One Page Annotated WSJ Summary, Tuesday Sept. 5

by: SA Editors
SA Editors
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BREAKING: Viacom Says Freston Resigns, Names Dauman New CEO

  • Summary: Viacom (NASDAQ:VIA) announced this morning that Tom Freston resigned as CEO, and appointed Philippe Dauman as president and CEO in his place. Freston's high points at Viacom included running the 'I want my MTV' marketing campaign in the early 80,running MTV Networks and pulling Nickelodeon to the top of the cable TV pack. Dauman will report to Sumner Redstone, viacom's Executive chairman and founder. Redstone said regarding Freston's departure: 'I have great respect for Tom Freston and want to personally thank him for his tremendous contributions to Viacom over the past 20 years. Tom successfully built MTV Networks into an unmatched force in the entertainment industry and assembled a best-in-class operational team to build on that foundation.' Viacom also named Thomas E. Dooley, 49, to the new position of senior executive vice president and chief administrative officer.
  • Comment on related stocks/ETFs: No direct reason has been provided for Freston's departure, and the shakeup may pressure the stock today. Freston recently discussed MTV's acquisitions and the digital landscape -- see the company's 2Q06 earnings conference call transcript.

In Gulf of Mexico, Industry Closes In On New Oil Source and BP Hires Former Judge To Be U.S. Ombudsman

  • Summary: Chevron, Devon Energy and Statoil are expected to announce a major breakthrough in accessing deep-water oil fields in the Gulf of Mexico -- the nation's biggest domestic source since Alaska's North Slope discovery. A production test has apparently been successful in the 'lower-tertiary' region, a 5-mile-deep, 300-mile-wide area that's 270 miles southwest of New Orleans. The companies estimate that up to 15 billion barrels of oil and gas reserves may be extracted from the find. It's a promising sign for other companies exploring the area as well: Anadarko, Royal Dutch Shell and BP. The Journal adds a cautious note that '(o)il companies still face technical challenges in tapping the lower tertiary, which requires them to penetrate unprecedented depths.' In a separate development aimed at stemming recent criticism over its operations, BP has hired former U.S. District Judge Stanley Sporkin to serve as company ombudsman. Following the recent pipe-corrosion affair at Prudhoe Bay, BP Alaska workers took complaints about company practice to an outside party. Sporkin has experience in Alaskan oil matters, having presided over a high-profile 1993 case brought by oil-tank broker Charles Hamel against the consortium that owns the Trans-Alaska Pipeline.
  • Comment on related stocks/ETFs: The announcement of potential new supply comes as oil prices fall another $1 on lower U.S. demand for gasoline and eased hurricane fears. Phil Davis is convinced crude oil prices still have a long way to fall, and may be subject to manipulation by the powers that be. Paul Kedrosky says 'peak oil' is inevitable, but demand will slack off under higher prices. Here are four independent deepwater oil riggers with fantastic fundamentals.

Airbus Names New Head Of A380 Jetliner Program and Judge Shelves Efforts by Airbus To Disqualify Boeing's Lawyers

  • Summary: New Airbus CEO Christian Streiff, who was appointed by its 80% shareholder Franco-German European Aeronautic Defence & Space Co. [EADS], began making his mark by replacing the head of its A380 superjumbo-jet program in an effort to revive the project after costly and embarrassing delays. Mr. Streiff was appointed as Airbus CEO in June, following Airbus' disclosure that the two-deck A380 now faced a second production delay of six months. EADS said the delay would cut about $2.57 billion from its operating profit over the next four years. In addition to problems with the A380, Airbus also has been forced into an expensive redesign of its proposed A350 jetliner, which competes with Boeing Co.'s (NYSE:BA) planned 787 "Dreamliner." Adding to Airbus's woes, on June 7 Britain's BAE Systems exercised an option to sell its 20% stake in Airbus to EADS. As part of that process, EADS and BAE hired investment bankers N. M. Rothschild & Sons Ltd. to value the stake. Their €2.75 billion valuation was surprisingly low; EADS had made provisions for a higher price. In coming weeks, BAE will call an extraordinary meeting of shareholders to approve or reject the sale. In related news, a District of Columbia Superior Court judge shelved efforts by Airbus to disqualify certain Boeing Co. lawyers from working on a contentious trade dispute. Airbus had filed a complaint against Boeing's choice of law firm on WTO-related work; the complaint said Boeing would have an unfair advantage because the firm employs former U.S. Trade Rep. Charlene Barshefsky, and a former Airbus in-house lawyer named Marco Bronckers. Boeing and Airbus are involved in a long-running trade dispute over civil-aircraft subsidies: The U.S. wants Europe to stop subsidizing Airbus; Europe has countered that the U.S. should curtail tax breaks, research contracts and other government aid to Boeing.
  • Comment on related stocks/ETFs: EADS' two core shareholders are French media group Lagardère SCA and DaimlerChrysler (DCX). Boeing stock has gained over 200% since early 2003. Since early May it has seen its most significant pullback, falling from the high 80s to the mid 70s. Various SA articles have focused on its ongoing strength, and the opportunity in the present dip.

