One Page Annotated WSJ Summary, Thursday Sept. 7

by: SA Editors
SA Editors
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H-P Faces Probe Over Its Inquiry Into Board Leaks

  • Summary: The California Attorney General's office announced it has been conducting an investigation into how Hewlett-Packard Co. (NYSE:HPQ) traced phone records of its board members last year, though they are unsure whether illegal activity of any sort took place. lockyer The activity was, at the very least, "colossally stupid," said Attorney General Bill Lockyer (pictured). The tactics used by H-P have already prompted an inquiry from the SEC as well as requests from state investigators for records from H-P and involved telecommunications carriers. The scandal centers on the use of "pretexting" to obtain directors' private phone records in an effort to identify the source of the leaks. Pretexting, or posing as a person in order to obtain private phone or other information about them, is illegal in California. H-P has already admitted to using pretexting in the course of investing leaks of what it felt was sensitive company information. H-P spokesman Mike Moeller said that H-P didn't know pretexting would be involved in the investigation. "We have determined pretexting will not be used in any future investigation if we have to do another one of these," Mr. Moeller added.
  • Comment on related stocks/ETFs: After a solid August in which H-P could do no wrong, Mr. Market may finally be dishing out a solid helping of backlash to the company. The share price, which had increased steadily from mid-July ($30) to just before the scandal went public ($36+) finally took a tumble yesterday, losing $0.62, or 1.7%, then falling another $0.15 after hours. George Gutowski has harsh words for HPQ's management and its handling of internal leaks. See yesterday's WSJ piece on H-P, which provides a nice background on the current scandal.

Sharp Jump in U.S. Labor Costs May Presage a Rise in Inflation and AHEAD OF THE TAPE: Warning Sign and New Rate Jitters Sink Stocks

  • Summary: In recent weeks, stock market indices have rallied on hopes the Fed will let the federal-funds target rate stand at 5.25% for the remainder of 2006, considering benign wholesale and consumer inflation and continued weakness in the housing market that could easily ripple into the broader economy. But a significant climb in labor costs now has economists worried more rate increases may be on the way: Labor costs jumped 5% in the second quarter compared with the year-earlier period, their fastest rate in six years. The data contributed to yesterday's drop in major stock indexes: The DJIA fell 63.08 points, or 0.6%, the S&P500 lost 12.99, or 1%, and the Nasdaq declined by 37.86, or 1.7%. The Russell 2000 Index, a benchmark of small companies, tumbled 15.46, or 2.1%. Economists questioned whether the pay increases were from one-time items like bonuses, or a broad rise in pay that could lead to rising inflation. Rising labor costs haven't yet forced companies to raise prices according to "beige book" reports released yesterday that found that while there were "widespread increases in the prices of energy and certain other commodities," they "do not appear to have passed through to finished consumer goods." But higher wages can be trouble for the economy if the extra cash starts pushing up prices of other goods, and companies shell out more to their work force to keep pace with inflation. Nonfinancial wages, a labor measure favored by the Fed, rose at a more modest 2.6% pace, showing that while "the trend is still up in terms of unit labor costs, the degree of increase is significantly modified." In it's final month, Q3 is beginning to look glum; the economy is slowing, and labor costs are climbing, and twice as many companies have been giving downward guidance compared with those guiding up. KB Home (NYSE:KBH) said yesterday that orders were down 11% and the housing market was increasingly challenging. Tiffany & Co. (NYSE:TIF) also reported disappointing results last week and guided expectations lower.
  • Comment on related stocks/ETFs: The industries hardest hit by rising labor costs are those who are in direct competition with manufacturers in countries where (even before current increases) labor-costs per unit are significantly lower than in the U.S., particularly the auto industry. General Motors Corp. (NYSE:GM) and Ford Motor Co. (NYSE:F) are desperately scrambling to find ways to cut labor costs and keep-up with overseas competitors such as Toyota Motor Corp. (NYSE:TM) and Honda Motor Co. (NYSE:HMC). Whether wage-increases lead to increased consumption (and ultimately more jobs), or whether more consumption leads and employment follows, David Andrew Taylor insists current payroll and labor-unit-cost increases can only be the signs of a strengthening economy. In a related article, WSJ wonders if corporate profits and labor costs can continue to travel in the same direction, and if not, which will give first.

