One Page Annotated WSJ Summary, Thursday July 13th

by: David Jackson
David Jackson
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TODAY'S MARKETS: Stocks May Tumble at Open As Oil Prices Hit Record High and Israel Widens Offensive in Lebanon, Striking Beirut Airport

  • Summary: In response to the incursion into its territory and the kidnapping of two of its soldiers by Hezbolla, which participates in the Lebanese government, Israel intensified its attacks on Lebanon, bombing the airport in a Hezbollah neighborhood of South Beirut and Hezbollah's TV station. Hezbollah launched rocket attacks on Northern Israel. Israel also intensified its actions in Gaza, where the Hamas government is hiding another kidnapped Israeli soldier. Crude oil on the New York Mercantile Exchange hit all-time highs early Thursday, trading 94 cents higher at $75.89 per barrel. About two hours before the start of trading, DJIA futures had fallen 45 to 11038, S&P 500 futures 4.9 to 1263.40, and Nasdaq 100 futures 9.5 to 1507.25.

Chinese Imports Of Crude Surged 15.6% in 1st Half

  • Summary: China's General Administration of Customs reported that China's imports of cruide oil rose 15.6% year over year in H1, far faster than the growth rate in the same period last year of 3.9%. China imported 40% of its oil in June; the Paris-based International Energy Agency estimates that China's total demand for oil grew by 11% in May, while others estimate the number at 7-10%.
  • Comment on related stocks/ETFs: Gordon Kwan, director of China oil research for CLSA Asia-Pacific Markets, is quoted in the article as follows: "The first-half import growth rate is another nail in the coffin for the oil-price bears". This won't help today's market.

Drought Drives Wheat, Corn Prices

  • Summary: Persistent drought conditions in the Great Plains are driving up the price of wheat, corn and other agricultural commodities. The Agriculture Department estimtes that the US wheat harvest will fall to 1.806 billion bushels from 2.106 billion last year, and the corn harvest fall 3.3 % to 10.74 billion bushels. It expects the average price of wheat to rise 17% to $4 per bushel and the price of corn to rise 24% to $2.45 per bushel. Demand from the ethanol industry is pushing up corn prices. As a result of rising agricultural prices, food prices are expected to rise 3-3.5% this year versus 2.5% last year.
  • Comment on related stocks/ETFs: The article mentions two companies that are being squeezed by the higher prices: Kellogg Co (NYSE:K) and Sara Lee Corp (SLE). But the impact could be widespread, and could further contribute to rising gasoline prices as higher corn prices raise the price of ethanol and thus gasoline.

AHEAD OF THE TAPE: A Central Shift and On Verge of Historic Rate Shift, Japan Bank Chief Faces Scandal and Banks in Japan Gear for a Boom

  • Summary: With the Bank of Japan about to put an end to its five-year policy of zero interest rates any day now, BoJ Chief Toshihiko Fukui is mired in an insider trading scandal. Though he technically didn't violate any laws, opinion polls show that the public thinks he should resign his post. According to the WSJ, this "latest scandal puts the spotlight on an institution in the throes of a crucial transformation…[the BoJ] has struggled to adapt to the new ethical and cultural standards that Japanese society is imposing on public servants." In general, the proposed rate hike has been giving investors cause for concern on two accounts: How far the BoJ plans to ultimately hike rates and how ending a 5 year zero interest policy with no modern precedent will affect Japan's economy. In the lead up to the rate hike, American financial companies with a heavy presence in Japan like Merrill Lynch, J.P. Morgan Chase, Morgan Stanley, and Citigroup have all increased the size and scope of their corporate loan teams as they advise companies how best to deal with the higher rates. There has also been a rush to lock in loans at the zero percent rates before the rate hike.
  • Comment on related stocks/ETFs: Incrementally positive for the US banks mentioned in the article: Merrill (MER), J.P. Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and Citigroup (NYSE:C). The rate rise has been widely predicted, and is therefore likely already priced-in to stock and bond markets. US investors can go long or short Japanese stocks via the iShares Japan Index ETF (NYSEARCA:EWJ) and the Japan Smaller Cap closed-end fund (NYSE:JOF).

