One Page Annotated WSJ Summary, Wednesday Sept. 13

by: SA Editors
SA Editors
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Falling Oil Prices May Spell Relief For Consumers

  • Summary: With increasing consumer concern surrounding the housing market, the drop in oil prices is often overlooked. Robert Mellman, senior economist at J.P. Morgan Chase thinks gasoline prices will soon fall to $2.30 a gallon, potentially boosting consumer spending and impacting Q4 economic growth. Still, he says, "Some 99% of the questions I get these days are about the size of the drag from housing, and I think that far too few people are thinking seriously about the boost from lower oil". The decline in oil prices is predicted to positively impact retailers across the value chain from Wal-Mart (NYSE:WMT) to Williams-Sonoma (NYSE:WSM). Equally important is the potential effect on inflation: according to Goldman Sachs economist Edward McKelvey, decreasing gasoline prices will take 0.4 percentage points off the overall inflation rate; he believes that "by boosting growth, lower energy prices could also make rate cuts less likely."
  • Comment on related stocks/ETFs: If lower gas prices raise consumer spending in the second half, the retailers' boost could be captured by going long the retail ETF -- Retail HOLDRS (NYSEARCA:RTH), which has already enjoyed a bump in the past month. Currency trader David Andrew Taylor comments on the downside to cheaper oil.

Dunn Resigns as H-P Chairman Amid Furor Over Phone Probes and BUSINESS: H-P Shuffle, a Step Back For Corporate Reform

  • Summary: In a major shake-up at Hewlett-Packard (NYSE:HPQ) resulting from the scandal surrounding illegal investigation techniques authorized by the company into its own directors and nine journalists, Chairman Patricia Dunn announced she will step down in mid-January. Current CEO Mark Hurd will replace Dunn, adding the "Chairman" title to his current "CEO." Dunn will stay on as a board member, the result of a tense compromise worked out among some of H-P's disaffected board members, brokered by Mr. Hurd and H-P's outside attorney, Lawrence Sonsini, also implicated in the scandal. Additionally, H-P said George Keyworth, identified in Ms. Dunn's probe as the source of the leaks, resigned from the board. In another development, California Attorney General Bill Lockyer says he now has "sufficient evidence to bring criminal charges against individuals inside Hewlett-Packard as well as outside the company." The entire scandal has raised questions of what the best form of corporate governance is for a 21st century economy. While Ms. Dunn has become the scapegoat for H-P's problems - perhaps rightly so as it was she who authorized the investigation - she only called for that investigation after consulting with the members of her board. Not only did she not oversee the investigation herself - that was done by the company under the control of CEO Hurd and General Counsel Ann Baskins - but no one - not Ms. Dunn, Mr. Hurd, Ms. Baskins or any other director - seems to have raised serious questions about how investigators managed to obtain private phone records. They all shared a blind spot on that point. The downside of the decision to combine the CEO and non-executive Chairman positions is that it's a step backwards for the cause of corporate reform. Fewer and fewer companies have separate individuals running the company and the board, and though most CEOs are in favor of such concentrated power, the notion that one person can be both CEO of a large corporation and chairman of the board to which that executive reports strains credulity and logic.
  • Comment on related stocks/ETFs: Criticism continues of the way H-P has handled the current scandal. The decision to "split the baby in half" and leave Patricia Dunn on the board of directors has raised the ire of Paul Kedrosky and Carl Howe. Neal Shanske gives stockholders fair warning, detailing all they need to know about the current scandal.

Apple Computer Aims to Take Over Your Living-Room TV

  • Summary: After much industry dithering about how to get downloaded content from the computer to consumers' living rooms, where the main couch potato activity takes place, Apple Computer (NASDAQ:AAPL) is unveiling its newest device, iTV. This little $299 box will be able to smoothly transfer downloaded PC content on to users' TV: "The Cupertino, Calif., company is hoping for a new wave of users who opt for the convenience of buying movies over the Internet just as they have with music on the iTunes Store." Though Disney (NYSE:DIS) is ready to dive in with an initial 75 titles, other studios are more hesitant, preferring to wait until after Q4, when they make most of their yearly sales. What they are really waiting for is Wal-Mart's (WMT) response to this new product: "The retailer, which accounts for at least 40% of sales on new-release DVDs, has expressed concerns about the prices the studios offer Apple for iTunes movies since they are cheaper than DVDs. The worry for Wal-Mart is that Apple's new movie service may cut into its traditional DVD business. The studios are mindful of not upsetting Wal-Mart too much because DVDs remain a major revenue source, even if growth has plateaued." However, most studios recognize that downloaded content will be a significant part of Hollywood's future, and with Apple's new device, the future is here.
  • Comment on related stocks/ETFs: Carl Howe says iTV marks the end of computers as IT, and the beginning of computers as TV. He also asserts that Amazon's (NASDAQ:AMZN) Unbox doesn't seem to be much of a threat to Apple's hegemony. Paul Kedrosky cuts through Steve Jobs' "reality distortion field", listing iTV's and Apple's limitations.

