Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy.
Here's a look at some of the week's biggest expected earnings gainers and decliners in the sector:
Baidu.com Inc. (NASDAQ: BIDU): $1.25 per share (+44.0%) on revenues of $134.7 million (+103.2%)
Broadcom Corp. (NASDAQ: BRCM): $0.44 per share (+38.6%) on revenues of $1.3 billion (+33.8%)
QLogic Corp. (NASDAQ: QLGC): $0.31 per share (+29.0%) on revenues of $170.0 million (+21.2%)
FLIR Systems Inc. (NASDAQ: FLIR): $0.32 per share (+28.1%) on revenues of $275.2 million (+44.0%)
Juniper Networks Inc. (NASDAQ: JNPR): $0.30 per share (+26.7%) on revenues of $927.4 million (+26.2%)
Waters Corp. (NYSE: WAT): $0.75 per share (+17.3%) on revenues of $391.6 million (+11.1%)
During the Great Depression, Franklin Roosevelt established the Work Projects Administration (WPA) to create work -- such as constructing public buildings, projects and roads and operating large arts, drama, media and literacy projects -- for Americans of all stripes.
Now the W Administration has its own WPA -- but this one only applies to the very wealthiest of Wall Street who are looking for more to do. The three million homeowners who are going through foreclosure won't get that $810 billion ($700 billion is earmarked for buying financial toxic waste and the other $110 billion went to buy the additional votes -- through tax cuts -- needed to get the House to pass the bill).
How will W's Wall Street WPA (WSWPA) program work? It will hire firms such as Bill Gross's PIMCO and Blackrock (NYSE: BLK) to manage a reverse auction to buy that toxic waste. Bill Gross bought $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) bonds at distressed prices, "advised" the administration on its $200 billion program to nationalize Fannie and Freddie, and then profited handily when the bailout boosted the value of Gross's bonds. Blackrock is already enjoying our tax dollars as the manager of the $29 billion in Bear Stearns assets which the Fed took on back in March. In total, WSWPA could generate $7 billion in fees (1% of the $700 billion to be spent) for Wall Street.
Lehman Brothers Holdings Inc. (NYSE: LEH) is poised to lose $2.6 billion and it's trying to dump $40 billion worth of real estate from its books. The Wall Street Journal reports that Guy Moszkowski, a Merrill Lynch & Co., Inc. (NYSE: MER) analyst thinks Lehman could lose $2.6 billion -- while others expect a mere $1.8 billion loss. Lehman normally reports in mid-September but it may pre-announce earnings this month.
I always find it interesting when analysts -- particularly those who work for banks with their own problems -- offer bearish earnings outlooks for their competitors. But I have met Moszkowski and I found him to be both very smart and a straight shooter. The Journal reports that he "more than doubled his loss projection to $2.6 billion and predicts that Lehman will take a $4.5 billion hit from write-downs." It quotes him as saying that an additional markdown up to 20% related to Lehman's remaining $64 billion in mortgage and commercial real-estate exposure "seems like a lot but can't be ruled out." If that were to happen, Lehman might need to raise more capital.
Speaking of that real estate, FT.com reports that Lehman is in talks to dump $40 billion worth of commercial real estate assets and securities. FT.com reports that there is a wide gap in what the potential buyers -- Blackstone Group (NYSE: BX) and BlackRock (NYSE: BLK) -- and Lehman think those assets are worth. It also reports that the assets in question consist of mortgages and mortgage-backed securities that Lehman valued at $29.4 billion at the end of May and real estate assets then valued at $10.4 billion.
So far, sovereign wealth funds have had bad luck with investments in U.S. financial institutions such as with Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).
Despite this, there still may be interest in dealmaking. Just take a look at the situation with Merrill Lynch. There was talk that the troubled firm would unload its 49.8% stake in BlackRock Inc (NYSE: BLK), and apparently there was interest from sovereign wealth funds, according to the Financial Times.
The potential suitors: Kuwait Investment Authority and Temasek (Singapore).
However, one issue was valuation. Why sell when the markets are in dire straights?
But there were some other key considerations. For example, BlackRock has been able to escape much of the turbulence from the credit crunch. More importantly, the firm has a lot of growth potential in global markets.
BlackRock must give consent for a sale -- at least for the next 14 months. So, in the end, it has a lot of power in the situation.
Blackrock (NYSE: BLK), an investment management firm, closed at $166.63 Monday. BLK is expected to announce Q2 EPS on July 17. Merrill Lynch (NYSE: MER) owns 52,395,082 shares of BLK as of March 21, 2008. BLK July 165 straddle is priced at $14. BLK August option implied volatility of 63 is above its 26-week average of 47 according to Track Data, suggesting larger price movement.
As expected, New York Mayor Mike Bloomberg's blind trust is interested in buyingMerrill Lynch & Co. (NYSE: MER)'s 20% stake in Bloomberg LP for between $4.5 billion and $5 billion, according to The New York Post.
The acquisition would give Bloomberg total control over his namesake media company and my employer for seven years. Merrill, of course, also is looking to unload its 49% stake in Blackrock Inc. (NYSE: BLK) to shore up its balance sheet. No word on potential buyers there.
