One Page Annotated WSJ Summary, Friday July 14th

by: David Jackson
David Jackson
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Bank of Japan Lifts Interest Rates

  • Summary: The Bank of Japan abandoned its five year zero interest rate policy Friday by raising short-term rates to 0.25% and stating that it would adjust the rate "gradually" in response to the economy and inflation. Its policy board supported the move unanimously. Economists expect the BoJ to continue to raise rates over the next two years. The zero interest rate policy was initiated in February 2001 when Japan was suffering from a weak economy and deflation; now Japanese economic growth is about 3% and consumer prices have been rising since November.
  • Comment on related stocks/ETFs: See more detailed analysis of the impact on the banking sector including the large US bank stocks.

GE's Net Income Rises 4.4% Amid Sale of Insurance Units

  • Summary: GE's Q2 results: Revenue up 9.2% to $39.90 billion, of which revenue from financial services rose 10% to $15.3 billion and revenue from infrastructure businesses rose 11% to $11.33 billion. Net income up 4.4%. EPS of $0.47, in line with the consensus estimate from sell-side analysts. GE reaffirmed its EPS guidance of $0.48-0.50 from continuing operations in Q3 and $1.94 to $2.02 for the full year. Cash flow from operations in the first half of this year was $14.3 billion, up from $8.0 billion last year, due to the $5.8 billion sale of GE's insurance businesses and a 9% increase in cash flow from it industrial businesses.
  • Comment on related stocks/ETFs: According to the press release, "Total company orders were up 17% for the quarter, showing strong future demand for our products and services. Orders for equipment increased 33%, including a 59% surge in Infrastructure orders, while services orders increased 13%." Nonetheless, the consensus estimate for next quarter of $0.50 is at the top of GE's own Q3 guidance range of $0.48-0.50.

Samsung's Profit Declines 11% As Sales of Cellphones Fall Off

  • Summary: Samsung Electronics Co.'s Q2 results: Revenue up 3.8% to 14.11 trillion won, operating profit down 14 to 1.42 trillion won. Cellphone sales declined for the first time in three years and margins shrunk in it memory chip and LCD display businesses. The decline in cellphone shipments resulted from a change Samsung made to its schedule for releasing new products. Instead of launching new handsets in Q1 as previously, Samsung switched to an early Q3 launch. As a result, shipments fell to 26.3 million units in Q2 from 29 million in Q1 and operating margins in the unit fell to 9.5% versus 10% in Q1 and 11.8% in 2Q05. Samsung's LCD operations had an operating margin of 2.5%.
  • Comment on related stocks/ETFs: Samsung Electronics, despite being a leading global consumers electronics and components manufacturer, does not trade in the US. However, it accounts for over 20% of the assets in the iShares MSCI South Korea Index Fund ETF (NYSEARCA:EWY). Note the low operating margins in the LCD business; consistent with the margin pressure accross the industry. News of Samsung's lower handset shipments may hit cellphone vendors Nokia (NYSE:NOK) and Motorola (MOT) and component vendors Texas Instruments (NASDAQ:TXN) and Qualacom (NASDAQ:QCOM) among others. If so, that may be a buying opportunity if the weakness is genuinely due to the product release schedule and not due to weak underlying demand.

D.R. Horton Warns on Profit

  • Summary: D.R. Horton announced that poor market conditions caused earnings for its fiscal third quarter (ending June 30) to come in at approximately 93 cents/share, down from $1.17/share a year ago. The warning came while the company issued its latest sales order report: 14,316 home orders for the quarter, down from 14,980 a year ago. While the housing market is broadly understood to be weakening, the warning from Horton is particularly significant as the company has been able to withstand previous downturns with minimal impact on profits, registering 114 consecutive quarters of year-over-year earnings growth. That remarkable streak appears to be broken.
  • Comment on related stocks/ETFs: The warning came after market close yesterday; in after hours trading, D.R. Horton (NYSE:DHI) dropped 9%. The warning is likely to hit Toll Brothers (NYSE:TOL) today as well -- it traded down over 3% after hours. Horton stock is down about 50% since the beginning of the year. Seeking Alpha contributor Bill R. had been wondering where Horton's income is coming from -- a prescient question, it seems.

