One Page Annotated WSJ Summary, Thursday July 6th

by: David Jackson
David Jackson
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AOL Mulls Giving Away Service

  • Summary: AOL CEO Jonathan Miller last week presented a proposal to Time Warner executives to retreat from the subscription revenue model and focus on generating advertising from free content and services. The proposal suggests providing AOL's entire range of services, including email, for free to anyone with a high-speed Internet connection. A third of AOL's subscribers have high-speed connections already and a further 8 million would be expected to cancel their $25.90 monthly dial up service, costing AOL up to $2 billion in lost revenue, partially offset by lower expenses and increased advertising revenue. AOL's subscriber base shrank from 26.5 million at end 2002 to 18.6 million in Q1 2006; during that quarter, AOL lost 850,000 subscribers to high-speed Internet providers. AOL generated $8.3 billion in revenue in 2005, of which nearly $7 billion came from subscriptions and only 16% from advertsing. Earlier this year AOL partnered with broadband providers to offer its services in a $25 monthly bundle, effectively discounting its services since the price was the same for its own dial-up service. "So far, however, these package deals haven't had the effect AOL had desired." AOL has also started publishing more free content on, but has found that most visitors are current AOL subscribers.
  • Comment on related stocks/ETFs: Jonathan Miller's proposal is an admission of crisis: AOL's walled-garden approach to the Internet is resulting in heavy and consistent customer attrition. However, the proposal offers no guarantee that AOL will be successful in the future, but will definitely result in a steep revenue decline if the projections cited in the article are correct. Given that Time Warner's stock (NYSE:TWX) is largely held by value investors, the implication of sharply lower cash flow in the foreseeable future could damage the stock. AOL's bet on free content and services, such as email, increases competition for Yahoo (NASDAQ:YHOO), Microsoft's (NASDAQ:MSFT) MSN and Google (NASDAQ:GOOG), and is therefore incrementally negative for all three stocks.

Microsoft Relents to Pressure On OpenDocument Format

  • Summary: Microsoft announced that under pressure from governments it will offer today a software download on its web site that will allow users of Word, Excel and PowerPoint to read and save documents in the OpenDocument format. Microsoft had been advocating its own document standard called OpenXML, but met resistance by rivals arguing that government archives shouldn't be entrusted to a standard controlled by a single company.
  • Comment on related stocks/ETFs: This will be taken as a negative for Microsoft (MSFT), as greater adoption of a non-Microsoft standard will imperil Microsoft's lock on the office productivity software market. With most users finding Office's bloated features unnecessary, the main barrier to switching to an open source alternative is document compatibility. This will therefore be read as incrementally positive for Sun Microsystems (NASDAQ:SUNW), promotor of the main open source rival of Office, OpenOffice, and to a lesser degree IBM (NYSE:IBM). However, be careful here; the devil is in the details. Microsoft can impede Office's ability to read and save OpenDocument documents in numerous small but impactful ways, starting with offering the software as a voluntary download rather than an automatic update. The article's statement that "Microsoft plans to release a tested and more polished version of the software late this year for Word and early next year for Excel and PowerPoint" also suggests that the current version may be problematic. Bottom line: too early to predict the demise of Office.

Amazon Launches Toy, Baby Stores

  • Summary: After losing a court ruling in March that allowed Toys "R" Us to regain control of its domain name, Amazon launched its own toy and baby stores Friday night. The new stores have twice as many items as the old stores, offer free shipping on goods shipped by Amazon itself, and include more products from third party sellers like Target, eToys Direct Inc. and the Discovery Channel store.
  • Comment on related stocks/ETFs: Amazon's (NASDAQ:AMZN) strategy is now looking less certain than ever. The advantage of offering shoppers goods from multiple vendors on a singe web site with a unified shopping cart may have been neutralised by Google Checkout. (See analysis of Google Checkout from Paul Kedrosky, Scott Devitt and Tim Boyd.) Amazon's remaining competitive advantage is its own logistics and fulfilment expertise, and the ability to offer free shipping that flows from that. The extention of free shipping to items in Amazon's baby and toy categories is therefore incrmentally positive. Toys "R" Us, meanwhile, is using GSI Commerce (NASDAQ:GSIC) and Deutsche Post World Net's Exel unit for fulfilment and shipping of its own online store. Amazon's re-entry to the toy category with free shipping is therefore incrementally negative for GSIC.