As I posted yesterday, Mike Bloomberg is a logical buyer for the Merrill stake in his company. Bloomberg has the right of first refusal of the sale as well, which probably scared away the few other potential buyers that were out there. Bloomberg LP also prides itself on being a private company that marches to the beat of its own idiosyncratic drummer.
Merrill shareholders, including a close relative, have not had too much to smile about lately. Shares of the New York-based investment bank are down more than 41% this year. Obviously, it's selling its assets from a position of weakness. The New York mayor will gain control over his media empire at a bargain that would have been unimaginable a few years ago.
In a quarterly dance routine that's becoming quite familiar -- call it the write-down, capital raising dance -- the Wall Street Journal reports that Merrill Lynch & Co. (NYSE: MER) is planning to sell a $5 billion stake in Bloomberg, the media company, and to cash out of its 49% stake, estimated at $12 billion, in Blackrock (NYSE: BLK).
Why is Merrill doing this? As we've seen over and over again in the last year, banks must maintain specific levels of capital to assets in order to meet regulatory requirements. When a bank reduces the value of its assets, as accounting rules require, the bank writes off the decline in asset values against its capital. In order to maintain a sufficiently high ratio of capital to assets, banks seek to raise capital equal to the amount of the write-down.
Merrill anticipates taking $6 billion in write-downs for the quarter. These could come from its $41 billion in Level 3 assets -- assets valued based on computer models since there is no active market that prices them. Merrill is fortunate to have these stakes available to sell because it will be able to raise capital without diluting current shareholders. Unfortunately, once it sells these stakes, Merrill shareholders will no longer get the earnings stream they generated.
I'm not sure how management at Lehman Brothers Holdings Inc. (NYSE: LEH) has time to run the business. What's more, with all the turbulence, I'm wondering if many of the employees are working mostly on parsing rumors and fine-tuning resumes.
Of course, this week Lehman got rid of its CFO, Erin Callan and president, Joseph Gregory. The company also raised $6 billion, which was quite dilutive. So from Monday to Friday, the stock price plunged from $33 to $25.81.
Yet, by Friday, things were perking up. The stock price shot up 13.7%. Maurice "Hank" Greenberg, the, who is the former CEO of AIG (NYSE: AIG), said he bought shares. This was also the case with BlackRock (NYSE: BLK) and Putnam Investments.
But there was something else: Wall Street was abuzz with buyout rumors.
In fact, according to a report from CNBC, it looks like the senior management team of Lehman is meeting this weekend (which is a rare thing). Are they talking to possible suitors? Or, is it to review the figures for Q2? Both?
Despite all this, the fact remains that Lehman's potential suitors are also distressed. So, even if there is a deal, the valuation is likely to be muted.
But there is an interesting scenario: Blackstone Group LLP (NYSE: BX) as a buyer or major investor. The firm is well capitalized and may want an investment banking platform. Moreover, the firm's cofounders -- Stephen Schwarzman (CEO) and Peter Peterson (Senior Chairman) -- were formerly with Lehman (back in the 1980s).
Barron's [subscription required] summarizes the likely fate of different classes of Auction Rate Securities (ARS) holders -- the $330 billion market for securities that used to reset in weekly auctions before it froze up in February. It reports that If you hold ARSs sold by a municipality or a taxable, closed-end mutual fund you may already have gotten your money back or may do so within weeks. And those holding issues from tax-free, closed-end municipal-bond funds will likely see some money back before long. But others may have a long wait ahead.
I first wrote about this in February and since then, the post has accumulated 4,031 comments. I cannot imagine how difficult it must be for these people to think they had their money in a safe, money-market like fund -- only to discover that they could not get access to their money at all. It appears that many of these ARS holders did not receive a prospectus and were not warned that the auctions could fail.
Meanwhile, here's Barron's prognosis for the different classes of ARS holders:
Municipal Issuers. Issuers like cities and toll roads had about $165 billion of the ARS market. Bloomberg estimates that north of $63 billion of municipal ARS have been refinanced, and that ARS holders were bought out without losing any money. About half of the municipal auctions are working again, with interest rates in the 4% to 5% area.
One of the beneficiaries of the credit crunch is BlackRock, Inc. (NYSE: BLK), which is a mega asset manager. A key part of the business is BlackRock Solutions, which helps firms deal with risk problems and asset impairments. Yes, it's a fast-growing business. For example, BlackRock is managing The Bear Stearns Companies Inc. (NYSE: BSC) complex portfolio.
Well, this week, BlackRock announced its Q1 results. Net income increased 24% to $241.7 million, or $1.82 per share. Revenues were up 29% to $1.3 billion. It certainly helps that BlackRock has $1.364 trillion in assets under management and there is a global platform, which allows for deep diversification.
On the earnings conference call, the firm's CEO -- Larry Fink -- said that his firm is pushing aggressively into distressed assets. He even likes mortgages.
Fink also thinks there will be "dramatic consolidation" in the investment management sector. After all, with the dislocations in the market, there are likely to be choice assets on the market. And, in light of BlackRock's strong performance, the firm will be in a prime position to capitalize on the opportunities.
