One Page Annotated WSJ Summary, Monday July 17th

by: David Jackson
David Jackson
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TODAY'S MARKETS: Stocks May Decline at Open and Israeli Troops Briefly Enter Lebanon As Strikes on Infrastructure Go On

  • Summary: Two hours before the start of trading DJIA futures are down 22 to 10761, S&P 500 futures are down 3.7 to 1238.50, and Nasdaq 100 futures are down 3 to 1472. In an attempt to destroy Hizbollah missile launchers that have been used to attack civilian targets including the city of Haifa, Israel said that a small number of ground troops entered south Lebanon last night but have since returned to Israel. Israeli fighters continue to attack Hizbollah targets. "Iran's Foreign Minister Manouchehr Mottaki also arrived in Syria for talks with the government there on the crisis. Syria and Iran have applauded Hezbollah's capture of two Israeli soldiers, which triggered the offensive." European and Hong Kong stocks traded lower before the US market opened.
  • Comment on related stocks/ETFs: David Andrew Taylor looks at what Mideast tensions mean for the markets, while Chad Brand says that geopolitical concerns shouldn't affect long0term investing strategies.

Corporate, Investment Banking Boost Citigroup's Net Profit 3.8%

  • Summary: Citigroup's Q2 results: Revenue up 10% to $22.18 billion, missing analysts' consensus estimate of $22.52 billion. Net income up 3.8% to $5.27 billion, EPS of $1.05 missed analysts' consensus estimate of $1.06. Corporate and investment banking was up 31% to $6.76 billion, and US consumer revenue up 1% to $7.57 billion. 270 new bank branches were opened, 74 in the US and 196 abroad. cit
  • Comment on related stocks/ETFs: Citigroup's Q2 results investor presentation is here (PDF). Note that Citigroup (NYSE:C) is a favorite stock of value fund manager Bill Miller. Citigroup's stock got hit hard after disappointing results last quarter.

Philips Reports 69% Drop in Net

  • Summary: Amersterdam-based Philips Electronics reported net profit of €301 million ($380.7 million) on €7.6 billion in revenue, falling shy of analyst estimates of €353 million profit, while beating the concensus revenue estimate of €7.54 billion. Philips noted strength in its consumer electronics and domestic appliance semiconductor unit, and repeated its yearly guidance for 5-6% revenue growth and operating margin of 7-10%. 2Q operating margin was 4.8%.
  • Comment on related stocks/ETFs: We'll publish the Philips conference call shortly -- check back here to read it. A recent Barron's article was bullish on Philips, especially if it were to spinoff its semiconductor business. On a lighter note: Earlier this year, Philips launched BodyGroom, a wet/dry electric razor for men to "trim and shave all body zones," including the "groin area." Philips has been told that it is the best-selling health-related appliance on Amazon.

Intel's Itanium Comes to Key Point

  • Summary: Intel will tomorrow introduce the latest in its 64-bit Itanium family, a duel core processor called Montecito. The new chip contains over 1.7 billion transistors but consumes only 100 watts, down from 130 for earlier models. Itanium-based systems are best suited to high-end task involving large database transactions, such as financial institutions. The number of Itanium-based systems sold in 2005 fell slightly year-over-year to 8,182, though revenue from those systems rose 42% to $640 million. HP accounted for over 80% of Itanium system sales in Q1. Other systems vendors who use the chip include Silicon Graphics Inc., Unisys Corp., NEC Corp., Hitatchi Ltd. and Fujitsu Ltd. Unlike AMD's Opteron chip and Intel's x86 processors, however, Itanium can't run software designed for 32-bit systems such as Windows and some versions of Linux. EMC's VMware unit has decided not to support Itanium.
  • Comment on related stocks/ETFs: The rollout of Intel's new processors -- including Montecio -- is incrementally positive for Intel's stock (NASDAQ:INTC), particularly given the level of negative sentiment. Probably insignificant impact on AMD's stock (NYSE:AMD) as the Itanium market is too small to impact AMD. HP (NYSE:HPQ), although it dominates the Itanium-based systems market, also has too little revenue exposure to be affected by this. Unisys (NYSE:UIS) and Silicon Graphics (SGID), due to their focus on high-end systems, may get more leverage from the new products. Sun Microsystems abandoned its proprietary-chip-only approach (it now uses AMD chips in some of its servers) and would use Montecito if it was truly compelling, so probably no competitive impact for Sun's stock (NASDAQ:SUNW).

