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BREAKING NEWS: U.S. Economy Grew at 2.5% Rate In 2nd Quarter, Commerce Reports

  • Summary: The Commerce Dept. reported the U.S. economy saw 2.5% GDP growth in the second quarter, with weakened consumer spending, residential and business investment growth. The GDP figure was significantly lower than many leading economists had predicted. The price index for personal consumption rose 4.1%. The PCE price gauge excluding food and energy climbed 2.9%.
  • Comment on related stocks/ETFs: The Fed has been hoping to slow growth in this manner to stem inflation; the figures may make a Fed rate hike next month less necessary.

New-Home Sales Fall, Business-Spending Pace Eases

  • Summary: (1) The Census Bureau reported that sales of new homes fell 3% in June to 1.13 million units, and sharply revised down its estimate for May from 1.23 million units to 1.17 million units. Sales were down 11.3% in the Northeast, in the Midwest and 6% in the South, but were up 8.2% in the West. Inventories of unsold homes at end-June hit a record 566,000 units, a 6.1 month supply at current sales rates, down from 6.4 in February. (2) The Commerce Department reported that new orders for durable goods exclusing defense and aircraft grew only 0.4% in June, sharply lower than May's 1.3% growth. Orders for defense capital goods were up 51.2% and aircraft orders rose 8.8%, so total durable orders rose 3.1%. (3) The Labor Department reported that claims for unemployment benefits fell by 7,000 to 298,000 in the week ending July 22.
  • Comment on related stocks/ETFs: The Census Bureau's new homes sales data, showing a decline of 3% in June, is far worse than the June existing homes sale decline of 1.3% reported yesterday by the National Association of Realtors [NAR], though the NAR's statistic for unsold home inventory is worse than the Census Bureau's at 6.8 months versus 6.1 months. The WSJ article quotes two views on the housing market decline: a Global Insight economist says the slowdown has decelerated in recent months and is more gradual than anticipated, while JP Morgan's US economist says "In the last two or three months, things have come down rapidly." The lousy Census Bureau data for June unsold home inventories suggests continuing weakness for the homebuilders; see Philip Frank on the short case for Centex (CTX). The homebuilder ETF (XHB) has been a wonderful short play since early April; David Fry comments on the chart.

Daimler Profit Rises Despite Drag From Chrysler Arm; VW Net Gains

  • Summary: German car makers DaimlerChrysler AG (DCX) and Volkswagen AG reported second-quarter progress with DaimlerChrysler reporting net profit of €1.8 billion, or €1.77 a share, compared with €737 million, or 73 European cents a share, in the year-earlier period. The company reported that it was sticking to its full-year forecast for operating profit "in excess of" €6 billion. Revenue was basically unchanged at €38.6 billion. But DaimlerChrysler's Chrysler arm reported a second-quarter plunge in operating profit and predicted a third-quarter loss, in a sign that the U.S.-based unit isn't escaping the problems plaguing its Detroit-based competitors. Volkswagen reported a loss of €84 million in North America in the second quarter, compared with a loss of €272 million a year earlier. It is hurt by the weak U.S. dollar, which causes cars made in Germany to be more expensive in the U.S. Overall, Volkswagen said second-quarter net profits more than doubled, to €859 million from €333 million, thanks to a gain of €796 million from the sale of its Europcar car-rental subsidiary earlier this year. Revenue rose 8% to €26.56 billion.