Casino Giants Take Their Vegas Battle To Tables of Macau

  • Summary: Four years after winning a license to operate a casino in Macau, Steve Wynn (NASDAQ:WYNN) opened his splashy $1.2 billion Wynn Macau yesterday. Wynn's archrival Sheldon Adelson of the Las Vegas Sands (NYSE:LVS) won a license at the same time as Wynn, and opened the Sands Macao two years ago, claiming first mover advantage. Macau is the only region in China where gambling is legal, and it has evolved into a formidable industry. Last year it generated $5.6 billion in casino-gambling revenues, beating out Atlantic City and coming close to Las Vegas' $6 billion turnover. The bulk of this revenue originates from locally owned casinos, but Wynn and Adelson aim to draw the big spenders into the market. The two are extending their rivalry beyond Macau's city center to Cotai Strip, where both are developing new casinos: Adelson is building a Venetian Macao (lagoon, gondoliers, and all), and Wynn has plans for two to three casinos on a 54-acre parcel on Cotai. As with Macau city, Wynn is waiting to see how Adelson fares before breaking ground.
  • Comment on related stocks/ETFs: The LVS conference call transcripts contain detailed information about the company's Macau plans. David Reidel asks if there is oversupply in Macau, and Bear Stearns upgraded WYNN last quarter. Marc Gerstein looks at opportunities in gaming stocks resulting from the new build-out of casinos.

To Boost Sales, Wal-Mart Drops One-Size-Fits-All Approach

  • Summary: Wal-Mart (NYSE:WMT), long known for its identical stores, has begun to adopt six model store types for different demographics. Eduardo Castro-Wright, the company's CEO of U.S. stores noted that if you have one store type across geographies "you end up under-serving everyone because you don't have an offering that is specific to that customer segment." One of the challenges Wal-Mart is currently facing is a slow-down of same store sales which dropped from 9% in 1999 to 3% last year. Competitor Target (NYSE:TGT) which sells at discount prices to more upscale shoppers recorded gains of 6% last year. This is not Mr. Castro-Wright's first shot at localization: as former head of Wal-Mart Mexico he refined the company's product mix to target various income levels.
  • Comment on related stocks/ETFs: Wal-Mart has its share of bears and bulls: Hilary Kramer doesn't think there's room for upside at Wal-Mart, and prefers Target's upscale approach. Yaser Anwar thinks there's room for growth at Wal-Mart, but Investopedia Advisor doesn't see a turnaround there any time soon. See the company's recent earnings call transcript.

Total to Increase '06 Capital Outlay To $14.5 Billion

  • Summary: French oil-and-gas giant Total S.A. (NYSE:TOT) disclosed a $1b (7.4%) increase in this year's capital spending, to $14.5 billion. Breakdown: $.5b new exploration, $.3b cost inflation on existing exploration, $.2b currency exchange. Projected long-term investment: $15-$16b per year. The company also announced that the company's head of exploration and production, Christophe de Margerie, will take over as CEO in mid-February (the change had been previously announced). Total and four other energy companies received invitations by Russian state-run OAO Gazprom to participate in talks about development of the massive Shtokman gas field in Russia's Arctic. Gazprom said it sent letters to Total, Chevron Corp. (NYSE:CVX), and ConocoPhillips (NYSE:COP) of the U.S., and Statoil ASA and Norsk Hydro ASA of Norway.
  • Comment on related stocks/ETFs: The Gazprom Shtokman exploration is a significant job; the first phase alone is projected to be in the area of $12-$14 billion. A Total spokesman called the renewed Gazprom negotiations "rather good news" for the company. The announcement coincides with Russia's recent decision to begin opening their energy markets to foreign investment to the tune of $87b. Phil Davis has been an outspoken oil-and-energy bear; FinancialRx feels things are just starting to warm up in the sector. The United States Oil Fund ETF (NYSEARCA:USO) offers exposure to the broader U.S. oil-and-gas market. The sector was down strongly yesterday on weakening oil prices.

Congress to Begin Exploration Of BP's Alaska Oil Problems

  • Summary: Last month BP PLC (NYSE:BP) partially shuttered its Alaska oil field after discovering corroded pipes. Today, Congress' House Energy and Commerce Committee will hear testimony from experts and BP officials. This is the most recent in an embarrassing series of regulatory, criminal and civil probes at BP. In March 2005, an explosion at BP's refinery in Texas killed 15 workers, resulting in heavy fines for safety violations. And the Commodity Futures Trading Commission [CFTC] alleges the company manipulated the U.S. propane market in early 2004, a charge the company denies. Investigators are also examining BP's crude-oil and unleaded gasoline trading. The company is at risk of losing its hard-earned reputation as a bastion of environmental and corporate responsibility.
  • Comment on related stocks/ETFs:BP of course denies that it ever rigged propane prices or engaged in illegal trading schemes. "Market manipulation did not occur," said spokesman Ronnie Chappell. But BP's own investigation resulted in the dismissal of three employees for “failure to follow its trading policies,” although the company declined to provide details. David Phillips asks, "Do any of our readers buy into Ronnie Chappell's transparent insincerity?" The company made $2.97 billion in profit last year from its trading operations—about 13 percent of its 2005 net income of $22.34 billion. But Roger Nusbaum has not been put-off by the scandalous negativity surrounding this stock. "In the few years I have been involved with the name there have been several instances where the headlines have been scary but with no lasting impact."