GM Approaches a Crossroad as It Considers Renault-Nissan Alliance

  • Summary: Friday evening, GM CEO Rick Wagoner and Renault/Nissan chief Carlos Ghosn agreed to a 90-day 'silent study' of the proposed three-way global alliance. GM's activist investor Kirk Kerkorian, key proponent of the deal, wants GM's board to conduct the review, and not Wagoner himself (who has expressed doubts on its efficacy). Toyota, which would be threatened by such an alliance, dismissed speculation that it may make a pre-emptive takeover bid for GM. GM stock jumped late last month upon Kerkorian's disclosure that he's pursuing the alliance, but has since fallen back somewhat with the general market decline. European union leaders are concerned the alliance would mean extensive job cuts. Within Europe, GM/Renault/Nissan could create significant operational synergies, but that's less true in Asia and elsewhere worldwide.
  • Comment on related stocks/ETFs: Mentioned only briefly in this article, one of the interesting fallouts of this deal, if it goes through, is what it would mean for Toyota -- Steven Towns notes that Toyota is already facing some significant challenges in its home market. If you follow General Motors, be sure to subscribe to all of our GM content by email.

Airbus Plans New Jet Program To Replace the A350

  • Summary: As the Farnborough Air Show kicks off, the CEO of Airbus' parent company [EADS] told reporters that the company is planning a new line of planes to replace its long-haul A350 model. The A350 has been criticized by airlines, who tend to favor Boeing's rival 787 'Dreamliner' plane due to its increased fuel efficiency, passenger comfort, and speed. The new Airbus jet will require an investment 'in the ballpark of $10 billion', which is about twice the budget of the two-year old A350 project. Airbus also should announce at Farnborough a new cargo-ready version of its A330 long-haul widebody, a growth market where Boeing has taken leadership. EADS also assured reporters that management difficulties, which have pressured its stock, are behind it.
  • Comment on related stocks/ETFs: Airbus' reputation has taken a hit on the A350 -- can that be recovered with the new (and very expensive) program? Meanwhile Boeing, while winning market share from Airbus, has raised its global demand outlook for the commerial airline market for the coming 20 years, by nearly 6%.

Chinese Rules Could Tie Up Foreign Retailers

  • Summary: China's cabinet, its State Council, is drafting new rules that would require retailers planning to build outlets larger than 10,000 square meters to submit their plans to a public hearing, and for cities to file detailed blueprints of commercial plans for review. The new rules could increase costs for non-Chinese retailers planning to expand in China, and increase the time it takes them to build new stores. Public hearings have been held in some cities since 2003, and none has resulted in projects being rejected. Last year China scrapped rules requiring foreign retailers to form joint ventures with local partners.
  • Comment on related stocks/ETFs: Two companies with US-traded stocks are mentioned in the article as having potential exposure: Wal-Mart (NYSE:WMT), which plans to add another 18 stores to the 60 it already operates there, and Best Buy (NYSE:BBY).

China Calls for Vigilance Amid Overheating Jitters

  • Summary: Chinese premier Wen Jiabo called for ongoing structural adjustments to prevent the country's high growth economy from overheating. GDP growth was reported at 10.9% in the second quarter, even faster than the 10.3% growth of Q1. Foreign exchange reserves rose to a record $941 billion in the quarter; the country uses these reserves to stabilize its currency amidst a widening trade surplus and investment inflows. The yuan has appreciated by less than 1.4% since being revalued by 2.1% against the dollar one year ago. This, despite the trade surplus and high foreign investment.
  • Comment on related stocks/ETFs: On China, see recent commentary from Enzio von Pfeil on its gaming industry and David Wolf on wireless providers.

H-P Devises Small Data Chip That Attaches to Most Surfaces

  • Summary: HP has developed tiny data storage chips, called Memory Spots, that hold up to 4 megabits of data, The data can be read wirelessly at 10 megabits per second by read-write devices placed within a memory of the data chip. HP predicts that Memory Spots could eventually sell for about $1, and could have application anywhere that local storage would be useful (such as hospital patients' wristbands or postcards). Though far more expensive that RFID chips, Memory Spots have better security due to the required proximity of the read-write device.
  • Comment on related stocks/ETFs: According to Creative Strategies Inc. analyst Tim Bajarin, quoted in the article, the technology is years from deployment. So no impact on HP's stock (HPQ).

Movielink to Offer Films Online That May Be Copied on DVDs

  • Summary: Movielink LLC will announce today that it has licensed technology from Sonic Solutions that allows consumers to download movies from the Internet and burn them on to DVD. This will allow Movielink's customers to watch movies on their TVs rather than their PCs without having to set up a home network. But Movielink needs to get the approval of the movie studios, which may be reluctant to cannibalize their sales of DVDs to Wal-Mart and other retailers, and may be concerned about pirating, despite the Sonic Solutions anti-piracy technology.
  • Comment on related stocks/ETFs: Strongest potential stock impact on Sonic Solutions (SNIC). Also potentially impacts sentiment (though not short-term revenues or profits) for the DVD rental stocks, Netflix (NASDAQ:NFLX), Blockbuster (BBI) and Movie Gallery (MOVI). Netflix defenders will point out that Movielink offers only 4% of the titles offered by Netflix (see the comments in Netflix' Q4 2005 conference call transcript). But Movielink is jointly owned by the movie studios -- Viacom (NASDAQ:VIAB) via Paramount Pictures, Sony (NYSE:SNE) via Sony Pictures Entertainment, Vivendi Universal (NYSE:V) via Universal Studios and Time Warner (NYSE:TWX) via Warner Bros. Studios -- and they have a strong profit incentive to disintermediate the movie rental companies in the long run. Movielink's small inventory is largely a problem of licensing, and is in the studios' ability to resolve. Also, the recent success of TV program downloads will encourage the studios that Movielink could be a long term success.