Exxon Profit Leaps, Adding Fuel to Political Fire

  • Summary: Exxon Mobil Corp. (XOM) reported its second-highest quarterly profit ever yesterday. The world's biggest publicly traded oil company by market value said its second-quarter net income was $10.36 billion, up 36% from $7.64 billion a year earlier. EPS was up 43%, to $1.72 a share from $1.20 a year earlier, due in large part to share buybacks. Estimates had been for $0.64 per share. The second-quarter result was among the highest quarterly profits for any publicly traded U.S. company ever, and slightly less than Exxon's best-ever profit of $10.71 billion in last year's fourth quarter. Revenue for the latest quarter rose 12% to $99.03 billion. Shares of Exxon fell 13 cents, or less than 1%, to $66.47 in trading yesterday.
  • Comment on related stocks/ETFs: See the full ExxonMobil conference call transcript from yesterday. The Oil Service ETF (OIH) fell slightly yesterday, but is up sharply for the week. Chad Brand has argued that XOM and its peers are still cheap vs. the commodity. Chevron (CVX) reports this morning, as oil inches even higher following the Venezuelan oil minister's statement that OPEC is 'powerless' to stop higher prices.

Siemens Earnings Soar; Sales Rise 14%

  • Summary: German conglomerate Siemens AG (SI) reported that its F3Q06 net profit doubled, with results no longer dragged down by its mobile-phone business. Net profit rose to €792 million ($1.01 billion) in the quarter ended June 30 from €389 million a year earlier. Sales at the Munich engineering and electronics company rose 14% to €21.17 billion from €18.58 billion while new orders climbed 14% to €22.44 billion. Despite a solid quarter, shares fell $2.07, or 2.53% on the NTSE yesterday.
  • Comment on related stocks/ETFs: Siemens gained significant market share in the U.S. and European telecom and wireless businesses during the last quarter by pairing up with companies such as Sprint (S) and Nokia (N) to provide networking equipment. William Trent has regularly reported on these developments, most recently in his pieces Sprint and Time Warner's Quadruple Play and More Consolidation in Telecom Equipment As Nokia and Siemens Announce $31.6 Billion Deal.

Aetna's Net Is Stunted By Rising Cost Pressures

  • Summary: Aetna Inc. (AET) reported trouble for the second straight quarter in raising premiums quickly enough to keep up with rising medical costs. The disclosure surprised investors and sent the company's stock tumbling 17%. Investors are concerned that increased competition for health-plan enrollment is causing Aetna and other insurers to bid too low for new business, eroding their profit margins. Three months earlier, Aetna's stock fell 20% on similar fears after its first-quarter earnings were announced. Aetna said net income slipped 1.4% from the year-earlier period to 67 cents a share. The latest results included a debt-refinancing charge and the write-off of an insurance recoverable related to a prior-year legal settlement. The drop in earnings came despite an increase in revenue, which rose 14% to $6.26 billion. Shares of other managed-care companies moved lower as well, with UnitedHealth Group (UNH) down 2.1% and Cigna Corp. (CI) sliding 8.4%. Cigna reports its second quarter on Wednesday; UnitedHealth reported higher quarterly profits last week.

Sony Posts a Profit as Stringer Continues With Turnaround Plan

  • Summary: Sony's Q2 results suggest that CEO Howard Stringer's turnaround plan may be succeeding. Sony's electronics division, which accounts for three quarters of its revenue, turned to a profit versus a loss a year ago. Revenue rose 11% to 1.74 trillion yen due to strong demand for Cybershot digital cameras, Vaio laptop PCs and broadcast equipment. Net profit of 32.3 billion yen ($277.7 million) compared to a 7.3 billion yen loss a year earlier. Sony's strongest growth was in movies, driven by the Da Vinci Code, with revenue up 42%. Financial services revenue fell 19% due ot losses in corporate bond investments. Sony's gaming business was down 29%. Sony plans to launch its PlayStation 3 game console in November, when Nintendo will also release its new Wii console. Microsoft's Xbox 360 is already on the market.
  • Comment on related stocks/ETFs: More detail on Sony's results are in Steven Towns' report. Sony's electronics results, for example in digital cameras, are consistent with earnings reports from Canon (CAJ) and Mastushita (MC). Canon raised its 2006 forecast for digital camera sales by 18%, and Matsushita's sales of Panasonic digital cameras almost doubled in Q1. These results seem to support the argument made in yesterday's WSJ article that growth has moved from enterprise technology to consumer gadgets, with strong implications for all the stocks involved. One interesting point to note if this is correct: while Apple dominates the music-gadget market and Microsoft is now a strong player in game consoles, the other major consumer electronics players are Japanese companies, not US companies. That contrasts with enterprise software and hardware, which are dominated by US companies.

