One Page Annotated WSJ Summary, June 13th

by: David Jackson
David Jackson
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Summary of selected articles from this morning's Wall Street Journal with comments on related stocks. Links are to the original WSJ article, which requires a paid subscription. Use this summary as a starting point for research; check the summary against the original before trading:

ASIA MARKETS: Stocks Decline Across the Region As Interest-Rate Worries Rise and TODAY'S MARKETS: Stocks Could Slide Amid Data

  • Summary: Asian markets are down hard again Tuesday. The Japanese stock market fell over 4%, its biggest one-day loss in two years. Hong Kong's Hang Seng Index fell 2.5%, South Korea's Kospi Index fell 2.9%, and India's Sensex dropped 4.2% within 5 minutes of opening. S&P 500 Index futures indicate that the DJIA will fall about 50 points at open, after its 99 point fall yesterday.
  • Comment on related stocks/ETFs: Asian markets are proving to be far more volatile thant the major US indices in this downturn. ETFs to watch (click on symbol for charts and commentary): Japan (NYSEARCA:EWJ), Korea (NYSEARCA:EWY), Taiwan (NYSEARCA:EWT), Hong Kong (NYSEARCA:EWH), Singapore (NYSEARCA:EWS).

Surge in Internet Use, Energy Costs Has Big Tech Firms Seeking Power

  • Summary: Electricity costs are becoming significant for Internet companies, with one data center using enough power for a town of 30-40,000 people. As a result, Internet companies are trying to locate data centers near supplies of cheap energy, as energy accounts for 20-50% of a data center's running costs.
  • Comment on related stocks/ETFs: Limited impact on the Internet stocks. The real story -- not mentioned in the article -- is the economic case for replacing old gear with new equipment running low power chips from Intel (NASDAQ:INTC).

As China's Auto Market Booms, Leaders Clash Over Heavy Toll

  • Summary: As the number of cars in China increases, pollution becomes a more acute problem. China currently has fewer than seven cars per thousand people, and is expecting rapid increases. Guandong, China's export capital, is expecting to triple auto production by 2010.
  • Comment on related stocks/ETFs: Although the theme of the article is negative -- the growing pollution problem -- the stats are strongly postive for the auto vendors. General Motors (NYSE:GM) and DaimlerChrysler (DCX) are both mentioned as having JVs in China, though the article also mentions increasing competition from local car manufacturers. Note: "McDonald's Corp. said last week that it expects at least half of its new outlets in China to be drive-throughs." McDonald's discussed China, car ownership and drive-thrus explicitly on its Q1 conference call; the most remarkable statastic was that drive-thrus have 50-80% higher sales volumes than non-drive-thrus.

Airbus in a Quandary in A350 Revamp

  • Summary: Airbus has decided to rework the design of its new A350 to better compete with the Boeing 787 "Dreamliner". With only 182 orders from 14 customers for the A350 versus Boeing's 403 orders from 29 customers for the 787, Airbus has been forced to increase the A350's range, size and comfort level. Although the proposed changes make the A350 more competitive, the plane would be slated for delivery in 2012, four years later than the 787. The redesign reopens competition for supplying the A350's engines. General Electric and Rolls-Royce were developing engines for the original version, but GE is now nervous about involvement in the new version as it may cannibalize its business with Boeing. "It remains unclear if the world's other maker of big jet engines, United Technologies Corp.'s Pratt & Whitney unit, is in the running."
  • Comment on related stocks/ETFs: Yet another article emphasising Boeing's (NYSE:BA) lead over Airbus. (See Airbus A380 Faces Operating Limits in yesterday's WSJ Summary.) Postive also for General Electric (NYSE:GE) as it supplies engines for the 787. Speculatively positive for United Technologies (NYSE:UTX) as a contract to supply engines for the A350 would be signficant.

Piloting Boeing's New Course

  • Summary: Interview with Boeing CEO Jim McNerney focuses on how he's trying to fix Boeing's broken ethical culture, keep to delivery commitments for military projects, and work closely with customers.
  • Comment on related stocks/ETFs: Important comment: "Oil prices aren't going to come down anytime soon, overall maintenance costs are important, and customer convenience is important. Airlines are all about productivity." Bullish for Boeing (BA) and the US Oil ETF (NYSEARCA:USO).

Monster Gets U.S. Subpoena In Widening Options Inquiry

  • Summary: Online job-search and recruitment firm Monster Worldwide received a US attorney's subpoena for information relating to the back-dating of stock options. Comverse Technology Inc. and Applied Micro Circuits Corp., also announced delays in filing financial reports due to options investigations. The SEC has issued informal inquiries to Broadcom (reported yesterday) and Equinix.
  • Comment on related stocks/ETFs: See Citigroup analyst Mark Mahaney's detailed note on Monster today. Too late to sell ahead of the negative news, as Monster (NASDAQ:MNST) fell 8% yesterday, Equinix (NASDAQ:EQIX) 7.8%, and Comverse (NASDAQ:CMVT) 13%. AMCC (NASDAQ:AMCC) fell only 2% yesterday, but has fallen to $2.78 from $4 at the beginning of April (see chart). Jim Cramer recommended AMCC at $3.84 on April 10th, arguing that it should benefit from the upturn in the telecom equipment market; perhaps he'd argue this is a buying opportunity.

Lehman Reports 47% Surge in Profit

  • Summary: Despite reporting its second best quarter ever, Lehman Brothers' stock got hit yesterday by concerns about a weakening environment for investment banking. Net revenue was up 35% year over year, but equity trading revenue fell 7% and investment banking revenue 11% from last quarter. Lehman's M&A revenue rose 8% sequentially. Chief Administrative Officer David Goldfarb claimed that despite the market decline in May there's been little change to Lehman's business. Analysts were surprised.
  • Comment on related stocks/ETFs: Goldman Sachs (NYSE:GS) reports today, Bear Stearns (NYSE:BSC) Thursday, and Morgan Stanley (NYSE:MS) next week. While Lehman has more exposure to the bond market (and thus rising interest rates) than Goldman and Morgan, investors may not want to hang around to find out how those stocks will react. Cramer likes Goldman.

