One Page Annotated WSJ Summary, June 14th

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:

Tumbling Markets May Be Reflection Of Strong Growth

  • Summary: Multiple asset classes continued their decline yesterday: gold fell 7.3%, silver 13%, Japanese stocks 4.1%, Russian stocks 10.5% and Columbian stocks 9%. But these declines are more a reaction to rising interest rates and the end of the "easy money era" than to fears about economic growth. In fact, the outlook for growth looks more balanced than before: while growth in the US is expected to slow, Japan just raised its estimate of inflation-adjusted growth to 3.1% from 1.9%.
  • Comment on related stocks/ETFs: Stronger economic growth plus higher interest rates isn't necessary bad for stocks, if it means stronger profit growth. (That's a big "if" as profit margins are at an all-time high and may revert to the mean.) One asset class, however, should be whacked by the combination of higher rates and higher growth: real estate. Higher rates mean the dividends on REITs are worth less relative to bonds, and also make real estate harder to finance, driving down prices. Remarkably, the REIT ETFs -- the Cohen & Steers Realty Majors ETF (NYSEARCA:ICF) and the iShares Dow Jones U.S. Real Estate Index Fund (NYSEARCA:IYR) -- have been relatively unscathed in this downturn. Full disclosure: the author is short IYR.

COMMODITIES: Metals Selling Spreads to Grains, Coffee

  • Summary: After another day of commodity price declines yesterday, Gold has now lost 23.5% of its value from its mid-May high, silver 37% and copper 25.5%. "Metals prices, along with equities and other commodities, are falling as global investors downgrade their expectations of global growth in response to interest-rate hikes in Europe and the U.S., and tough inflation talk by the Federal Reserve. Dollar strength also has been a nemesis for commodities as a stronger greenback makes dollar-denominated commodities pricier."
  • Comment on related stocks/ETFs: Note the contradiction between this article and the previous one which argued that investors are concerned about inflation, not low growth. The drop in metals and commodities suggests exactly the opposite. Total confusion! There's no copper ETF (yet), but the new silver ETF (NYSEARCA:SLV) and gold ETF (NYSEARCA:GLD) are proving to be remarkably volatile. Perhaps the availability of the ETFs themselves filled these asset classes with speculation, explaining the extreme price movements and contradictory inflation signals.

Japan's Zero Rate May Stick Around

  • Summary: Sharp declines in Japanese stock prices may force the Bank of Japan to delay raising interest rates, prolonging the "carry trade" whereby investors borrow money at low rates in Japan to invest in higher interest paying assets elsewhere. "A majority of economists still think a rate rise is likely next month, but that could change if financial markets deteriorate further."
  • Comment on related stocks/ETFs: The Nikei has rebounded by 1.4% at the time of writing, so perhaps Japan will raise rates anyway. Investors can play Japanese large caps via the iShares MSCI Japan Index Fund (NYSEARCA:EWJ) and small caps via a closed-end fund, the Japan Smaller Capitalization Fund Inc. (NYSE:JOF).

In Oil's New Era, Power Shifts To Countries With Reserves

  • Summary: The balance of power is shifting decisively from oil consuming countries to oil producing countries. The International Energy Agency forecasts that world oil demand will rise 37% by 2030, but the oil producing countries don't have the resources to meet that demand. Developing countries, traditionally suppliers of oil, are themselves fueling demand due to growth in China and India and higher consumption in Saudi Arabia. According to the CEO of Italian oil major ENI SpA, the search for new oil reserves has become "a nightmare".
  • Comment on related stocks/ETFs: Bearish for oil majors Exxon Mobil (NYSE:XOM), Royal Dutch Shell (RDSA), and Total S.A (NYSE:TOT). Bullish for the US Oil ETF (NYSEARCA:USO), and the stocks of exploration and extraction equipment companies such as Tenaris (NYSE:TS), which announced yesterday that it was acquiring Maverick Tube. List of other energy infrastructure stocks here.

Russia to Tighten Access To Oil and Gas Reserves and China Considers Ways to Boost Energy Ties With Its Suppliers

  • Summary: "Senior Russian officials confirmed fears that the Kremlin will restrict foreign energy companies to the role of junior partners in all but the country's smallest oil and gas fields, keeping the richest reserves for newly assertive domestic companies." But at the same time, "A Chinese government agency is calling for China's closer cooperation with its energy-trading partners and greater opening of its energy sector."
  • Comment on related stocks/ETFs: Bullish for the Russian oil and natural gas companies. Gazprom and Rosneft don't trade in the US, but Lukoil has an ADR (OTCPK:LUKOY). ConocoPhillips (NYSE:COP) owns 17% of Lukoil.

Report Cites U.S. Vulnerability To Venezuela Oil-Flow Disruption

  • Summary: A report by the US Government Accountability Office predicts that a six month stoppage of Venezuelan oil output would lead to an $11 increase in the price of oil (per barrel). Venezualan oil output has declined from a daily average of 3.1 million barrels in 2001 to 2.6 million today, and "is likely to continue to decline because the country is relying less on private oil companies to boost output and more on state-run oil company Petróleos de Venezuela SA, which has become highly politicized under Mr. Chávez."
  • Comment on related stocks/ETFs: Bearish for the oil majors, positive for US Oil ETF (USO).