Intel Invests in Provider Of Wireless Internet Access

  • Summary: Craig McCaw's WiMax network operator Clearwire Corp. has raised $600 million from Intel and another $300 million, including a sale of its NextNet Wireless Inc. hardware business for an undisclosed amount to Motorola. Clearwire also withdrew its plans for an IPO, claiming that strategic deals with Intel and Motorola would have required a re-write of the IPO documents, that the Vonage IPO flop had nothing to do with the decision, and that Clearwire may chose to pursue an IPO in future. Clearwire is believed to be the second largest owner of US spectrum suitable for WiMax and currently sells wireless Internet access in 26 metro markets in the US, Ireland, Belgium, Denmark and Mexico.
  • Comment on related stocks/ETFs: Motorola's purchase of NextNet Wireless may increase the competitive pressure on WiMax infrastructure vendors Airspan (AIRN) and Alvarion (NASDAQ:ALVR), and is thus incrementally negative for both stocks. Motorola's purchase of the business was no doubt part of a broader partnership, and might kick-start Motorola's entry to the WiMax infrastructure market by locking up potentially the largest US customer. It also provides technology diversification for Motorola. Thus a net positive for Motorola's stock (MOT). Intel's large investment in Clearwire looks confused in light of Intel's sale of its own communications chip business, so probably incrementally negative for its stock (NASDAQ:INTC). For more background on Clearwire (CLWR), see key excerpts from its IPO filing and analysis from Jon Ogg and Evelyn Rubin.

Apple Will Sell Only LCD Monitors

  • Summary: No more bulky CRT monitors for Apple (NASDAQ:AAPL) -- the company introduced a $899 iMac with LCD monitor for schools and students, replacing its last cathode ray tube-based model. Apple was a pioneer (surprise) in the LCD sphere, introducing the thinner screens as standard to most of its computer lines back in 2001.
  • Comment on related stocks/ETFs: No shocker here on the monitors, but the cheaper iMac for schools/students, timed well for back-to-school season, could be quite significant for Apple's Q3 sales. Related in today's Seeking Alpha: LCD TVs Gain Share in Critical Market Segment; Considering the Stock Impact

GM Management to Lay Out Objections to Alliance

  • Summary: General Motors (NYSE:GM) Chairman and Chief Executive Rick Wagoner plans to lay out management's objections to the proposal by Kirk Kerkorian and other large shareholders to forge an alliance with Nissan (OTCPK:NSANY) and Renault. Wagoner's objections are both fundamental (how automotive alliance work) and procedural (how this proposal was brought forth). Wagoner and GM management would, apparently, prefer to devote all efforts to implementing GM's restructuring plan, and doesn't see much to gain from the proposed alliance.
  • Comment on related stocks/ETFs: John Bethel is wondering what GM's other major shareholders, beside Kerkorian, think of the proposed alliance. GM stock got a boost recently from the proposal, but that may reverse if managment succeeds in thwarting it. Steven Towns recently noted that a tough 1st half for Nissan may be a buying opportunity.

North Korea Gives U.S., Allies Few Good Options and Pyongyang Deepens Tehran Ties With Suspected Arms Exports and North Korea Missile Lapse Is Break for Pentagon

  • Summary: While this situation continues to generate uncertainty in the world markets, The Journal notes that the failure of the North Korean long-range missile gives the Pentagon some breathing room in its U.S. missle shield project. This effort has taken nearly 20 years and $100 billion to date, while contractors have yet to overcome some basic quality control and technological hurdles. Next month a test in California will attempt to shoot down a mock enemy missile launched from Alaska.
  • Comment on related stocks/ETFs: The defense companies on the project are the biggies: Boeing's (NYSE:BA) missle-defense unit, Raytheon (NYSE:RTN), Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC). If this situation continues to heat up, investor sentiment may turn more positive for these contractors in anticipation of the extention and expansion of such contracts. But any failure in next month's test could spell trouble for the responsible party's stock. Note also the fall of the South Korean ETF (NYSEARCA:EWY) on the recent news -- just the beginning?

