One Page Annotated WSJ Summary, Wednesday August 2nd

by: David Jackson
David Jackson
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Breaking News: Time Warner Swings to a Profit; AOL to Give Away Email Accounts

  • Summary: Time Warner's Q2 results: Revenue up 1.2% to $10.71 billion. Advertising revenue up 11% to $2.24 billion. Net income of $1.01 billion. EPS $0.24. Free cash flow for H1 was over $2.6 billion. CEO Dick Parsons said that cable, movies and network TV delivered "standout operating performances" and AOL did better than expected. The company also confirmed that AOL will give away email accounts and content for free starting September, and announced that it would buy back $15 billion of stock by the end of 2006 and the rest of its $20 billion buy-back program in 2007.
  • Comment on related stocks/ETFs: Time Warner's Q2 revenue of $10.71 billion missed the consensus estimate of $10.99 billion, though EPS of $0.24 beat the consensus of $0.19. AOL's decision to give away its content for free has already been widely publicised and is therefore priced in to the stock. The speed of the decision to do this will probably have more impact on the competitors who now need to compete more for free web-based email subscribers: Yahoo (NASDAQ:YHOO), Google (NASDAQ:GOOG) and Microsoft's (NASDAQ:MSFT) MSN. You'll be able to read the full TWX transcript as soon as it's up here. And for entertainment value, here's a discussion of Steve Case's apology for the AOL-Time Warner merger.

MSN Gets Strong Start In Race to Win Web Video Ads

  • Summary: Microsoft Corp.'s MSN has a strong position in Web video ads, ahead of Google and Time Warner's AOL and behind only Yahoo, in contrast to its almost non-existent market share in the pay-per-click and banner ad market. MSN spent heavily in recent years to acquire Internet rights to programming from major TV networks, and is strongest in news clips via a 99 year deal with General Electric's NBC. Microsoft recently signed a deal to license episodes of the Fox comedy "Arrested Development" for the next three years. Yahoo, in contrast, has focused on its own video content, while AOL carries content from Time Warner's Warner Bros. and cable channels Nickelodeon and the History Channel. The popularity of YouTube, which doesn't insert ads into video uploaded to its site but soon plans to, has forced its competitors to carry user-uploaded video on their sites as well. Google has stumbled in the video ad market by offending content producers by giving away transcripts and still images, and suffers from the challenges of video search. AOL has acquired a couple of video search comanies and expects its video search to be on par with its text search next year. Yahoo has allowed users to upload descriptions of their videos to aid search. While video ads currently comprise only 2.3% ($385 million) of the total online advertising market, they are forecast to rise in value at double the rate of the overall ad market to $2.35 billion by 2010 according to eMarketer. A 30 second video ad commands the same price as a 30 second ad on ABC's hit show "Desparate Housewives" -- about $25-30 per 1,000 viewers. 80% of online video ad inventory was sold out in 2005, and demand is expected to rise five-fold in 2007, faster than supply.
  • Comment on related stocks/ETFs: Incrementally negative for Google (GOOG), positive for Microsoft (MSFT) and Time Warner (NYSE:TWX); neutural for Yahoo (YHOO). Positive for Internet content companies that have announced expanded video offerings including CNET (NASDAQ:CNET) and (TSCM). (Full disclosure: short TSCM at time of writing.)

Mexico's Biggest Oil Field Sees Decline

  • Summary: Crude-oil production at Mexico's Cantarell oil field, the country's biggest, is falling far more quickly than predicted by the country's state oil monopoly. Output, which was above two million barrels a day under two years ago has dropped from 1.92 million barrels a day in January to 1.74 million a day in June. That compares with the official prediction by Petróleos Mexicanos that production would decline to a daily average of 1.9 million during 2006. Such a drop is bad news for the global and U.S. oil markets. With the U.S. trying to reduce its dependency on oil from the Middle East, a strong decline in Mexican production, which currently supplies the U.S. with 8% of its crude, could spell increasingly high prices and an even greater dependency on unstable Middle Eastern monarchies.
  • Comment on related stocks/ETFs: For a related article on Venezuela's state-run oil monopoly PDVSA, see my summary of yesterday's WSJ piece Hugo Chávez' Reforms Mean a Severe Reduction in State-Run PDVSA's Daily Output.

