Filed under: After the bell, Earnings reports, Alcoa Inc (AA)

The day every investor waits for/dreads has finally arrived. Earnings season has just been kicked off as the first of the Dow Industrials, Alcoa Inc. (NYSE: AA), has just reported first-quarter results. This quarter, the results have been anticipated/feared more than usual. With many economists saying the U.S. has likely entered a recession in the first quarter, corporate profits may be next to be hit.

Well, Alcoa alleviated some fears and confirmed others. The aluminum giant posted a first-quarter profit of $303 million, or 37 cents a share, down from $632 million, or 75 cents a share, in the same period a year ago. Alcoa’s income from continuing operations was $361 million, or 44 cents a share, 4 cents short of analyst estimates. Alcoa, however, beat on the top line, with revenue of $7.4 billion, better than the $7.2 billion analysts had expected.

The usual suspects were all present. For example, when accounting for the currency impact, Alcoa said profit came to 52 cents a share. In addition, industrial demand was lower while energy costs surged, causing margins to squeeze and profits to be halved. Still, the company pointed out that aluminum prices are at historic highs and demand in Asia is still strong.

Continue reading Alcoa hurt by energy cost; sales top estimates though

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Filed under: Google (GOOG), Employees

I guess things are tough all over — even Google Inc. (NASDAQ: GOOG) is laying off people.

For the first time, the tech darling of the internet will be cutting a large number of jobs, with the reductions coming from the company’s new DoubleClick workforce. Google completed its purchase DoubleClick on March 11, and it was widely expected that the Goog would fire some of DoubleClick’s 1,500 employees. According to The New York Times, though, the 300 number is larger than expected.

Google is also planning on selling Performics Search Marketing, a unit of DoubleClick. Performics is a search engine marketing company that gets paid to place ads on search engines. This could interfere, or appear to interfere, with Google’s objectivity when ranking — and charging for — page popularity. So bye bye Performics!

Google has about 17,000 employees worldwide, having added over 6,000 in 2007. CEO Eric Schmidt has promised to slow the pace of hiring in the coming months.

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National City is looking to sell itself as it struggles to remain viable in the face of mounting mortgage-related losses and a nose-diving stock price.  The company has vigorously tried to stave off the effects of souring loans apparently to little avail.  (h/t Don)  I wonder if they’ll get more than $2/share out the initial offer?  They’ll likely not get $10 as their stock price hovers around $9.90 at the time of this posting.

From the MSNBC story on National City looking to sell itself:

CLEVELAND - A day after National City Corp. said it was considering strategic options a report said the struggling bank, hurt by the worsening mortgage and housing market, could sell itself to another Cleveland-based bank.

The Wall Street Journal, citing people familiar with the matter, reported Wednesday that National City is considering an outright sale to KeyCorp. Analysts said a KeyCorp buyout might lead to large cost reductions.

 

Lehman Brothers analyst Jason Goldberg said other potential buyers include Wells Fargo & Co., JPMorgan Chase & Co. and PNC Financial Services Group Inc. He noted that the company has sold a few divisions in recent years, including its National Processing unit.

Gerard Cassidy of RBC said an outright sale is unlikely because of National City’s high exposure to risky loans. But a sale of some assets is likely, he wrote, and the company could try to find a way to get more money from a $1 billion stake in Visa Inc., although it cannot sell those shares outright.

Source [blownmortgage]

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Filed under: Analyst reports, Analyst upgrades and downgrades, Novartis AG ADS (NVS), Nortel Networks (NT)

MOST NOTEWORTHY: Seagate, Nortel Networks and Ann Taylor were today’s noteworthy downgrades:

• Thomas Weisel downgraded Seagate (NYSE: STX) to Market Weight from Overweight as they believe the company’s growth will be more muted given high existing market share and overall industry growth.
• Baird downgraded Nortel (NYSE: NT) to Neutral from Outperform citing checks that indicate deteriorating US Enterprise sales in the last few weeks of Q1. The firm now expects companies to guide flat QoQ instead of up and to make cautious 2H08 comments.
• Ann Taylor (NYSE: ANN) was cut to Neutral from Buy at Piper to reflect concerns over the LOFT division as well as consumer spending.

OTHER DOWNGRADES:

• Citigroup lowered TJX Cos (NYSE: TJX) to Hold from Buy.
• WestLB downgraded to Hold from Add Novartis (NYSE: NVS).
• Hartford Financial (NYSE: HIG) was downgraded to Neutral from Buy at UBS.

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Filed under: Politics, Presidential elections

Hillary Clinton appeared on Jim Cramer’s Mad Money recently, and faced some pretty tough questions about the economy, financial markets and regulation.