Comcast Posts 7% Profit Rise Amid Strong Web-Phone Sales

  • Summary: Comcast Corp.'s Q2 results: Revenue up 11% to $6.23 billion, net income was $460 million versus $430 million a year earlier. EPS of 0.22 versus $0.19 a year earlier. Net new voice service subscribers were 227,000, including 306,000 new Internet phone subscribers versus 15,000 a year earlier, and a loss of 79,000 traditional voice subscribers. Comcast now forecasts 2006 new voice subscribers of 1.3-1.4 million versus its prior prediction of 1 million. Comcast also added 305,000 new cable Internet service subscribers, up from 300,000 last year. Average revenue per broadband customer was $43.78 during the quarter, up from $43.35 a year earlier.
  • Comment on related stocks/ETFs: Comcast's stock (CMCSA) has performed well, despite the fact that Verizon and AT&T are taking share in the broadband market through aggressive pricing. Jim Cramer correctly points out that, unusually, both sides in this price war seem to be winning. The key for the future performance of the telco stocks -- Verizon (VZ) and AT&T (T) -- is the cable companies' voice rollout. Internet voice chat such as Skype, AOL Instant Messenger and Yahoo Messenger don't pose an immediate threat to the telcos, because most customers have unlimited-use monthly plans. That means that telco voice revenue is only threatened by line cancellations, not reductions in minutes used; and Skype isn't enough to get someone to cancel their regular phone line. The strong Comcast digital voice numbers, however, suggest that AT&T and Verizon now have something to worry about. Comcast's transcript is a must-read for anyone interested in the future of voice service; look particularly at Brian Robert's comments about the 45% sequential increase in Comcast's digital voice subscribers. On Comcast's stock (CMCSA), remember that the company will gain by the addition of systems acquired from Adelphia. Resources: press release, slide presentation in PDF, webcast of conference call (requires registration), full conference call transcript ("RGU" in the call refers to "revenue generating units"); more on Comcast's voice push from John Bethel.

NTT DoCoMo's Net Falls 21% On Costs Related to 3G Services

  • Summary: NTT DoCoMo (DCM), the leading cellular phone service provider in Japan with 55% market share and slightly over half of its 51-million plus subscribers on 3G, reported a 21% drop in net income y-o-y for the first quarter ended June 30th. The decrease is attributed to higher costs associated with enhancing its 3G network and promoting 3G service. Net income came in at 163.51 billion yen ($1.4b) but note that in Q1 last year DoCoMo benefited from a one-off gain of 62 billion yen ($530m) from selling Hutchison 3G UK Holdings Ltd. shares. DoCoMo's revenue increased by 2.7% y-o-y to 1.219 trillion yen ($10.4b). DoCoMo said it is maintaining its full-year earnings projections with net income estimated at 488 billion yen ($4.2b) and revenue at 4.838 trillion yen ($41.4b). In an effort ward off tougher competition DoCoMo is focusing more on improving its handsets and offering innovative functions such as its "osaifu-keitai" or wallet phone service.
  • Comment on related stocks/ETFs: After delving further into NTT DoCoMo's (DCM) earnings the 21% fall in net income is not as bad as it seems. First, there is the one-off gain in Q1 last year. Second, if DoCoMo weren't spending money to market and expand upon its 3G services there would be a lot more reason for concern. Nevertheless, Japanese analysts are worried that DoCoMo will continue to lose incremental market share to aggressive number two rival KDDI Corp (Tokyo: 9433). This is a legit concern but not significant enough to completely shun DoCoMo shares, which as of late have been trading at or near all-time lows. It is harder for DoCoMo to put up as flashy numbers because of its huge size. Also, DoCoMo's industry metrics are still very competitive, if not the best in the industry. Lastly, the threat from Softbank Corp (OTCPK:SFTBF), which bought Vodafone Japan earlier this year -- the number three player with approx. 17% market share -- is not as serious as initially thought. DoCoMo could still trade even lower as investors are very standoffish with number portability becoming available this fall. See Steven Towns' Number Portability Spooks Investors in Japanese Cellular Co's. And look for value investors to move in as DoCoMo has been buying back shares and its yield is looking increasingly attractive.

