One Page Annotated WSJ Summary, Friday July 7th

by: David Jackson
David Jackson
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Tobacco Industry Wins Big At Florida High Court and Tobacco Victory Lifts Industrials By 73.48 Points

  • Summary: The largest punitive damages award ever against cigarette makers ($145 billion) was thown out by a Florida Supreme Court ruling that found it 'excessive as a matter of law.' Altria (NYSE:MO), parent company of Philip Morris, rose 6% on the news. The ruling 'illustrates the major change in the litigation landscape for cigarette makers, which just a few years ago were dealing with concerns about their viability.' Altria benefits internally as well, for the ruling clears the way for the spinoff of its Kraft Foods business and separation of its international tobacco business from its domestic one. The court did, however, rule that cigarette smoking causes disease and is addictive, and that the tobacco companies conspired to conceal its dangers -- allowing for individual lawsuits to persist.
  • Comment on related stocks/ETFs: David Fry wonders if trial lawyers hedge their verdict outcomes by going long MO. If you have pangs of conscience when investing in cigarette companies, you're not alone. Note that RJ Reynolds (NYSE:RAI), another beneficiary of the ruling, is expanding into smokeless tobbacco.

AMD Cautions Of Revenue Drop As Intel Cuts Prices

  • Summary: AMD warned last night after the market closed that Q2 revenue would be 9% lower sequentially, worse than its prior guidance of "flat to slightly down", in spite of "record" sales of its Opteron server chips. AMD has been eating into Intel's share of the microprocessor market, historically 80% of unit sales and 90% or revenue, but Intel is now counterattacking by cutting prices and releasing three new microprocessors by August.
  • Comment on related stocks/ETFs: AMD's stock (NASDAQ:AMD) was down less than 1% in after-hours trading because weak PC sales and price competition with Intel were already priced-in to the stock. William Trent discussed Intel's aggressive price cuts on June 9th and data points from Lenovo and Walsin on July 3rd, and the Semiconductor Industry Association reported a 2% year over year decline in microprocessor sales by value on July 5th. The key question for semiconductor investors now is what's priced-in to Intel's stock (NASDAQ:INTC). Intel's profitability is highly leveraged to revenue, but it's hard to guage the extent of the damage from the price war with AMD. The WSJ article says "Intel is expected to report one of its worst quarterly results in years for the period ended June 30", but the issue is: How bad is bad? The AMD news also won't help the PC stocks, particularly HP (NYSE:HPQ) and Dell (NASDAQ:DELL). The key issue for them is how much of AMD's pre-announcement was due to weaker than expected unit volume, implying that PC sales were weak, and how much was due to price competition with Intel, which has no implication for PC sales volumes and might actually boost the profitability of the PC vendors. Dell's cost advantage over HP becomes stronger when component prices are falling due to its lean-inventory model, and microprocessors are the single most expensive component in most PCs.

H-P to Further Streamline Operations, Real Estate

  • Summary: After already announcing that it would consolidate its 85 data centers into 6 locations, HP said that it would consolidate several hundred more locations world-wide into "core sites".
  • Comment on related stocks/ETFs: Evidence that HP CEO Mark Hurd isn't done cutting costs is incrementally positive for HP (HPQ), but the news will be drowed out by the implications of the AMD pre-announcement.