Department-Store Giant's Dilemma: One Mall, Two Macy's

  • Summary: As part of its $11 billion acquisition of May Co. last year, Federated Department Stores Inc. (FD) is converting stores across the country bearing some of the most storied names in retailing -- Marshall Field's, Filene's, Robinsons-May, and Hecht's -- into Macy's department stores. The move, which is to take place simultaneously at 400 locations across America this Saturday, creates an unexpected dilemma for Federated: 85 mall locations will now feature more than one Macy's. This puts the chain at risk for cannibalization, the phenomenon of two nearby stores within a single chain stealing each other's customers. "It's a terrible situation to have two Macy's in the same mall, unless it's a giant mall like [Bloomington, Minn.'s] Mall of America," says Carol Parish, managing director for brand strategy, of WPP Group's Enterprise IG, a branding consulting firm, adding, "I would think that at midsized malls Macy's will work aggressively to see if they can find a different tenant." Still, Federated CEO Terry Lundgren doesn't see it as a problem. In an interview, he says the duplication is in large part "a positive outcome" because Macy's wants more space to display its merchandise, and most of its existing mall stores aren't large enough.
  • Comment on related stocks/ETFs: The WSJ article points out that while retail sales continue to increase on a year over year basis, breaking the two billion dollar mark for the first time in FY 2006, department stores have seen their share of the pie continue to shrink, from upwards of 6% just 8 years ago to a paltry 4% last year. Abbi Adest notes an article in last weekend's NY Times exploring why Federated's lastest move could spell more trouble for the department store retail model. Miriam Metzinger breaks down Federated's most recent conference call in which the company discusses the May acquisition and Macy's rebranding.

HEARD IN ASIA: China's New Bankruptcy Law May Give Lift to Bank Stocks

  • Summary: China now has its first formal corporate-bankruptcy process after the Enterprise Bankruptcy Law was enacted last week following twelve long years of deliberation. China's creditor banks stand to benefit most, however, given already high valuations, new buying induced by the bankruptcy law is unlikely but is at least seen as supporting current valuations. Three of China's five largest banks trade publicly with valuations ranging from 16 to 21 times expected earnings, compared to Hong-Kong listed banks averaging 15x and U.S. banks at 12x. The current delinquent loan recovery rate in China is 20% of face value with Moody's estimating that figure to be near 30% for the most recently issued loans and expecting it to approach to the global average of 70% via the newly enacted bankruptcy law.
  • Comment on related stocks/ETFs: The three largest publicly traded Chinese banks (Bank of China, China Construction Bank, and Bank of Communications) are not listed in the U.S. However, one way of getting exposure to these banks is with the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), of which at least 15% of assets (as of the end of July per Morningstar.com) are the three banks. Another way is with the Jardine Fleming China Region fund (NYSE:JFC) which has the three banks at about 5% of assets. Foreign banks with the largest presences in China that could benefit from the newly enacted bankruptcy law include: Bank of America (NYSE:BAC), Citigroup (NYSE:C), HSBC (HBC). The Bank of East Asia (OTCPK:BKEAY), is also an interesting play on Chinese lending. There is ongoing concern about some draft rules for foreign banks operating in China seeking to enter the lending business in the local yuan currency.

