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Fed Report Finds Economic Growth Is Starting to Slow and FOREIGN EXCHANGE: Fed's 'Beige Book' Sends the Dollar To Broad Declines

  • Summary: The Fed's 'beige book' report on regional economic activity showed that economic growth lessened around the U.S. in the past six weeks, while price pressures generally 'remained in check.' The report, one of many factors the Fed uses to determine monetary policy, would seem to give another reason to end rate hikes in the near future. Consumer spending appears somewhat weaker, while strong factory and commercial lending activity suggests business spending may be compensating for it. On wages, a growing gap between highest- and lowest-paid employees was observed, and food retailers appear stronger than restaurants in some regions, suggesting more low-income customers are choosing to cook at home rather than eat out. The report led the dollar down sharply against the Euro and Asian currencies, on concerns for a weaker U.S. economy and lower interest rates in the near future.
  • Comment on related stocks/ETFs: Note that Treasury bonds continue to move higher as evidence of a slowing economy builds.

Once Highflying Tech Industry Reboots for Era of Slower Growth

  • Summary: Recent earnings results have confirmed that the tech industry is now mature and slow-growth. HP says it expects fiscal 2006 sales growth of 4-6%, Dell of 4.3% in Q2, . IDC predicts that corporate IT spending will rise by just 5% annually from 2005-2009. Companies are responding with cost-eliminating mergers, stock buybacks, dividend payments and management reshuffles -- all typical of companies in mature, not growth industries. Cisco, however, rejects the contension that its market has matured. Internet companies including eBay, Amazon and Yahoo have also exhibited slowing revenue growth recently. Oracle CEO Larry Ellison's contraversial claim that the tech industry has reached maturity seems to be true. The new growth areas seem to be consumer gadgets including cellphones and iPods.
  • Comment on related stocks/ETFs: This is a crucial article for tech stock sentiment, as it appears on page 1 of the WSJ and draws a broad conclusion from earnings season so far. Although there's no data to back this up, WSJ articles like this one seem to be good indicators of short term market movements. Note particularly the contrast to the Barron's main feature this weekend that argued that now was the time to buy large cap stocks, and included in its buy list Cisco (NASDAQ:CSCO). Bottom line: this article is a strong negative for tech stocks. The question is how much the sentiments it expresses are already priced-in, and how much the further impact the article will have.

Australian Interest Rates Are Focus As Data Show Inflation Quickening and Oil Costs, Tax Concerns Hurt German Business Confidence

  • Summary: Annual inflation in Australia rose to 4% in the second quarter, the highest since 1995. The figure strongly suggests that an interest rate hike (from the current 5.75% to 6%) is in the cards for next week. Higher fuel and food prices contributed to the higher-than-expected figure from the Australian Bureau of Statistics. In Germany, meanwhile, the closely-watched business confidence index fell more than expected, while remaining near a 15-year high. Concerns over oil prices and a proposed sales tax hike contributed to the fall. European indicators are showing mixed signals on the strength of the Continent's economic upturn, with consumer spending up in Italy and France while business confidence has now declined recently in Spain, Italy, Demark, Belgium and Germany.
  • Comment on related stocks/ETFs: Note that there's now an ETF that tracks the Australian currency: Australian Dollar Trust (NYSEARCA:FXA).