Tribune Net Falls; McClatchy Posts Nearly Flat Profit

  • Summary: Chicago-based newspaper publisher, Tribune Co. (TRB) reported second quarter declines due to sluggish advertising, declining circulation, and reader defections to the Internet and other media. McClatchey Co. (NYSE:MNI) reported flat earnings from the year earlier quarter. Tribune Co. posted a steep decline in earnings which will likely add pressure from Tribune's largest shareholder, the Chandler family, for the company to either break up or put itself on the market. Net income fell 62%, or 28 cents a share from 73 cents a share, a year earlier. The year-earlier period was boosted by a gain of 13 cents a share, while the latest quarter was hurt by a $90 million loss from selling television stations in Atlanta and Albany, N.Y. McClatchy Co. reported roughly flat earnings, not including its recent acquisition of Knight Ridder. McClatchey said net income was $44.1 million, or 94 cents a share, compared with $44.2 million, or 94 cents a share, a year earlier. In 4 p.m. composite trading on the NYSE, Tribune was down 2.6% while McClatchey was up 1.7% on the Big Board.
  • Comment on related stocks/ETFs: To read a transcript of Tribune Co.'s recent quarterly conference call, click here. For McClatchy's Co.'s recent conference call, click here.

FTC Targets Home-Listing Limits

  • Summary: The Federal Trade Commission yesterday charged the Austin (Texas) Board of Realtors, a local affilate of the National Association of Realtors, the dominant trade group for real estate agents and brokers, with violating anti-trust law by enforcing a rule that bars discount realtors from sharing their listings with web sites such as Realtor.com via multiple listing services (known as "MLS"). The FTC says it is now approaching other local boards of realtors to clarify their practices. The Austin board said it scrapped the rule last August. Last year the Justice Department filed a suit alleging that the National Association of Realtors' policy to allow brokers to block their listings from appearing on other brokers' web sites restrained competition.
  • Comment on related stocks/ETFs: Incrementally positive for Realtor.com owner Move Inc. (NASDAQ:MOVE). More fundamentally, real estate agents are fighting a rear-guard action against the Internet's ability to reduce information inefficiency in their market, a key factor in holding up the excessive level of real estate commissions in the US. As more house transactions move to the Internet, other companies that stand to gain include Zip Realty (NASDAQ:ZIPR) and HouseValues (SOLD). Eventually a meaningful proportion of real estate transactions will occur without broker involvement, benefitting Tribune (TRB) which recently acquired ForSaleByOwner.com, and IAC/Interactive Corp. (IACI) which owns Owners.com.

Dell to Reduce Promotions In Pricing Overhaul

  • Summary: Dell announced that it would simplify its pricing by cutting the numbers of promotions and rebates offered on a single-product-basis by 80% over the next 18 months, starting with Inspiron notebooks and flat screen TVs in August and extending to Dimension desktops. Electronics retailers have moved away from mail-in rebates in favor of "instant savings" at the store. Dell's share of the US PC market fell to 30% in Q1 from 32% a year earlier.
  • Comment on related stocks/ETFs: Dell's competitive advantage lies in its greater efficiency and cost advantage over HP. Confusing customers with complex pricing is thus the dumbest thing Dell can do. Instead, it should offer straight prices that consistently undercut the competition. This development is therefore incrementally positive for Dell's stock (NASDAQ:DELL), possibly more so than the market will give it credit for, and incrementally negative for HP (NYSE:HPQ), Gateway (GTW) and the retailers who carry their products, Best Buy (NYSE:BBY) and Circuit City (NYSE:CC). Dell's stock fell to a new 52 week low yesterday. For an overview of the debate between the bulls and bears on the stock, read this summary with links, and articles by Eddy Elfenbein and Dah Hui Lau.

Intel to Lay Off 1,000 Managers

  • Summary: Intel will lay off 1,000 managers throughout all levels of management and geography, a move that recognizes the semiconductor giant's workforce has become bloated. Intel has been attempting to improve its profit margins amidst stronger competition from Advanced Micro Devices and slower sales growth in PCs. As of the end of March, Intel had about 103,000 employees; in 2005, the Intel workforce grew fully 17%, with the number of managers growing at a faster pace than the rest of the workforce. This is the first broad reduction of Intel managers in the company's history.
  • Comment on related stocks/ETFs: Intel reports 2Q earnings this Wednesday. William Trent notes that Intel's new high-performance server chip, dubbed Woodcrest, is faster than AMD's new server chip that sent ripples through the industry last month. Chad Brand, meanwhile, is closing out his paired arbitrage trade: long INTC, short AMD.