How California Failed in Efforts To Curb Its Addiction to Oil

  • Summary: California's effort to convert some significant portion of its cars to run on alternative fuels has largely failed to date -- a case study in the challenges facing this process. Despite its pursuit of methanol, natural gas, electricity and hydrogen as methods of curbing gasoline use, even environmentally-conscious Californians haven't overcome the big obstacles: lack of infrastructure, performance shortcomings, and higher costs. Oil and auto companies have worked within the state's pollution limits, and the state hasn't found the means or model to promote broad adoption of alternative fuels against the oil/auto lobby, despite an effort with methanol in the '80s and natural gas in the '90s. Yet the hybrid market in California is the largest in the nation (26% of the total), and the question is if today's $75/barrel oil will push a renewed effort. Heavy ethanol use, however, could clash with the state's clear-air laws. An initiative is on the November California ballot to tax oil extractors heavily and fund ethanol and other alternative energy businesses with the proceeds. GM is among the (unlikely) promoters of E85 in California.
  • Comment on related stocks/ETFs: Paradoxically, this article is strongly positive for the ethanol stocks, because it shows that demand for ethanol from California could be a lot higher, despite the fact that the price of ethanol is already high and supply can't keep up with demand. See the earnings results just reported by Archer-Daniels Midland (NYSE:ADM). A heavy tax on the oil companies would incrementally hurt ExxonMobil (NYSE:XOM), Sunoco (NYSE:SUN) and Chevron (NYSE:CVX).

Archer-Daniels' Profit Surges, Fueled by Demand for Ethanol

  • Summary: Archer Daniels Midland Company reported fiscal 4Q earnings of $410.3 million (62 cents/share) -- over twice last year's earnings for the period. Soaring demand for ethanol has turned it into a major cash cow for the company, though ADM still derives only a small portion of its revenue from ethanol. ADM's oil seeds unit was also particularly strong. ADM is the nation's largest ethanol producer -- contributing about 1 billion of the 4 billion gallons produced. The federal government's new law requiring oil companies to use some alternative fuels to make fuel has brought a new wave of demand to the ethanol market, driving prices higher.
  • Comment on related stocks/ETFs: Investors interested in exposure to the ethanol market are presented with a bit of a dilemma on ADM -- though it's the biggest player in that market, its other agricultural divisions mean it's far from a pure play. ADM's results should bode well for straight ethanol stocks like Pacific Ethanol (NASDAQ:PEIX) and The Andersons (NASDAQ:ANDE). Prefer more diversification? See components of the PowerShares WilderHill Clean Energy ETF (NYSEARCA:PBW).

Big Three Struggle As Toyota Beats Ford in U.S. Sales and Ford to Review Its Ailing Brands, Explore Alliances and GM Says Sale Of GMAC Faces Possible Delay