Mixed Retail-Sales Data Cloud 2nd-Half Views

  • Summary: "The International Council of Shopping Centers said June same-store sales increased 2.6%, below the 3.8% average gain for the first five months of the year and on the low end of its expectations." Results by segment, in order of sales volume, as follows. Discounters: Wal-Mart (NYSE:WMT) up 1.2%, Costco up 4.0%, Target (NYSE:TGT) up 4.8%, Dollar General (NYSE:DG) up 2.5%, Family Dollar (NYSE:FDO) up 3.6%. Department stores: Federated Department Stores (FD), which owns Macy's and Bloomingdales, up 1.7%, JC Penney (NYSE:JCP) up 4.3%, Nordstrom (NYSE:JWN) up 4.7%, Dillard's (NYSE:DDS) down 1.0%, Neiman Marcus [privately owned] up 6.1%, Saks (NYSE:SKS) up 4.7%. Apparel: TJX (NYSE:TJX) up 4%, Gap (NYSE:GPS) down 6%, Kohl's (NYSE:KSS) up 7.1%, Limited (LTD) up 3.0%, AnnTaylor (NYSE:ANN) up 12%. Miscellaneous: Pier 1 Imports (NYSE:PIR) down 18.4%. Teen Apparel: Abercrombie & Fitch (NYSE:ANF) down 4%, American Eagle Outfitters (AEOS) up 11.0%.
  • Comment on related stocks/ETFs: The retailers reported their numbers in the morning, and the market rose during the day. There's no doubt about the strength of the economy, so weaker than expected retail numbers may have been taken as a positive as they reduce the chances the Fed will continue to raise rates after the next increase.

Former Kmart Chief to Become RadioShack Chairman, CEO

  • Summary: Julian Day, ex-COO of Kmart and then COO of Sears, will be RadioShack's (NYSE:RSH) new CEO. RadioShack's Q1 profits fell 85% year over year, and it announced cost reductions including the closure of up to 700 stores.
  • Comment on related stocks/ETFs: Julian Day's appointment as CEO is a strong positive for RadioShack (RSH) due to his outstanding experience restructuring retailers.

Mexico Ratifies Presidential Win For Conservative

  • Summary: Mexican election officials confirmed that Felipe Calderon has won the presidential election by a very narrow margin. Unrest remains, however, as the country stands deeply divided on socio-economic lines, and the populist losing candidate, Andrés Manuel López Obrador, has promised to launch a legal and social rebellion against the new government's legitimacy. The peso climbed 1.3% and Mexican stocks rose 3.5% on the news. Calderon has promised to encourage foreign investment in Mexico, simplify the income tax structure, lower corporate taxes, and crack down on the nation's large tax evasion problem.
  • Comment on related stocks/ETFs: A green light to buy the Mexico ETF (NYSEARCA:EWW), which has risen over 6% this week on the news? Muizz Kheraj makes the case for it, citing increased US outsourcing, educational improvements and a growing Hispanic population in the US.

Covering Your Tracks In an Online World Takes a Few Tricks

  • Summary: Individuals are finding that it's hard to erase personal information about themselves from social networking sites, portals and search engines. The article chronicles the exasperated attempts of a handful of people to eradicate information posted by themselves or friends on MySpace, Yahoo and Amazon's book reviews.
  • Comment on related stocks/ETFs: The underlying message of the article is: be careful about using MySpace or writing about yourself on a blog. That could have been incrementally negative for News Corp. (NASDAQ:NWS), which owns MySpace, and Google (NASDAQ:GOOG), which owns Blogger, but both services are growing so rapidly that this article won't make any difference. More potentially impactful is the poor customer service experience reported about Yahoo (NASDAQ:YHOO) and Google (GOOG) and -- admittedly failed -- litigation against Yahoo over its delay responding to a request to remove personal information from its site. So far the legal risks seem limited ("The case was dismissed, on the grounds that the Telecommunications Act of 1996 says Internet companies cannot be held legally responsible for material published on a Web site by a third party."); but note the recent legal challenge to web video sites, with potentially far reaching implications for Internet content companies.