Under Pressure, Airbus Redesigns A Troubled Plane

  • Summary: Airbus will likely unveil its redesigned A350 passenger plane at the Farnborough Air Show next week. The success of the A350's launch is critical for Airbus and its ability to compete with Boeing's "Dreamliner". If the A350 isn't officially launched at Farborough, and Airbus instead just collects commitments from customers without itself committing to invest in the project and build the plane, that could lead to further customer defections to Boeing.
  • Comment on related stocks/ETFs: The article is classis WSJ: outstandingly well-written and researched. But in this case the information is almost all backward-looking, and Airbus' travails are now priced-in to its stock and Boeing's (NYSE:BA).

Virgin America Gets Closer To Start of Passenger Flights in U.S

  • Summary: The Department of Transport rejected a request from rival carriers to freeze the approval process for Virgin America's launch of US passenger flights and investigate its ownership structure. Federal rules limit foreign ownership of US airlines, but rival airlines led by Continental contend that billionaire Richard Branson might play a larger role than Virgin America's structure suggests. Virgin Atlantic's CEO said that he is cautiously optimistic that Virgin America will receive approval soon. Virgin America has placed firm orders for 34 Airbus A320s, secured $177.3 million in financing, and is undergoing standard review of its crew training procedures by the FAA.
  • Comment on related stocks/ETFs: Incrementally negative for US airlines Continental (NYSE:CAL), American -- owned by AMR (AMR), JetBlue (NASDAQ:JBLU), Airtran (AAI), US Airways (LCC), and Southwest Airlines (NYSE:LUV).

Latest Verdict In Vioxx Suits Is Merck Victory

  • Summary: In the latest round of courtroom battles against Merck's Vioxx painkiller, a New Jersey jury found the company not responsible for the heart attack of a 68-year old woman who had taken the drug for about two years prior. Merck removed the drug from the market in September 2004 following a study in the New England Journal of Medicine that linked it to higher chances of heart attack and stroke for patients using it long-term. This is the seventh jury decision on Vioxx damages claims, with the scorecard currently split down the middle between plaintiffs and Merck. The company faces nearly a dozen new ones until the end of this year alone. A Lehman Brothers analyst noted that the decision is 'important in our minds because the notion that Merck is closer to potential class action on long term use [has been] diminished.'
  • Comment on related stocks/ETFs: Merck (NYSE:MRK) stock got a boost in Thursday afternoon trading in response; the stock's been creeping upwards since November. Note that Merck still faces 11,500 lawsuits from individuals alleging Vioxx caused their heart attacks and strokes.

Zocor, Lipitor Feel Pinch from Generics

  • Summary: Despite steep price cuts by Merck to protect its Zocor (simvastatin) cholesterol drug from generics, the generics have captured fully 49% of new simvastatin prescriptions in the U.S. since they became available at the end of June. Israeli generic drugmaker Teva Pharmaceutical captured 32% of those new prescriptions, while Dr. Reddy's of India gained 14% and the remaining 3% went to India's Ranbaxy. Pfizer's Lipitor, the most popular treatment, also saw its share of new prescriptions drop, from 42% the week before to 40% the week the generics were released. Pressure against Lipitor is mounting as insurers encourage a move to the reduced-price Zocor or a generic simvastatin. AstraZeneca's statin Crestor has also been gaining share recently, especially among newly diagnosed patients.
  • Comment on related stocks/ETFs: Negative for Merck (MRK) and Pfizer (NYSE:PFE), a significant positive for Teva (NYSE:TEVA) and Dr. Reddy's (NYSE:RDY), and incrementally positive for AstraZeneca (NYSE:AZN). Israeli journalist/analyst Shlomo Greenberg recently called Teva's stock fall in the wake of the Merck price cut 'patently absurd' and a great buying opportunity - will he be proven right? Note, however, that Teva had some bad news yesterday on the legal front in a suit with Forest Labs.