May Retail Sales Rose 0.1%, Signaling a Slowing Economy

  • Summary: The Commerce Department reported that May retail sales rose only 0.1% month-over-month versus 0.8% in April as consumers spent more on gas and groceries and less on new cars, home furnishings, building materials, garden supplies and eating out. "Excluding the volatile auto, gasoline and building-materials sectors, retail sales rose a sluggish 0.4% in May, the third consecutive month at that pace."
  • Comment on related stocks/ETFs: Higher gas prices and interest rates are hitting housing-related and discretionary spending by lower income bracket consumers. Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) are the obvious short candidates. Note that Buffett owns both stocks.

Qualcomm Raises Earnings Forecast

  • Summary: Qualcomm's new fiscal Q3 (Calendar Q2) forecast: EPS of $0.35-0.36 versus prior forecast of $0.32-0.34, revenue of $1.91-1.96 billion versus prior forecast of $1.77-1.87 billion. The EPS forecast includes a stock option expense of five cents a share.
  • Comment on related stocks/ETFs: Positive data point for the handset vendors Motorola (MOT) and Nokia (NYSE:NOK). Qualcomm's (NASDAQ:QCOM) most recent conference call transcript contains a useful overview of its view of the handset market.

Interest-Rate Fears Drive World-Wide Slide

  • Summary: Continued declines in emerging market stock markets could generate its own momentum, driving international investors back to developed markets. In the last three weeks, emerging market stock mutual funds have seen $8.5 billion in outflows, equal to 43% of all new money that flowed into the funds in 2005. Since May 10th, Russia is down 29%, India 28%, Brazil 21%, S. Korea 17%, Japan 16% and Hong Kong 11%.
  • Comment on related stocks/ETFs: ETFs are available for Japan (EWJ), Korea (NYSEARCA:EWY), and Hong Kong (NYSEARCA:EWH), but there are no ETFs yet for India or Russia, so look at closed-end funds instead: the Morgan Stanley India Investment Fund Inc. (NYSE:IIF), The India Fund Inc. (NYSE:IFN), and the Templeton Russia and East European Fund Inc. (NYSE:TRF). David Fry on the Templeton Russia Fund: "This one's pushing a one month 45% decline. Buy and hold? Nyet!!"

AHEAD OF THE TAPE: Don't Start Your Engines

  • Summary: Higher US gasoline prices are leading to reduced demand. Imports of foreign petroleum were down 7% year over year in April. Meanwhile, "Producers are shifting toward ethanol and away from the gasoline additive known as methyl tertiary butyl ether... in order to meet government emission regulations. As demand for ethanol soars, supply of the additive has been tight, pushing the price of ethanol up to highs of around $4 a gallon... In a recent report titled "The Ethanol Catastrophe," Philip Verleger, an independent oil economist, told his clients soaring ethanol costs could drive the retail price of gasoline to as much as $6 a gallon."
  • Comment on related stocks/ETFs: Ethanol stocks (click on ticker for chart and analysis) include Pacific Ethanol (NASDAQ:PEIX), Archer Daniels Midland Company (NYSE:ADM), Xethanol (XNL), VeraSun (VSE), MGP Ingredients (NASDAQ:MGPI), Aventine Renewable Energy (AVR), Green Plains Renewable Energy (NASDAQ:GPRE), Andersons Inc. (Nasdaq: ANDE), Veridium Corporation (VRDM), and SunOpta (NASDAQ:STKL).

HEARD ON THE STREET: Kroger Fights Goliath, And Investors Freeze

  • Summary: Supermarket Kroger, with 2,050 supercenters is the largest US grocer measured by sales. The company has expanded by buying competitors' stores and winning customers from supermarkets that closed due to Wal-Mart. But the stock trades at only 15x forward EPS versus 20 for SuperValu and 19 for Safeway. The company announced in March that it would start paying a dividend, but its stock is down 2% in the past three months while the food retail and wholesalers group has been flat.
  • Comment on related stocks/ETFs: Clearly bullish for Kroger Co. (NYSE:KR), bearish for Supervalue (NYSE:SVU) and Safeway (NYSE:SWY), neutral for Wal-Mart (NYSE:WMT).

Street Sleuth: Investors Sour on Exchange Shares

  • Summary: Since announcing its merger with Euronext, shares in NYSE Group Inc. have fallen 20%. Exchange stocks are being hit harder than the broader US market as investors harvest gains and some investors believe the stocks are fairly valued even at current levels. The drop in NYSE Group's stock may force it to sweeten its merger deal with Euronext.
  • Comment on related stocks/ETFs: Negative for NYSE Group Inc. (NYSE:NYX).

SMALL STOCKS: Tuesday Morning Tumbles 14%; Russell 2000 Turns Negative for '06

  • Summary: Dallas close-out retailer Tuesday Morning (NASDAQ:TUES) fell 14% after saying it would miss Q2 consensus estimates. Oil industry tube product company Lone Star Technologies (LSS) rose 6.7% in reaction to Tenaris' bid for Maverick Tube. Raising guidance: Thermoplastic enclosure producer Lamson & Sessions (LMS), stock up 16%; semiconductor products provider Diodes (NASDAQ:DIOD), stock up 15%.
  • Comment on related stocks/ETFs: Best Buy (NYSE:BBY) reported earnings yesterday. The conference call was strongly upbeat, the stock was up over 5%, and the transcript contains interesting comments for home theater fans as well as investors.

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