EBay's PayPal Chief to Step Down, Jolting Investors

  • Summary: The president of eBay's PayPal online payments business, Jeff Jordan, said he plans to leave eBay later this year, to be replaced by Rajiv Dutta, currently president of eBay's Skype unit. Mr Jordan, who some had expected to succeed CEO Meg Whitman, adds to the list of other recent high-profile departures from eBay, including COO Maynard Webb, SVP of Product Lynn Reedy, regional manager Gil Penchina, and SVP Michael Dearing. eBay's stock fell 5.3% in reaction to the news, to its lowest level since 2003.
  • Comment on related stocks/ETFs: This couldn't be a worse time for eBay (NASDAQ:EBAY) to change its PayPal management. The next few months will be critical for eBay to measure and respond to the competitive threat from Google Checkout. eBay investors need to understand carefully the potential impact of Google Checkout. Viewpoints to consider: Tim Boyd argues that Google Checkout is a net positive for eBay; but that wouldn't explain why eBay just banned its sellers from using the service. Scott Devitt says that Google Checkout is a loss leader. Mr Jordan's departure from eBay and the management transition inside PayPal is incrementally positive for Google (GOOG). Meanwhile, Michael Markowski says that eBay's stock is now cheap.

Verizon Nears Spinoff of Directories

  • Summary: Verizon, which announced plans to divest its directories business last year, is about to file papers with the SEC to spin-off the business but hasn't yet ruled out a sale. Verizon's strategy is to shed businesses and focus on wireless and broadband, and announced plans in April to sell its Caribbean and Latin American assets, has already sold its Hawaiian phone business and Canadian directory business, and is considering offers for its land lines in Vermont, New Hampshire, Maine and states near the Great Lakes region. The directories business could be worth $10-13 billion, and generated 2005 revenue of $3.45 billion (down from $3.55 billion in 2004) and EBITDA of $1.75 billion. A spin-off would allow Verizon to shift some of its $38 billion of debt to the new entity and avoid a taxable gain. Verizon is spending $20 billion on upgrading its plant to fiber, and may also want cash to purchase Vodaphone's stake in Verizon Wireless.
  • Comment on related stocks/ETFs: Verizon's (NYSE:VZ) greatest challenge is its cash flow -- how to service its $38 billion debt load while trying to fund its fiber buildout and buy Vodaphone's stake in Verizon Wireless. As such, a spin-off of the directories business makes little sense if it wouldn't generate cash or meaningfully reduce debt. The filing could therefore be a preliminary to a sale. Vodaphone (NASDAQ:VOD) investors will watch this carefully.

India Delays Privatization Plans Amid Coalition Allies' Resistance

  • Summary: India's plans to privatize minority stakes of government-owned companies were put on hold again amidst fierce opposition from communist party coalition members. Observers note that if such a relatively minor process cannot proceed, the country faces a far bigger challenge in easing restrictions on foreign investment and lessening regulations on corporate practice. The economy in India is growing fully 8% annually, but many hoped for even stronger growth if such pro-business reform were to be implemented.
  • Comment on related stocks/ETFs: An incremental negative for the two U.S.-traded Indian CEFs -- Morgan Stanley India Investment Fund (NYSE:IIF) and The India Fund (NYSE:IFN) -- as they look to regain footing following May's big selloff. You can follow developments in U.S.-traded Indian stocks in Seeking Alpha's India section.

Housing Signals Some Stabilizing; Jobless Claims Fall and Office-Vacancy Rate Declines, Propelling Rents 2.1% Higher

  • Summary: The National Association of Realtors' index for pending sales of existing homes, a broadly recognized gauge of future sales, turned upward in its latest report, indicating that the housing market is 'cooling gently' and that a 'soft landing' for housing may be more likely. The latest index report comes in 10.1% below the year-earlier level. Meanwhile, the office vacancy rate declined for the ninth consecutive quarter. The 13.8% vacancy rate has pushed rents 2.1% higher on national average. Strongest growth is in New York; Fort Lauderdale, Fla.; Miami; and Austin, Texas.
  • Comment on related stocks/ETFs: A skeptical David Fry says that whenever a realtor describes the market as stable, 'it usually means it's collapsing' -- take a look Fry's commentary on Homebuilders ETF chart. And recognize that supply-side indicators of the housing market, such as reports from the homebuilders and the index of homebuilder confidence, suggest the downturn may be far worse than this.