Cowen IPO Sinks, May Give Pause To Other Lenders

  • Summary: Cowen Group (NASDAQ:COWN) traded down to $15.88 yesterday from its IPO price of $16. The IPO price itself was significantly below the expected range of $19-21 a share, which it set with underwriters Credit Swisse Group and Merrill Lynch. Cowen's poor reception may bode badly for three other investment banks that have filed for, or plan to file for IPOs: Ryan Beck Holdings Inc., Evercore Partners Inc. and Keefe, Bruyette & Woods Inc. Cowen's business may not be comparable to the others, however, due to its revenue concentration in low-margin trading and growth-oriented investment banking, which make it particularly susceptible to trading conditions and the health of the IPO market.
  • Comment on related stocks/ETFs: Cowen's profits declined 78% last year while other investment banks were minting more money than ever. The sales and trading business is suffering from relentless margin compression. According to Bloomberg (full article definitely worth reading), "Yesterday's sale values Cowen at about 0.8 times its 2005 revenue. That compares with ratios of about 1 for Lazard Ltd. (NYSE:LAZ), the New York-based investment bank that has soared 50 percent since its IPO in May 2005, and Morgan Stanley (NYSE:MS), the biggest securities firm by market value."

AHEAD OF THE TAPE: Who's Minding the Register?

  • Summary: The retail sales report will be issued today, and evidence is accumulating of weakness in the sector. Wal-Mart reported weak same store sales in June, William-Sonoma this week lowered its outlook, and Gap announced the departure of the head of its Old Navy division. Employment in the retail sector fell by 54,000 or 0.4% year over year in June according to the Labor Department, and Goldman Sachs economist Jan Hatzius says that year over year declines in retail employment have always coincided with recessions in the past, though this time it may be due to consolidation among department stores. The National Federation of Independent Business and the Conference Board also reported decreased optimism this week. However, retail sales were up 7.6% year over year in May (and 9.1% excluding autos).
  • Comment on related stocks/ETFs: See also the data for June retail sales, William Trent's analysis, and an earnings preview for the retail stocks.

HEARD ON THE STREET: Demand Allows Rosneft to Price IPO at High End

  • Summary: Russian state oil company OSO Rosneft is seeing strong demand for its approximately $10 billion London IPO scheduled to begin trading next week. International oil companies such as China National Petroleum, BP PLC and Malaysia's Petronas have ordered large stakes, driving the price to around $7.55/share, near the top of the company's proposed $5.85-$7.85 range. Wealthy Russian investors and some individual Russians will also participate in the floating of Rosneft shares. Analysts see the IPO as more of a private placement to strategic buyers. OAO Lukoil remains Russia's largest oil company, but Rosneft is seen as 'The Kremlin's oil company', and may enjoy a special ongoing privilege that will mean a competitive advantage. The IPO is still being challenged in court by former shareholders of Yukos, another large Russian oil concern that trades in the U.S. (YUKOY), who claim Rosneft illegally seized Yukos property in 2004.
  • Comment on related stocks/ETFs: Eddy Elfenbein says it's hard to disagree with claims that Rosneft's IPO is a sale of stolen goods. Travis Johnson is 'flabbergasted' that this IPO may actually go through, and points to a Washington Post column by Steven Pearlstein on the IPO that's caused considerable buzz. Roger Nusbaum commented on Yukos and Rosneft as investments back in April.

COMMODITIES: For Oil, Does $80 a Barrel Loom?

  • Summary: With the August crude contract reaching $76.70 a barrel in floor trading Thursday, then $78+ in after-hours trading, market participants are gearing up for $80 oil in the near future. Last year, Goldman Sachs predicted oil would reach $100 a barrel and were much ridiculed at the time, but now that figure doesn't seem far fetched at all. Legendary oil man T. Boone Pickens predicts $80 oil, but not before the beginning of 2007. Barclay analysts see a test of $80/barrel as 'imminent' given the recent Mideast turmoil. Nymex futures are up more than 26% so far this year, after a 37% rise in 2005 and 33% in 2004.
  • Comment on related stocks/ETFs: The most straightforward way to ride the upswing is to go long the U.S. Oil ETF (NYSEARCA:USO). Note that despite oil's rise, the energy ETF (NYSEARCA:XLE) was actually down yesterday -- David Fry points to program selling of underlying stocks as the culprit.