TRACKING THE NUMBERS: Investors Exit Vehicles to Limit Hedge-Fund Risk

  • Summary: For the first time, a stent maker has acknowledged the increased risk of "late stent thrombosis" (blod clots appearing in the stent after a few months) with its product. Boston Scientific (NYSE:BSX) disclosed that its internal analysis of clincial data on its stent showed an increased risk of blood clots. Although Boston Scientific does not think that the increased clotting risk is unique to its product, their chief medical officer said "The right thing for us to do as responsible manufacturers is, when we have evidence of an issue, to go forward with regulators".
  • Comment on related stocks/ETFs: This news follows Boston Scientific's disclosure of problems with their pacemakers and defibrillators. Stents are big business (to the tune of $5 billion a year), with Boston Scientific and Johnson & Johnson (NYSE:JNJ) as the leading manufacturers. A competitor, Xtent (NYSEMKT:XTNT) recently filed an IPO . Of additional concern: Johnson & Johnson recently forecasted slower growth for medical devices.

HEARD ON THE STREET: Will Hershey Meet Its Forecast?

  • Summary: Preliminary data suggest that Hershey Co. (NYSE:HSY) will post unexpectedly weak end-of-year sales numbers. This prompted a J.P. Morgan Chase analyst to downgrade Hershey on Tuesday, resulting in a more than 4% one-day drop. Hershey has spent the past five years attempting to innovate in both products and operations -- tapping into Americans' growing taste for dark chocolate, for example, and setting up Home Depot (NYSE:HD) as a marketing channel. These moves boosted the stock by over 100% between 2001 and 2005, but it has since tumbled by over 20%. The decline partly reflects market apprehension regarding the ability of the company, which relies substantially on grocery store sales (28% of revenue), to boost its representation in convenience stores, which are a growing source of candy sales. It also reflects concern over Hershey's loss of market share over the past four months to Mars brands like M&Ms and Dove. Though the J.P. Morgan Chase analyst has cut his 2006 and 2007 forecasts, others are more sanguine. A Credit Suisse analyst says concerns about Hershey's sales data may be overblown, and points out that Hershey's 2Q sales were up a solid 6.6% -- a promising indicator, in his view.
  • Comment on related stocks/ETFs: Catablast Media took a closer look at Hershey's valuation and didn't find an attractive defensive play. Jim Cramer, on the other hand, regards Hershey as a worthwhile defensive stock with a good risk-reward ratio. For related stories, please see Seeking Alpha's coverage of Food and Restaurants in the Retail sector.

Does MTV Still Rock?

  • Summary: Has MTV lost touch with reality? Viacom's (NYSE:VIA) crown jewel has faced shrinking ratings both among its regular viewers as well as for big ratings catchers like the Video Music Awards. In the past, the quirky, iconoclastic ways of MTV have made it a hospitable place for writers, producers and stars. Recognizing this, Viacom's new CEO, Philippe Dauman, who has minimal experience in the entertainment side of the media industry needs Ms. Judy McGrath and other veterans to give the unit a jolt without blowing up the strong foundations MTV has established. Still, MTV is currently a far cry from its days in the eighties and early nineties when its content was provocative and the channel was the constant center of criticism, which created legions of loyal young viewers. Some people now feel the company has become allergic to criticism. CEO Dauman will have to walk a tightrope as he decides how to reinvigorate the network without sending it into shock following the firing of Tom Freston.
  • Comment on related stocks/ETFs: Geoff Gannon is of the belief that firing Tom Freston was a big step in the wrong direction for Viacom and the sometimes dictatorial Sumner Redstone. Wall Street certainly seems to agree: Shares have dropped nearly 10% since Freston was let go two days ago.