Flavor Experiment for KitKat Leaves Nestlé With a Bad Taste

  • Summary: How to leverage one successful consumer product into a full range of hits? Nestle-owned KitKat was one of the UK's biggest sellers, but its ambitious 'new flavors' campaign has flopped. Kraft (KFT) is trying something similar with 'multi-themed' Oreos, and Unilever (NYSE:UN) is branding its Dove beyond soap, into shampoos and lotions. Overall results from so-called 'line extensions' have been mixed, but now only 5% of new food and household products are entirely new brands, down from 20% 10 years ago. In the U.S., Hershey (NYSE:HSY) owns the rights to KitKat, and has been more conservative with the brand, but sales have been flat in recent years. Cadbury Schweppes (NYSE:CSG) has been outperforming Nestle in the UK chocolate market, which, per capita, is almost twice the size of the U.S. market.
  • Comment on related stocks/ETFs: Nestle trades in the US as an ADR (OTCPK:NSRGY). Jim Cramer likes Cadbury Schweppes.

Southwest Airlines Raises Fares Again, Citing Fuel Prices

  • Summary: Southwest (NYSE:LUV) implemented one of its largest fare increases ever, hiking the price by $3-10 for one-way trips and raising its refundable fare rate. Southwest spokeswoman Paula Berg: 'We earned $548 million last year and our fuel bill is expected to be $800 million higher this year. Something has got to be done about it.' Despite the price hikes, Southwest's fill rate is strong -- averaging 80.4% full in June, up from 76.2% a year ago.
  • Comment on related stocks/ETFs: Jack Miller has argued for some time that Southwest and other domestic-only carriers can't compete in the current internationalized environment, and for this reason Continental (NYSE:CAL) and American (AMR) are the only strong buys in the sector.

Valassis in Talks To Purchase Advo For $1.1 Billion

  • Summary: Valassis Communications Inc., which prints and distributes coupons in newspapers and online and creates promotional fliers placed on doorknobs, is in "advanced negotiations" to purchase Advo Inc., which produces and distributes packets of local ads via regular mail, for more than 50% higher than its current market cap of $763 million. Valassis cut its 2006 EPS projection in late June. The market for "free-standing inserts" rose 3.6% in 2005 to $1.44 billion, but may come under pressure due to mergers between large retailers, which tend to reduce advertising budgets. Over the last 12 months Valassis generated net income of $85 million on revenue of $1.1 billion and Advo net income of $38.9 million on revenue of $1.41 billion.
  • Comment on related stocks/ETFs: Whatever the synergies, Valassis's stock (NYSE:VCI) will likely take a hit on this offer due the large premium it's paying for Advo (AD).

WPS Is Far Along In Talks to Buy Peoples Energy

  • Summary: Wisconsin utility WPS Resources Corp. (NYSEARCA:WPS) is in advanced discussions to purchase Chicago gas utility Peoples Energy Corp. (PGL) for about $1.5 billion. Peoples Energy stock is down 13% in the last year while other gas utilities are up 6%, and is trading at 16.7 times current earnings versus 18.9 times for the gas utility group.

Atlantic City Casinos Shut Down Due to New Jersey Budget Impasse

  • Summary: New Jersey Governor Jon Corzine shut down Atlantic City casinos Wednesday morning went he removed state regulators who must be present for the casinos to legally operate. The NJ budget debate has brought state services to a halt, and the casino industry will lose about $20 million a day until it's settled. An extended closure would be a major hit for investor confidence in the sector as well.
  • Comment on related stocks/ETFs: The key stocks here and their market response yesterday: Closest-to-pure-play Trump Entertainment (TRMP), which Phillip Davis made a great call on earlier this week, was down 3.8%, Harrah's Entertainment (HET) down just 1%, Boyd Gaming Corp. (NYSE:BYD) down 1.4% and MGM Mirage (NYSE:MGM) down 1.4%.

Can Wal-Mart Cash In On Financial Services?

  • Summary: Over the last few years Wal-Mart has been able to expand its financial services business in areas that don't require acceptance of deposits and thus don't require a banking license. Though they currently account for a minute proportion of Wal-Mart's revenue, it processes 1.5-2 million money-services transactions per week. It offers check cashing, bill payment, money orders and wire transfers, the latter via a partnership with MoneyGram International Inc. Wal-Mart significantly undercuts the competition, offering check cashing for $3 and money orders for 46 cents. It has aggressive plans to expand its financial services business, and is still waiting for approval of its plans to obtain an industrial bank charter in Utah and federal deposit insurance. Wal-Mart says it wants the approvals to process its own credit card transactions, not to offer retail banking services. Wal-Mart's attempt to expand its money-services business is being opposed in various states by competitors.
  • Comment on related stocks/ETFs: Financial services represent a profitable growth opportunity for Wal-Mart and a threat to potential competitors. Stocks mentioned in the article that could be impacted: First Data Corp (NYSE:FDC), which owns Western Union, and Ace Cash Express Inc. (AACE), which operates check cashing stores in 38 states. Wal-Mart's expansion of its money-services business could benefit partner MoneyGram International (NYSE:MGI).