Zimmer Gets FDA Approval For Ceramic Hip Replacements

  • Summary: Orthopedic products producer Zimmer Holdings (ZMH) received regulatory approval to market its Trilogy AB ceramic hip replacement system. The stock rose 1.3% on the news.
  • Comment on related stocks/ETFs: Fund manager Eddy Elfenbein says that 'if any business could be described as the perfect business, it might be medical devices.' It seems that narrow healthcare funds proposed by Ferghana-Wellspring may well fulfill a market need for sub-sector exposure to areas such as orthopedics or cardiac devices (stents and pacemakers). Several ETFs target this sector including SPDR Biotech (NYSEARCA:XBI), Powershares Dynamic Biotech and Genome (NYSEARCA:PBE), Health Care SPDR (NYSEARCA:XLV), S&P Global Healthcare Sector Index Fund (NYSEARCA:IXJ), iShares NASDAQ Biotechnology Index (NASDAQ:IBB), iShares Dow Jones US Healthcare (NYSEARCA:IYH) and Powershares Dynamic Pharmaceuticals (NYSEARCA:PJP). Of these ETFs, XBI and XLV have the lowest expense ratios.

In Major Shift, Investment Pros Lose Their Appetite for Risk

  • Summary: Professional investors are moving money out of asset classes driven by short term speculation, such as gold, commodities, real estate, small caps and emerging market stocks, into asset classes perceived as higher quality or less risky such as large caps and developed foreign markets.
  • Comment on related stocks/ETFs: The article is largely backward-looking, because most of the money managers quoted in the article have discussed asset shifts they have already made, and many of the more speculative asset classes, such as gold and emerging market stocks, are already down sharply from their highs earlier this year. The article therefore provides little predictive value, unless the managers cited are first movers at the start of a longer lasting trend. In fact, this article may be evidence that sentiment about commodities and emerging markets has bottomed. If that's the case, a smart contrarian move would be to buy those "speculative" asset classes via ETFs: the iShares Emerging Market Index ETF (NYSEARCA:EEM), the streetTRACKS Gold ETF (NYSEARCA:GLD), the iShares Silver ETF (NYSEARCA:SLV), the iShares Microcap Index ETF (NYSEARCA:IWC), the US Oil ETF (NYSEARCA:USO) and the Deutsche Bank Commodity Index Tracking Fund ETF (NYSEARCA:DBC).

AHEAD OF THE TAPE: Prediction Market

  • Summary: The Labor Department releases its monthly jobs growth number today. Payroll processing company Automatic Data Processing (NASDAQ:ADP) and economics forecasting firm Macroeconomic Advisors published a report Wednesday suggesting the number should come in "well over 350,000", in contrast to investors' earlier expectation of about 200,000. However, the ADP-Macro Advisors prediction may be inaccurate due to imperfect seasonal adjustment and a short and recently flawed track record. In contrast, the Institute for Supply Management's indexes for manufacturing and nonmanufacturing employment suggest jobs growth could be weak.

HEARD ON THE STREET: Kerkorian Plan: Stealth Takeover? and What Alliance With Mr. Ghosn Could Bring GM

  • Summary: Is Kirk Kerkorian trying to effectively take over control of GM? His 9.9% GM stake via his investment company Tracinda Corp. takes on an increasingly aggressive activist stance as he promotes an alliance with Nissan and Renault. If that alliance actually materializes, Kerkorian and his partners would control about 30% of GM. GM's management, led by CEO Rick Wagoner, is fighting the proposal, and some observers believe Kerkorian's move is also aimed at ousting Wagoner in favor of Carlos Ghosn, chief executive of Nissan and Renault. The stock's recent run toward $30 has many wondering if it's still cheap (it sells at discount to cash, and only 8x this year's sales), or is a classic 'value trap' susceptible to a deteriorating underlying business. An alternative take on the Kerkorian move recognizes the tremendous synergies that Ghosn has forged at Renault-Nissan, where that alliance allows both companies to streamline production by use of similar components. Could GM profit as well, and is Wagoner et al. merely stubborn in resisting?
  • Comment on related stocks/ETFs: Yaser Anwar notes that while GM, Ford (NYSE:F) and Chrysler (DCX) posted a substantial decline in their US sales for the month of June, Toyota (NYSE:TM) managed to retain its position as the third largest company in the US by reporting a 14% jump in its sales.