Cable Firms Salivate Over Slices of Adelphia Pie

  • Summary: The FCC is today expected to approve the sale of Adelphia's cable systems today. The $17 billion sale of Adelphia is expected to close July 31st, adding 3.5 million subscribers to Time Warner and 1.8 million to Comcast. Time Warner presense and ability to compete with satellite TV will be significantly strengthened in Los Angeles, Dallas, Cleveland and parts of New York, and Comcast's in Miami, northern Virginia, Boston, Minneapolis and Pittsburgh. Time Warner will reach 75% of LA households, up from 15% today, but will have to fight high penetration of satellite TV and telco-provided broadband. The increased reach from the acquisition of Adelphia's systems makes it feasible for Time Warner to launch a national advertising campaign on broadcast TV. It plans to promote phone service, functionality that allows viewers to see programs from the beginning even if they started watching when the show had already started, and interactivity. Consolidation in the cable industry will likely continue.
  • Comment on related stocks/ETFs: Incrementally positive for Time Warner (NYSE:TWX) and Comcast (NASDAQ:CMCSA). Incrementally negative for telco competitors AT&T (NYSE:T) and Verizon (NYSE:VZ) and satellite competitor DirectTV Group (DTV).

EU May Break Up Sony, BMG Units After Ruling Overturns Merger

  • Summary: A European Court decision Thursday overturned the European Commission's clearance of the Sony-BMG Music merger in 2004 and ordered the commission to reassess the merger, opening the possibility that the merger could be broken apart. The Court of First Instance, the European Union's second-highest court, backed a challenge by the independent record label group Impala, claiming that the Commission failed to demonstrate the the combined entiry wouldn't have a monopoly position. "Universal Music holds the top Music spot in Europe, with Sony-BMG pulling ahead in the U.S. The rivals control about a quarter each of the $32 billion global music market. The other two majors are EMI and Warner Music, with about 30% of the global market between them."
  • Comment on related stocks/ETFs: Incrementally positive for competitors Universal Music, owned by Vivendi Universal (NYSE:V) and Warner Music Group (NYSE:WMG) which is in a merger battle with EMI. More on the Warner-EMI battle here.

Barnes & Noble To Review Grants Of Stock Options

  • Summary: A shareholder filed a suit against Barnes & Noble Inc alleging that it backdated options grants. Barnes & Noble's board said it would conduct a review but said there was no merit to the suit. However, "a review of securities filings shows that Barnes & Noble granted stock options to senior executives at monthly lows", including grants to founder and chairman Leonard Riggio and his brother Stephen, the current CEO. Separately, Corinthian Colleges said it established a committe of independent directors to investigate options grants.
  • Comment on related stocks/ETFs: Barnes & Noble (NYSE:BKS) and Corinthian Colleges (NASDAQ:COCO) join the list of stocks you don't want to own until this is resolved.

SAP Sees Slower Software Sales

  • Summary: German enterprise software vendor SAP pre-announced Q2 results that fell far short of analyst expectations. Software sales are expected to be 621 million euros, versus consensus expectations of 675 million euros. Software sales are expected to rise by 16% in the US, by 3% in its core Europe, Middle East and Africa market, but to be flat in the Asia-Pacific region. Asia-Pac sales rose by 12% in Q1. Although the company re-iterated its outlook for the year of 15-17% revenue growth, the stock fell 7.5% in European trading.
  • Comment on related stocks/ETFs: SAP trades in the US as an ADR (NYSE:SAP). So software now joins the tech meltdown, following semis, PC, flat panels and storage. Oracle (NASDAQ:ORCL) has less exposure to Europe and more to the US, but like every other large US tech company relies on the Asia-Pac region for sales growth.