  • Summary: For the month of July, Toyota Motor Corp., grabbed the number two spot in the U.S. for sales for the first time ever, overtaking Ford Motor Co. High gasoline prices don't seem to be hurting the likes of Toyota and Honda Motor Co., the latter, which also achieved a milestone in taking the number three spot away from DaimlerChrysler. Toyota's July sales increased 11.7% y-o-y to 241,826 vehicles, while Honda's increased 6%. Ford on the other hand had a disastrous month in which sales of its best-selling model line, the F-series fell 45.6% y-o-y. Overall, Ford's sales were down 34.3% to 239,989 cars and trucks. General Motors Corp. said its results were better than expected even though sales dropped 22.5% to 406,298 vehicles, led by a 28.4% fall in SUV and truck sales. DaimlerChrysler didn't fare any better with a 34% drop in sales in spite of a 4% increase for its Mercedes-Benz unit. Nissan continues to struggle due its dearth of new models as its sales dropped 19.5%. Among European brands only VW and Porsche were able to increase sales, at 5% and 12%, respectively. Autodata Corp. said the U.S. auto market as a whole saw sales fall 17.4% versus last year because of the heavy promotional discounting the Big-3 used to boost demand last year. Poor July sales may have been the final straw in forcing Ford management to stop the bleeding. Ford is now said to be hiring a new strategy advisor in order to review its ailing brands such as Jaguar and consider asset sales or broader alliances. Ford will be hiring former investment banker Kenneth Leet, who has led M&A teams at Goldman Sachs and Bank of America. His first priority is the Jaguar brand and he'll be reporting directly to Ford Chairman & CEO Bill Ford. A person close to the matter said the hiring was initiated by Mr. Ford with backing by the board of directors. And the bringing in of an outsider was "accelerated" by the three-way discussions between Nissan-Renault and General Motors. Jaguar sales are down 30% globally for the first half of the year, having fallen 34% last year. As if GM needs another headache, it now could face a delay by federal banking regulators in the $14 billion sale of its financing arm, General Motors Acceptance Corp (also known as GMAC) -- a deal regarded as vital to its turnaround efforts. Although the deal can be terminated if it's not completed by March, GM said that it expects to close the deal in the fourth quarter and doesn't expect a delay to threaten the deal. The potential delay is part of the Federal Deposit Insurance Corp.'s "decision Friday to put a moratorium until Jan. 31 on all applications for banking charters by nonbank companies." Also, because of a change in tax loss provisions related to the sale of GMAC, GM said it is increasing its second-quarter net loss by $200 million. GM's Q2 loss now totals $3.4 billion but its originally reported operating profit of $1.2 billion is unchanged.
  • Comment on related stocks/ETFs: July sales were expected to be lower after last year's aggressive employee discount pricing campaigns by the U.S. Big-3. What's a bit surprising however, is the extent of sales decreases in SUVs and trucks, and especially for Ford's F-series. It really seems like history is repeating with the high gasoline prices and Japanese autos continuing to gain ground via their compact and more fuel-efficient models. Toyota (NYSE:TM) is the last of Japan's Big-3 to report earnings this Friday, but it's estimated that operating profit will come in 23% higher y-o-y. Honda (NYSE:HMC) reported record quarterly earnings again. And despite its troubles Nissan (OTCPK:NSANY) managed to salvage its Q1. If you thought GM would be helped further by the alliance discussions with Nissan-Renault, think again says John Bethel in "Going, Going, Ghosn? GM-Nissan-Renault Merger Seeming Increasingly Unlikely."

IAC Net Falls Amid Softness at Shopping Network

  • Summary: IAC/InterActiveCorp's Q2 results: Revenue up 18% year over year to $1.61 billion. Net income down 91% to $53.8 million from $618.1 million, which was boosted by a one-time gain of $464.5 million from the asset sales and the inclusion of Expedia, which has since been spun off. EPS fell to $0.17 versus $1.77 a year earlier. Revenue from the retailing unit, which includes the Cornerstone catalog business and Home Shopping Network, rose 2% to $775 million, with operating profit up 9% to $47 million. Revenue from Home Shopping Network actually declined. Revenue from the Services Division, which includes Ticketmaster and other international ticketing units, rose 21% to $533 million. Operating profits from the Lending Division, ie. LendingTree, fell 37% due to a weaker mortgage market and higher marketing costs. Year over year results from the Media and Advertising Division aren't helpful, as they include the acquisition of Operating profit from the Membership and Subscriptions Division, which includes, vacation time-share business Interval International, and discount business Entertainment Publications, was $21.3 million, despite a $17.9 million loss at Entertainment Publications. "Although IAC's earnings revealed management problems and low margins in several of its businesses, analysts said the stock rose because results in other operations -- such as ticket sales and online dating services -- were better than anticipated"
  • Comment on related stocks/ETFs: The article ommited some key data points: "Adjusted" EPS of $0.32 beat the consensus estimate of $0.29, and revenue of $1.61 billion narrowly beat the consensus of $1.6 billion. So the upside came from better-than-expected profitablility, particulalry from Ticketmaster and IAC's results were issued before the market opened yesterday, and the stock rose almost 6% in subsequent trading during a generally down-market; so the results are now largely priced-in. The key issue for investors is therefore the implications for other stocks. First, the strong results from Ticketmaster are bullish for Hollywood Media (OTCPK:HOLL), which sells theater tickets online and also owns 26% of (Full disclosure: the author is long HOLL.) From the IAC conference call: "TicketMaster’s strong momentum continued in Q2, selling more than 30 million tickets for the third consecutive quarter, and achieving all-time highs in revenue, which increased 14%, profits, and online penetration, thanks to a healthy summer concert season and 21% higher international revenue, with business in the U.K. and Australia performing very well." Second, the increased marketing costs for LendingTree are bearish for mortgage lenders, particularly those that are reliant on online advertising. CFO Thomas J. McInerney talked about "a very challenging operating environment" and said that customer acquisition costs rose 20% year over year. Full conference call transcript here.

