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Fed's Latest Rate Boost Contains A Hint of a Pause, Lifting Stocks and GDP Is Revised Upward To 5.6% Rate in 1st Quarter and Fed's Calm Words About Inflation Send Stocks Up

  • Summary: As expected, the Fed raised rates yesterday for the 17th time in a row, to 5.25%. But it didn't explicitly say it was considering another rise; its statement said "The extent and timing of any additional firming [in monetary policy] that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." Earlier in the day, the Commerce Department's estimate for Q1 GDP growth was revised up to 5.6% from the last month's estimate of 5.3%, implying that the economy is growing at the fastest rate since Q3 2003. Consumer spending rose 5.1% versus the prior estimate of 5.2%, while business spending rose 14.2% versus the prior estimate of 13.1%. and corporate profits rose 13.8% versus 8.8%. The estimate of inflation, however, was not revised upwards. The unexpected gentleness of the Fed's language combined with the upward revision to GDP and lack of revision to the inflation index fueled a sharp rally in the stock market. The Dow gained 2%, with all 30 component stocks rising, the S&P 500 gained 2.2%, and the Nasdaq 3%.
  • Comment on related stocks/ETFs: David Taylor looks at the three most important paragraphs from the Fed statement. Roger Nusbaum wonders if this rally is a fake out.

FOREIGN EXCHANGE: Dollar Falls After the Fed Suggests Possible Pause in Tightening Cycle and U.S. Net Debt Increases 14% To Record-Level $2.69 Trillion

  • Summary: The dollar immediately reacted to the Fed's softer than expected policy statement. It fell to $1.2647 from $1.2553 against the euro and $1.8265 from $1.8191 against the pound sterling. The dollar moved to 115.07 yen from 116.47 yen, and 1.2385 Swiss francs from 1.2464. Emerging market currencies, particularly the Brazilian real and the Mexican peso, also rallied after the Fed's statement was published. New Zealand's currency also gained. Earlier in the day, the dollar had rallied in reaction to the GDP and inflation numbers. Separately, the Commerce Department reported that US net debt at the end of 2005 climbed by 14% year over year.

China's Boom Poses Threat to Neighbors, A U.N. Report Says

  • Summary: A report from the United Nations Development Program says that low-price Chinese imports are damaging the economies of other developing countries while China offers no export market because those countries' goods don't match China's needs. Textiles and clothing are the largest export industry for many developing countries, and they are failing to compete with China's low wages. The UN suggests that aid should be provided to help those countries transition to other industries and developed countries should give the poorest countries preferential import status.
  • Comment on related stocks/ETFs: More evidence of pent up pressure for a yuan revaluation?

Spill Shows Gasoline Supply Strain and Iran Rejects G-8 Deadline Push For a Response to Nuclear Offer

  • Summary: The continuing impact of last week's Louisiana oil spill, Iran's refusal to discuss its nuclear program, and a Department of Energy report of lower US crude oil inventories pushed up gasoline futures yesterday by 8.9 cents to $2.29 a gallon, 14% higher than a week ago, and crude-oil futures by $1.33 to $73.52 a barrel, about $3 higher since the spill. US retail gasoline price are now 23% higher than a year ago and crude oil prices 15% higher. Rising ethanol prices are expected to lead to further price increases a the pump this summer. Despite rising prices, US gasoline demand is up 0.4% over a year ago. US oil refineries are operating at 94% capacity but aren't keeping up with this demand growth. The US produces 8.6 barrels of gasoline per day but consumes 9.1 million barrels. Gasoline inventories fell by one million barrels last week as imports fell to 958,000 from 1 million the previous week. On Iran: a top official said Iran wouln't meet a deadline to respond to an international offer on nuclear negotiations in time for a G8 meeting in Russia on July 15. A communique said the G8 was "disappointed" by the Iranian response; a US official called that "an understatement".
  • Comment on related stocks/ETFs: Mark Mahorney cautions against going long oil into the July 4th weekend via the US Oil ETF (USO). But Raymond James strategies Jeffrey Saut picks oil stocks.

Japan Will Mandate Ethanol Use by 2030; Global Warming Cited

  • Summary: Japan's Environment Ministry will require all cars to run on a blend of 10% ethanol, 90% gasoline by 2010, in an attempt to cut environmental damage and reduce Japan's dependence on oil. Ethanol production from sugar cane will be stepped up on the island of Miyako. Japan's goal falls short of standards being met by current US auto manufacturers models which run on 85% ethanol blends. GM, Ford and Chrysler have already produced 5 million cars that can run on 85% ethanol, and are expected to produce another million this year. All of Toyota's cars already meet the 10% ethanol standard.
  • Comment on related stocks/ETFs: Despite the fact that the article states that Japen will produce its own ethanol and want to reduce its dependence on foreign suppliers, this will be viewed as another positive development for the US ethanol stocks, listed here. See also the detailed article on ethanol in yesterday's WSJ summary.

