One Page Annotated WSJ Summary, Monday July 3rd

by: David Jackson
David Jackson
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Wal-Mart Expects Sales at Bottom Of June Forecast

  • Summary: Wal-Mart said Saturday that it estimates June year over year same-store sales growth of only 1.2%, at the bottom of its prior prediction of 1-3%. Analysts differed on whether the tepid growth was company-specific or industry-wide. The shortfall may have been caused, or exacerbated by, Wal-Mart's remodelling of 1,800 stores over the next year and a half, involving inventory cuts, emphasis on higher value non-grocery sales and a reduction in labor hours to align workers with peak shopping hours. The consensus estimates for industry-wide June same store sales is currently 3.3%. However, JP Morg an said that Wal-Mart's numbers suggest that other discount retailers will also post poor June same store sales results. Most retailers will announce June same-store sales on Thursday.
  • Comment on related stocks/ETFs: Other discount retails at risk -- if the Wal-Mart (NYSE:WMT) shortfall is not company-specific -- include Dollar General (NYSE:DG), Family Dollar Stores (NYSE:FDO) and Dollar Tree Stores (NASDAQ:DLTR). Target (NYSE:TGT) continues to take share from Wal-Mart; its most recent guidance for June same-store sales is the "upper half" of the 3-5% range.

Airbus Problems Lead to Ouster Of Key Executives

  • Summary: Noël Forgeard, co-CEO of European Aeronautic Defence & Space Co. [EADS], and Gustav Humbert, the CEO of Airbus, have been sacked in response to costly delays in the two-deck A380 project and French regulatory probes of Mr Forgeard's stock sales. The new Airbus CEO is Chrisian Streiff, a 26 year veteran of French industrial conglomerate Saint Gobain Group, which is primarily known as a glassmaker. The appointment of a manufacturing process expert rather than an aerospace expert is significant. Airbus will be integrated more closely into EADS, but the two-tier management structure remains. EADS' stock is down 13% since announcing the A380 delay, while competitor Boeing's stock is up 5%. EADS faces a number of challenges, including a WTO attack from the US about European government subsidies for Airbus and BAE's excercise of a put option that will force EADS to buy the 20% of Airbus it doesn't already own. EADS put aside 3.5 billion Euros for the stake, but might have to pay only 2.75 billion Euros.
  • Comment on related stocks/ETFs: EADS' two core shareholders are French media group Lagardère SCA and DaimlerChrysler (DCX).

GM-Renault-Nissan Wouldn't Be Easy, Past Auto Pacts Show

  • Summary: General Motors' largest shareholder, Kirk Kerkorian, has suggested that GM join the Renault-Nissan partnership, allowing the combined entity to share engine development costs and consolidate suppliers. But DaimlerChrysler's experience, in which it got "bogged down by infighting, profit breakdowns at its Chrysler and Mercedes divisions and unexpected difficulties realizing synergies", GM's own experience with Fiat, and BMW's failed acquisition of Rover suggest that large auto mergers are not easy. GM has excess capacity, and can't easily free itself of pension and healthcare obligations. Cars also have six year product cycles making fast turn-arounds difficult.
  • Comment on related stocks/ETFs: Despite the scepticism expressed in this article, a GM-Renault-Nissan merger would probably propel GM's stock (NYSE:GM), at least in the short run. First, most investors doubt whether GM can fix its problems within its current structure, so a major change will be seen as positive. Second, Nissan's Carlos Ghosn, who would run the combined entity, has a glowing track record turning around Nissan from steep losses to profitability. Announcement of a merger would probably be viewed as negative for DaimlerChrysler (DCX) as it would enhance GM's ability to compete more aggressively on price. It could also negatively impact Nissan's stock (OTCPK:NSANY) as many investors won't appreciate being shakled to money-losing GM in the short run in return for a vague promise of greater long-run profitability.