Japanese Investment Jumps

  • Summary: Government data shows that capital investment in the April-June period grew by an impressive 16.6% y-o-y, the fastest pace since July-Sept. 2002, which means GDP for the period could be upward revised to 1.5% from 0.8% (annualized) on Sept. 11th. The CAPEX growth rate was a surprise and was led by such sectors as: semiconductor equipment, automobiles, and wholesale and retail in the non-manufacturing sector. Although the government survey also showed that this was the 16th-consecutive quarter of expansion and the markets reacted by sending stocks, bond yields and the yen higher, it is still unlikely the Bank of Japan will raise raise rates again this year due to uncertainty over the U.S. economy. Some analysts are skeptical of the government data since the better than expected results can be attributed to a sampling bias, similar to other key indicators, in which the firms surveyed change year to year.
  • Comment on related stocks/ETFs: The BoJ is not seen raising rates at this week's rate decision meeting, especially with a change in leadership coming later this month as PM Koizumi finishes his second and last term. The yen has surged since Friday when it was trading close to Y117/US$1 and is now in the upper Y115/US$ range. This should result in an added pop for ADR, ETF, and other Japan fund investments. If the stronger yen persists however, it will eat into foreign exchange conversion profits but should not result in any negative surprises. Japan's Big-3 auto: Toyota (NYSE:TM), Nissan (OTCPK:NSANY) and Honda (NYSE:HMC) are plays on the auto sector. Advantest (NYSE:ATE) is a large-cap semiconductor equipment play.

HEARD ON THE STREET: Storms Remain 'a Threat Hanging Over Market'

  • Summary: For the first time since 2002, no hurricanes hit the U.S. by the season's midpoint last week. But beware that "September has been the most active month of all, giving birth to 104 -- more than a third -- of all known storms in the past 155 years." While three of the five costliest storms in U.S. history hit in August, some of the top ten storms including last year's Rita hit later in the year. This month's storm activity or inactivity will have a substantial impact on the financial markets, especially among reinsurers (Berkshire Hathaway (BRKA) is up 5% in the last month) and energy stocks, down 4% in August. But all investors are impacted by storms: the DJIA fell 1% on average in the days before 12 of the costliest storms since 1965, and rallied by a similar amount after the storms.
  • Comment on related stocks/ETFs: Yaser Anwar recommends five small cap hurricane plays, and Ant and Sons recommend natural gas plays for hurricane season including Cabot Oil & Gas Corp. (NYSE:COG), Petroleum Development Corp. (PETD) and Global Industries Ltd. (NASDAQ:GLBL). Chad Brand suggests taking a look at Chesapeake Energy (NYSE:CHK) and Anadarko Petroleum (NYSE:APC)

Behind Easing of Airline Rules, KLM's 20-Year Urge to Merge

  • Summary: In the 1980's KLM (AKH) introduced European travelers to the hub-and-spoke system, enabling travelers to connect to more international flights in its system. Its next feat was to expand the international hub-and-spoke to the U.S., by buying 19% of Northwest Airlines (NWACQ) in 1989. The rest of the industry followed suit, which resulted in the creation of Star Alliance, onworld and SkyTeam (which includes KLM). KLM's next step was to structure a unique merger with Air France, where Air France acquired KLM, but the two airlines keep their own management and identities (plus 2 hubs - Paris and Amsterdam). So far, the result has been a 10% increase in overall traffic, a 20% increase in hub traffic, and a 69% increase in operating profit. Yet even with the increased operating profit, the company's operating profit margin is about 5%, which is lower than rivals'. With the successful integration of the two airlines complete, their next step is to increase their operating margin by cutting costs.
  • Comment on related stocks/ETFs: While shares of legacy carriers have recovered, they are still risky investments. Discount carriers have fared better, especially those with business models that enable them to compete with automobile travel. Keep in mind what Warren Buffet said in a 2002 interview:

    If a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money... the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success.

