uaua

Commodities prices are getting to McDonald's (NYSE: MCD), again. According to Reuters, "McDonald's Corp said on Thursday it was considering further price increases, but would do nothing that slowed customer traffic into its global network of stores."

That may be wishful thinking. In a recession, even modest increases in prices can drive consumers away in droves. The company will still have a Dollar Menu, but that dollar will buy a bit less in terms of food and drink.

McDonald's is indeed playing with dynamite if it tries to get a bit more money out of its customers. People can still buy a can of beans and eat at home.

McDonald's could make the choice of keeping prices level and taking slightly smaller margins. It could go to its investors and say that its operating income could fall by a modest amount because customer loyalty is more important long-term than earnings-per-share are short-term.

If it does those things, its shareholders should be happy.

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

Oh, happy day. Mortgages issued in the first half of 2007 are going bad at a rate much faster than those issued in 2006. According to The Wall Street Journal, data from the "Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months."

The news means that earnings could get worse at large banks that have mortgage loans at the center of their businesses. Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) come to mind. That should be especially interesting for investors in the two companies. Over the last month, both stocks have recovered. Washington Mutual is up about 2% and Wachovia has risen a remarkable 30%.

Wall Street had hoped that bank stocks, especially those with businesses focused on the mortgage markets, would improve as subprime loans worked their way through the system. That may have worked if prime mortgages weren't going bad at an increasing rate these days and loans from 2007 didn't appear to present more risk than those from earlier periods.

All of that is to say that a stock like Wachovia, which fell as low as $7.80 and then recovered to $18.41, is not out of the woods. As a matter of fact, it may be heading back in.

Douglas A. McIntyre is an editor at 24/7 Wall St.

AIG (NYSE:AIG) Cut to Market Perform at FBR, according to 24/7 Wall St. The financial website also reported VMware (NYSE:VMW) Started as Underperform at Bernstein and Polo Ralph Lauren (NYSE:RL) Raised to Outperform at Morgan Keegan.

Credit Suisse downgraded Avon (NYSE:AVP) to Neutral from Outperform, according to Brieifing.com. The news service also reports that Jefferies downgrade UTStarcom (NASDAQ:UTSI) to Underperform from Hold.

Douglas A. McIntyre

AIG (NYSE: AIG) may have a new CEO, but his track record is no better than that of the man he replaced. The firm said its second-quarter net loss was $5.36 billion, or $2.06 a share. AIG blamed the housing and credit markets, but, of course, the real trouble rests with its risk management. According to Reuters, "AIG said it recorded $5.56 billion in second quarter unrealized market valuation losses on credit default swaps, the same area that led to losses in the prior two quarters."

While the company's insurance and investing units are still profitable, AIG may have to post similar losses in the next two quarters if the US credit and housing markets get worse. It has already moved ahead with its plan to raise $20 billion. It may have to add substantially to that to offset big deficits .

With AIG's stock at about $25 and a market cap of $72 billion, another capital injection cold drive shares down to $20.

In other words, AIG's shares may be down over 50% this year, but that does not make them a good investment. The stock could actually still be one of the most risky among large-cap firms. AIG joins many other financial companies in finding that replacing CEOs does them no good.

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

The resale value of Toyota (NYSE: TM) cars is usually pretty good. They are admired for their quality and durability. So when the big Japanese company says it will have to write down the value of many of its leased vehicles, it is an indication that the auto industry's troubles in the U.S. are getting worse.

According to The Wall Street Journal, "the company will set aside major reserves for its first quarter to cover losses from vehicle leases in the U.S." Toyota's first quarter ended June 30.

The news is a signal that a severe problem within the car industry is widening. Leased vehicles are often coming back to car companies with so little value that they cannot be resold for enough money to reclaim a reasonable part of their original prices. The difference has to be written off. The trouble is especially acute with SUVs and pick-ups because their fuel-efficiency makes them unattractive.

The problem has a domino effect. The leased cars coming back are sold as used. Their prices have been undermined by the current U.S. economy and gas prices, and the vehicles are marketed at deep discounts. That often makes them attractive alternatives to new cars. And, since the auto companies are already having trouble selling new cars, their problems are compounded.

Toyota's news may be bad for Toyota, but it is worse for the the industry as a whole.

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

Citigroup (NYSE: C) is in talks with federal and New York State authorities to settle charges that it misrepresented the liquidity of the auction-rate securities that it sold to clients. The financial instruments were presented as being nearly as liquid as cash, but when the market in the paper locked up a year ago, owners of the securities could not sell them.