Blaming Faulty Part, Sony Scales Down World-Wide Launch of PlayStation 3

  • Summary: How ironic is it that the same Blu-ray DVD technology that Sony wanted to push with the launch of its next generation PlayStation 3 game console is now the cause of a second delay, this time a four month delay for the game console's forthcoming launch in Europe and responsible for halving the initial available supply in Japan and the U.S. for the November launch? Sony's head of gaming Ken Kutaragi replies, "This became a typical result of not knowing what to expect with a brand-new component. This was a completely unexpected problem. There's nothing I can say except, 'I'm sorry.' " The delay in Europe and tight initial supply in Japan and the U.S. will further give Microsoft's Xbox 360 a chance to expand its user base, and it will benefit Nintendo's launch of its own next-generation console called Wii. Sony's problems don't end with gaming: its electronics division has high hopes of Blu-ray DVD besting rival advanced DVD technology HD-DVD as does its pictures division have an interest in seeing sales of DVDs pickup, and its semiconductor business has a stake in the console's Cell microchip, and of course there's the game publishing business that's affected as well.
  • Comment on related stocks/ETFs: Positive for Microsoft (NASDAQ:MSFT) and Nintendo (OTCPK:NTDOY). Potentially negative for game developers such as Electronic Arts (ERTS) but the delay might have been expected and thus the ultimate impact is unknown. Mitsubishi UFJ Securities recently downgraded Sony (NYSE:SNE) based on a heavily downward revised forecast of expected PS3 shipments. The MUFJ analyst seems to have been at least partially correct and could turn out to have made a perfect call if in fact Sony can't ship the six million units it expects to in the first year although Sony gaming chief Ken Kutaragi is standing by the six million unit shipment forecast. Sony has had a string of bad luck lately with the PS3 issues following the Dell (NASDAQ:DELL) and Apple (NASDAQ:AAPL) notebook PC battery recalls. In mid-August the editor of U.S. PlayStation Magazine said she decided to buy an Xbox 360 instead of waiting for a PS3, particularly criticizing the unit's $600 price tag and lack of interest in Blu-ray DVD technology. Still there may be some good news for Sony as it appears to be ahead of Microsoft's schedule last year by about a month in terms of getting development units of its next-gen console in developers' hands. And digital camera and LCD TV sales seem to be strong. See Sony's latest conference call transcript.

'Dogs of the Dow' Strategy Proves You Aren't Barking Up Wrong Tree

  • Summary: Feel like betting on down and out blue chips? The "Dogs of the Dow" method involves investing in the 10 components of the Dow Jones Industrial Average with the highest dividend yield and holding those stocks for about a year. Many of the Dow components with the highest dividend yields have seen their share price decline during the preceding year, making them the supposed underdogs of the stock market. By the end of August, the so-called Dogs had total returns of about 21% for 2006 -- well above the 7.9% the industrial average as a whole has returned this year. Overall, the Dogs of the Dow theory tends to have an uneven performance. Last year, for instance, the 5% decline marked by the Dogs was worse than the returns of 1.7% from the industrial average as a whole. Still, the case of Dog-member GM's stock illustrates just how profitable the strategy can be. The automobile company's stock has surged around 59% year to date, making it the best performing Dow industrial component for 2006. "They are all large, dividend-paying companies we have all grown up with," says Neil Hennessy, president and portfolio manager of the Hennessy funds, a proponent of the Dogs of the Dow theory. "You are getting paid to wait for the stock to go up in value."
  • Comment on related stocks/ETFs: Asif Suria has more on this year's Dog success. Note that while the Dogs strategy allows investors to go long down and out blue chips, the DOG ETF provides investors an easy way to short the DJIA. Are you feeling bullish or bearish?

Home Builders See Weak Results

  • Summary: Home builder KB Home (KBH) cited declining orders and weak new-home demand in lowering its earnings forecast yesterday to between $8 and $8.50 a share annually, down from estimates of $10 a share in June. It expects net orders for the quarter to fall 43% from a year earlier. Home builder Hovnanian Enterprises Inc. (NYSE:HOV) reported a 34% decline in Q3 profits citing higher costs, slower-paced orders, and increased cancellations. Revenue rose 18% to $1.55 billion; costs rose 26% to $1.43 billion. Net contracts for Q3 declined 19%, and their dollar value decreased nearly 24%. Hovnanian's contract-cancellation rate rose to 33% from 24%.
  • Source: (Economic Policy Institute)
  • Comment on related stocks/ETFs: In an interview following the Fed's release of their "beige book" yesterday, Economic Cycle Research Institute's [ECRI] Lakshman Achuthan discussed the weakness in the housing market, saying, "This housing story still has to unfold. It doesn't look like there's a bottom price in this housing price downturn just yet." Bear in mind: Despite Wall Street's current obsession with homebuilder weakness and the housing bubble, residential housing and real-estate accounts for only 5% of real U.S. GDP. Of course indirectly it may account for substantially more, bearing in mind appliances, furnishings, etc. The streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB) offers exposure to the U.S. residential housing market, allowing both short and long plays.