IPO Market Was Soft in August, But Months Ahead Look Solid

  • Summary: After being spoiled with two mega-IPOs in 2004 (Google) and 2005 (Baidu), this August's IPO market was tepid. Seven IPOs that were set to raise $2.9 billion in August were canceled or postponed, and seven companies raised $1.7 billion. For comparison's sake, in August 2005, 31 companies raised $5.8 billion. There were three bright spots this year: Evercore (NYSE:EVR), Aircastle (NYSE:AYR), and InnerWorkings (NASDAQ:INWK) went public with double digit percentage increases. And the IPO bench is packed with 160 companies set to launch, the highest number since October 2004.
  • Comment on related stocks/ETFs: Bill Simpson's insight into Evercore's IPO was spot on, and Market Participant called Aircastle an aircraft REIT. Clearfish Research took a look at InnwerWorkings back when they filed their S1. There is one IPO on deck this week: Chinese education provider New Oriental Education (NYSE:EDU). Seeking Alpha provides coverage of all IPO filings.

Tyco Backed Off Stock-Option Plan

  • Summary: On October 13, 1999, a proposal was presented to Tyco's (NYSE:TYC) compensation committee to grant three million options to CEO Dennis Kozlowski and finance chief Mark Swartz. The options would be priced "using the date with the lowest volume-weighted average sale price" that month. The proposal was shown to Tyco's compensation consultant, Towers Perrin, who warned that the award might constitute a "discounted option award", which would require Tyco to take a charge against earnings equal to the discount. The problematic language was subsequently crossed out, and replaced with the date following Tyco's October 15th board meeting.
  • Comment on related stocks/ETFs: This is positive news for Tyco, especially after enduring all the negative publicity generated by Kozlowski. While the list of companies involved with the options backdating scandal is growing, the alleged transgressions vary significantly.

AHEAD OF THE TAPE: Fear. Not.

  • Summary: Investors no longer seem to be worried about market risk and volatility. One popular measure of risk, the CBOE Market Volatility Index, or the VIX, is back down to normal levels after reaching its highest point in three years. Other indicators moving in the same direction are emerging-market stocks and bonds -- risky securities that fell into a deep funk in mid-June and which have now bounced back. And in the corporate-bond arena, investors seem downright ebullient: "Now, almost any company can borrow any amount at close to historically low levels for almost any purpose," says Brian Reynolds, chief market strategist at brokerage firm M.S. Howells. With the economy showing signs of slowing, the Fed appears unlikely to raise rates this month after last month's pause, meaning market stability may be here to stay.
  • Comment on related stocks/ETFs: While Justin Lahart's piece implies that Wall St. has shaken much of the economic anxiety that plagued it this summer, there are many who are still apprehensive when it comes to the near future. They see negative signs on the horizon -- a weakening dollar/higher inflation, a looming housing market crisis, and lessening consumer confidence -- to name but a few. Andrew David Taylor believes the Fed Might Need to Do More to stave off an economic decline. CrossProfit deals with the possibility of a collapsing housing market pushing the U.S. into recession and permabear Investing-the-Middle-Way espouses the belief that weakening consumer spending will soon send the markets tumbling down.

Russia's Electricity-Liberalization Plan Advances

  • Summary: Energy analysts warn of a looming Russian electricity crisis. Five years of economic expansion have lead to a big increase in demand for electricity, while state ownership and regulated rates have stifled investment in new projects. Russia is now going ahead with the privitization of its electric-power industry, aimed at drawing $87 billion in investment to the sector. On slate is the introduction of market-driven power pricing. (Natural gas, which fuels most of Russia's power plants, continues to be strictly regulated at below-market prices.) Anatoly Chubais, who spearheaded the move, leaves this week on a tour of the U.S. and Europe to raise capital. Several big foreign utilities already have expressed interest, including Italy's Enel SpA, Fortum Oyj of Finland and Germany's E.On AG. Russian industrial groups are also eager to invest; state run OAO Gazprom hopes that by investing in gas-saving technology in power plants, it will free up more of its fuel for lucrative export sales. Investors will be offered the chance to buy stakes in the 20 existing power companies, or to build plants. Demand growth is expected to outpace capacity additions for several years, leading to price increases. Wholesale electricity prices have nearly tripled since 2000, and are likely to rise an additional 69% through 2011. The government has also promised investors a guarantee that will reimburse investment costs if rates come in lower than expected. Some analysts criticized the plan for being too timid; completely free-market prices will take between five and 15 years. Others warn that the changes could still be sidetracked.
  • Comment on related stocks/ETFs:
  • No ETFs offer direct exposure to the emerging Russian free-market. Closed-end funds Central Europe & Russia Fund (NYSE:CEE) and the Templeton Russia & Eastern Europe Fund (NYSE:TRF) give access to the east Europe, but have been criticized for being "less than ideal."

