One Page Annotated WSJ Summary, Wednesday July 12th

by: David Jackson
David Jackson
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Bombs Rip Indian Trains at Evening Rush Hour and Investigators Sift Through Wreckage A Day After Mumbai Bombings and India Market Is Expected to Reopen

  • Summary: At least 190 people were killed by a series of eight bombs that struck Indian's financial capital of Mumbai on Tuesday evening. The Indian government believes that an Islamic terrorist organization is behind the co-ordinated attacks, possibly from neighbor Pakistan. The Indian stock market was closed by the time of the attacks, but it's likely to impact that exchange for today's trading, which is expected to proceed normally. The Indian market had already dropped sharply recently -- down 29% from its May peak. As the U.S. markets were still open at the time of the bombings, ADRs of Indian stocks were hit, albeit in uneven manner: Tata Motors (NYSE:TTM) fell 48 cents to $16.50 but Infosys Technologies (NASDAQ:INFY) was just 26 cents lower at $78.01.
  • Comment on related stocks/ETFs: Two U.S. traded closed-end funds covering India took a beating: the Morgan Stanley India Investment Fund (NYSE:IIF) and the India Fund (NYSE:IFN) run by Blackstone. Remarkably, Bloomberg is now reporting that the Bombay exchange bounced back from early losses and actually closed 3 percent higher, boosted by strong earnings report from Infosys (INFY).

EU Fines Microsoft $357 Million

  • Summary: The EU fined Microsoft $357 million for failing to comply with its 2004 antitrust order to share code with rivals allowing them to develop Windows-compatible programs. The EU Competition Commissioner also threatened a fine of 3 million euros ($3.82 million) per day beginning July 31st until Microsoft complies. Microsoft provided 12,000 pages of technicl documentation, but the EU judged it unworkable. Microsoft says that it has 300 people working full time to provide the information, and that the EU shifted the goal posts. The EU says the fine is unrelated to the current work. Microsoft lost an appeal against the original ruling but can still appeal to the European Court of Justice. It may also appeal the ruling Wednesday to fine the company again.
  • Comment on related stocks/ETFs: Eddy Elfenbein correctly thinks the new daily fine is significant. The fixed $357 fine should have less impact on Microsoft's stock (NASDAQ:MSFT) due to the company's massive cash flow generation and the amount of cash on its balance sheet. The EU's tough stance is potentially more impactful on Microsoft's competitive position and ability to exploit its dominance of the operating system market. Potentially positive for Real Networks (NASDAQ:RNWK).

Narrower Deficit Is Likely This Year

  • Summary: The Bush Administration said it expected the 2006 budget deficit to shrink by about 7% to $296 billion due to a tax revenue increase of 11.4% versus a spending increase of about 9%. Corporate income tax revenue is expected to rise by 20% and individual income tax by 15%. The new 2006 deficit estimate is far better than the CBO's February projection of $371 billion and the White House's estimate the same month of $423 billion. However, the deficit is expected to rise in 2007 to $339 billion as tax revenue growth slows, partly due to the elimination of the telephone excise tax which will cost $16-18 billion, and changes to the AMT. Spending will also be boosted, due to an additional $60 billion on Iraq and Afghanistan and $123 billion this year on Gulf Coast hurricane aid.
  • Comment on related stocks/ETFs: The Federal deficit is of interest to traders and investors because of its impact on interest rates and the dollar via the balance of payments. But the Federal deficit is only one factor in determing the balance of payments and aggregate US borrowing. Although this is good news, it's probably less important than China's widening trade surplus with the US.