According toThe Wall Street Journal, Citi conversations with regulators "to resolve allegations of wrongdoing in the auction-rate-securities market could result in its buying back several billion dollars of the illiquid securities from investors and paying a sizable fine."

Leaving Citi aside, banks and brokerage houses could face another substantial series of write-offs if the industry decides to come clean on the auction rate mess. The market totaled about $360 billion. While the paper is not worthless, it may bring only 60% of its face value. The leaves a hole of nearly $100 billion.

Financial companies may not have a choice beyond settling. It appears that both personal investors and corporations were told that they could get the money out of auction rate securities with ease. When banks decided to no longer take on the risk of trading the paper, most of the bonds could not be sold at all.

Investors at banks and brokerage houses should get ready for a new round of write-offs large enough to take their shares back to their recent lows.

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

Morgan Stanley (NYSE:MS) has decided it does not want to take the risk of laying out more money on many of the home equity loans it has given to customers. Many of the houses backing these funds are now worth less than their mortgages. According to Bloomberg, Morgan "told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines."

Since most other banks and brokerages with similar loans out to their customers have the same problems Morgan does, it appears that the market is at the beginning of a period where, for many people. getting money from these facilities will come to an end.

Since consumers are already faced with high commodities and oil prices, costly credit, and falling home and stock values, the home-equity loan was one of the last places people could turn for capital.

The news is almost certainly bad for retailers and auto companies. Consumer access to capital seems to be shrinking by the day. Cutting off home-equity withdrawals may take balance sheet risk away for Morgan and its peers, but their customers will get squeezed even harder than the economy is squeezing them now.

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

Whole Foods (NASDAQ: WFMI) was one of the great retail growth stories of the last five years. From mid-2003 to early 2006, the company's shares rose $25 to $77. After a couple of tough years, the stock is back under $20.

Whole Food's most recent quarterly results were abysmal, adding to the perception that the best days for the health food chain are over.

WFMI's net income dropped to $39 million from $49 million in the same quarter a year ago. The company also suspended its dividend and cut capital spending for non-store activities by $50 million.

According to the AP, "The natural foods grocer said it now expects sales growth of 6 percent to 10 percent for the year - rather than the previously stated 25 percent to 30 percent growth. And the company said its comparable-store sales are expected to grow 1 percent to 5 percent, down from the previously anticipated 7.5 percent to 9.5 percent growth."

Not unlike Starbucks (NASDAQ: SBUX), Whole Foods is caught in a downturn it cannot arrest. Larger food chains looked at the WFMI success and decided to open natural food sections of their own. Whole Foods charges a premium for its products and, in a slow economy, consumers are less likely to accept that.

The recession will end, but competition from larger food retailers will not. Whole Foods may have to drop its prices permanently. That means its old margins are never coming back.

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

JP Morgan downgraded Novartis (NYSE: NVS) to "neutral" from "overweight", according to Briefing.com. The news service also reports that Citigroup added Freeport McMoran (NYSE: FCX) to its "Top Picks" list.

American International Group (NYSE: AIG) Started as Sell at Societe Generale, according to 24/7 Wall St. The financial site Limelight Networks (NASDAQ: LLNW) Raised to Buy at Jefferies.

A company the size of Cisco (NASDAQ:CSCO) should not be growing during a recession. But, it did anyway.

Cisco reported net income of $2 billion, or $.33 a share, compared with a profit of $1.9 billion, or $31 a year ago. Revenue moved from $9.4 billion to $10.4 billion.

According to MarketWatch, on its earnings call the company "reaffirmed Cisco's long-term revenue growth projections of 12%-17% per year."

There are two reasons Cisco's numbers are surprising. The first is that its large router business primarily sells products to telecom and cable companies. Capital spending in those sectors has not been sharply increasing, so Cisco must be improving its market share or its margins.

Another significant piece of Cisco's business is home set-top boxes and small-business video conferencing. It touches a vast pool of consumers and enterprise with modest numbers of employees.

In other words, Cicso has risk across many pieces of the economy, and its still did well.

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

Now that analysts have figured out that the credit crisis is moving from subprime to prime borrowers, the economic detective squad has begun to look for what's next. Turns out they don't have to look much further than the same consumer who cannot afford his mortgage.

According to The Wall Street Journal, "Rising defaults on credit-card payments, coupled with a bleaker economic outlook, are spooking investors in the market where this debt is packaged and sold." The result is a double-edged blade. Banks that hold these packaged securities will have to begin to write them down just as they did mortgage-backed paper. And consumers will find credit harder to come by because banks do not want more write-offs.