Electronic Arts' Loss Widens

  • Summary: While expensing stock-based compensation caused Electronic Arts' to report a wider loss last quarter, core results beat analyst expectations. EA's fiscal first quarter loss was $81 millon ($0.26/share) , up from a $58 million ($0.19/share) loss for the same period last year. This year's fiscal quarter loss included $37 million of stock-based compensation expenses which were not accounted for last year. Excluding these expenses, the FQ1 loss was $0.12/share, an improvement over the $0.18/share loss from the same period last year, and better than the $0.24/share loss analysts were expecting. FQ1 revenue was $413 million, up 13% from last year's $365 million, and trouncing EA's previous forecast of $300-$340 million (aided by their 2006 FIFA World Cup soccer videogame, released prior to this year's "real" World Cup). EA is forecasting FQ2 revenue of $635-$685 million, with a net loss between $0.22-$0.28/share.
  • Comment on related stocks/ETFs: Consumers have held back spending on videogames as videogame console makers introduce their new gaming consoles. Steve Towns applauds Nintendo's (OTCPK:NTDOY) pricing on the WII console, but is concerned about Sony's (NYSE:SNE) Playstation 3 price point. Microsoft (MSFT) released the Xbox 360 in late 2005. Electronic Arts' FQ1 2007 conference call can be read here.

Kodak's Loss Widens As Revenue Declines 8.8%

  • Summary: Eastman Kodak Co., reported an 8.8% decline in Q2 revenues to $3.36 billion and a net loss of $282 million, or 98 cents per share, versus a loss of $155 million, or 54 cents per share, last year. Kodak also announced that it will stop manufacturing digital cameras and instead will shift production to Flextronics International Ltd. of Singapore. It will continue to sell digital cameras under the Kodak brand. Much of the losses on the quarter were attributed to restructuring charges that totaled $246 million pre-tax. Once a cash cow, its film group posted a 41% drop in pretax profit due to both a continued decline in sales and higher costs of silver used in making film. Kodak shares tanked 14% in Tuesday trading to $19.20 -- the first time it has fallen below $20 since 1981. Job cuts and restructuring charges will be higher than planned as Kodak completes its four-year restructuring process next year.
  • Comment on related stocks/ETFs: Eastman Kodak's (EK) plight is a stark contrast to the success Canon Inc (NYSE:CAJ) is experiencing in its camera and printer business. In its Q2 earnings release last week Canon increased its full-year forecast for sales of digital cameras by 18% to 1.01 trillion yen ($8.65b) and this is with already having figured in increased competition from Sony (SNE) and Matsushita (NYSE:MC). In its Q1 earnings release, Sony reported strong sales of its Cyber-shot digital cameras. It is expanding into digital SLR cameras through its acquisition of Konica Minolta's related assets. Matsushita's digital camera sales were very strong on the quarter, having nearly doubled to 43.8 billion yen ($382m) from 22.1 billion yen (see its earnings summary here and here).