Mexicans, Divided by Class, Vote for President

  • Summary: The Mexican presidential election appears to be neck-and-neck between the left-wing Andrés Manuel López Obrador and the conservative Felipe Calderón. Announcement of the result will now be postponed until after a hand count that will begin Wednesday. A narrow win for either candidate, particularly Mr Calderón, could cause political instability because rhetoric on both sides is "heated", and Mr. López Obrador built his career "on using massive protests to achieve his political aims" and is claiming that there is a plot to steal the presidency from him. Both candidates are claiming victory. The outgoing conservative president, Vicente Fox, was unable to pass any major economic legislation because Congress was divided, and the vote for Congress, like the presidential vote, is also currently too close to call. Mr. López Obrador advocates government job creation, infrastructure spending, and increased transfer payments and energy subsidies. Mr Calderón advocates faster integration into the global economy, currency stability, more flexible labor laws and an attack on corruption in the legal system. Mexico faces tougher economic challenges due to competition from China and other Asian countries, rising short term interest rates, poor education and unlawfulness.
  • Comment on related stocks/ETFs: The delay in resolving the election will not help Mexican stocks or the iShares Mexico Index ETF (NYSEARCA:EWW). Muizz Kheraj believes that the Mexico ETF is an attractive long term investment because the country will benefit from US outsourcing, educational improvements and a growing Hispanic population in the US. But Roger Nusbaum rightly comments on the article that foreign investors need to wait for the outcome of the election. The Mexico ETF has rallied after the sharp sell-off in emerging market stocks; chart here.

AVIAN FLU: PREVENTING A PANDEMIC: China Suffers Bird-Flu Outbreak

  • Summary: China's official news agency reported Saturday that a new outbreak of bird flu has occured near Zhongwei, a city in the Ningxia region. No details were given other than a statement that vehicles and people entering and exiting the region were being disinfected. Separately, China's Health Ministry is investigating the possiblity that a man who died in 2003 supposedly of SARS, in fact died of bird flu, raising questions about China's ability to detect and control emerging diseases.
  • Comment on related stocks/ETFs: Investors concerned about the risk to their portfolios from a bird flu pandemic should read this overview of Bird Flu Stock Ideas On Seeking Alpha.

Government Shutdown In New Jersey Continues

  • Summary: New Jersey Governor Jon Cozine and state legislators failed to reach a compromise budget plan on Sunday. As a result, the head of the Casino Control Commission ordered gaming in Atlantic City to stop at 8am Wednesday. The casinos are challenging the decision in an appeals court, but it's not clear when a ruling will be issued. Mr Corzine wants to increase the state's sales tax from 6% to 7% to help reduce the $4.5 billion budget deficit.
  • Comment on related stocks/ETFs: Not clear what, if any, impact there would be on the gambling stocks if the Atlantic City casinos are closed. MGM Mirage (NYSE:MGM) is an investor in the Borgata and the Tropicana is owned by Aztar (AZR), which is being acquired by privately-held Columbia Sussex.

Miller to Buy 'Energy Beer' Brands From McKenzie

  • Summary: UK-based SABMiller said it has agreed to acquire two "energy beer" brands, in a move that will almost certainly intensify competition in the beer market. Beer sales overall are stagnant, but sales of caffeine-laced "energy beers" are growing fast. Sales of Sparks, one of two brands SABMiller is purchasing (the other is Steel Reserve), grew at an annual compound rate of 107% between 2003 and 2005. SABMiller already owns a malt energy beer, Mickey's Stinger, with 7% alcohol by volume and "more caffeine than a cup of coffee". SABMiller is buying the two brands for $215 million from privately-held McKenzie River, and will also work with McKenzie River's founder and president to develop new products. US competitor Anheuser-Busch sells two energy beers, Tilt and B(e), and is test marketing a third.
  • Comment on related stocks/ETFs: Incrementally negative for Anheuser-Busch (NYSE:BUD), but not enough to impact the stock. Eddy Elfenbein thinks that BUD's attempt to move into hard liquor is "di-WORSE-ification", and wonders if Anheuser-Busch will gain anything from its recent EU Budweiser trademark victory. The largest potential growth market for beer is China; overview of the Chinese beer market here.

KLA Finds Options-Dating Problem

  • Summary: Semiconductor manufacturing equipment firm KLA-Tencor said Friday that it would take a charge to correct the misdating of stock options granted to executives and employees. KLA-Tencor is already under investigation by Federal regulators and prosecutors. "Over the years, KLA has demonstrated a highly unusual pattern of option grants to top executives dated ahead of big run-ups in share price, often at low points."
  • Comment on related stocks/ETFs: KLA-Tencor (NASDAQ:KLAC) was one of the first companies to be investigated for option manipulation. Evidence that KLAC misdated options is compelling and openly available from SEC filings, so this adamission adds little new information and is therefore probably priced-in the stock. Jack Ciesielski discusses the Apple and Computer Associates options probes. As a footnote, the WSJ covergate of options mispricing has been outstanding ever since it initiated the investigation and broke the scandal. It's coverage like this that makes the WSJ required reading for every business executive and investor.