The consumer will have lost one of his last places to find cash, and banks will face more losses and the risk of having to raise additional capital. Since credit has driven consumer spending, the retail industry may be in for another shock.

Thirty years ago, China did not have much of a middle class. A large number of people who have recently moved to big cities for jobs in the fast-growing economy still lived in rural areas then. China's increasing role as an exporter changed that.

As Chinese began to see wage improvement, these people not only became consumers of goods, they drove a thriving stock market and real estate prices. A lot of that is about to end.

According to The New York Times, "Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening." Some of the immediate fallout of that will be good for the West. China may need less oil and a smaller supply of metals commodities. That could bring down the prices of these and cut back inflation in big economies like the U.S.

The less pleasant side of the coin is the U.S. exports to China will almost certainly slow, putting pressure on corporate earnings here.

The worst case is much worse, and looks like Japan in the 1980s. A boom in exports helped drive inflation in Japan. The value of its real estate and banks sky-rocketed. Japanese businesses started to buy up U.S. assets. When growth in Japan slowed a bit, the value of real estate and the stock market in the country collapsed. Money from Japan used to buy U.S. treasuries disappeared. So did the demand for U.S. goods and services. No one was a winner.

It is hard to imagine a recession in China as it has a GDP growth rate of nearly 10% and has been growing faster than that for years. But Japan's problems thirty years ago are a warning. Nothing good lasts forever.

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

Alan Greenspan has become like the fictional character "Zelig." Every time the business community turns around, there he is. The opinions of the former Fed chairman have taken on the characteristics of a broken record.

Greenspan wrote an essay for the FT in which he said, "The insolvency crisis will come to an end only as home prices in the US begin to stabilise and clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities." That statement has been obvious for several months. It adds no insight to the debate of how the credit crisis might end and repeats the same premise the he gave on CNBC a few days ago.

In his written comments, Greenspan also said there would be more bank failures.

The old man is now risking his legacy as an economist and long-time Fed chief by becoming a media star whose only attraction is that he is famous. What he has to say about the economy adds little or nothing to the debate.

To save what he has of his reputation, he should spend more time at home and less time making hackneyed pronouncements.

Douglas A. McIntyre is an editor at 247 Wall St.com.

Bristol-Myers Squibb (NYSE: BMY) has made a $60 a share offer for the part of ImClone (NASDAQ: IMCL) that it does not already own. ImClone chairman Carl Icahn does not think tha$60 is high enough, despite ImClone trading below $40 in June. The offer seems like a pretty good deal, and since BMY owns 17% of ImClone , there is not likely to be another bidder.

According to The Wall Street Journal, ImClone's board appointed a committee to review last week's $60-a-share offer, but the biotechnology company said the board's "preliminary view is that offer substantially undervalues ImClone."

Icahn should take the money and run. Bristol-Myers clearly has the option to withdraw its bid and watch the stock drop back to $45. Holders of ImClone stock would likely get POed at Icahn, and is it any wonder?

It is not a perfect match, but the ImClone negotiations are starting to shape up the way Microsoft's (NASDAQ: MSFT) talks with Yahoo! (NASDAQ: YHOO) did. Microsoft needed Yahoo! for its internet strategy. No other company was going to pay a large premium for the portal's shares. When Microsoft walked away, Yahoo!'s share lost a third of their value.

Icahn has a history of pushing for a better deal. His batting average on recent investments is hardly perfect. He is not doing anyone, including himself, any favors by fighting with Bristol-Myers.

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

Intel (NASDAQ: INTC) knows that the market for basic server and PC chips will not grow as fast over the next five years as it did over the last five. The economy plus high market penetration will see to that.

So, Intel is looking to new markets to save its bacon. It has already entered the segment for relatively low-powered chips for handheld "computers." Whether that business will ultimately be large is anyone's guess.

According to The Wall Street Journal, the world's largest chip company "is providing the first details of a chip technology that is designed to help break into new markets, starting with high-end graphics used for computer games and animation." This technology will help higher end PCs run games and video content.

With Intel's balance sheet and big share of the current PC market, the announcement could spell gigantic trouble for AMD (NYSE: AMD) and Nvidia (NASDAQ: NVDA). A little over two years ago AMD bought graphics chip company ATI. So far, the deal has been a bust.

Concerns that the graphics chip market could get crowded and that margins could be under pressure have already driven AMD and Nvidia to recent 52-week lows. Over the last year, Intel shares are off about 5%. Shares in the other two companies are down over 60%. With Intel coming into the market, that could actually get worse.

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