Can Mr. Fix-It Find Time for GM? and Chinese Auto Titan Shifts Its Holdings

  • Summary: The Journal's Jesse Eisinger believes that GM shares, on the rise since December, now have a 'Carlos Ghosn premium' built-in, referring to the Brazilian executive who has begun significant reform at Renault and Nissan, and whom GM investor Kirk Kerkorian hopes will do the same for GM. Yet Ghosn (pronounced 'Goan') has yet to really turn things around at Renault, where he's been for less than a year. Renault investors want him to remain focused on the growth strategy he's prescribed for the French automaker, instead of taking on the huge GM task. Eisenger further notes that GM's cash position is 'more precarious than some investors and analysts think', due to a questionable bill-paying system that leaves the company with peak cash at the end of quarters. In a separate development, the large Chinese state-run car maker Shanghai Automotive is selling its portion of the SAIC Motor Corp. unit to a publicly traded affiliate for about $2.5 billion. GM also owns a stake in SAIC.
  • Comment on related stocks/ETFs: Glenn Curtis, writing for Investopedia Advisor, makes the case for GM stock as a buy for the long haul. John Bethel finds a 'good cop/bad cop' dynamic at GM with Wagoner/Kerkorian, and Travis Johnson finds the French proposal for GM to be not such a hot idea.

Outsourcing Revenue Is Seen Falling in '06

  • Summary: A consulting firm that tracks outsourcing deals reports that though the number of projects has grown in the first half of 2006, revenue from outsourcing contracts won't match last year's $75 billion. Contracts have become shorter-term and less lucrative for the major outsourcing companies: IBM (NYSE:IBM), Accenture (NYSE:ACN) Electronic Data Systems (NASDAQ:EDS) Computer Sciences Corp. (NYSE:CSC) and Hewlett-Packard (NYSE:HPQ) -- though all five of these firms inked megadeals worth over $1 billion each during the first half of the year.
  • Comment on related stocks/ETFs: Despite this trend, William Trent believes Accenture, which recently reported strong earnings, is due for big 4Q growth.

Newspapers Are Expected to Post More Weak Results for Quarter

  • Summary: Upcoming earnings results for newspaper and radio stocks do not look positive. Newspaper executives were relatively pessimistic at the Newspaper Association of America's Mid-Year Media Review in June, reporting that strength in ad revenue in May didn't last into June. The New York Times (NYSE:NYT) then warned in June that it expects earnings to show no year-over-year growth. Gannett (NYSE:GCI) reported that Q2 started off slowly. In contrast, Dow Jones (DJ) said it was seeing broad revenue gains across the consumer and enterprise segments. While print advertising is weak, companies are reporting growth in online advertising of 20-30%. Merrill Lynch analyst Lauren Fine expects E.W. Scripps (NYSE:SSP) to post 5% ad revenue growth and for Journal Communications (NYSE:JRN) and Journal Register (JRC) to post 3% declines. Stifel, Nicolaus analylst Kit Spring expects revenue from radio companies to be roughly flat year over year.
  • Comment on related stocks/ETFs: Despite the enthusiasm of some value investors for newspaper stocks due to their cash flow, they continue to underperform. The chart below shows the performance of NYT and GCI over the last year; click to enlarge:

    NYT GCI chart

Popular Mortgage Web Site Under Scrutiny

  • Summary: A former advertiser is suing for carrying misleading "bait and switch" ads from competitors. The suit, against the advertisers themselves and as well, seeks $16.5 million in damages and a minimum of $33 million in punitive damages. Bankrate is accused of knowingly carrying ads from mortgage lenders that offered unrealistically low rates that were never in practice given to borrowers in an attempt to lure them into more expensive deals. The plaintiff, the founder of mortgage lender American Interbanc, alleges that Bankrate received 529 complaints from users about the ads, mostly before Bankrate CEO Thomas Evans took office, but some after he did so. The president of another mortgage lender is quoted in the article saying he stopped using Bankrate because it is "not a level playing field". In contrast, competing sites E-LOAN and Lending Tree have received relatively few complaints.
  • Comment on related stocks/ETFs: Other than the financial impact of the lawsuit, this article is a major blow to Bankrate's (NYSE:RATE) credibility. Incrementally positive for competitors IAC/Interactive (IACI) which owns Lending Tree and Popular Inc. (NASDAQ:BPOP) which owns E-LOAN.