Congress Considers Fixed-Price Defense Contracts

  • Summary: Weapons R&D work is usually billed on a cost-plus basis, but Sen. John McCain wants to shift risk to the contractors by requiring fixed-price contracts. Cost-plus contracts generated over 60% of sales for Lockheed Martin and Northrop Grumman in 2005, and abotu 50% for Raytheon and the defense businessses of Boeing and General Dynamics. Fixed-price contracts would prevent government budget exposure to cost overruns, such as the recent $20 billion increase in cost for the $277 billion Joint Strike Fighter program. A move to fixed-price contracts is the defense sector's "top legislative fear". The president of the Aerospace Industries Association trade group argues that cost-plus contracts are cheaper for the nation because they involve lower profit margins and claims that "the defense industry has had the lowest average operating profit margins of any industrial sector since 1980".
  • Comment on related stocks/ETFs: Maybe the defense industry has low operating margins, but you wouldn't know that from the stocks. If Congress does insist on fixed-price contracts, expect a hit to the major defense contractors: Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD).

Cendant to Sell Travel Unit To Blackstone Affiliate

  • Summary: Cendant sold online travel services Orbitz and eBookers and its Galileo global travel distribution system [GDS], which together comprise its Travelport business, to private equity firm Blackstone Group for $4.3 billion. Traveloport has revenue of $2.5 billion and $550 million in EBITDA. Cendant is in the process of spinning out businesses in an attempt to raise its stock price; it sold Travelport instead of spinning it out because it is taking a loss on the sale so there's no taxable gain. Travelport had been hit financially by a charge equivalent to the entire value of eBookers due to integration problems. Morgan Stanley analyst Cris Gutek said Cendant "left several hundred million dollars on the table" because it rushed to sell Travelport, but Travelport CEO Jeff Clarke disputed that.
  • Comment on related stocks/ETFs: The suggestion that Cendant is selling off its businesses at too low a price, if true, won't help its stock (CD). Meanwhile, investors in Expedia (NASDAQ:EXPE), Travelzoo (NASDAQ:TZOO) and the other online travel sites will want to consider whether the purchase of Travelport by a private equity firm will enhance its competitive strength. The answer: probably not, as private equity firms are focused on maximising cash flow through cost cutting. In fact, Cendant's sale of Travelport caps a monumental failure in its foray into online travel. Bundling Internet businesses with an arguably outdated GDS was a mistake, and it failed to invest enough in Orbitz to make it a strong competitor. Perhaps Blackstone will eventually IPO Orbitz and eBookers as an Internet pure play, leading to the reappearance of Orbitz as a public company. Cendant's latest conference call transcript is here.

Railroad CEOs Prodded on Ability To Handle High Freight Volume

  • Summary: For the third year running, US regulators are "prodding" CEOs of the largest freight railroads to show they can handle increased volume during the Thanksgiving and holiday season, caused by the strong economy and record agricultural harvests. Bear Stearns estimates that Q2 freight volume rose 4.3% year over year. The largest freight railroads are expected to spend 21% more on infrastructure upgrades this year than last.
  • Comment on related stocks/ETFs: Positive for both stocks mentioned in the article: Burlington Northern Santa Fe (BNI) and Union Pacific Group (NYSE:UNP).

Japan's Business Optimism Rises

  • Summary: The Bank of Japan's quarterly "tankan" survey of large manufacturers' business sentiment rose to 21 in June from 20 in March, with companies surveyed saying they plan to increase spending on plant and equipment by 6.2%. The survey result increases the probability that the Bank of Japan will raise interest rates at its July 13-14th meeting, abandoning its zero interest rate policy.