Thailand's GDP Rate Slows As Political Crisis Curbs Growth

  • Summary: The current political crisis and subsequent economic slowdown in Thailand is a good example of the risks involved in investing in emerging markets. A dissolved parliament and a botched election this past April has hurt domestic consumption and investment resulting in slower quarter-on-quarter GDP growth and a lower GDP forecast for the year (4.2%-4.7% from previous forecast of 4.2%-4.9%). One area of strength has been (agricultural and electronics) exports, which jumped 16% in Q2. Thailand's central bank is not seen changing its target rate given a globally rising rate environment and instead has suggested fiscal stimulus. Thai inflation seems to be under control and the Thai baht is seen as stable given the strength of exports and tourism revenue. New elections are scheduled for Oct. 15th but could be delayed.
  • Comment on related stocks/ETFs: Investing in Thailand is not without risk, especially if the upcoming election is delayed and/or is not a success. However, for those interested in Thailand there are two Thai closed-end funds listed on the NYSE: The Thai Fund (NYSE:TTF), which is advised by Morgan Stanley and the Thai Capital Fund (Pending:TF), which is advised by Daiwa. Given the comparatively small size of Thailand's economy, the number of holdings in each fund totals 34 and 54, respectively, with both having a majority of assets in their top-10 holdings. Based on their similar holdings the logical choice seems to be The Thai Fund since its expense ratio is 1.76% versus the Thai Capital Fund's 2.46%. The Thai Fund also trades at a 1.8% discount to its NAV whereas the Capital Fund is trading in-line. For more information on these CEFs, see a related post on Seeking Alpha from earlier this year, Morningstar.com's pages on TF and TTF, and The Wall Street Journal's Global Indexes and Thai stock data.

MARKET MOVERS: Taking Stock: What's Ahead For Investors

  • Summary: Many money managers and analysts are optimistic about the rest of 2006, while acknowledging there are some hurdles that must be overcome. The article looks at five key areas: 1) The Fed — has it finished raising interest rates? Key indicators such as Core CPI, consumer spending, and Q2 growth seem to indicate inflationary pressures have relaxed. But underlying inflation remains elevated. 2) Housing — will it drag the markets down? Housing-related bonds are the single biggest part of the bond market. Housing market measures are currently down 10-20% from their highs. Banks warn of profit cuts due to mortgage defaults and falling initialization. But dropping lending rates in anticipation of Fed cuts (see 1) could signal an end to the current slump. 3) Oil prices — where are they headed? Crude is up 13% on the year but down 10% from its highs. High oil prices reduce consumer spending and economic growth. 4) Elections — what impact will they have? Stocks tend to bottom in the months before congressional elections and begin a sustained rally: Since 1950 stocks have averaged 30% gains in the 12 months following Q3 of the congressional-election year, and have never declined. These worries could mean a jittery September, but once investors adjust to the electoral outcome, markets could rally. 5) September — bad things often happen in September. September is the only month in which the Dow industrials have, on average, declined noticeably. Where we stand: The DJIA is ahead 6.7% since mid-July. It is currently at three-month highs, and less than 260 points from its record close of 11722.98 of January 2000.
  • Comment on related stocks/ETFs: Breaking down economic components gives the appearance of making them easier to foretell. But none of the factors exist in a vacuum, and each argument invites a counter-argument. One example: Will continuing high oil prices push the stock market down due to high production costs and reduced consumer spending, or will they drive it up as reduced spending and economic growth allows the Fed to cut interest rates, making the stock market a more attractive investment? In a related article, Barron's asked 12 leading analysts for their predictions about what the rest of 2006 holds in store. In our "Quick comment" you'll find links to many of SeekingAlpha contributors' bold forecasts.

Notable articles on Seeking Alpha today: Andrew Schmitt's winners and losers in optical communications; can Ford survive?; why the pundits are wrong on Caterpillar; investing in Russia and eastern Europe still lacks an appropriate vehicle; high expectations for Nintendo's new console is driving that stock to multi-year highs; David Andrew Taylor thinks the Fed may have more work to do to dissolve inflation.

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