Noncarbonated Drinks, Snacks Lift PepsiCo Profit by 14%

  • Summary: PepsiCo (NYSE:PEP) reported a 14% rise in second quarter profit, beating analyst estimates on both revenue ($8.6 billion actual vs. $8.3 billion) and earnings (80 cents/share actual vs. 77 cents/share). Strength in noncarbonated drinks, its Frito-Lay snacks unit, and international operations drove the strong growth. The company also raised its earnings outlook for the year to 'at least $2.95 a share'.
  • Comment on related stocks/ETFs: In trading before the bell this morning, Pepsi was up about 1%.

Tribune's Net Income Drops 62% Hurt by Atlanta, Albany TV Stations

  • Summary: Tribune Co. Q2 results: Revenue down 1.4% to $1.43 billion, due to a decline in newspaper circulation and flat advertising. Net income down 62%, hit by losses at the Atlanta and Albany television stations it plans to sell. Earnings from continuing operations of $0.53 missed analyst consensus estimate of $0.55. Actual EPS including the TV stations to be sold was $0.28.
  • Comment on related stocks/ETFs: See the full text of the press release, which stated that "the competitive environment in our larger markets is still challenging, but we saw good growth in the second quarter at many of our medium-sized markets like Orlando and South Florida. Interactive revenues, the fastest growing segment of our business, were up 27 percent this quarter." Tribune's stock (TRB) price is probably more determined by the perceived break-up value of the company and its aggressive stock buy back plan than by its short-term results. A recent WSJ article questioned the wisdom of stock buybacks using debt, and specifically discussed TRB.

Gannett Reports An 8.3% Decrease In 2nd-Period Net

  • Summary: Media company Gannett's (NYSE:GCI) Q2 results were impacted by a soft advertising environment, higher newsprint costs and weak results from the UK. Revenue was up 6.1% to $2.03 billion, but EPS of $1.31 was down from last year's $1.37. Broadcasting revenue rose 3.8% and newspaper operating revenue by 6.4%, but newsprint costs rose 12%. Local and real estate advertising was relatively strong.
  • Comment on related stocks/ETFs: Full details and discussion in Gannett's conference call transcript.

Infosys Net Jumps 50% on Increase in Orders

  • Summary: Indian outsourcing company Infosys reported strong Q2 results and raised guidance. Revenue rose 46% and net profit 50%. The company added 38 new clients, and said that demand from Europe is growing faster than from the US. Its raised its full year EPS forecast to a range of 124.71-125.74 rupees from the prior range of 113.85-115.1 rupees.
  • Comment on related stocks/ETFs: Infosys trades as an ADR in the US (NASDAQ:INFY); it was up 5% after the results were announced. Full details and discussion in the Infosys conference call transcript. Incrementally positive for competitor Wipro (NYSE:WIT), whose ADR opened yesterday at $12.89 but closed lower at $12.71.

Memory-Chip Partners End Expansion Talks

  • Summary: South Korean's Hynix Semiconductor announced it has ended talks with STMicroelectronics (NYSE:STM) on a proposed NOR flash memory chip partnership. Hynix explained that it prefers to concentrate its efforts in NAND flash memory. NOR chips are generally used for cellphones, while NAND is prefered in MP3 players and digital cameras. STMicro and Hynix already have a NAND flash joint project.
  • Comment on related stocks/ETFs: The broken-off talks should not have a significant impact on STMicro stock -- the company is broadly diversified (it produces ASIC chips as well), and it's unlikely this project was priced-in. NAND remains the higher-growth and more lucrative sector of flash memory production. Of the 'pure play' flash companies, Saifun appears the most richly valued, at 11.6x trailing 12 months' sales, while Silicon Storage stocks sells for less than 1x trailing 12 months' sales.

Disney Is Considering Job Cuts

  • Summary: A WSJ source indicates that Disney (NYSE:DIS) is considering 'several hundred' layoffs in its movie studio division, following poor recent box office performance and the ongoing integration of Pixar Animation. Disney now plans to produce about eight Disney-branded films a year, plus one Pixar and one Disney Animation movie. Its Touchstone division -- designed to appeal to an adult audience -- will be dramatically cut back to two or so movies a year from its previous six or seven. Disney's Pirates of the Carribean: Dead Man's Chest, meanwhile, had the biggest opening weekend ever with $135.6 million of ticket sales at North American theaters last weekend. Pixar's most recent movie, Cars, also crossed $200 million at the domestic box office last weekend. Disappointments like Dark Waterand The Brothers Grimm led Disney to poor revenue results for the past two quarters, including a major loss in the fourth fiscal quarter of 2005.
  • Comment on related stocks/ETFs: Carl Howe explains how Dead Man's Chest can achieve superhit status, even in our 'long tail economy' -- its about the movie studios limiting choice, while 'net-based companies like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) maximize it through intelligent technology.