AHEAD OF THE TAPE: Housing Foundations

  • Summary: The National Association of Realtors today reports data for pending home sales, ie. contracts that have been accepted by the seller and will close in the next few months. Pending home sales give a more accurate picture of current conditions than existing home sales. In April, the pending home sales index was down 11.7%. Suppy side housing indicators, such as reports from homebuilders and the index of homebuilder confidence suggest that the downturn in the housing market is worse than that suggested by demand side indicators like new mortgage applications and home sales. Disparity between the two might suggest that homebuilders are overestimating the severity of the situation, or that sales have been driven by steep price reductions.

HEARD ON THE STREET: Land-Value Erosion Seen As a Problem for Builders

  • Summary: After falling 28% on average this year, many homebuilder stocks are trading close to book value. But book value might be overestimated if land values are in fact worth less than they cost. Many homebuilders cap their exposure to declining prices at 5-10% of the land value by using options and deposits. Jeff Barcy, CEO of California-based land investor Hearthstone, says land values may decline 20-305 in the hottest markets. Bulls say that the bad news is priced in, the stocks are cheap, and companies like NVR Inc. (NYSE:NVR) are buying back stock.
  • Comment on related stocks/ETFs: Homebuilders that have already announced a financial impact of walking away from options or deposits include Centex (CTX), Hovnovian Enterprises (NYSE:HOV), and Toll Brothers (NYSE:TOL). On valuations, the articles says that "Pulte Homes Inc. (NYSE:PHM) and Beazer Homes USA Inc. (NYSE:BZH) trade at about 1.2 times book, while shares of M.D.C. Holdings Inc. (NYSE:MDC) trade at 1.1 times and shares of Standard Pacific Corp. trade at about book value".

TRACKING THE NUMBERS: Midprice Restaurants Feel Pinch

  • Summary: While high-end and low-end restaurants have recently done well, the mid-tier eateries have struggled and their stock prices have begun to reflect it. The Journal's research indicates that, due to high gas prices and other factors, the typical customer of such outlets has recently chosen to stay home or downgrade to fast food. The companies in focus here include family-dining restaurant chains like CKE Restaurants (CKR) , Papa John's (NASDAQ:PZZA) , Cheesecake Factory (NASDAQ:CAKE), Applebee's International (APPB), Ruth's Chris Steak House (NASDAQ:RUTH), OSI Restaurant Partners (OSI), and P.F. Chang's China Bistro (NASDAQ:PFCB)
  • Comment on related stocks/ETFs: The PowerShares Dynamic Food & Beverage ETF (NYSEARCA:PBJ) is quite heavily invested in this sector. For a report on how McDonald's and other low-tier retaurants should fare in the near future, see Outlook for Fast Food Stocks in This Slowing Economy from Investopedia Advisor.

Quest Software Will Restate Results After Options Probe
SMALL STOCKS: Trident, Zoran Tumble Sharply; Duquesne Surges

  • Summary: Quest Software (NASDAQ:QSFT) fell 9.9% on its announcement of restating financials due to failure to properly recognize stock option grants; Trident Microsystems (TRID) dropped 17% yesterday on a Thomas Wiesel downgrade; Zoran (NASDAQ:ZRAN) fell 10% on a grand jury subpoena regarding stock options irregularities; Duquesne Light Holdings (DQE) rose 18% on its buyout from a private equity group; Directed Electronics (OTC:DEIX) dropped 7.3% upon receipt of a FCC letter that two of its radios it supplies to Sirius Satellite Radio (NASDAQ:SIRI) are not compliant with regulations.
  • Comment on related stocks/ETFs: Here's an updated chart of all the companies under investigation for irregularities in their stock-option grants.

Notable articles on Seeking Alpha today: Today's earnings schedule, including consensus estimtes and past results. LCD TVs are gaining share; a discussion of the data and investment implications by an industry insider. An in-depth look at alternative energy stock Distributed Systems. Jim Cramer's latest Mad Money stock picks. Rob Black's Retail Stock Report. Nintendo's market share in Japan. Eddy Elfenbein comments on Rosneft's IPO, and more IPO analysis.

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