EDS's Earnings Surged in Period, Led by Big Pacts

  • Summary: Electronic Data Systems Corp. (NASDAQ:EDS) said yesterday its second-quarter profit quadrupled and that its improving financial health is allowing it to accelerate job-cut plans. EDS said profits will be squeezed by increased severance costs during the third quarter from a plan to cut 4,000 jobs in high cost locations throughout Europe and North America, but much of the hit will be offset by strong revenue growth allowing the company to meet full-year earnings targets. EDS reported second-quarter net income of $104 million, or 20 cents a share, compared with $26 million, or five cents a share, a year ago. Revenue rose 3.9% to $5.19 billion, driven by improved performance for large contracts with the British Ministry of Defense and the U.S. Navy. In addition, EDS said it signed $5.4 billion in contracts in the second quarter, more than double the $2.6 billion signed in the year-ago quarter. For the third quarter, EDS said it expects earnings, excluding items, of 16 cents to 21 cents a share on revenue of $5.3 billion to $5.5 billion. Analysts surveyed by Thomson Financial have forecast earnings of 29 cents on revenue of $5 billion. For the year, EDS stuck to its forecast for earnings, excluding items, of 83 cents to 93 cents a share. It raised its revenue target to between $21 billion and $21.5 billion from a range of $20 billion to $20.5 billion.
  • Comment on related stocks/ETFs: EDS's main competitor, IBM, was downgraded by Goldman Sachs from a BUY to a NEUTRAL rating following their recent earnings release. Here's a look at IBM's recent conference call transcript.

Verizon Unlikely to Buy Vodafone's Wireless Stake

  • Summary: After years of trying to buy Vodafone Group PLC's (NASDAQ:VOD) stake in Verizon Wireless, Verizon Communications Inc. (NYSE:VZ) said it was now unlikely to take over the 45% stake of its wireless partner. Verizon Chief Executive Officer Ivan Seidenberg said in a conference call yesterday that he and Vodafone CEO Arun Sarin are "extremely pleased" with the partnership between the two companies. Verizon, of New York, made the announcement as it reported a 24% decline in second-quarter earnings after one-time costs for severance payments in the latest period, although it recorded strong growth in wireless services. Including results from the former MCI Inc., which it acquired this year, Verizon said net income totaled $1.61 billion, or 55 cents a share, compared with $2.11 billion, or 75 cents a share, a year earlier. Revenue jumped 26% to $22.68 billion. In the other major telecom earnings report yesterday, Qwest Communications International (NYSE:Q) posted a profit for the second quarter, reversing a year-earlier loss, amid cost cuts and strong sales of high-speed Internet connections. Net earnings totaled $117 million, or six cents a share, compared with a loss of $164 million, or nine cents a share, during the year-earlier period, which included a debt charge of $43 million. The company's revenue was flat at $3.47 billion, but Qwest's operating expenses declined to $3.1 billion, down 6% from a year earlier, as a result of cost cuts and improved productivity.
  • Comment on related stocks/ETFs: For more on Verizon's quarter, see the company's conference call transcript. Also available: Quest's conference call transcript.

Vonage Customers Withhold Payment For IPO Shares

  • Summary: Despite quarterly revenue increasing dramatically to $143.4 million from $59.4 million (from the same period last year), Vonage's quarterly loss widened from $63.6 million to $74.1 million ( $1.16/share) for the same period. Vonage forecasts full year revenues of $600-$615 million, with marketing costs of $360-380 million (over 50%!). Adding insult to injury, customers are refusing to pay for shares (over one million) that they purchased in the IPO this past May. Vonage indicated that it will initiate collection efforts against those customers.
  • Comment on related stocks/ETFs: Vonage closed at $6.70 yesterday, down from the $17 IPO. With no dramatic changes in Vonage's business model, Chad Brand is wondering why investment bank price targets for the stock remain between $9-$11/share.