Northwest Airlines, Attendants Talk As Deadline Nears

  • Summary: Northwest Airlines and its flight attendants union continued talks ahead of Monday's deadline, when the company will have the legal right to impose its terms on the union. The Association of Flight Attendants represents the workers, and has threatened a strike or sporadic work stoppages if its terms aren't met. A U.S. Bankruptcy Court judge may decide today to extend the deadline.
  • Comment on related stocks/ETFs: With its stock trading on the pink sheets at $0.56, is there much downside left in Northwest?

HEARD ON THE STREET: After Long Saga, UAL's Investors Say: 'Show Me' and United Airlines Headquarters To Move to Downtown Chicago

  • Summary: Following the carrier's emergence from bankruptcy protection in February, investors have have driven down stock of its parent company, UAL Corp., over 20%. Poor first quarter results contributed to the sentiment, and now pressure's on for 2Q numbers to show real improvement for the nation's number two carrier behind American. Most analysts agree that United did not adequately cut costs during its prolonged Chapter 11 period; another concern is Southwest's push into two key United hubs, Denver and Washington DC. This quarter is typically strong for airlines -- American and Continental are expected to post solid profits, as their recent stock gains have presaged. In the spotlight on United's upcoming earnings call: lower non-labor costs and progress on its restructured balance sheet. In a separate report: United has decided to keep its corporate headquarters in Chicago, moving to a high rise there early next year in a move that the company describes as a cost-cutter -- both to consolidate its Chicago-area real estate, and because the city and state will propose legislation to cap a local jet-fuel tax, an apparent incentive United received for agreeing to stay in the Windy City.
  • Comment on related stocks/ETFs: Among Seeking Alpha contributors, Jack Miller is a longtime bull on the airlines, while Bill R. is a bear.

THE OUTLOOK: As Bigger Piece of Economic Pie Shifts To Wealthiest, U.S. Deficit Heads Downward

  • Summary: The Bush administration recently credited itself with stimulating the economic growth that resulted in higher tax revenues and thus a smaller than expected budget deficit. But the improvement is in fact due to a shift of income to the wealthy: the proportion of national income going to wealthy individuals and corporations has risen, while the share going to typical share owners has shrunk. Since wealthy individuals pay higher taxes, that has led to the increase in tax receipts. Tax receipts are expected to be 5% higher than what was forecast in February, but inflation adjusted GDP is expected to be only 1% higher. The unemployment rate is lower than previously forecast, but so too is payroll growth. Economists believe the supply-side effects of President Bush's tax cuts on the whole economy have been minimal.
  • Comment on related stocks/ETFs: The data confirm that the Bush tax cuts strongly favored the wealthy. They go a long way to explaining the disparity in results between the low-end and discount retailers and the high-end and luxury retailers. In particular, this helps explain the June same store sales data which showed weakness in Wal-Mart's (WMT) sales and relative strength in Nordstrom (NYSE:JWN), Saks (NYSE:SKS) and Neiman Marcus.

MARKET MOVERS: Keeping Cool Amid Global Strife

  • Summary: Middle East fighting has almost never done long-term damage to the US stock market, except when economic fundamentals have been seriously damaged, usually a disruption in the supply of oil. The market tends to overreact to Middle East crises. Crude-oil futures hit $77.03 a barrel Friday, below the all-time inflation adjusted high of $98.58 in 1980 but 4x its 2001 level, partly on fears that Iran will be drawn into the current conflict. However, even if the Middle East conflict abates, concerns remain about US consumer spending, the housing market and global interest rates. More data will be available Thursday when The Federal Reserve releases a summary of its June meeting, and consumer price and housing starts data are released.
  • Comment on related stocks/ETFs: Geopolitical tensions are not the only factor propelling the price of oil and gasoline. See Three Factors Pushing Up the Price of Oil & Gasoline and Why Oil is Cheap at $75 a Barrel. Note also John Hussman's argument that the stock market has a good record predicting bad news, and it's currently issuing a tornado warning.

Notable articles on Seeking Alpha today: Today's earnings schedule. Rob Black's sector reports -- Retail and Media. One Page Summary of this weekend's Barron's. A closer look at ProShares' inverse ETFs. The short case for Hansen Natural and Garmin. The latest summary of Jim Cramer's Mad Money stock picks. Travis Johnson on Lions Gate Entertainment and Microcap Spectulator on China Expert Technologies. Rich Vanden Boogard compares two stocks: Panera Bread versus Apple Computer. Paul Kedrosky on the Hertz IPO.

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