing business at a standstill -- yet another pillar of Citigroup's corporate strategy is evaporating.
Goldman Sachs (NYSE: GS) is heading toward Japan in a partnered bid with Aetos Capital LLC to buy Japanese property company Simplex Investment Advisors in a 65% premium share bid, for the equivalent of about $1.1 billion to $1.35 billion, depending on your price calculations in current and closing prices of yen on the Japanese stock prices versus closing prices. The bid is for at least 80% of Simplex, and it appears that Nikko Cordial, part of Citigroup Inc. (NYSE: C) in Japan, is selling its 42.5% stake to the venture.
If you think the U.S. property weakness has been bad, the situation in Japan has been worse. Japan experienced its own bubble back in the 1980s, and only in recent years have things seemed to get better. Goldman Sachs has already been active in buying commercial and recreational properties in Japan over the last decade, but this would mark a larger leap into a property market that may hold relative values.
Goldman Sachs has raised over $4 billion this year for property acquisitions, so you can assume more land grabs are coming. Bloomberg has a pretty detailed piece that gives more background on the ongoing landgrabs in Japan. If you want to look up more data on Simplex Investment Advisors, it trades under the numeric stock ticker "8942" on the Tokyo Stock Exchange. Jon Ogg produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.
Citigroup (NYSE: C) doesn't want to just be in the business of managing money for rich people. It likes the billionaire money management business even better. Odd, since Citi's shareholders seem to get poorer every year.
The bank has "a newly created unit to serve Asia's super-rich and plans to hire 10 high profile bankers and aims for annual revenue growth faster than its wealth business in Asia," according toReuters. "Ideally, I would have a team of 10 senior private bankers, with each banker managing 10 to 15 client relationships representing $2.5 billion in assets and earning $25 million in revenue each," the head of the division said.
It may be an interesting business for Citi, but for a bank that deals in hundreds of billions of dollars, it is hardly worth much effort. Unless, that is, there is a by-product.
Most of the world's wealthiest people control assets well beyond their own. Many are heads of multinational companies or are part of the government infrastructure in countries like Singapore. In other words, wealth management could be a Trojan horse for building corporate and investment banking.
And, rubbing elbows with the very rich is probably fun.
Bank of America's (NYSE: BAC) stock was trading at $48 back on August 14 when the market was as nervous as it's been in years. The sub-prime mess was exactly that -- a mess. The information flow was spotty and no one really knew what the effect would be on the major brokerage firms balance sheets. Times have changed a bit but investor psychology has shifted back to the positive. So what's going on and what has happened?
The mortgage scenario in the United States is still muddled and not quite over with at this point. The four major brokerage firms all reported their collective August 31st quarter-end numbers and they were a mixed bag. But the one overriding thought was that credit markets were stabilizing and perhaps after one more quarter's results, everyone should sleep better. The major banks, however, have yet to report their September 30th numbers as that event takes place over the next two to three weeks.
Citigroup (NYSE: C) pre-announced that its September quarter would be ugly and bad debt reserves will be absorbed through the balance sheet and income statement. But the stock reacted positively. Investors' sentiment has shifted to where most -- if not all -- of the bad news is out and the prices of these stocks reflect that fact. The Federal Reserve has also lowered the key interest rate and it looks promising for another round or two of further rate reductions.
Citigroup (NYSE: C) believes that it has too many leveraged loans on its balance sheet, so it may sell them to KKR at a discount. According to the FT, "banks have been looking for ways to help clear some of the $300bn worth of leveraged loan commitments they have made." The amount of money being raised to buy problem bank loans could be as much as $170 billion.
Citi provided financing for a number of deals put together by KKR and its peers. Will it now lend them money to buy them at a discount off the big bank's own balance sheet? It sounds like a round trip.
While regulators and investors in the large money center banks would like to see their balance sheets improved, there is some irony in the idea that these banks might help fund entities that could purchase the byproducts of their lending mistakes. Investors should hope that regulators keep a keen eye on the practice so that the banks are not accused of trying to sweep their problems under a rug that they are helping companies like KKR finance.
U.S. stock futures are indicating a somewhat higher open at the moment ahead of several economic reports today and tomorrow that may cause traders to stay on the sidelines until data is released.