Apple and CA Report Problems In Options Grants

  • Summary: Apple announced yesterday after the market closed that it had found "irregularities" in stock option grants made between 1997 and 2001, and has appointed a board committee of external directors to investigate. The statement referenced a grant to CEO Steve Jobs which Apple says was later cancelled and did not result in a profit for him. Apple's SEC filings show that an option for 10 million shares was granted to Mr Jobs in January 2000 at the stock's lowest closing price that month. In the 20 days following the grant the stock rose 30%. Separately, Computer Associates said it is unable to provide audited results for its fiscal year due to problems with option grants from 1997 to 2001. CA says it sometimes failed to inform employees of grants for up to 2 years after they were awarded. That would allow CA's management to grant options at strike prices below the market price of the stock. Two other companies, Equinix and Intuit, announced that they had received options-related subpoenas from US attorneys following separate investigations by the SEC.
  • Comment on related stocks/ETFs: Apple (AAPL) is the highest profile stock so far to be hit by the options scandal. The risk for investors isn't only the reputational damage and potential fines; it's that CEO Steve Jobs may be forced to resign if it is proved that he knowingly took an option grant at below market prices. The stock impact would be dramatic because Mr Jobs has been responsible for turning around Apple over the last few years. All these stocks -- Apple (AAPL), CA (CA), Equinix (EQIX) and Intuit (INTU) may take hits today. More analysis from Jason Wood.

Microsoft Delays Release of Office and Microsoft Manager to Join Google

  • Summary: Microsoft announced that it would release the next version of Office at the end of this year instead of in October as planned. It blamed the delay on "product performance" issues. The product is now scheduled for broad delivery to customers in early 2007, potentially later than the January release of Vista. Both product releases will now miss the all-important holiday season. Separately, Vic Gundotra, a general manager responsible for encouraging software developers to use Microsoft platforms, will join Google next year. He joins other key Microsoft managers: "Kai-Fu Lee, who headed Microsoft's China business; Mark Lucovsky, a top engineer; and Adam Bosworth, a former general manager and software expert."
  • Comment on related stocks/ETFs: The news flow from Microsoft and the sentiment on its stock (MSFT) can get worse. Value investors who bought MSFT aren't looking smart. This news will add to calls that CEO Steve Ballmer should be fired.

Chrysler to Unveil Employee Pricing, Challenger Model

  • Summary: Daimler-Chrysler will announce an incentive scheme that offers company employee pricing on most Chrysler, Dodge and Jeep vehicles, interest free loans of up to 36 months and a 30 day return guarantee. Chrysler will also bring forward the release of the new V8-powered Dodge Challenger coupe to next year. The Challenger is the fourth vehicle built on the 300 sedan base, allowing the company to cut development costs from $1 billion for the 300 to about a third of that for the others that share the 300 base. GM's competing muscle car, the Camaro, is at least two years from production.
  • Comment on related stocks/ETFs: Not clear what the impact will be on Daimler-Chrysler's stock (DCX); remember that interest free loans are now more expensive because rates are higher. Clearly negative for Ford (F) and (GM).

Boeing to Record Up to $1.1 Billion In Charges on Jet Delays, U.S. Pact

  • Summary: Boeing said it would take up to $1.1 billion in charges to its Q2 earnings, consisting of a $615 charge for a settlement with the Justice Dept. which was expected, but also an unexpected charge of $300-500 million for delays on an Airborne Early Warning & Control [AWACs] program for Australia and Turkey. The AWACs contracts, for conversion of Boeing 737 passenger planes to smaller versions of the military surveilance planes used by the US, are worth about $4 billion. Six planes were scheduled to be delivered to Australia in November, but now won't be delivered until 2008. Boeing's cash flow this year is expected to be about $5.5 billion.
  • Comment on related stocks/ETFs: Boeing's stock (BA) has benefitted strongly from competitive wins against Airbus for commercial planes. Perhaps investors are overlooking the dynamics and risks of Boeing's military business. George Gutowski says Boeing's profits will be wiped out by the charges.

Palm Posts 54% Profit Rise From Hand-Held Device Sales

  • Summary: Palm announced results for the quarter ending May 31st but issued disappointing guidance for next quarter. Revenue rose 20% year over year to $403.1 million and profits rose 54% to $27.2 million. Palm shipped 623,000 Treo smart phones and 495,000 handheld computers. Palm forecast sales for next quarter of $380-385 million, below the consensus estimate of $413 million.
  • Comment on related stocks/ETFs: See the full Palm conference call transcript.