Coach Net Rises 31% on Solid Sales

  • Summary: Bucking recent concerns in the retail sector, Coach reported Q2 (fiscal Q4) quarter profit of $117.6 million ($0.31/share), up 31% from $89.9 million ($90.23/share) for the same period last year. Total sales and direct-to consumer sales both increased 23% to $514.4 million and $419 million, respectively. Retail store sales rose 11%, with same store sales (stores open at least one year) rising 19%, and factory stores sales rising by 29%.
  • Comment on related stocks/ETFs: Despite Coach's recent recovery from its July 15th 52 week low ($25.18), Chad Brand still sees room for more upside. Coach and other luxury retailers have the wind at their backs because of widening income inequality in the US, leading to greater spending power among more affluent shoppers. See Coach's fiscal fourth quarter earnings conference call.

Burger King Posts Loss, Tepid Sales

  • Summary: Shares of Burger King Holdings Inc. (BKC) fell 13% after the chain reported meager sales growth and a $9 million loss in its first quarterly earnings release since becoming a public company. Upbeat nevertheless, Burger King CEO John Chidsey told investors the chain is benefiting from a slowdown in spending at sit-down restaurants that is prompting some consumers to trade down to fast-food chains. But Burger King's sales results didn't show a boost from that shift. Comparable-store sales rose just 1.7% during the fourth quarter that ended June 30 -- at or just below Burger King's long-term sales-growth target. the company posted a quarter loss of $9 million, or seven cents a share, compared with profit of $2 million, or two cents a share, a year earlier. Revenue rose 6% to $533 million. Shares of BK responded in kind, shedding $2.01 a share to $13.24 in composite trading yesterday.
  • Comment on related stocks/ETFs: Read Investopedia Advisor's Outlook for Fast Food Stocks in This Slowing Economy, in which he predicts Burger King's current fall.

KKR Appears to Win Philips Unit

  • Summary: Following Kohlberg Kravis Roberts & Co.'s huge deal last week for its investment in a proposed $21 billion buyout of hospital giant HCA Inc., KKR is said to have won a "brutal" auction bid with Silver Lake Partners for Philips Electronics NV's semiconductor division. The deal is believed to be worth more than €8 billion ($10.25 billion). Philips is one of the largest chip makers in the world and previously said it would consider an IPO for its semiconductor unit. The environment for private-equity deals shows signs of shifting as debt-market investors are becoming more conservative, yet private-equity firms are feeling pressure to find targets for their big war chests. A lawyer who represented an unsuccessful group in the auction said the bidding "was brutal" and as the bids went higher, "everyone lowered their expectations on returns." The lawyer also said private-equity firms are "really stretching now" to do deals. Another sign of change from this deal is the fact that private-equity firms usually prefer investments with stable cash flows given the often large amount of debt involved. However, chip makers' cash flows are anything but steady due to the competitive nature and volatility of the business.
  • Comment on related stocks/ETFs: Philips (NYSE:PHG) trades in the U.S. as an ADR listed on the NYSE. SeekingAlpha founder David Jackson commented early last week on the Philips auction: "Private equity firms seem to be doing extremely well; just look at the Hertz numbers. But the deals are getting larger and larger, and if the market goes into a prolonged downturn, the private equity firms will be left holding a lot of, well, private equity. In the meantime, this sort of deal helps put a floor beneath publicly-traded equity prices."

Flat-Panel TVs Gain Popularity

  • Summary: According to a survey released yesterday by NPD Group, 40% of TV-owners plan to buy a new TV set in the next year, with 15% leaning toward LCD and 12% toward plasma. The number of plasma and LCD TV sets sold has grown more than 500% in the past two years. Consumers purchased 4.2 million flat-panel displays in the year ended in June, according to NPD. The growth in the upscale TV market has been the result, at least in part, of falling prices with the average price of plasma sets dropping 43% in the past two years and the average LCD price slipping 7%.
  • Comment on related stocks/ETFs: For more on the Flat Panel TV market, see William Trent's recent piece LCD TVs Still Getting Cheaper Faster Than Expected.