Yesterday, U.S. markets closed lower as Friday's unemployment report started looming closer. Last month, the employment report sparked quite the selloff, although it also probably swayed the Federal Reserve more toward a rate cut. The Dow Jones Industrial Average lost 79.3 points yesterday, or 0.56%, the Nasdaq Composite fell 17.68 points, or 0.64% and the S&P 500 7.04 points, or 0.46%.
As for today, the Labor Department will report weekly jobless claims at 8:30 a.m. EDT, before the opening bell. Then, at 10:00 a.m., the Commerce Department releases August factory orders, which are expected to have declined 2.8% in August after an increase of 3.7% in July.
Oil prices fell in Asia today, continuing the decline from the previous session following an unexpected increase in U.S. crude oil inventories. Oil fell below $80 a barrel. Crude oil futures have fallen four straight days after trading at near record levels last week. The dollar lost ground against both the euro and the yen.
Overseas, Asian markets ended lower, with Hong Kong Hang Seng dropping 1.84%. Major European markets also fell in early trading ahead of the rate decisions there by the Bank of England, but are now trading mostly higher after the BoE decided to hold rates where they were. The European Central Bank is also set to decide on interest rates later in the day.
In corporate news, Citigroup (NYSE: C)for Forsee to step down but expressed concern about the company's strategy, the newspaper said. is in talks with private equity group Kohlberg Kravis Roberts on funding to purchase some of the leveraged loans from Citi's balance sheet, according to the Financial Times.
Sprint Nextel (NYSE: S) CEO Gary Forsee is feeling the pressure from activist investor Ralph Whitworth, which owns about 2%. While Whitworth isn't calling for Forsee to step down, he expressed concern about the company's strategy.
Marriott International Inc. (NYSE: MAR) reported a 7% drop in its third-quarter profit as strong revenue per available room and unit expansion were offset by a decline in timeshare profits and a higher tax rate. The results beat consensus estimates of analysts.
Barron's Online's (subscription required) "Inside Scoop" section reported that on Friday, two days after the stock dipped to $12.07, a 6-year low, Borders Group Inc (NYSE: BGP) CEO George Jones bought 50K shares, his first open market purchase since joining the retailer.
The Financial Times (subscription required) reported that Citigroup Inc (NYSE: C) CEO Chuck Prince is waiting for a review of the company's $3.3B in losses and writedowns in its banking business for Q3 before deciding whether to fire executives as a result of the poor performance, according to senior Citigroup executives.
Yahoo Inc (NASDAQ: YHOO) said it was considering selling Kelkoo, the online shopping comparison service that it acquired in 2004, admitting the acquisition did not pan out as planned, reported the Financial Times.
WEBSITES:
Sun Microsystems (NASDAQ: JAVA) is going to combine its storage and server product teams to create a new converged group called the Systems team, Sun Microsystems CEO Jonathan Schwartz wrote in his blog.
TheStreet.com's Jim Cramer can't understand why the bank's board of directors hasn't fired this CEO already, much less after news of horrible results.
Why not fire Citigroup (NYSE: C) (Cramer's Take) CEO Chuck Prince? I mean, what the heck is the big deal about it? Why is this board of directors so wedded to this guy? What are they waiting for?
I am astounded that, after this miserable preannouncement of $3 billion in charges for the quarter, Chuck Prince doesn't simply announce that he is stepping up to executive chairman to promote new people. How can this guy have such a hammerlock on this company?
The company's statement today is remarkably horrible, replete with all sorts of language by Prince that says the company really blew it. What's the issue now with not firing him? What makes him one of the protected CEOs? How can he get away with it?
I am seething about this. Here was the worst quarter of any of the financials so far, and he's unscathed? Where is the justice? Where is the outrage?!?
I guess it just doesn't matter. He's there as long as he wants to be.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup.
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Citigroup (NYSE: C) will report full 3Q EPS on 10/15.
More than ever, Wall Street cares about you. Not you personally but average folks who don't have multi-billion dollar bonuses, pay obscene rents to live in a refrigerator-box sized apartments or have to write essays to get their children admitted to nursery schools that are more selective than some universities.
Bank of America
U.S. stock futures are indicating a somewhat higher open at the moment ahead of several economic reports today and tomorrow that may cause traders to stay on the sidelines until data is released..gif){kind=logo}
TheStreet.com's Jim Cramer can't understand why the bank's board of directors hasn't fired this CEO already, much less after news of horrible results.