U.S. Broadband Subscriptions Rise

  • Summary: The FCC reported that US consumer and business broadband subscriptions rose 33% to 50.2 million lines, with DSL rising by 5.7 million lines and cable model lines rising 4.2 million. The cable industry's market share fall 3.5 percentage points to 57.5% and the telcos' rose by 3.3 percentage points to 40.5%. In 2005, the US ranked 12th in the word for broadband penetration, according to the OECD, behind Iceland, South Korea and Japan. According to the Pew Internet & American Life Project, 42% of American's had high speed Internet access at home in March 2006, up from 30% a year earlier.
  • Comment on related stocks/ETFs: According to the Pew Report, "Adoption of high-speed internet at home grew twice as fast in the year prior to March 2006 than in the same time frame from 2004 to 2005. Middle-income Americans accounted for much of the increase, along with African Americans and new internet users coming online with broadband at home." News of the rise in the rate of broadband adoption is incrementally negative for the bellweather Internet stocks including eBay (NASDAQ:EBAY), Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO), because their revenue growth was relatively tepid despite strongly rising Internet users and usage. Put differently: if that's how they performed when broadband Internet penetration was accelerating, how will the 'Net stocks perform when the US reaches broadband saturation?

Baidu Net Soars on Increased Traffic

  • Summary: Chinese search-engine company Baidu.com Inc. (NASDAQ:BIDU) posted net income of 58.5 million yuan ($7.3 million), or 1.69 yuan a share, up from 12.1 million yuan, or 0.39 yuan a share for its recent-ending quarter. Revenue more than doubled to 191.6 million yuan from 69.7 million yuan. The number of active online-marketing customers increased to more than 90,000, an increase of 22% from the first quarter. While the results beat the average estimate of analysts surveyed by Thomson Financial, the results didn't meet some investors' higher expectations. Shares of BIDU fell $13.44, or 15%, to $78.53 in after-hours trading.
  • Comment on related stocks/ETFs: For more on Baidu.com's recent quarter, read the company's conference call transcript. On the growth of internet usage in China of late, see Helen Wang's China To Become Top Internet Use Nation; Fare Is Decidedly Youth-Focused and Shaun Rein's China's New Obsession with Blogs and How Companies Can Benefit.

Matsushita's Profit Climbs 7%, Led by Sales of Plasma TV Sets

  • Summary: Japanese electronics company Matsushita, which sells products under the Panasonic brand in the US, reported a 42% year over year rise in operating profit in Q2 due to strong sales of plasma TVs and digital cameras. Net profit rose 7%. Matsushita holds 70% of the plasma market, and said that plasma sales rose 70%. The company said that price declines were less severe than for LCD TVs, and that lower prices were offset by sales of larger size TVs and lower manufacturing costs. Despite the 70% rise, Matsushita said that plasma sales were below its expectations for the quarter. Its digital camera sales rose to 43.8 billion yen from 22.1 billion yen due to the popularity in the US of its slim digital cameras with image stabilization.
  • Comment on related stocks/ETFs: Matsushita trades as an ADR in the US (NYSE:MC). See Steven Towns's outstanding write-up of Matsushita's results, including links to the company's presentation and press release. Matsushita's concern about demand in the US and China is particularly interesting. Matsushita's disappointment at plasma sales in Q2 was effectively predicted by Simon Lewis on Seeking Alpha on July 24th. If plasma is losing out to LCD screens, Sharp (OTCPK:SHCAY), which just announced Q2 results, may be a better bet. Note that Matsushita's results contain a mixed message for Corning (NYSE:GLW) which supplies glass for plasma and LCD TVs. Matsushita's Q3 plasma sales were disappointing, but the move to larger sizes -- note that Matsushita recently launched a 103" model -- should be a positive for Corning. Corning just announced that it would miss Q3 estimates due to excess customer inventory. William Trent says the entire flat panel market has been over-hyped. Seeking Alpha, by the way, has outstanding coverage of the flat panel stocks.

