Cerberus Update, Weak Retail Sales, FDIC's Blair Worried About Commercial Loans, Prime Borrowers Becomming a Problem, VMware Company of Interest

Cerberus denies talk of fund defaults - Reuters
Reuters reports Cerberus Capital Management yesterday dismissed market speculation that some of its hedge funds, which have suffered losses and heavy redemptions, are in danger of default. Traders in London and Frankfurt were buzzing with talk that a major hedge fund was headed for default. Much of the talk was directed at Cerberus, a private-equity and hedge-fund firm hit hard by losses at Chrysler and GMAC. "There is absolutely no truth to the speculation," said Tim Price, a Cerberus spokesman.

Where have we heard this type of denial before? Oh yes, I remember, last year with Bear Stearns and Lehman denials to name just a few. We better keep an eye on this story. We learned last year that big hedge fund failures can lead to big problems for the equity markets.

Weak back-to-school sales spell trouble for holidays - WSJ
WSJ reports shoppers are focusing on deals and limiting buying mainly to necessities, based on August sales estimates that herald another tough holiday season for beleaguered retailers. Despite sales tax holidays in several states designed to spur sales, back-to-school spending remains lackluster, according to industry experts.

Retailers' recent efforts to shake customers from deep discounts and spur buying by tightly controlling inventories are fizzling. Now, retailers that traditionally rely on back-to-school sales as an barometer of demand for the remainder of the year face tough choices on stocking and hiring. Customers should find ever slimmer pickings and fewer clerks (this doesn't bode well for those thinking unemployment is close to the peak) as stores hold off on early holiday orders and further trim costs...

We have seen an equity market recovery in the first half of this year based on a return to normalcy in the credit markets. Going forward, a new catalyst will need to develop to push the equity markets higher. One such catalyst could be an economic recovery and in turn better earnings in Q3 and Q4. However, stories like the one above cast a pall over a possible economic recovery and raise the question: Can the equity markets continue to move higher if positive earnings momentum does not materialize?

The following two stories add to the shroud being drawn over any possible recovery in Q3 and Q4...
FDIC's Bair says commercial loans "looming problem" - Reuters.com
Reuters.com reports the chairman of the FDIC said commercial real estate issues will increasingly drive U.S. bank failures. FDIC head Sheila Bair told CNBC Tuesday evening that commercial real estate loans remain a "looming problem" for banks' balance sheets and she expects the area to increasingly be a driver for bank failures during the remainder of this year and 2010.

Bair said she would try to avoid tapping its line of credit with the Treasury Department. "We'd like to try to avoid that," Bair told CNBC in an interview... Bair said the FDIC has not yet decided whether to charge the bank industry more special assessments to replenish the fund. She defended the loss-share agreements that the FDIC has extended to acquirers of failed banks, saying the arrangements have saved the agency billions of dollars over the past two years.

Pace of delinquencies for prime borrowers is accelerating - WSJ.com
WSJ.com reports the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers. Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

Companies of Interest
(Please click on the link above to review previous EPS/Company posts)

Periodically I will post the EPS news or other relevant coverage of companies we find interesting. This is not a recommendation to purchase or sell the shares. I will not engage in the hackneyed approach of other bloggers and give advice about when to buy or sell. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Of course, if you are an investor in any of the Fortune's Favor Family of Funds or a client of RCM our door is always open. Feel free to call or email questions at any time.

VMW VMware: AmTech reviews Vmworld 2009; sees virtualization approaching acceleration phase (33.75 ) With approximately 12,500 attendees, AmTech was taken aback by the activity level at Vmworld 2009. Throughout the day, firm spoke with numerous contacts and clearly the IT industry remains committed to virtualization. In fact, firm has increased conviction that virtualization is approaching an acceleration phase in its adoption curve. They believe virtualized desktop infrastructure (VDI) will be HUGE. In fact, a VMW executive believes it offers a ~50% reduction in total cost of ownership and that the industry will be 50% virtualized within 5 yrs. Customers want to save money and lessen complexity. Virtualization is the #1 vehicle for CIOs to both save capex/operating expense dollars while easing complexities of the data center. Virtualization penetration of new server shipments is ~15% in CY09...

Q2 EPS, LIBOR-OIS Spreads Narrow, July Retail Sales, Initail Jobless Claims

Second quarter earnings can be best characterized as light on revenue but strong on cost cutting, leading to better than expected EPS. The more positive bottom line results have helped fuel the equity market rally over the last couple of months.

Meanwhile, Aug. 13 (Bloomberg) -- The Libor-OIS spread narrowed to a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal,” adding to evidence the freeze in credit markets is thawing. Clearly credit market stabilization has been a major driver of the equity market rally.

While the rally has been a nice reprieve from the bear market the question remains what will compel the markets higher in Q3 and Q4. With credit back to normal that driver is off the table and cost cutting/belt tightening can only work to improve EPS for a short period of time. Revenue must accelerate in the 2nd half of the year for this bear market rally to turn into a bonafide bull market.

With that thought in mind I am publishing the next two stories. If the consumer can't find a job then spending will not return and revenue will continue to be disappointing. I fear this will result in a resumption of the down trend in the back half of the year.

Of course, these are long term questions and as my Mom always says "you must live the questions; the answers reveal themselves." "Living the questions" in this case means trading the trend while keeping your eyes open and your mind alert.

ECONX July Retail Sales Disappoint
The July Retail Sales report is a disappointment and yet another reminder, in the midst of a rising stock market, that the consumer isn't all he/she used to be due to weak wage growth, depressed asset prices, and concerns about job security...

For the month retail sales were down -0.1%. Excluding autos, they were down -0.6%. Both figures were well off the consensus forecasts that called for increases of 0.8% and 0.1%, respectively. The government doesn't provide any context behind the numbers, but with broad declines in most sales categories, it is clear that consumers weren't doing a lot of discretionary spending.

There will be a tendency to dismiss the weakness as being the result of consumers delaying purchases to take advantage of tax-free holidays that got pushed into August this year. There will likely be some makeup in August, but there is still no other way to read the July data than to consider it a disappointment. To the latter point, retail sales, excluding autos, gasoline station, and building materials, which is a measurement that flows into GDP estimates, was down for the fifth straight month.

ECONX Initial Claims Still Way Too High

Initial jobless claims for the week ended August 8 increased to 558,000 from a revised 554,000 in the prior week. The current number lifted the 4-week moving average to 565,000 from 556,500. Continuing claims, in contrast, fell 141,000 to 6.202 million. That dropped the 4-week moving average for the series to 6.259 million from 6.287 million. There is cold comfort in the drop in continuing claims since it most likely reflects people losing benefits. To be sure, there isn't much hiring happening... Separately, while the trend in initial claims has been better of late, a reading north of 500,000 at this point is still downright bad and still well above prior recession levels when the 4-week average for claims was closer to the 400,000-450,000 range. The labor market is weak and these figures aren't a great portent for consumer spending activity.