IPOS: Hertz's Owners Take Final Steps To Launch IPO

  • Summary: Just six and a half months after the leveraged buyout of Hertz by private-equity funds Carlyle Group, Clayton Dubilier & Rice Inc., and Merrill Lynch Global Private Equity, the company is preparing to file for an IPO. The private equity funds acquired Hertz from Ford for $2.3 bilion and the assumption of $13 billion in debt, and then paid themselves a $1 billion special dividend by issuing additional debt. Hertz' revenue increased 8.9% in Q1 year over year, benefitting from a strong economy and expansion into the "off-airport" market currently dominated by Enterprise Rent A Car Co. However, costs could rise as GM and Ford push up fleet prices on their cars to limit the impact on their cars' resale values.
  • Comment on related stocks/ETFs: Before you buy this IPO, read this discussion of increased debt leverage for companies like Hertz. The success of the Hertz IPO is important for Cendant (CD), which plans to spin off its Budget and Avis businesses later this year.

SMALL STOCKS: Sento, Winnebago, Entrust Sink

  • Summary: Small stocks crashed and burned for a second straight day on news of escalating violence in the Israeli-Arab Conflict. In trading indicative of how small caps faired, the Russell 2000 index of small-cap stocks lost 1.98% while the Standard & Poor's SmallCap 600 index fell 1.93%. In sector news, suppliers of recreational products were hardest hit as the spike in crude prices fanned existing fears about weakening consumer spending. Motor-home manufacturer Winnebago (NYSE:WGO) fell 5% while recreational-vehicle maker Monaco Coach (MNC) dropped 6.6%. Software fared poorly as well with Transaction Systems Architects (TSAI) shedding 4.9% and Entrust (ENTU) falling 3.3%. In terms of individual performers, information technology-services company Sento (OTC:SNTO) hemorrhaged 54% after announcing that it expects a first-quarter net loss of $1.4 million to $1.5 million. Multi-Fineline Electronix (NASDAQ:MFLX) plunged 23% after the Anaheim circuit-board maker cut its third-quarter earnings estimate, due to higher product and labor costs. Other big decliners included Nastech Pharmaceutical (NSTK) (16%), Sypris Solutions (NASDAQ:SYPR) (18%) and Sirenza Microdevices (OTCQB:SMDI) (15%). Gainers were few and far between. The list included Flow International (NYSE:FLOW), up 6.2%, on stronger than expected fiscal fourth-quarter profits, helped by strong demand; G-III Apparel Group(NASDAQ:GIII), up 5.7%; and Biolase Technology (BLTI) which gained 5.2%.
  • Comment on related stocks/ETFs: Shares of Multi-Fineline Electronix recovered earlier in the month on Morgan Stanley analyst comments that problems at Muli-Fineline competitor MFS Technology Ltd. were not indicative of problems at other circuit board makers like Multi-Fineline. Such optimism proved unfounded yesterday after the company cut 3Q profit estimates by nearly 40% and shares plunged 23%.

HEARD IN ASIA: China Car Market Gets Bumpier

  • Summary: The once highly-protected Chinese car market has become far more open to competition, with more foreign car makers entering the high growth market and a number of upstart Chinese manufacturers making waves as well. Prices are falling as quickly as demand is growing -- passenger car sales rose more than 36% in the first half of 2006 over the year-ago period. GM reported profit of $327 million from China sales last year, down 22% from 2004. Volkswagen lost $151 million there in 2005, after profiting by more than that amount the year before. Japanese manufacturers appear best able to cope with the dwindling margins in China, though GM and others are cutting prices in an effort to remain competitive. Most Chinese are buying their first car, so brand loyalty is a minimal concern, and price is far more important than in most western developed markets.
  • Comment on related stocks/ETFs: Another challenge facing GM... Note that Honda (NYSE:HMC) has significant activity in China, and may be the best way for a US investor who can't access Hong Kong markets to play the growth of the car industry in China. Interestingly, on a recent conference call, McDonalds executives discussed how the growing drive-thru market is spurring its growth in China.

Notable articles on Seeking Alpha today: Today's earnings schedule. Dave Fry blames the mullahs for the recent market decline. Rob Black's tech stock report and energy stock report. The new DOG ETF. Vonage takes another beating. The latest from Jim Cramer.

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