RIM Profit Slips On Cost Increases As Sales Rise 35%

  • Summary: Research in Motion's results for the quarter ending June 2nd: Sales up 35% to $613.1 million, earnings down 2% to $129.8 million. The Blackberry subscriber base increased by 680,000 to 5.5 million, and is expected to grow by 675,000-700,000 next quarter. RIM shipped 1.2 million devices in the quarter.
  • Comment on related stocks/ETFs: See the full RIMM conference call transcript.

General Mills' Net Falls 52%

  • Summary: General Mills' results for the quarter ending May 28th: revenue up 4.6% year over year to $2.85 billion, net income down 52% to $222 million due to a one-time gain on an asset sale last year. Yoplait yogurt division sales up 14%, meals division sales up 7%, cereals division sales down 1%, Pillsbury USA division sales down 1%. CEO Steve Sanger said General Mills raised prices on cereals too much and lost market share as a result.
  • Comment on related stocks/ETFs: Jim Cramer views General Mills (GIS) as a consistent growth stock that will buy back stock and raise dividends.

A 'Good Deed' For AIDS Drug Hits Obstacles

  • Summary: Gilead Sciences' program to supply the AIDS drug Viread to developing nations at reduced cost "has been snarled in a string of bureaucratic snafus and miscalculations". Gilead sold Viread for $200 per year versus the $5,300 it costs in the US, but found that mismanaged applications for regulatory approval and import permits hampered the project, leading to criticism from activists and developing countries. Abbott Laboratories and GlaxoSmithKline have also been criticised for their sales of AIDS drugs in developing countries. GlaxoSmithKline sold its drug Ziagen to developing countries for $625 a year, which many regard as excessive. It says it has now cut the cost 28%.
  • Comment on related stocks/ETFs: Gilead Sciences (GILD) and Abbot Laboratories (ABT) come out of the article looking inefficient but well meaning. GlaxoSmithKline (GSK) looks less well-meaning.

Pirates' Treasure?

  • Summary: Disney has made a large bet on the two sequels to Pirates of the Caribbean, the first of which will soon open. The two movies cost over $450 million, and Disney has also invested in a new theme ride and merchandise campaign. Making two movies in the same series together has the advantage of cutting costs and easing scheduling, but also raises the risk: if the first movie is a flop, the second is already paid for and can't be cancelled. Back to the Future and Lord of the Rings benefitted from this strategy, but The Matrix lost. "...Early audience research suggests the first [Pirates of the Caribbean] sequel has the potential to be a monster hit."
  • Comment on related stocks/ETFs: Incrementally positive for Disney (DIS).

Can Silk and Leather Tempt Shoppers Back to Old Navy?

  • Summary: Old Navy, owned by Gap Inc., is testing higher end fashion in an attempt to rejuvenate its stale product line and combat competition from Target and Wal-Mart. While it will continue to carry under-$40 basics, Old Navy will now offer leather and silk goods at higher prices and will raise the quality of its traditional products. It hopes that less discounting will offset higher materials costs. The Gap and Banana Republic brands will also offer higher quality products. The risk is that Gap Inc's lower income shoppers are being squeezed by high gasoline prices and can't afford more expensive clothes.
  • Comment on related stocks/ETFs: Probably incrementally postive for Gap Inc. (GPS), though the article also highlights the risks of the new strategy. Old Navy's EVP Merchandising, Sheryl Clark, is quoted in the article as follows: "We use Abercrombie as our internal gauge; whether you like them or not, they execute beautiful product. The trim, detail, wash, label -- everything is executed against a very high standard." Positive for Abercrombie & Fitch (ANF).

Shutterfly Files IPO Offering $92 Million In Photo Site's Stock

  • Summary: Online photo site Shutterfly filed to sell up to $92 million of stock in an IPO, with the proposed ticker SFLY. The company has been profitable for three years, but faces increasing competition from new sites including Tabblo, Photobucket and Riya, and more established competitors including HP's Snapfish and Yahoo's Flickr. Underwriters are Goldman Sachs, JP Morgan, Piper Jaffray and Jeffries and Co.
  • Comment on related stocks/ETFs: Business Week's Tim Mullaney evaluates the Shutterfly IPO.