Oji Paper's Bid Breaks With Taboo

  • Summary: Oji Paper Co's tender offer for smaller rival Hokuetsu Paper Mills Ltd. is not only a rare tender offer in itself but is actually the first time ever that a Japanese blue-chip has attempted a hostile takeover of a rival company. Oji is Japan's largest papermaker by sales and the potential deal valued at as much as $1.4 billion would result in the world's fifth-largest paper company. Hokuetsu rejected Oji's acquisition proposal last week and countered by offering to issue shares to a white squire, Mitsubishi Corp, on Monday at 607 yen ($5.30) per share. Oji's tender offer opened today and lasts until September 4th. It said it would pay 800 yen ($6.98) per share if the issuance is carried out or 860 yen ($7.50) if the issuance is scrapped; the latter amount representing a 9.7% premium to Hokuetsu's Monday close of 784 yen. Nearly a quarter of Hokuetsu's shareholders are foreign institutional investors thus, Oji has asked its adviser, Nomura Securities Co., to draft an open letter asking them to challenge Hokuetsu management. Jonathan Allum, a strategist at KBC Financial Products commented, "This is real, old-style, traditional Japan slugging it out. It may be that this will be the beginning of a series of similar moves."
  • Comment on related stocks/ETFs: Neither Oji (Tokyo: 3861) nor Hokuetsu (Tokyo: 3865) are traded in the U.S. and although this tender off might not make the front pages in the U.S., it is big news for Japan and could have a lasting impact on its business environment. M&A activity has been brisk in recent years and is expected to remain strong as larger firms look to deploy cash hoards to expand growth, at the same time big name private-equity firms have been setting their sights on Japan. The authors of the article noted that "Oji's decision to push forward with a hostile tender offer is a sign of the dramatic changes under way in corporate Japan." Deals involving smaller firms and investment funds have helped break the "taboo" and now market forces are in play.

HEARD ON THE STREET: Sprint Nextel Has a Bullish Ring

  • Summary: Sprint Nextel stock has dropped about 19% since April and 8% YTD due to high subscriber turnover and other factors, but is becoming more attractive to many analysts due to fundamentals. The consolidation of the U.S. wireless business into three main companies (Cingular Wireless and Verizon Wireless are the other two) means costs have been falling faster than subscription rates, and since Sprint Nextel is the only 'pure play' wireless provider among them, it can leverage that savings into its bottom line in a more rapid manner. Additional reasons for bullishness on Sprint Nextel: its large holdings of radio spectrum (important for advanced wireless broadband), impressive revenue growth in the high-single to low-double digit area, and large cash position of $6.6 billion, which could be deployed in share buybacks.
  • Comment on related stocks/ETFs: Famed Legg Mason Value Trust Manager Bill Miller is a Sprint Nextel bull -- it's his largest position, and he states that its 'private market value is conservatively 50% above today’s [stock] price'. Dean Bubley comments on how sophisticated feature phones from Nokia and Motorola are challenging wireless providers, but that wifi phones really don't pose such a threat.

AHEAD OF THE TAPE: Caffeine Highs

  • Summary: How to categorize Starbucks? At first glance it's a restaurant chain, but the fact that the company has managed to grow sales profitably for 14 straight years suggests that it lacks the cyclicity of most restaurants, and is better understood as a consumer staples company, like Coca-Cola. Starbucks is banking on that steady growth continuing as it plans to triple its international presence, to 30,000 stores. Investors have begun to wonder if this is sustainable -- the stock is down 17% from its May high. Starbucks reports earnings after the close today.
  • Comment on related stocks/ETFs: William Trent isn't convinced by the skepticism - he remains impressed by Starbucks' 6 percent same-store sales growth accompanied by 20% store base expansion. Steven Towns, though, thinks Starbucks has become overly ambitious in Japan.