Web Site Is a Prelude To Glaxo's OTC Weight-Loss Pill

  • Summary: GlaxoSmithKline PLC has launched a weight-loss website,, as a prelude to release of its new over-the-counter weight-loss pill Alli. Alli has not yet received FDA approval; if it does, it will be the first FDA-approved over-the-counter diet pill available in the US. Glaxo's new web site contains articles about dieting and weight-loss as well as recipes, quizzes and discussion boards. To participate in discussions, users have to register, providing their first name, email address, date of birth, ZIP code and ethnic background. Glaxo says it may use the information for market research and promoting its products. The new web site competes with other major online diet web sites, including those from Jenny Craig, Weight Watchers, the Zone Diet, the South Beach Diet. Sanofi-Aventis (NYSE:SNY) has not launched its own web site for its obesity drug Acomplia, which is also pending FDA approval.
  • Comment on related stocks/ETFs: This story has significant ramifications for the internet industry and individual stocks. Gathering consumer data online, marketing to web users and owning targeted advertising inventory are now sufficiently valuable that large consumer-oriented companies like Glaxo (NYSE:GSK) are willing to launch their own web sites. Specifically, as the online advertising market grows and the price of pay-per-click ads continues to climb, the launch and marketing of a new web site becomes cost effective. (The key challenge will be to convince users that they are unbiased.) Specifically in this case: incrementally negative for competitors eDiets (OTC:DIET) and Weight Watchers International (NYSE:WTW). Glaxo's decision to gather its own user data via launch of its own web site sets a negative precedent for online survey company Greenfield Online (SRVY). More generally: the creation of wholly-owned web sites to take ownership of ad inventory is incrementally negative for content portals like Yahoo (NASDAQ:YHOO) and 'Net advertising firms like Google (NASDAQ:GOOG) and ValueClick (VCLK).

In Sycamore Suit, Memo Points To Backdating Claims

  • Summary: An ex-employee of optical networking company Sycamore Networks has revealed the existance of a memo discussing a promise made to six new employees to grant them stock options at the lowest price of the quarter and to mis-record their start dates to maximise the value of their options, and evaluating risks the manipulation would be discovered by the company's auditors. The memo is the clearest evidence yet that a company understood the illegality of its manipulation of stock options. The memo has surfaced as part of a lawsuit brought be Sycamore's ex-director of human resources, who claims he was unfairly dismissed because he refused an order from then-CFO Frances Jewels to manipulate options and was then fired.
  • Comment on related stocks/ETFs: Ms. Jewels was replaced as CFO in October 2004, but that doesn't matter: this is a clear case of another company caught in the options trap. Don't own Sycamore's stock (OTCPK:SCMR) until this is cleared up. And even then, beware of the excess hype in the optical space. The only thing that makes this stock attactive is the fact that it has over $850 million in cash on its balance sheet, and a market cap of about $1.1 billion. But who wants to own a corporate money market fund?

Monster May Restate Earnings

  • Summary: Monster Worldwide Inc. said that it may need to restate its financial results for 2005 and earlier to record additional non-cash charges for past options grants. That's effectively an admission that it " could have issued options at favorable, below-market prices to employees and failed to properly record a cost for the resulting extra pay". Monster was the subject of a WSJ article about options abuses last month which highlighted an April 2001 grant at the lowest closing price in the first half of that year; the stock rose 67% in the 20 days following the grant. Monster is under investigation by the Justice Dept. and SEC.
  • Comment on related stocks/ETFs: See the detailed analysis of Monster's (NASDAQ:MNST) options grants by Mark Mahaney, the options scandal scorecard, and the potential fallout for a company of options manipulation.

AHEAD OF THE TAPE: Warnings Worrywarts

  • Summary: The market is now in mid-"pre-announcement" period, with earnings warnings from Lucent, Wiliams-Sonoma, AMD and 3M. But soon the regular earnings seasons will get going, in which companies usually best analyst estimates. S&P estimates current estimates for Q2 earnings growth at 9.4% and expects the real number to be closer to 11.5%. Most companies are not seeing evidence that the economy is slowing, so the market may do well as companies report their Q2 results, before being hit by new worries in the fall.
  • Comment on related stocks/ETFs: Chad Brand disagrees, and says you need to be careful here. The problem with the argument that things look worst at the time in the quarter when companies are issuing warnings is that it should hold true every quarter, in which case the market should always rise when earnings season proper gets underway. But that isn't the case. The key issue is therefore what proportion of companies have issued warnings. Ticker Sense, meanwhile, takes a look at the stock market impact of last earnings season, and Shlomi Cohen discusses late earnings warnings.