XM Loss Widens, And User Outlook Is Lowered Again

  • Summary: XM Satellite Radio reported a net loss of $231.7 million (87 cents/share), including $105 million in charges, mostly from debt restructuring. Revenue grew 82% y/y to $227.9 million. XM cut its subscriber estimate to a year-end total of 7.7 million (previously guided to 8.2 million, and at beginning of 2006, guided to 9 million). XM CEO Hugh Panero called retail sales 'unacceptable' on the conference call. Churn rose to 1.83% from 1.42% a year ago, and new car activations fell to 54.5% from 57.6%. The company's goal of reaching break-even on cash flow from operations is less likely to be met given the lowered subscriber estimates. After falling in early trading, XMSR stock rose 5.1% on the day, a move analysts attributed to short covering and bad news priced into the share.
  • Comment on related stocks/ETFs: The top and bottom line numbers slightly beat analyst estimates. Read the full XM Satellite Radio conference call from yesterday. The big question for the sector now is if Sirius (SIRI) is taking market share from leader XM, or if the whole market has fundamentally weakened. Sirius reports earnings on August 1.

Raytheon, Northrop Post Jump In Profits, Raise 2006 Outlooks

  • Summary: Buoyed by demand for military electronics and information-technology services, defense contractors Raytheon Co. (RTN) and Northrop Grumman Corp. (NOC), reported higher second-quarter profits and raised their earnings outlooks for 2006 while L-3 Communications (LLL), reported a loss because of charges, including one related to the backdating of stock options. Quarterly profit rose 54% at Raytheon and 17% at Northrop Grumman. Raytheon said net income was $310 million, or 69 cents a share, compared with $201 million, or 44 cents a share, in the year-earlier quarter. Sales were $5.71 billion, up 5.6% from $5.41 billion a year earlier. Northrop reported net income of $430 million, or $1.23 a share, compared with $367 million, or $1 a share, in the year-earlier period. Sales fell 2.6% to $7.60 billion from $7.81 billion. Meanwhile, L-3 said second-quarter net fell 58% to $49.8 million, or 40 cents a share, from $119.4 million, or 99 cents a share, during the year-earlier period. The company, reported that quarterly sales rose 49% to $3.08 billion from $2.08 billion a year earlier.
  • Comment on related stocks/ETFs: According to Enzio von Pfeil, Raytheon should continue to have an upside based on U.S. defense cooperation with Japan. Read his piece Raytheon to Benefit from New U.S.-Japan Defense Cooperation to find out more.

Mazda's Net Profit Soars On Auto Sales in U.S., Europe

  • Summary: Mazda reported a surge in Q1 profit to 6.61 billion yen ($57m) from 419 million yen ($3.6m) last year. Sales were driven by its minivans and sport convertible models in the U.S. and Europe. A weak yen also benefited Mazda since overseas sales converted to yen are more profitable. Mazda was further helped on a y-o-y comparative basis since last year it booked a one-off loss of 21 billion yen ($180m). Mazda's sales increased in Q1 by 9.5% to 734.3 billion yen ($6.3b). It is maintaining its full-year financial forecast with expectations of record net profit of 75 billion yen ($642m) on sales of 3.1 trillion yen ($26.5b) and record operating profit of 135 billion yen ($1.15b).
  • Comment on related stocks/ETFs: Mazda Motor Corp (Tokyo: 7261) is not traded in the U.S. but it is a competitor in the global auto markets nonetheless. Its Q1 earnings show further evidence that the domestic auto market in Japan is of lesser importance and competition will further intensify in overseas markets. Japanese analysts seem rather upbeat on Mazda's prospects. Mitsubishi UFJ Securities gave Mazda its highest rating and a target share price with 20% upside from its Friday close of 743 yen.