FUND TRACK: Outside Fund Managers Deliver Mixed Results

  • Summary: According to Financial Research Corp, sub-advised funds, namely funds that outsource stock picking to an external advisor, now account for one in every eight mutual funds, and increased their assets by 25% to $755 billion since 2004, versus 15% for the overall mutual fund industry. But subadvised funds underperformed internally managed funds by 0.36% over the five years, despite the fact that the fees they charge tend to be considerably higher. Subadvised US stock funds have an average expense ratio of 1.16% versus an industry average of 1.07%, and subadvised international bond funds have an average expense ratio of 1.22%, "about 1½ times those charged by internally managed funds in the same category".
  • Comment on related stocks/ETFs: The data in this article are important because subadvised funds should be able to shop around for the best stock picking talent more easily than internally managed funds. The underperformance of subadvised funds is therefore more evidence in favor of indexing, against active management. More evidence here.

SMALL STOCKS: Tweeter Home, Citi Trends Fall; Hot Topic, Golf Galaxy Advance

  • Summary: Tweeter Home Entertainment (NYSE:TWTR) dropped 12% on reporting lower sales; Citi Trends (NASDAQ:CTRN) fell 17% on disappointing comparable-store sales growth; Deb Shops (DEBS) also dropped 12% upon poor same-store performance and cutting its yearly earnings guidance; Hot Topic (NASDAQ:HOTT), however, jumped 11% on a surprisingly strong comp-stores report; software company Openwave (OPWV) collapsed 33% upon reporting preliminary 4Q results well below estimates; Collectibles company Escala Group (ESCL) jumped 44% to $6.40 upon reporting strong auctions sales. The Russell 2000 index of small-cap stocks gained 0.79 point, or 0.11%, to 720.64.
  • Comment on related stocks/ETFs: In related smallcap activity, William Trent notes that Valassis in Talks to Buy Advo (AD, VCI). Phillip Davis recently noted that Sotheby's could gain from Escala's troubles -- but now it seems Escala is back on track.

HEARD IN ASIA: Nintendo Seems Poised to Score On Strength of DS Game Device

  • Summary: Nintendo (OTCPK:NTDOY) stock has risen 33% this year amid growing recognition that it will be one of the few gaming companies to increase profits in 2006. The company's portable game device, the DS, has been a mega-hit in Japan, and the company's main challenge right now is meeting demand. And the Fall launch of Nintendo's new console, the 'Wii', may well give the company a further boost against rival Sony's (NYSE:SNE) PlayStation 3, and Microsoft's (NASDAQ:MSFT) XBox 360. One concern, however, is that the large U.S. market prefers 'shooting, fighting and racing' games, which are not the focus of the Wii.
  • Comment on related stocks/ETFs: Steven Towns says 'If interest in the Wii at E3 is any indication of how sales will go, then maybe this time Nintendo can win back some market share and continue to please shareholders.' Sony's PS3, meanwhile, is more expensive than many Japanese citizen's rent. See more on the game console sector.

Notable articles on Seeking Alpha today: Today’s earnings schedule, including consensus estimtes and past results, and a preview of Alcoa's results. David Taylor's energy sector roundup. Interesting analysis of two Israeli technology stocks -- Checkpoint and Retailix, and an analysis of Tibco Software. Enzio von Pfeil says North Korea's missile tests make PetroChina a buy. Jom Cramer's latest Mad Money stock picks. And finally, we just launched a new category specially for investment bankers: Mergers & Acquisitions.

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