Senator Clinton shined. She came across as well-informed, and Cramer spent most of the interview agreeing with Ms. Clinton — impressive given that he also spent an entire interview giving attaboys to Ron Paul.

Senator Clinton was also impressive in her discussion of executive compensation where she lashed out at excessive compensation without banging the populist drum that gets many Democrats a bad rap. She explained that executives should be rewarded for creating great wealth for shareholders and that the “pay for pulse” compensation at many of these financial companies threatens to kill the goose that laid the golden egg.

Be sure to watch the video, regardless of what you think of Hillary: you’ll probably be impressed.

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We are once again firmly in Wonderland and falling deeper into the rabbit hole as the market is responding to negative news as if it just won a Powerball contest. On Monday, UBS AG announced another $19 billion in writedowns putting it firmly in the lead of all those in the writedown 500. […]
Related Posts:
■The Genesis of the Credit Bubble: Advertising, Deception, and $163 Billion in Subprime California Loans Resetting in 1 Year.
■This Housing Mess is Getting Ugly and Your Face Shows it. Unintended Consequences of Lost Home Equity.
■Real Homes of Genius: Today we Salute you Pico Rivera. $300,000 for an 856 Square Foot Home with 5 Bedrooms?
■Real Homes of Genius: Today we Salute you Buena Park. $511,000 for 864 Square Feet. Even Knott’s Berry Farm is Cheaper!
■Real Homes of Genius: Today we Salute you Stanton.

We are once again firmly in Wonderland and falling deeper into the rabbit hole as the market is responding to negative news as if it just won a Powerball contest. On Monday, UBS AG announced another $19 billion in writedowns putting it firmly in the lead of all those in the writedown 500. The race of course is dominated by investment banks and each writedown simply is a reflection of poorer performing mortgage assets;, aka Real Homes of Genius with sub-prime loans. Yet this is fantastic news somehow and the amazing plan that will turn the market around? Dilution of shares! You really have to enjoy the headline for this article:

And what does this plan further entail?

“To rebuild its cushion against further losses, UBS is seeking shareholder approval to raise $15 billion by selling new shares to existing shareholders in a so-called rights issue. “Our firm turned a page today at the end of a bitter chapter,” said Marcel Rohner, chief executive of UBS. “We will return our company to profitability.”

The write-downs at UBS and Deutsche Bank put financial firms’ total losses on subprime-mortgage investments well above $150 billion — more than halfway to the eventual total of $285 billion forecast by ratings firm Standard & Poor’s. That is based on a total of $1.4 trillion of subprime securities issued from 2005 through the third quarter of last year.”

It seems like a pattern is emerging here. First, if you are a large investment bank facing sub-prime problems you must:

A. Oust your leader with of course a nice severance package

B. Decide to sell more shares and call it “turning around” or some other cheerleading tagline

C. Announce the news in conjunction with horrible news (i.e., $19 billion in writedowns)

D. Add a touch of oregano and the market rallies

E. Rinse and repeat

If all goes bad, you always know that the Federal Reserve will step in and provide a back stop to a total collapse. There isn’t much to lose for those on Wall Street. Yet we now realize fully that the Fed cutting rates is doing nothing except kicking the dollar in the gonads and doing nothing to save the American homeowner. This has been the implication of course, that the rate cuts would somehow inject stability into the market which of course it has not. Now that we realize this hasn’t done much aside from diluting our US Dollar and we are still heading toward a recession, we get the amazing and fantastic $300 billion bailout via the FHA. Let us look at this puppy with closer eyes:

“Program would permit FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages. In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.”

Language is absolutely critical here. Whether you agree with this plan or not, this is a government sponsored bailout. I realize that this problem does require some solutions but if we are to seriously talk about these issues, let us call them for what they are. Heck, even Chairman of the House Financial Services Committee Barney Frank has this on the proposals:

“FRANK ANNOUNCES NEW ECONOMIC, MORTGAGE AND HOUSING RESCUE PROPOSAL”

So let us go back to the first paragraph. First, the wording on “viable mortgages” is very ambiguous. Does this mean 30 year fixed mortgages? Does this mean new mortgage products? Also, we read that lenders will need to accept “substantial” write-downs of principal to unload mortgages but what is substantial? Does that mean that the government will use independent appraisers to go to properties to accurately assess a value? If they are planning on allowing current appraisers to do the work this leaves the door wide open for more fraud and gaming of the system. Look what they’ve done with the current housing market! This here is extremely important since homes should be valued for their current market value and discounted at current rates.