NEC Electronics, Seiko Epson Trim Losses by Cutting Expenses

  • Summary: Japanese electronics companies NEC Corp and Seiko-Epson reported earnings after the market closed in Tokyo today with both firms reporting narrower Q1 losses as a result of cost cutting and focusing on higher profit margin products. NEC was helped by strength in its microchips division. Although NEC's net loss only narrowed slightly to 6.09 billion yen, its operating loss dropped by more than 40% to 5.76 billion yen, while sales rose 13% to 165.24 billion yen. NEC is maintaining its full-year forecast but cited weaker than expected global demand for flat-panel TVs and a slowing PC market in the US as areas that affected its Q1 results. Seiko-Epson fared better despite lower sales as it narrowed its net loss to 5.68 billion yen from 7.05 billion yen y-o-y. Sales declined 5.3% to 322 billion yen but operating profit swung to profitability to 7 billion yen from a loss of 5 billion yen last year. Lastly, Advantest, a leading manufacturer of semiconductor test equipment which reported earnings yesterday had a 47% jump in Q1 net profit to 11.48 billion yen on a 15% increase in sales to 59.87 billion yen. Advantest is maintaining its full-year forecast.
  • Comment on related stocks/ETFs: NEC's stock trades in the US only as a thinly-traded ADR (NIPNY), but Seiko's doesn't, so the relevant question for US investors is the impact on the wider Japanese market. The Nikkei is still experiencing a lot of day-to-day volatility despite overwhelmingly positive earnings reports but it seems Thursday trading may have sparked a reversal with the N225 gaining 2% on the day. Since most Japanese firms report after the market closes, the impact of earnings announcements is not known until the next day of trading. ADR and ADS trading ahead of the reaction in Japan can swing either way. For instance, ordinary shares of Advantest (NYSE:ATE) gained 3.12% in Tokyo following its announcement after having lost 2.24% in the prior day's trading and its ADSs losing 1.79% . So far there have been some first-half and full-year upward revisions but given that analysts see Q1 forecasts as largely conservative that definitely leaves open the possibility of upward revisions coming this autumn. One area of concern to keep your eyes on is the mention by a number of Japanese firms, including NEC (NIPNY), of the state of the U.S. economy.

Lucent Earnings Tumble 79%; CEO Expects Fortunes to Improve

  • Summary: Lucent Technologies Inc. reported a 79% drop in profit and declining sales for its fiscal third quarter because of delayed spending by U.S. telecommunications operators. The N.J. maker of telecommunications gear said net income fell to $79 million, or two cents a share, in the period ended June 30 from seven cents a share during the year earlier period. In addition, sales fell 12% to $2.05 billion from $2.34 billion. Consensus estimates for the quarter had been for total revenue of $2.16 billion and EPS of $0.04. Lucent executives blamed shrinking sales on delayed spending by U.S. telecom carriers, which they said are assimilating their own merger wave. They expect operators to increase spending on network improvements to make Lucent's fourth quarter the year's best. Some analysts were cautious of such optimistic prognostications. "I would be a little bit worried that the fourth quarter will be a bit softer than they've hinted at," said Richard Windsor, a London-based telecom analyst with Nomura Securities.
  • Comment on related stocks/ETFs: For more on Lucent's recent quarter, see their conference call transcript.

Microsoft to Acquire Technology To Speed Patient Data to Doctors

  • Summary: Microsoft (NASDAQ:MSFT) said it would purchase healthcare software technology called Azyxxi, for an undisclosed amount. Azyxxi, which was developed by three physicians, gives doctors instant access to patient data, including X-rays and other diagnostic scans located at far away healthcare facilities. Microsoft will hire software creators Dr. Feied and Fidrik Iskandar, along with about 40 workers from its development team as part of the purchase agreement.