Intel Overhauls Its PC Chip Line, Pressuring AMD

  • Summary: Intel Corp. introduced 10 new chip models in its Core 2 Duo family. CEO Paul Otellini called the Core 2 Duo chip "the best microprocessor we've ever built". In test run by trade publications, Intel's new chips beat AMD's on most performance tests. The $999 high-end version for desktop gaming PCs is available now, and other desktop versions, ranging in price from $183 to $530, will be available late August. Notebook versions will be shipped to systems manufacturers in September. VP Sean Maloney said Intel is planning a major increase in advertising to promote the new chips. Intel's price-cuts of the chips replaced by Core 2 Duo are leading to market share gains against AMD. An analyst with Current Analysis estimates that Intel regained 13 percentage points of market share in the laptop market in the three months to end-June.
  • Comment on related stocks/ETFs: This news is already priced-in to the stocks of Intel (INTC) and AMD (AMD), particularly because of the detailed discussion of these issues on the recent conference calls from Intel (see transcript) and AMD (see transcript). The added information in the WSJ article is that Intel plans to increase its advertising budget significantly, implying that increased marketing may help PC sales and the stocks of Dell (DELL), HP (HPQ), Gateway (GTW) and the other stocks in the PC "foodchain". Remember, though, that Intel always invests in marketing major new product releases, and the delay in the release of Windows Vista until early 2007 may reduce the impact of an advertising push.

Wynn Signs Up Vegas Icon Binion As a Macau Draw

  • Summary: Casino magnate Steve Wynn is sending Jack Binion, a 69-year old casino management veteran from Las Vegas, to head up Wynn Resorts' new operation in the Chinese gambling center of Macau. Wynn Macau, the second casino run by a U.S. company in the region after Las Vegas Sands', is scheduled to open Sept. 5.
  • Comment on related stocks/ETFs: Enzio von Pfeil says Wynn and Sands will be big winners in Macau, but Sands has sold off recently after announcing they want to put another $8 billion into their Macau operation. David Riedel of Riedel Research Group thinks there may be oversupply in Macau.

STEVE BALMER INTERVIEW: An Imprint All His Own

  • Summary: In this interview with the Journal, the first since Bill Gates announced plans to step down from day-to-day management, Microsoft CEO Steve Ballmer asserts 'the company is brighter looking forward even than looking back.' Ballmer dismisses as 'random malarkey' claims that Microsoft is having a hard time hiring talent on either the tech or business end, stating its attraction, retention and compensation are tops. Looking forward, he sees online services as its key distribution model and Microsoft's 'core,' while open source software is its new competition. On the matter of growth through acquisitions, Ballmer states that 'we've not been able to close the loop and figure out how large acquisitions actually create shareholder value.'
  • Comment on related stocks/ETFs: Given Ballmer's acknowledgment of the centrality of online services and open source software, can the behemoth tack quickly enough to stay competitive? Carl Howe raises serious doubts, drawing an instructive comparison to IBM in the '70s. Jason Wood provides key takeaways from Microsoft's recent earnings report; see the conference call transcript.