It is clear even from the first paragraph that this will bailout mortgage holders. What if the property is worthless? There are some areas that simply have no market so how are these going to be valued? There does appear to be some back stops for these contingencies:

“Eligibility Requirements for Existing Loans (Requires All of the Following):

• Owner-occupied principal residences only (no investors, speculators or second homes);
• [Existing senior loan being refinanced must have been originated between January 1, 2005 and July 1, 2007];
• To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less that 40 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s). Regulators can make exceptions for involuntary changes after that date;
• Participating mortgage holders/investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full;
• Existing mortgage holders/investors must accept their losses - taking substantial write-down sufficient to establish a 5 percent loan loss reserve for the FHA, bring the loan-to-value ratio on the new FHA-loan down to no greater than 90 percent of property’s current appraised value, result in a meaningful reduction in mortgage debt service by the borrower, and to pay all up-front fees for the new loan. Accordingly, to qualify, mortgage holders would need to accept a substantial write-down, receiving no more than 85 percent of the property’s current appraised value as payment in full for the existing loans.”

I actually tend to agree with most points however, the main concern I hold is that if we are to use the current infrastructure of oversight, there is huge potential for fraud once again. Unless we have new entities coming in and ensuring appraisals are correct and accurate and verifying owner occupancy and also income, we will once again be going into liar loan territory. There is a lot to gain and lose here and the pressure to commit fraud by institutions is high. Those hungry for commissions will do anything they can to squeeze people into homes once again. If this plan does go through as is, it is incredibly important that stiff penalties and oversight are put over the lenders like a hawk.

Some of the language here is too flexible. What do they mean by purposely default? Do they mean walking away? They have to be more specific here. Also, I’m certain that many investors will fight to keep the penalty fees in since that is a reason many brokers made out like bandits on these mortgages. The more toxic the higher the yield. Now who will be one of the few responsible for this oversight?

“Increased Fraud Prevention/Oversight

• The HUD Secretary shall establish independent quality reviews to determine underwriter compliance, and rates of delinquency, claims and losses;
• Submit semi-annual reports to Congress; and
• HUD Inspector General shall conduct annual audit of the program.”

Bwahaha! You mean Alphonso Jackson who just resigned a few days ago under massive cronyism charges? Interesting how right on the back of this new FHA proposal the HUD Secretary resigns. Oh man we are so screwed.

Real Homes of Genius - Today We Salute you Covina

Let us not forget that there is a ton of junk floating out there. We are nowhere close to seeing the end of sub-prime resets and we haven’t even taken a look at Alt-A or Pay Option ARMs. These are the next ticking time bomb that should hit in 2009 through 2011. The above home just hit the market a few days ago. It is a 3 bedroom 2 bath home in the city of Covina. The home is currently bank owned so fortunately, this would not qualify for the new FHA plan. But let us take a look at the sales history here:

Sale History

01/17/2008: $411,507 *

11/17/2003: $268,000

06/25/2002: $210,000

We can presume that the sale price in January was simply the bank taking the place back. You may be wondering, how can it be that a place that sold for $268,000 in 2003 now has a balance of $411,507 without any sales? Welcome to the next big issue, the home equity line and second mortgage problems. Given that recent data shows that $1.1 trillion in home equity mortgages is out there, and these certainly won’t qualify for the FHA bailout, we have another issue just waiting to fall. This place has a pool listed and one of the pictures shows that it has modern accents to it. Given that the home was built in 1954 I think you can put 2 and 2 together and have an idea where the 2^nd mortgage went. The current price is $370,000 and I’m sure given the 424 other homes for sale in Covina, this place will have stiff competition.

There is a great new tool out by the New York Fed that uses data from Loan Performance to show mortgage market data across the U.S. This is a very useful tool and may run a bit slow given that I’m sure many are using it:

I went ahead and ran the program on Covina and the results do not look promising:

Share in foreclosure: 10.8%

Share ARMs resetting in 12 mos: 43.2%

Share low or no documentation: 47.5%

Share ARMs: 73.8%

And how we are close to a bottom with the above statistics is beyond me. Today we salute you Covina with our Real Homes of Genius Award.

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Related Posts:
■The Genesis of the Credit Bubble: Advertising, Deception, and $163 Billion in Subprime California Loans Resetting in 1 Year.
■This Housing Mess is Getting Ugly and Your Face Shows it. Unintended Consequences of Lost Home Equity.
■Real Homes of Genius: Today we Salute you Pico Rivera. $300,000 for an 856 Square Foot Home with 5 Bedrooms?
■Real Homes of Genius: Today we Salute you Buena Park. $511,000 for 864 Square Feet. Even Knott’s Berry Farm is Cheaper!
■Real Homes of Genius: Today we Salute you Stanton.