MOST NOTEWORTHY: Hershey Foods, Genentech and Garmin were today's noteworthy downgrades:
Bernstein downgraded Hershey Foods (NYSE: HSY) to Market Perform from Outperform, citing commodity cost pressures & slowing volume growth.
Thomas Weisel downgraded Genentech (NYSE: DNA) to Market Weight from Overweight after the company reported Q1 results, due to Avastin growth concerns and a lack of meaningful drivers of long-term revenue growth until 2009.
Oppenheimer cut Garmin (NASDAQ: GRMN) to Perform from Outperform on concerns regarding PND pricing and the company's profitability dynamics.
OTHER DOWNGRADES:
Blackrock (NYSE: BLK) was downgraded at Goldman to Neutral from Buy and to Market Perform from Outperform at Wachovia.
A fantastic Barron's [subscription required] interview with Blackrock Inc. (NYSE: BLK) CEO Laurence Fink suggests that the collapse of The Bear Stearns Companies (NYSE: BSC) was aided by hedge funds. But my interview with an industry insider suggests that some hedge funds not only created the collapse, but profited from it through short selling.
Here's an excerpt from the Fink interview:
"The fall of Bear Stearns was a liquidity crisis. It has been rumored that there were hedge funds promoting hostile and negative comments, which accelerated the fear of doing business with Bear Stearns. I believe it would be prudent if the SEC investigated these rumors. Bear Stearns was a very fine institution destroyed by the profiting of a few. In a normalized market, Bear Stearns would have never fallen like this. The rating agencies caused the ultimate fall of Bear Stearns."
This is consistent with what I heard from a Wall Street insider who attended a March 14 speech by President Bush at the Economic Club of New York -- three days before the JPMorgan Chase & Co. (NYSE: JPM) deal to buy Bear at $2 a share. This insider sat at a table next to a New York hedge fund manager and asked him whether he was surprised by the collapse of Bear Stearns. What the hedge fund manager said came as a shock to me: "Bear's collapse didn't surprise me. We've been short Bear for five days. All the hedge funds have been pulling their prime brokerage business from Bear."
BlackRock (NYSE: BLK), which is a top global asset manager, is one of the few that has been relatively unscathed in the financial meltdown. The company avoided such things as subprime securities and was quite conservative with client portfolios.
As a result, BlackRock now has lots of flexibility. So, what to do? Well, the firm has put together an IPO filing for a fund of hedge funds (to raise about $500 million). The offering will be on the London Stock Exchange.
Basically, a fund of hedge funds is a platform where managers invest in various hedge funds. True, the fees can be high, but there are some key advantages, such as diversification and improved due diligence. Besides, BlackRock has proved to be a top-notch operator with understanding complex investments. After all, the firm is helping to deal with the management of a big part of the Bear Stearns (NYSE: BSC) portfolio.
Actually, BlackRock's fund of hedge funds is part of Quellos Group LLC, which the firm purchased last year. In other words, it looks like BlackRock may snag a nice return on this deal.
About a year ago, I had a chance to hear a presentation by Laurence Fink, who is the CEO of BlackRock (NYSE: BLK), which is a mega money manager. Simply put, he was a bit concerned about the markets. With the huge amounts of leverage, he thought that investors weren't getting enough premium for the potential risk.
Yes, it was a good call. And the upshot is that BlackRock has been a stellar performer.
Well, now Fink is more sanguine. In fact, in this week's Barron's [a paid publication], there is an interview with him.
What's his take? First of all, he think investors should dip into equities, such as the big caps that benefit from global growth. Some of his choices include: General Electric (NYSE: GE), Monsanto (NYSE: MON), United Technologies (NYSE: UTX) and Boeing (NYSE: BA).
He also likes high-grade mortgage debt. Basically, the spreads are attractive (and seem to account for the risk levels).
Finally, Fink is bullish on overseas markets, especially commodity-based counties like Brazil.
TheStreet.com's Jim Cramer says we'll finally get real pricing of the hard-to-mark paper.
After months of saying, "Why don't they bring in some pros, do a Resolution Trust and get on with things?" I can't believe that it is actually happening. With the anointing of BlackRock (NYSE: BLK) (Cramer's Take) -- nice short squeeze in that one, buddy -- to parse out or invest in the worst toxicity that is Bear's (NYSE: BSC) (Cramer's Take) portfolio, the Fed/Treasury -- and I reiterate that the Treasury is driving this -- is signaling the beginning of the end of the "hard to mark/hard to trade" component of this nasty bear market in fixed income.
Even as recently as two weeks ago I could not believe this stuff couldn't trade and remained 20 bid and 80 asked, meaning that the gulf between buyers and sellers was just too ridiculous.
Now, with BlackRock, empowered by the government, to dump stuff or parse it out, we are going to get real prices because "something has to happen." Some trades have to occur. All that had happened before this was that Bear inventoried all this bad stuff, having unwound it from funds of its own or taken junk from clients, and we had no idea how to value it.
Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy. 
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