INSIDE TRACK: As Bally Poison Pill Runs Down, Hedge Fund Builds Up Its Stake

  • Summary: Hedge fund Pardus Capital Management continues to accumulate shares of Bally Total Fitness, nearing the 15% ownership level at which Bally's 'poison pill' anti-takeover tool would kick in. But with the poison pill expiring on Saturday, company managment and the hedge fund appear to be headed for another standoff in their months-long battle over Bally's ownership.
  • Comment on related stocks/ETFs: Bally stock (BFT) has been in sharp decline since its May peak.

COMMON SENSE: Time Warner May Get a Lift From Cable Assets

  • Summary: Investment columnist James Stewart wonders if AOL's recent move to provide free access to the bulk of its online content can jumpstart Time Warner stock, after its prolonged flatlining between $16-19. Stewart has personally lost thousands of dollars in expired TWX call options over the years, but still believes investors are unfairly valuing Time Warner, punishing it for its 'old' media properties Time Inc., HBO and Warner Brothers and its cable business (which accounts for 25% of its revenues and 1/3 of its profits). Stewart believes the bundled cable/internet service that Time Warner offers may ride the HDTV boom and spur growth, but in the meanwhile, he's hedging his bets -- he owns Verizon (NYSE:VZ) and AT&T (NYSE:T) stock as well.
  • Comment on related stocks/ETFs: Key background on AOL's proposed free content strategy can be found here and here. See also Time Warner's latest conference call transcript - and we'll publish this quarter's soon after it's held as well.

OPTIONS: Hefty Positions Taken on Corning

  • Summary: More than 20,000 Corning alls and 14,00 Corning puts changed hands yesterday, including 7,400 Corning August $22.50 calls and the same number of August $20 puts, suggesting a large bet that Corning's stock will stay within a $18.10-$24.40 trading range over the next month.
  • Comment on related stocks/ETFs: A number of companies in the flat panel industry, including 3M (NYSE:MMM), LG Philips LCD (NYSE:LPL) and AU Optronics (NYSE:AUO) have provided evidence of weak sales throughout the flat panel "food chain". But Corning (NYSE:GLW), the largest producer of thin glass for flat panel TVs and monitors, hasn't yet pre-announced disappointing results. For the latest data on this industry, see the transcript of the LG Philips conference call from last night.

SMALL STOCKS: Tessera, Axcelis, Conexant Gain As Applebee's and Cosi Decline

  • Summary: Semiconductor smallcaps got a boost yesterday on KLA-Tencor's (NASDAQ:KLAC) announcement that bookings for the fiscal fourth quarter topped estimates -- Tessera Technologies (NASDAQ:TSRA) jumped 8.4% and Conexant (NYSEARCA:CNXT) gained 6.2%; ADRs of Indian companies Sify (NASDAQ:SIFY) and Patni (NYSE:PTI) declined upon the news of terrorist attacks in Bombay; Small restaurant stocks dropped as well -- Applebee's (APPB) down 2.2% on a downgrade, and Ruby Tuesday (RI) slipped 3%; Bob Evans Farms (NASDAQ:BOBE) was down 1.6%; Cosi (NASDAQ:COSI) fell 12% on poor earnings results; Talbots (NYSE:TLB) jumped fully 23% on raising guidance.
  • Comment on related stocks/ETFs: Conexant's revenue has grown 43% year over year. Note the strength of the semiconductor ETF (NYSEARCA:SMH) yesterday -- ready for a bounce off these lows? Asif Suria sees the drop in Indian stocks as a strong buying opportunity.

Notable articles on Seeking Alpha today: Today's "enhanced" earnings schedule. Latest conference call transcripts from Genentech, Audiovox and LG Philips LCD. Rob Black's sector reports: media and energy. Steven Towns on Hitachi's HD-DVD technology. Jim Cramer's latest stock picks from Mad Money, Stop Trading and radio show. Lots of ETF activity: a new value index ETF, double-inverse ETFs and who's winning the ETF business. And finally, although this is off topic: a great tip on how to make cheap international calls from a cell phone.

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