ADVERTISING: 'Upfront' Signals Cable-Ad Slowdown

  • Summary: The cable networks' annual "upfront" ad-sales negotiations, during which they sell about half their fall season ada inventory, are pointing to a weak market. Broadcast networks finished their upfront market earlier this month with declining ad commitments for the second year running. Merrill Lynch now predicts that the cable networks' upfront will grow 3% this year, down from about 8% last year. There's an oversupply of ad inventory, and media buyers are asking for flat or decling prices. Time Warner's TBS and TNT have only sold about half their upfront inventory compared to all of it at this time last year.
  • Comment on related stocks/ETFs: Incrementally negative for Time Warner (TWX), Viacom (NYSE:VIA), Liberty Mediaa (NASDAQ:LBTYA) and other cable network operators, and thus negative also for the cable provides such as Comcast (CMCSA) and Cox (COX).

HEARD ON THE STREET: Trust Loads Up On New York's Trophy Properties

  • Summary: New York Office REIT SL Green Realty Corp (NYSE:SLG) has outperformed all other publicly traded office REITs this year and the past three years. Its stock is still attractive due to its plans to add new properties in New York. Occupancy and rental rates in New York are strong, and the company's stock price doesn't fully reflect the value of the office buildings it owns. Its currently properties are concentrated in mid-town, where it is underwriting rental rate increases of 25-30% over the next three years. Bears point to excessive compensation for SL Green's executives.
  • Comment on related stocks/ETFs: The article provides more details about why REITs are outperforming the residential market. See further discussion of the lack of correlation between the US housing and commercial property markets.

SMALL STOCKS: Micrel and Yankee Candle Fall As Syntax-Brillian Soars 37%

  • Summary: Small stocks fell yesterday on a mix of geopolitical concerns and weak earnings reports. Leading the way were the Russell 2000 index of small-caps and the Standard & Poor's SmallCap 600 index which fell 1.9% and 1.7% respectively. In sector news, chip stocks tumbled, giving up their gains of the previous session. Among small caps, Asyst Technologies (ASYT) slid 6.2% and Micrel (NASDAQ:MCRL) lost 5.9%. Several small biotech stocks did poorly as well: Savient Pharmaceuticals (OTC:SVNT) fell 4% while Onyx Pharmaceuticals (NASDAQ:ONXX) declined 2.6%. In terms of individual performers, Yankee Candle (YCC) tumbled 13%, the NYSE's biggest decline, after citing weaker-than-expected performance; Secure Computing (SCUR) plunged 38% after lowering their quarterly earnings forecast; and Tut Systems (TUTS) entered a freefall that left shares down 39% after they announced second-quarter results would fall below earlier guidance. One of the few big gainers was Syntax-Brillian (BRLC) which shot up 37% on expectations fiscal fourth-quarter revenue will come in at or above the high end of its previous projections.
  • Comment on related stocks/ETFs: Syntax-Brillian (BRLC) is the one bright spot in the TV industry. Its press release said it was raising guidance today for Q2, but note that its gross margins are still expected to be only 10-12%.

Notable articles on Seeking Alpha today: Today's earnings schedule. Industry insider Simon Lewis on the flat panel market, and Wiliam Trent's analysis of LG Philip's conference call. Jim Cramer's Mad Money stock picks. Eddy Elfenbein on further Dell estimate cuts. James Fraser on an under-followed ethanol stock. Oliver Schwindler on shipping stocks. Google earnings preview. Latest conference call transcript: Genzyme Corp.

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