TRACKING THE NUMBERS: 'Not MY Stock': The Latest Way To Fight Shorts

  • Summary: In an effort to fight back against short sellers who they claim are manipulating their stock, executives at a number of small companies have requested that shareholders demand physical copies of stock certificates. Their hope: Brokers will no longer be able to lend out shares for orders to sell short, and existing shorts will be forced to cover, triggering a short squeeze. The companies include Rx Processing, Sedona, NewMarket Tech and Riverbank Investments -- all traded OTC or on the Pink Sheets -- yet so far they haven't succeeded in convincing many shareholders to do so. This is the latest effort among companies whose stock has fallen sharply amidst large short interest to confront the shorts as the source of the problem; executives from Overstock and Fairfax Financial Holdings have filed lawsuits, launched private investigations and begun publicity campaigns with that aim.
  • Comment on related stocks/ETFs: Greg Newton recently commented on the Fairfax case, noting the shorts have new reasons to believe they're right. The ongoing Overstock drama, marked by the bizarre behavior of CEO Patrick Byrne, is summarized here and here. Dylan Wetherill comments each week on stocks at risk of a short squeeze, and if you are interested in following all 'short ideas' by our contributors, check out that category.

INSIDE TRACK: Exxon Insiders Quicken Pace of Sales

  • Summary: So far this quarter, executives at Exxon (XOM) have sold off more shares than in the previous two quarters combined. Ten insiders have sold off more than $30 million worth of shares, acquired mainly through options, over the last week. Still, rather than raise an alarm bell, experts on the energy sector feel the sell off is merely a result of Exxon shares hitting their highest point in the last 52 weeks. On the whole, only a small portion of insider shares have been sold off meaning that executives at Exxon believe shares will continue to rise.
  • Comment on related stocks/ETFs: For more on Exxon's recent ending quarter which yielded the second highest profit in its corporate history, see the conference call transcript. Cross Profit believes that regardless of per-barrel oil prices, Exxon should continue to reach new heights. Read his piece Oil at $85 or $65 a Barrel? Either Way ExxonMobil Bores to New Highs for more.

HEARD IN ASIA: Expected Flood of Chinese Funds Flowing Offshore May Be a Trickle

  • Summary: The Chinese government announced plans in April to ease its strict foreign-exchange rules in order to allow its citizens and companies to invest offshore. It was thought this would result in a huge rush of funds among the estimated $4 trillion in savings accounts out of China and especially boost mainland Chinese firms listed on the neighboring Hong Kong exchange. This hasn't happened and isn't expected to produce more than a trickle of an outflow because the long-await Qualified Domestic Institutional Investment, or QDII, system is not only both cumbersome and costly but currently limits individual investors to fixed-interest investments like bonds and not equities. Only selected clients will be able to invest in equity funds through asset-management companies. HSBC analyst Zhi Ming Zhang said in a research report last month that QDII's impact on global bond and equity markets will be "virtually negligible." It's not all bad news regarding QDII however, because analysts understand that its influence could grow with time. Morgan Stanley analyst Jerry Lou argued that there could be upside for Hong Kong-listed firms that are under-represented on mainland bourses. For now though, QDII also requires that investors be given full protection against currency risks, further adding to fund expenses and representing a serious challenge to investment funds since no yuan hedging tools exist to on products with long maturities.
  • Comment on related stocks/ETFs: This is a rather disappointing development for investors in Chinese stocks, particularly those listed outside of mainland China that were expecting to receive a boost in share prices. There are in fact a number of forces at play here including China's swelling foreign-exchange reserves and speculation Beijing will allow the yuan to appreciate further, which is in effect keeping more yuan parked for the moment. Overall QDII should be view as positive as a step in the right direction. Professor Jizhou Wang of Capital University of Economics & Business in Beijing, argues QDII "is more meaningful in political terms than in economic ones" because it is a sign China is ready to start draining its vast foreign-exchange reserves. China Eastern Airlines Corp (NYSE:CEA) is one Chinese firm traded in the U.S. mentioned in the article as a potential large beneficiary of QDII since its Hong Kong shares trade more cheaply than the separate class of its shares listed in Shanghai, thus representing an arbitrage opportunity.

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