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Filed under: Forecasts, Consumer experience, Economic data, Commodities, Oil, Housing, Recession

Alan Greenspan has been traveling overseas too much promoting his book. Today he said there is over a 50% chance of a recession in the U.S. According to Reuters, the former Fed chairman said “I would not describe the situation we are in as a recession, although the chances that we’ll have one are more than 50 percent.”

If Mr. Greenspan was in the U.S. more often he might notice that many people can no longer afford both gas and food due to inflation in commodities prices. That alone has curtailed spending among many members of the lower and middle classes.

The drop-off in retail sales devils major retailers. Three U.S. airlines have already filed Chapter 11, and that number may well rise. Auto sales were off over 14% at both of the larger American car companies.

Many stocks in major U.S. firms are near 52-week lows and non-farm payrolls dropped sharply according to the most recent report. Financial institutions have cut tens of thousands of jobs, and that may get worse.

Otherwise, everything is fine.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: International markets, Other issues, Rumors, Rants and raves, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), Apple Inc (AAPL), Ford Motor (F), India, Private equity, Scandals, Citigroup Inc. (C), JPMorgan Chase (JPM), Merrill Lynch (MER), Oil, Headline news, Bear Stearns Cos (BSC), Federal Reserve, Recession

Every day another story about our recession and the related fallout pops up. Are we in a recession or not? Or will we just teeter on the edge? The debate continues between those anal retentive types that must see all the actual facts, and those that see the signs all around and proclaim that “if it looks like a duck and it quacks like a duck, then by golly…”

The Federal Reserve Board has acted as if we are in a recession. They sit on one side of the teeter totter lowering interest rates to counter balance the weak economy and moderate the impact of potential negative growth. Clearly they are throwing ballast off a sinking ship.

There has been much debate recently about the Fed’s dramatic bailout of The Bear Stearns Companies, Inc. (NYSE: BSC) with the cooperation and maybe hand rubbing of JP Morgan Chase & Co. (NYSE: JPM). Some feel Bear Stearns should have been allowed to collapse and others feel that the Fed had no choice in the matter and was not protecting BSC, but the overall confidence in world financial markets.

I take the latter position because I think it’s self evident that BSC’s rapid fall two weeks ago was simply a modern day run on the bank, one resulting from a lack of confidence. The Federal Reserve has an imperative to maximize market confidence. Maybe Bear Stearns falls to it’s doom by itself and maybe it is the first in a series of dominoes. Those that say let it collapse are proponents of taking a risk that might start an unstoppable tidal wave of financial ruin.

You could no more let BSC go bankrupt than you can wait to see the two consecutive quarters of negative growth before taking recession watch action. It is interesting that some wizards would take action in one case but not the other without seeing the contradiction in their positions. Citigroup Inc. (NYSE: C) and Merrill Lynch & Co., Inc. (NYSE: MER) are not out of the woods yet. Both companies had such nightmare investments in their portfolios that they had to clean house at the top by firing their chief executive officers. They certainly have some of the same ailments of Bear Stearns and resemble big dominoes in my eyes.

Unemployment is going up. On Wall Street and there is no debate about that. On the other hand on the west coast, the housing market is having a crippling effect on parts of the economy, and the State budget is a disaster. The only thing this has not affected is the tech sector and Apple, Inc. (NASDAQ: AAPL), with its CEO Steve Jobs. Apple has mountains of cash and a strong product line, and has sworn to maintain full employment and expand R&D no matter what. The tech sector may be down in 2008 in terms of sagging stock prices but jobs seem to be stable — both Steve Jobs and your tech job.

What is not stable is the price of oil, as oil dips to $106 on renewed flows from Iraq pipeline, or gold with its own bubble which are near all time highs. They were showing signs of temporary softness earlier in the week but that’s nothing a good war like the one in Iraq cannot sway in a moments notice.

While Wall Street suffers in the east and housing suffers in the west, Ford Motor Company (NYSE: F) has been busy hoping to minimize their employee and shareholder suffering by selling off Jaguar and Land Rover to Tata Motors ADR (NYSE: TTM) of India. I am not sure which will help them more: the infusion of $1.7 billion or simply having a few less things on their plate to worry about.

Consumer confidence is down, no surprise, the market has been mostly up lately… which is a big surprise. Google Inc. (NASDAQ: GOOG) remains a center of attention as the guessing game about earnings growth and the value of a click continue and while that remains big news, even bigger news, the acquisition of Yahoo! (NASDAQ: YHOO) by Microsoft Corporation (NASDAQ: MSFT) has gone silent. And the silence is deafening. Are they hammering out a deal?

Recession or not, the market will remain very active and the guessing games will go on. Have a good week end. Hopefully the Fed can take a rest so that we might too.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: We own shares in BSC & TTM.

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Gary Vaynerchuk of Web 2.0 fame has declared

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