U.S. Budget Gap Shrinks on Surge In Tax Receipts

  • Summary: The Federal budget deficit fell almost 17% year over year for the first eight months of the fiscal year due to higher corporate and individual income tax receipts. Tax receipts were up 13% year over year, whereas spending was up "only" 8%. The growth in tax receipts is largely from corporation tax and wealthy individuals paying capital gains tax and tax on other non-wage income.
  • Comment on related stocks/ETFs: Guess the outlook for capital gains tax receipts looks a little shakier with the stock market's recent performance.

Zale Ends Merger Talks With Signet

  • Summary: Zale Corp., which operates 2,100 jewelry stores in the US, ended merger talks with Signet, which operates 1,246 jewelry stores in the US. Zale said Signet had approached it, but Zale's board decided against the merger. Zale's Q4 profits fell after the company tried to appeal to more upscale clients but failed; it then ousted its top management, and expects to announce a new CEO "within the next several weeks". Revenue from Signet's US stores, under the Kay Jewelers and Jared brands, surpassed that of Zale's US stores last year. A merger would have led to significant store overlap.
  • Comment on related stocks/ETFs: The merger talks were a double positive for Zale (NYSE:ZLC) shareholders: first, the Signet offer suggested that Zale's valuation was attractive, and second, a merger would have led to less competition and cost reductions from store closings. Now the merger's off Zale once again doesn't look so great: management turnover, failed strategy, exposure to a slowdown in consumer spending (after all, Zale's product is totally discretionary) and increasing competition from online jewelry retailers. Zale's stock was up 16% at one point yesterday on news of the merger deal, but closed only 3.5% higher; AP reported the deal was off aabout half an hour before the market closed. Signet, though based in the UK, has a US ADS (NYSE:SIG). Full disclosure: the author is short ZLC.

Tenaris to Acquire Maverick Tube For $2.4 Billion

  • Summary: Tenaris agreed to acquire Maverick Tube, a competing provider of tube products for the oil and gas extraction industry, for about $2.4 billion, a 42% premium to Maverick's closing price yesterday and a 24% premium to its average price over the last 90 days. Goldman Sachs advised Tenaris, Morgan Stanley advised Maverick.
  • Comment on related stocks/ETFs: Maverick's (MVK) CEO said in an interview that he was seeing "a significant increase in demand for what we call our premium alloy oil country tubular goods. This is a result of deeper and more complicated wells that are being drilled in the US and abroad." Cramer made a bearish call on Maverick as recently as May 31st, although he's generally been bullish on energy infrastructure stocks. This just isn't Cramer's day...

HEARD ON THE STREET: Kraft's Stock Issue May Test Shelf Life

  • Summary: Altria Group (previously known as Phillip Morris) sold 280 million shares of Kraft Foods, equal to 16% of its stake, to the public in 2001. Altria is now preparing to issue another 1.5 billion Kraft shares to Altria shareholders. But Kraft is facing more competition from grocery stores' own-label products, derives an increasing proportion of revenue from Wal-Mart ( 14% in 2005 versus 12% in 2003), and is suffering from rising energy and packaging expenses due to commodity prices. Kraft Foods trades at a forward (2006) P/E of about 16.5, slightly above the S&P 500 forward P/E of 16. In a note to clients, Prudential analyst Robert Campagnino said "We believe that Kraft shares will be under significant pressure post-spin, and that at current levels the risk/reward facing investors in Kraft shares is not particularly favorable."
  • Comment on related stocks/ETFs: You can't get much more negative than this. Negative for Kraft (KFT), negative for Altria (NYSE:MO). Unrelated question: if you're a socially responsible investor, can you short a stock like MO?


  • Summary: The May number for the producer price index is due today, and number for the consumer price index tomorrow. While Ben Bernanke described recent inflation readings as "unwelcome", investors may be worrying excessively about inflation. The core producer price index was up only 1.5% year-over-year in April, lower than most of 2005, and while the consumer price index has accelerated recently, much of that is due to housing costs.
  • Comment on related stocks/ETFs: The most direct way for investors to play the inflation number is with the iShares Lehman TIPS Bond Fund (NYSEARCA:TIP).

SMALL STOCKS: Zale Rises, Piper Jaffray Tumbles

  • Summary: The Russell 2000 fell 2.59% yesterday, closing below 700 for the first time since early January. BrightSmile (BSML) and Zale (ZLC) rose on merger news. The decline in Lehman Bros' stock after earnings also hit Piper Jaffray (NYSE:PJC) and LaBranche (NYSE:LAB). Cellphone distributor InfoSonics' (NYSE:IFO) stock fell 28% after it restated Q1 EPS to $0.15 from $0.22. NPS Parmaceuticals (NASDAQ:NPSP) "will cut its staff by 53% and discontinue all activities related to the commercialization of its Preos osteoporosis treatment in the U.S."
  • Comment on related stocks/ETFs: Is this finally the long-predicted rotation out of small caps? Roger Nusbaum discussed this in September, and Merril Lynch made the call in January. You can trade the Russell 2000 directly with the iShares Russell 2000 Index ETF (NYSEARCA:IWM). Full disclosure: the author is short IWM.

Seeking Alpha updates: Interesting commentary today from William Trent on the semiconductor sector and Eddy Elfenbein on which sectors have suffered most in this pullback.