TRACKING THE NUMBERS: For Short Sellers of GM, A Trip to the Scrap Heap

  • Summary: 17% of General Motors shares were sold short at the beginning of 2006, up from 10% five months before, and any shorts who haven't covered are now sitting on 60% losses. GM has been the best performing Dow component stock, defying the shorts as cost-cutting and a tightened balance sheet have attracted new investors. Some hedge funds short GM bought GM bonds as a hedge, which lessened the blow, as the bonds are up about 15% in recent months. Short interest in GM is now down to 14%. Both bulls and bears recognize, however, that the runup in GM stock is not indicative of any fundamental improvement in GM's ability to build popular products in a high-priced fuel environment. Some new shorts came in following this week's earnings report, which acknowledged the company continues to lose market share.
  • Comment on related stocks/ETFs: John Bethel has been an outspoken long on GM since April of 2005, claiming 'GM working out as an investment does not require substantial improvement in its North American car and truck business.' So far, he's right on. See another bullish take on GM from Glenn Curtis.

AHEAD OF THE TAPE: Growing Anxiety

  • Summary: Ahead of today's official report, economists have ratcheted up estimates on second quarter GDP growth to 3.2%, an indication that the economy may not be slowing as much as many predict. Stronger than expected consumer spending, lower imports, and higher durable goods inventories are contributing factors to the raised estimates. Eyes are now on the inflation element in today's report, which may give the Fed reason to raise rates in August, dulling any enthusiasm the GDP figure may bring Wall Street.

SMALL STOCKS: Georgia Gulf and Biosite Decline; CryoCor, Wolverine Tube Surge

  • Summary: Small stocks dove and underperformed their larger counterparts as the chemicals and biotech sectors faced heavy selling pressure. The Russell 2000 index of small-cap stocks lost 1.3% while the S&P's SmallCap 600 index lost 1.2%. russell 2000 The commodity-chemicals group slid after large-cap Dow Chemical (DOW) reported a drop in second-quarter net income because of higher costs for energy and raw materials. Wellman (WLM) lost 7.4%. Small biotech stocks declined, following the lead of Biosite (BSTE), which reported a 43% decline in its second-quarter net income because of the cost of settling a patent suit and higher research and administrative costs. Biosite lost 5.35, or 12%, to 39.75. In terms of individual performers, Skechers USA (SKX) fell 15% after the company's second-quarter results came in below analysts' expectations. Blockbuster (BBI) fell 12% after reporting a weak second quarter. Checkpoint Systems (CKP) fell 21% after reporting that second-quarter net income tumbled 45%. In gainers, wolverine Wolverine Tube (WLV) jumped 16% after the copper-tube maker swung to a second-quarter profit, reflecting strong wholesale-market conditions.
  • Comment on related stocks/ETFs: See more on Biosite, and Blockbuster's latest conference call transcript. And don't confuse Checkpoint Systems (CKP) with Check Point Software Technologies (CHKP)!

Notable articles on Seeking Alpha today: Today's earnings schedule and estimates. Steven Towns' overview of the big Japanese companies' earnings. Shlomo Greenberg on ClickSoftware and Zoran. Asif Suria on investing in WiMax stocks. Latest conference call transcripts: eLong, RealNetworks, Sohu.com, PortalPlayer, Synaptics, THQ, Sierra Wireless, Digital River, McAfee, Audible, Newmont Mining, Wendy's International, Telefonica, Agnico-Eagle Mines, The Knot.com, Southern Company, ExxonMobil, TheStreet.com, Celgene, Taiwan Semiconductor, Millennium Pharmaceuticals, XM Satellite Radio, Compania de Minas Buenavenura, Questar, BT Group, Alcatel, Comcast, Blockbuster, Sony, Tellabs, NCR. A contrarian bullish view on Ford, but some potential corporate governance issues with the stock. Canon's blow-out quarter. Shlomi Cohen says HP paid up richly for Mercury. Track transcripts here and earnings reports here. Did you notice we changed the look of Seeking Alpha's article pages and stock pages? We'd love to hear your feedback (comment below).

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Source: One Page Annotated WSJ Summary, Friday July 28th