JDfn Daily Digest - September 17, 2008

The government has stepped in to rescue American International Group Inc. (AIG) with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove senior management.

Barclays PLC (BCS), the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s (LEH) bankruptcy reorganization to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.

There are reports that Morgan Stanley (MS) officials are weighing whether the firm should remain independent or merge with a bank given the recent turbulence in the company's stock. Morgan Stanley CEO John Mack wants to avoid the mistake made by Lehman Brothers CEO Richard Fuld, who brushed aside buyout offers until the market crushed shares of the firm and force it into bankruptcy.

The U.S. government has been reaching out to large banks in an effort to organize a buyout of the struggling Washington Mutual Inc. (WM). A New York Post report said regulators have reached out to Wells Fargo & Co., JPMorgan Chase & Co. and HSBC Holdings PLC, among other institutions.

The Federal Reserve did not lower interest rates despite all the recent financial market upheavals, but that doesn't mean the central bank won't cut rates in coming weeks. Many economists believe Fed Chairman Bernanke and his colleagues decided to save their remaining options, given that their key lending rate is already at a low 2 percent, so that they will have room to make cuts later this year, if markets remain chaotic.

The Treasury Department has announced that it will provide cash to the Federal Reserve to fund the central bank's operations to provide liquidity to financial markets. In a statement, Treasury said that it would raise the cash in a program of Treasury bill auctions, known as a temporary Supplementary Financing Program.

Construction of new homes and apartments fell to the lowest level in 17 years last month. The Commerce Department reported that housing construction dropped a surprise 6.2 percent last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991.

The Commerce Department reported that the U.S. current account deficit widened to $183.1 billion in the second quarter, or 5.1% of gross domestic product. The increase in the deficit was accounted for by a decrease in the surplus on income and an increase in the deficit on goods.

The U.S. House of Representatives approved a measure by a vote of 236 to 189 to lift the ban on offshore oil and gas drilling. The bill would allow drilling as close as 50 miles from the coast, with seas further offshore than 100 miles opened up completely.

The Energy Department reported that U.S. crude supplies fell 6.3 million barrels for the week ended Sept. 12th. Supplies have fallen by a total of more than 14 million in four weeks amid storm-related output disruptions in the Gulf of Mexico. Distillate supplies were down 900,000 barrels in the latest week and motor gasoline inventories fell by 3.3 million.

Longs Drug Stores Corp. (LDG) said it will not enter into discussions with Walgreen Co. (WAG) about its $2.8 billion bid for the drugstore operator. Walgreen made a $75-per-share offer for Longs last week, hoping to unseat CVS Caremark Corp.'s previous bid of $71.50 per share, worth about $2.7 billion.

Scheduled U.S. Economic Reports (Thursday)

Initial Jobless Claims (Week of Sept 13th), Philadelphia Fed Index (Sep), Leading Indicators (Aug)

In Earnings News

General Mills (GIS) said profit fell 4 percent during the fiscal first quarter. Earnings for the quarter fell to $278.5 million, or 79 cents per share. Analysts predicted profit of 87 cents per share.

Adobe Systems (ADBE) reported a fiscal third-quarter net income dropping to $191.6 million, or 35 cents a share, from $205.2 million, or 34 cents a share, in the same period a year earlier. Analysts on average had estimated Adobe would post earnings excluding special items of 46 cents a share.

Brady Corp. (BRC), which makes labels, signs and safety devices, said its fiscal fourth-quarter profit jumped 33 percent. For the quarter, Brady earned $34.8 million, or 64 cents per Class A common share, compared with $26.2 million, or 48 cents per Class A common share, for the same quarter last year. Analysts expected a profit of 62 cents per share.

AAR Corp. (AIR) said its first-quarter profits rose 21.4 percent on strength in its aviation parts, maintenance, and structures and systems divisions. The company said it earned $18.4 million, or 44 cents per share, up from $15.2 million, or 36 cents per share, during the same period last year. Analysts expected profit of 45 cents per share.

Scheduled Earnings Reports (Thursday)

Carnival Corp, FedEx, Palm, Oracle Corp, Conagra Foods, Pier 1 Imports, Cintas Corp

Stocks in the News

Nortel Networks (NT) warned that carriers are cutting back their capital spending more than previously expected.

SanDisk (SNDK) traded much higher after Samsung Electronics of South Korea (AANGY) bid $26 a share, or $5.85 billion, for the maker of flash-memory technology.

Ambac Financial Group (ABK) said its direct exposure to Lehman Brothers was limited to six interest rate and currency.

Ace Ltd (ACE) and the Travelers Companies (TRV) were upgraded to buy from neutral by Goldman Sachs on hopes they can pick up market share from AIG.

Boeing Company (BA) traded lower after Japan Airlines and Boeing have come to a compensation deal over the manufacturer's delayed 787 Dreamliner deliveries.

Darden Restaurants (DRI) fiscal first-quarter profit fell to $82.1 million or 58 cents a share.