HEARD IN ASIA: Japanese Retail May Get a Jolt

  • Summary: Wal-Mart has a big opportunity to expand its presence in Japan if it purchases the nation's third largest retailer, Daiei Inc., which would give it 13% of the total floorspace of all supermarkets complementing its 54% stake in Seiyu Ltd. However, a purchase instead by Japanese rival Aeon Co., the largest retailer in Asia by sales, would result in a 22% share of floorspace. Regardless, analysts see a purchase by either as having a potentially huge impact on Japanese retail, shifting bargaining power away from difficult suppliers and wholesale distributors. Further consolidation in Japanese retail will likely mean more good news for investors, with retail stocks seen adding to their outperformance of the broader TOPIX Index. Purchasing Daiei might not have an immediate impact on either Aeon or Wal-Mart's earnings warns an analyst and it still could be tough going given a 3.2% fall in July supermarket sales in Japan, the seventh consecutive month of y-o-y sales declines.
  • Comment on related stocks/ETFs: Although Wal-Mart's (WMT) operations in Japan to-date have not exactly been ideal, its stake in Seiyu (OTC:SYLTF) (Tokyo: 8268) is starting to show a glimmer of turning into a success story as it continues to reorganize. Having a stronger bargaining position via a Daiei (DAIEY) (Tokyo: 8263) purchase could help Wal-Mart/Seiyu further reduce costs and improve its supply-chain. Positive impact on Wal-Mart's stock price is more likely over the longer-term. Note that a Wal-Mart spokeswoman in Tokyo declined to comment on a Daiei deal and Aeon (OTCPK:AONNY) (Tokyo: 8267)said it isn't in talks with current Daiei owner Marubeni (OTCPK:MARUY) (Tokyo: 8002) at this time. See a separate story from today's WSJ asking if localization is the answer for Wal-Mart. And see whether you agree that Wal-Mart's growth is going to slow as it heads down the slope of maturity. Also check out comments on Wal-Mart's exit from Germany and South Korea in its latest conference call transcript.

TRACKING THE NUMBERS: Investors Exit Vehicles to Limit Hedge-Fund Risk

  • Summary: During 2003 and 2004, investors plowed about $12 billion into hedge-fund index funds (or 'investable index funds'), believing these would be a good way to capture the returns of that booming industry in a low-risk manner. Yet many such funds are not keeping up with the indexes they track. For example, the MSCI Hedge Invest Index, the investable index fund that tracks the MSCI Hedge Fund Composite Index is up 2.9% (year-to-date), while the index itself is up 5.1% during the same period. Reasons for the poorer performance of these funds: high fees, plus the fact that investable index funds generally do not close their funds to new investors, while strong-performing hedge funds often do not accept new investors because they want to keep their funding to a specific level (to invest efficiently). The end result? Investors are starting to pull money from investable index funds.
  • Comment on related stocks/ETFs: SeekingAlpha contributor Richard Kang wrote an interesting piece, where he deals with the question of whether or not hedge funds are acting like index trackers. Also, check out SeekingAlpha's ETF site , where there is a 2 part post (1, 2) on creating your own hedge fund

Reports Find the Pace Of China's Overhauls Lure Foreign Investors

  • Summary: An annual World Bank survey covering the period between Jan. 2005 - Apr. 2006 shows China has sped up the pace of its economic reforms, moving up 15 spots to place 93rd out of 175 countries in terms of ease of doing business. China ranks third globally behind the U.S. and U.K. in FDI inflow with an expected $86.5 billion this year compared to $79.1 billion last year. However, there are growing concerns of over-investment and capacity but the Economic Intelligence Unit expects FDI to slow to $80 billion by 2010 after topping an expected $100 billion including portfolio inflows each year through 2010. One of the World Bank report's authors suggested China could do more to ease its business start-up process. Note there are certain variables the report doesn't track and it is based on findings only from Shanghai.
  • Comment on related stocks/ETFs: In recent news China passed a law (effective June '07) creating the first corporate bankruptcy procedures and seemingly allowing greater delinquent loan collections by lenders. On the retail front we see large U.S. retailers applying for and receiving approval to set up shop. See the World Bank's website for its annual Doing Business report. Also, read about the catch-22 between MNCs and Chinese labor. And finally, see Morgan Stanley's Stephen Roach on China's tightening campaign.

Notable articles on Seeking Alpha today: A cheaper than expected Windows Vista is good news for Dell; why Apple's getting into the TV business; Cisco's monopolistic practices in optical modules can't go on forever; a close look at casino gaming equipment stocks; what's next for miner Phelps Dodge?; the long case for smallcap Sitel Corporation; Jim Cramer's latest stock picks.

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