Glaxo Announces Breakthrough On Bird-Flu Vaccine; Net Rises

  • Summary: GlaxoSmithKline PLC announced its Q2 results and that it has produced an effective bird flu vaccine for humans. Glaxo's clinical trial of 400 people used a vaccine with a low level of active ingredient, or antigen, yet produced a strong immune response against the H5N1 virus in 80% of those who received it. Questions remain about how Glaxo will manufacture the vaccine in quantity and how effective an H5N1 vaccine will be if the virus mutates into a pandemic strain. But Glaxo CEO Jean-Pierre Garnier is beginning to speak with governements and plans to approach the Bill & Melinda Gates Foundation about providing it to poorer countries. Glaxo plans to charge £4 to £7 a shot, about the same as for a seasonal flu vaccine. Separately, Glaxo announced that Q2 revenue rose 11% to £5.81 billion and profit rose 14% to £1.32 billion ($2.43 billion), and raised its full year EPS growth guidance to 12% from the prior guidance of 10%. Deutche Bank estimates that the H5N1 vaccine could generate potential sales of $2 billion.
  • Comment on related stocks/ETFs: Glaxo's stock, which trades in the US as an ADR (NYSE:GSK), fell slightly after the company reported results as analysts were expecting stronger guidance. But if the DB analyst is right and the H5N1 vaccine could generate $2 billion in sales, that's a significant percentage boost to Glaxo's potential revenue. Glaxo's development of an effective H5N1 vaccine should also impact other pharma stocks that have run up on potential sales of Avian flu treatments. Potential shorts include Gilead Sciences (NASDAQ:GILD), which partners with Roche to produce and distribute Tamiflu, and Sanofi-Aventis (NYSE:SNY) which has been developing a competiting H5N1 vaccine. According to the WSJ article, "Two doses of Glaxo's vaccine, each containing 3.8 micrograms of antigen, achieved the 80% protection rate. By contrast, Sanofi-Aventis SA earlier this year said two doses of its vaccine, each containing 7.5 micrograms of antigen, achieved a 40% protection rate." The successful development of an H5N1 vaccine may also lead traders to unwind "Avian flu" short positions. Seeking Alpha has a category tracking the stock implications of Avian Flu.

WellPoint Profit Rises 34%, Aided By Cost Controls

  • Summary: Health insurer WellPoint Inc. (NYSE:WLP), the largest U.S. managed-care company by commercial enrollment, posted a 34% increase in second-quarter profit, citing disciplined front office management and the effects of a recent acquisition. Second-quarter net income rose to $751.2 million, or $1.17 a share, from $559.4 million, or 90 cents a share, in the year-earlier period. Revenue climbed 27% to $13.94 billion from $10.99 billion. The latest results include the operations of WellChoice Inc., acquired in December; the year-earlier results don't, which accounts for the seemingly enormous growth in profits and revenues. WellPoint increased its EPS estimate for FY 2006 to $4.74; in May, the projection was for earnings of $4.63 a share. The forecast assumes completion of the company's share-repurchase program in the third quarter, for which $399.6 million is authorized. Medical membership totaled almost 34.2 million as of June 30 -- short of some analysts' estimates -- an increase of more than 5.3 million members from 28.8 million a year earlier. The enrollment includes 4.8 million members gained from the WellChoice acquisition. WellPoint expects year-end enrollment of 34.5 million members, compared with a previous forecast of 34.8 million.

GM Beats Expectations, But Faces More Work

  • Summary: General Motors reported a $3.2 billion loss ($5.62/share) for the second quarter on a 12% rise in revenue (to $54.4 billion). The results included $4.3 billion in charges for a major buyout program to reduce its workforce, among other one-off charges. Cost cutting and strong sales of new SUVs led to the better-than-expected results, which should give CEO Rick Wagoner some breathing room to further implement his turnaround plan, and raise questions about the proposed Renault/Nissan partnership with GM. North American operations lost $85 million, a profit decline was seen in Asia, and growth was reported in Europe, Latin America and Africa. GM stock jumped 4.4% on the day to $32, the highest level since last September. The company now sees its 'early attrition' program reducing costs by $9 billion on a running-rate basis by the end of this year. GMAC, a long-running profit machine for the company, posted record net income of $898 million for the quarter, up from $817 a year ago.
  • Comment on related stocks/ETFs: Without the one-time items, GM earned $2.03/share, handily beating the 55 cents/share consensus analyst estimate. GM leads the Dow component stocks in performance this year, and yesterday's jump will only add to that. Jim Cramer quipped on his show last night that GM stock seems to have gone from 'uncool' to 'cool' overnight: 'Not long ago, you couldn't give away a GM share.'