Circuit City Increases Dividend

  • Summary: Circuit City Stores' board approved a plan to raise its quarterly dividend to $0.04 from $0.0175 and to boost its stock buy-back by $400 million to $1.2 billion.
  • Comment on related stocks/ETFs: Circuit City's stock (CC) has significantly outperformed rival Best Buy (BBY). Circuit City's stores were so miserably managed that the company had ample room for improvement, while Best Buy is generally a far better managed company. This is a stark reminder that of the importance of the expectations and sentiment that are already priced-in to a stock, and the potential for upside surprises. CC and BBY one year chart below; click to enlarge:

    CC and BBY chart

IPOs: Aventine Falls 11% After Pricing High; Gmarket Drops 1%

  • Summary: Ethanol company Aventine Renewable Energy Holdings Inc. (AVR) priced its IPO at the top of the range at $43 and raided the deal size from 7.75 million shares to 8.06 million, but then closed down 11% in trading yesterday. Korean e-commerce company Gmarket (GMKT) closed down 1% to $15.10 after selling 9.1 million ADRs. The poor performance of both stocks was particularly striking given the broad strength in yesterday's market.
  • Comment on related stocks/ETFs: Analysis of Aventine here and Gmarket here.

HEARD ON THE STREET: NYSE, via Euronext, Aims to Regain Its Appeal for International Listings

  • Summary: NYSE Group Inc. CEO John Thain believes that an acquisition of Euronext NV will enable his company to recapture market share in international stock listings. Because US regulatory oversight (particularly Sarbanes-Oxley) is stricter than that of European markets, none of the 25 largest international IPOs in 2005 listed on the NYSE or Nasdaq. New stock listings constituted 21% of NYSE Group revenue in Q1 and 3% of Euronext's. Critics, however, argue that the NYSE name alone won't be enough to increase Euronext's share and that many companies are now listing on their domestic markets. The two companies are still awaiting European and US shareholder and regulatory approval for the deal.
  • Comment on related stocks/ETFs: There's been little public discussion of the long-term impact of ETFs on the NYSE Group's (NYX) new listings business. ETFs allow US investors to buy foreign stocks in index form, obviating the need to for the companies to list in the US. Note the slew of new ETFs, including those from Claymore and Wisdom Tree.

AHEAD OF THE TAPE: Inflation Fighting

  • Summary: The Commerce Department releases its monthly report on personal income and spending today, including a consumer price index that the Fed views as more important than the Labor Department's. It rose 2.9% in April. Core inflation, which excludes food and energy, rose 2.1%, and is expected to rise 2.1% or 2.2% in May. JP Morgan economist Bruce Kasman thinks inflation is too high and the Fed will be forced to raise rates again.

HEARD IN ASIA: In Macau, It's Time to Bet

  • Summary: Two Hong Kong firms, Galaxy Entertainment and Melco International Development (both traded in Hong Kong), are competing for the gambling market in the former Portuguese colony of Macau that was returned to China in 1999. Melco has partnered with Australian firm Publishing & Broadcasting on $2.6 billion worth of luxury projects, including a six star hotel, while Galaxy is aiming at lower income, casual Chinese tourists. Melco is competing head-on with the US gambling firms. Las Vegas Sands (LVS) already has a casino in Macau and will open another one in 2007, and Wynn Resorts (WYNN) will open its first Macau casino in September.
  • Comment on related stocks/ETFs: US investors in Las Vegas Sands (LVS), Wynn Resorts (WYNN) and MGM Mirage (MGM) view Macau as pure upside opportunity. Although this articles is focused on the two Hong Kong stocks, it highlights the foreign competition to the US gambling firms.

SMALL STOCKS: RSA Climbs on EMC Takeover

  • Summary: The small cap indexes saw their biggest one day percentage gains since October 2002, with the Russell 2000 up 3.8% and the S&P SmallCap 600 up 3.4%. RSA Security (RSAS) rose 18% on a buyout offer from EMC (EMC). Stocks moving due to earnings results or guidance: American Greetings (AM) down 12%, Neoware (NWRE) down 42%, Systemax (SYX) up 36%, Hartmarx (HMX) down 11%, Merix (MERX) up 12%, Silicon Image (SIMG) up 19%.
  • Comment on related stocks/ETFs: Small cap stocks just seem to have much higher beta than large caps. Sure, the Fed announcement helped, but the dollar decline should have meant that small caps would rise less than large caps.

Notable articles on Seeking Alpha today: Latest conference call transcripts from Research in Motion and Palm. Rob Black's reports on Energy Stocks and Tech Stocks. Jim Cramer's latest stock picks. Lazard's analysts pick stocks for July 4th. More on Google Check out from Paul Kedrosky. Why Muizz Kheraj is buying the Mexico ETF.

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Source: One Page Annotated WSJ Summary, Friday June 30th