AHEAD OF THE TAPE: Buttering U.S. Bread

  • Summary: Developing countries including China and Russia accounted for 39% of US securities (mainly Treasuries) purchases in the first four months of this year, up from 25.9% for all of 2005. In April, the number rose to over 50%, and the real number is probably higher because some developing market purchases come via the UK and other developed countries. Bank of America strategist Joseph Quinlan says this increases the risks to the US economy because this source of financing is less reliable, for example if the price of oil falls and oil producers have less cash to park.
  • Comment on related stocks/ETFs: Pessimists have been concerned about the funding of the US trade deficit from capital inflows for over two years, just as they've been concerned about the low or negative saving rate of the US consumer sector. So far it's been a mistake to predict a decline in the stock market or a sustained fall in the dollar based on those concerns. But that doesn't mean that they'll never hit home. For concerned investors, currency ETFs are probably the best instrument to play this. Pluses and minuses of currency ETFs discussed here.

HEARD ON THE STREET: Investor Activism Grows Globally, But Wins Are Rare

  • Summary: Hedge funds are becoming increasingly activist, trying to improve underperforming companies by waging proxy fights against incumbent managements. But they are often hampered by large institutional investors, including pension funds and mutual funds, voting with management often out of lack of interest.
  • Comment on related stocks/ETFs: Lots of stocks mentioned in the article, but no stock impact.

SMALL STOCKS: Airspan, Saba Software Plunge; Russell Ends Quarter 5.3% Lower

  • Summary: Airspan Networks (AIRN) down 34% on announcing a delivery delay for its WiMax products to a major customer; e-learning software company Saba Software (OTCPK:SABA) down 21% on disappointing earnings results; biotech company Dendreon (NASDAQ:DNDN) up 12% on plans to submit a license application to the FDA later this year for a prostate cancer drug; Chinese telecom product firm Qiao Xing Universal Telephone (XING) down 20% on disappointing earnings; measurement systems Faro Technologies (NASDAQ:FARO) up 14% on an analyst upgrade in response to earnings; video game and music distributor Handleman (HDL) down 4.6% on disappointing earnings; Ultra Clean Holdings (NASDAQ:UCTT) up 12% on announcing the acquisition of Sieger Engineering.
  • Comment on related stocks/ETFs: The e-learning market has been a disappointment to investors. There are two small cap stocks in the space: Saba Software (OTCPK:SABA) and SumTotal (SUMT). Saba's stock tumbled on news of its earnings miss, but SumTotal closed at $6.27 after opening at $6.41. The question for investors is whether Saba's problems are company-specific or indicative of wider weakness in the e-learning market. From my vantage as a board member of privately-held competitor Cornerstone OnDemand, it's both. The software market is moving rapidly to hosted solutions and average selling prices are falling. One year chart comparing Saba to SumTotal below; click to enlarge:

    saba and sumtotal chart

TRACKING THE NUMBERS: Countdown Starts for Satellite Giant

  • Summary: The two leading satellite companies, Intelsat and PanAmSat (both privately owned) are set to complete a $3.2 billion merger today. Investors just purchased $3 billion of high yeild bonds from the two firms, and are now looking for new marketing initiatives and significant cost cutting. But the companies' growth has been tepid: PanAmSat's Q1 revenue was up only 2.1% to $213 million and Intelsat's was down 4% to $280 million. The combined company plans to expand in India and Latin America, and cut its workforce from 1,400 to 1,000.
  • Comment on related stocks/ETFs: No stock impact; the combined company will be privately-owned.

FUND TRACK: Fees Are Falling, as Are Old Habits

  • Summary: The Investment Company Institute, a fund industry trade group, reported that stock fund investors paid an average of 1.13% in fees and expenses in 2005, and that 50% of net inflows went into funds with an expense ratio of 0.5% or less. Separately, Morningstar analysts said that Allianz AG, Putnam Investments and Janus Capital Group Inc. are "on the road to recovery" after the trading scandals, with Janus building up its research analyst bench.
  • Comment on related stocks/ETFs: The argument for ETFs over actively managed mutual funds is compelling. In the long, the switch to ETFs should damage Janus' stock (NYSE:JNS), even if the short term performance of its funds is improving.

Notable articles on Seeking Alpha today: One page summary of this weekend's Barron's. Which ETFs did best in the first half of this year to end June. William Trent on Dell and the PC market. The solar energy market is hot, according to Rob Day. Jeff Molander thinks Google Checkout is bad news for Valueclick. launches a new game. Roger Nusbaum wonders whether too many ETFs are hitting the market, and has clients 50% in cash. Small cap specialist Yehuda Fruchter says the RSA Security Acquisition is Bullish for ActivIdentity. Jason Wood has seen Sirius' Radio's mobile device, which makes him "giddy".

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