Honda Posts 30% Jump in Profit On Lure of Fuel-Efficient Cars

  • Summary: Honda Motor Co.'s (NYSE:HMC) emphasis on fuel-efficient vehicles helped to lift its net profit 30% in their most recent quarter. With gas hovering around $3 a gallon in the U.S., the auto maker has seen strong demand there for its products reporting that sales in North America were 456,000 in the April-June quarter, an 8.6% increase from the year-earlier quarter. Those sales helped Honda post a net profit of 143.4 billion yen ($1.22 billion) in their recent quarter, up from 110.6 billion yen in the year-earlier period. Total sales in the quarter climbed 15% to 2.60 trillion yen, from 2.26 trillion yen the previous year. Toyota Motor Corp. (NYSE:TM), Japan's top auto maker by volume, will release its earnings next week. Analysts predict that Toyota, which also promotes its fuel-efficient cars in the massive U.S. market, will show equally strong results.
  • Comment on related stocks/ETFs: For more on Honda's most recent quarter, see Steven Towns' Honda Reports Another Record Quarter, Raises FY Sales Forecast. To understand why analysts at UBS feel Japan's 'Big 3' automakers will continue to turn big earnings, read UBS Starts Japan's Big-3 Auto at "Buy", also by Steven Towns.

ConocoPhillips Posts 65% Jump In Quarterly Profit

  • Summary: ConocoPhillips's (NYSE:COP) reported successful second-quarter earnings yesterday to the tune of $3.09 EPS, up from $2.21 a share during the year earlier quarter. Revenue was $47.1 billion, up 13% from $41.8 billion in the year-earlier quarter. ConocoPhillips's earnings suggest that other major American oil producers will also report earnings that outperform consensus estimates. Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) both report earnings in the coming days. ConocoPhillips's earnings come as Americans continue to dig deeper into their own incomes to afford retail gasoline prices that top $3 a gallon on avergae. The company's results, and expected similarly robust profits from Exxon Mobil and Chevron are likely to fuel political anger toward the big oil producers. In response, ConocoPhillips's chairman and ceo James Mulva, said in a statement that the company has an $18 billion capital-spending plan for 2006, a 50% increase from 2005 and triple what it spent three years ago. In another positive, ConocoPhillips said earnings from exploration and production jumped 71% while profits from refining and marketing rose 54%. ConocoPhillips's results beat Wall Street expectations as analysts surveyed by Thomson Financial expected just $2.81 a share. Shares responded by jumping $1.15, or 1.70% in trading yesterday. They picked up another $0.17 after hours.
  • Comment on related stocks/ETFs: For more on ConocoPhillips's recent quarter, read their conference call transcript. For more on earnings expectations across the oil production sector, read Rob Black's recent Energy Stock Report.

EMI Won't Pursue Its $4.6 Billion Bid For Warner Music

  • Summary: EMI Group has abandoned its plans to buy Warner Music Group for up to $4.6 billion. EMI and Warner, the world's third- and fourth-largest music companies by market share, have been attempting to purchase each other since May, the latest stage of a multiyear effort to merge the two. Two weeks ago, a European Court questioned the anti-trust viability of another large music merger, between Sony Music and BMG, which joined forces in 2004 to become Sony BMG Music Entertainment. That ruling hampered the EMI-Warner merger discussions. The two companies are struggling to compete with industry leaders Vivendi Universal and Sony BMG, and could cut costs by up to $400 million if the merger were to take place.
  • Comment on related stocks/ETFs: Incrementally positive for Vivendi (NYSE:V) and Sony (NYSE:SNE). Warner Music was sold by Time Warner (NYSE:TWX) in 2004 to a group of private equity investors (led by Edgar Bronfman Jr.) who later took 23% of it public and still own the rest of the company; WMG dropped about 2.5% on the news yesterday. See the Warner Music Group's latest conference call.

AHEAD OF THE TAPE: Bellwether Blues

  • Summary: 3M and United Parcel Service have seen sharp stock falls recently on profit warnings (3M) and poor results and outlook (both companies). 3M and UPS are highly exposed to gyrations in the world economy, a fact investors may have forgotten amidst steady growth in their core businesses over the past few years. The damage suffered by these two stocks may indicate a more general recognition on the part of investors that the world economy is more risky than it has been for some time.
  • Comment on related stocks/ETFs: Analysts from Birinyi illustrate that UPS is now more oversold than it's ever been, and that 3M is one of the worst-performing Dow components this year.

HEARD ON THE STREET: Reality Check: ADP Aims To Beat Bad Publicity

  • Summary: Paycheck-processing firm Automatic Data Processing (NASDAQ:ADP) is trying to end a bad PR streak: it admitted earlier this month that it was duped into revealing confidential client info, and its much-publicized report on jobs, designed to predict official government statistics, came out nowhere near the official numbers. Yet ADP stock trades at an attractive 22x trailing multiple, and the company has a growing cash horde that keeps investors interested. Its 30% market share in paycheck processing leads nearest competitor Paychex by 20%, and the company regularly gains 21-29% of its profits from short-term interest payments on corporate deposits leading up to payday. Its brokerage business, facing high competitive pressures, has hamstrung overall growth; some analysts believe ADP should sell this unit.
  • Comment on related stocks/ETFs: ADP is on Lehman Bros.' 'Uncommon Values' portfolio for this year. See the company's latest conference call transcript.

TRACKING THE NUMBERS: Firms Ponder What Constitutes Cash

  • Summary: The Big Four accounting firms have expanded the category of 'not-cash' to stem a recent corporate trend of considering certain less-liquid high interest investments 'cash and equivalents' on balance sheets. Higher cash holdings can mean favorable treatment for loan terms and attract greater investor interest. Corporate finance managers are fighting the move, which focuses on auction-rate securities and variable-rate demand notes as two types of assets that should not be considered cash equivalents. While deep markets exist for these securities, their maturity of up to 30 years is problematic, according to the reformers, led by PricewaterhouseCoopers.

IPOs: IPO for Outsourcing Firm WNS Increases 23%

  • Summary: Shares of Indian outsourcing firm WNS Ltd. (NYSE:WNS) jumped 23% on their first day on the NYSE, the best start from an initial public offering this month. The Mumbai-based company closed yesterday at $24.50, well above its IPO price of $20. In another sign of just how keenly sought the stock was, the offering also was the first deal this month to price at the high end of its targeted range. The five other IPOs so far in July either priced at the low end or below underwriters' expectations ending trading nearly flat with their offering prices. Private-equity firm Warburg Pincus, which acquired a controlling stake in WNS in May 2002, controls about 54% of the company after the IPO, which included a total of 11.2 million American depository shares.
  • Comment on related stocks/ETFs: For more on the WNS IPO, read Abbi Adest's July 24th This Week's IPOs: Chart Industries, CHG Healthcare Services, GeoMet Inc., and WNS Ltd.

Notable articles on Seeking Alpha today: Today's earnings schedule and estimates. Latest conference call transcripts from: Linear Technologies, Vertex Parmaceuticals, GSI Commerce, Silicon Image, Cirrus Logic, Baidu.com, Cadence Design Systems, AsiaInfo Holdings, NAVTEQ, Symantec, Akamai, ConocoPhillips, Telefonica Moviles, Boeing, Hess, Monster Worldwide, Martha Stewart Living Omnimedia, Biogen, Corning, Saifun, Lucent, Lattice Semiconductor, QLogic, Plantronics, Fiserv, Xilinx, Getty Images, and Flextronics. Jim Cramer's latest picks. Herb Morgan makes tactical adjustments to his ETF portfolio.

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Source: One Page Annotated WSJ Summary, Thursday July 27th