At Goldman, Top Fund and Earnings Drop

  • Summary: Until recently, Global Alpha -- a $10 billion hedge fund established by Goldman Sachs (NYSE:GS) -- has lived up to its name as a market outperformer. In 2005, for example, it posted a return of 33%. But the fund lost almost 10% of its value last month, a result that dents Goldman's reputation as a risk manager and creates concern about wider uncertainty. Global Alpha, which depends for its decision-making on proprietary mathematical models that set it apart from the rest of Goldman's traders, made a series of bad bets: it expected prices in global bond markets to fall when in fact they rose, for example, and it bet that the New Zealand dollar would fall against the US dollar just before it rose by 6%. This poor performance took place concurrently with mixed messages from the markets -- stock market movements appear generally positive toward the economy's prospects, while bond market movements imply a more negative view. There is some concern that Global Alpha's experience might be an indicator of wider uncertainty. Though Goldman saw an overall decline in third-quarter profit, its results still beat analysts' expectations, which helped buoy the stock as well as the overall market yesterday.
  • Comment on related stocks/ETFs: Erik Dellith believes that Goldman's third-quarter results will set the standard for the other top-tier banks that are soon to report. For more information, see the Goldman Sachs press release on third-quarter results as well as the transcript of the company's conference call.

Disk-Drive Makers Keep on Racing To Raise Capacity

  • Summary: The hard-disk-drive celebrates its 50th anniversary this week in Silicon Valley. Meanwhile, HDD manufacturers are busy at work boosting storage capacity by leaps and bounds. Researchers at Hitachi's HDD unit have achieved 345 gigabytes of data per square inch on a disk versus the 133GB drives now on the market and the 230GB achieved in its labs last year. Seagate Technology said it plans to announce the development of a 421GB per inch drive. Both Hitachi and Seagate seem to be aiming for 2009 and 2010 as launch periods for today's highest capacity lab development drives. Note that IBM invented hard drive technology in 1956 and subsequently sold its drive unit to Hitachi in 2003.
  • Comment on related stocks/ETFs: R&D at the largest hard-disk-drive manufactures makes sense and should translate into higher revenues and profits given that Microsoft (NASDAQ:MSFT) is preparing to launch its long awaited Vista operating system later this year, Apple (AAPL) is now selling its 6th generation video iPods, the spread of TiVo-like (NASDAQ:TIVO) digital video recording devices, the growing importance of data archiving for companies and government agencies, and even a popular video game console, the Xbox 360 by Microsoft has a hard drive option. The investment plays in this segment are Seagate Technology (NASDAQ:STX), Western Digital (NYSE:WDC), and Hitachi (HIT). A growing threat exists however, in the form of NAND flash memory chips.

Ford May Cut Salaried Costs 30% As Restructuring Push Accelerates

  • Summary: Continuing its restructuring, Ford (NYSE:F) announced that it will seek job and benefit cuts, with the goal of reducing overall salary costs by 30%. Staff reduction will be mostly at manager/supervisor levels, and Ford hopes that most job cuts will be through early retirement offers, employee buyouts and normal attrition. Layoffs will be the last resort. Ford also seeks to save on benefit costs, which will include cuts to pensions and health-care plans. Separately, Ford announced a new approach to car pricing, which will focus on selling cars closer to the full sticker price. Vehicle production volume will be adjusted to meet demand by idling or closing plants if necessary. The goal is to avoid building too many cars, which then requires the offering of costly incentives to move them off dealer lots.
  • Comment on related stocks/ETFs: This latest move in Ford's reorganization follows its announced intention to sell its Aston Martin nameplate. While Ford's $1.6 billion loss was dwarfed by GM's (NYSE:GM) $11.3 billion loss, the domestic Big 3 face increasing competition from Toyota (NYSE:TM) which made $12.6 billion last year. While the reorganization addresses Ford's overcapacity issue, it remains to bee seen if they can build products which resonate with the American public.

Time Warner Puts 18 Titles on Block, Pruning Portfolio

  • Summary: Time Warner (NYSE:TWX) is looking to sell 18 of its less profitable magazines for upward to $300 million total. Titles on the auction block include Popular Science, Skiing, Parenting and Field & Stream. Although Time Warner currently owns about 150 magazine title, most of its magazine profits come from a few popular titles, most notably Sports Illustrated and People. Time’s focus will be to increase the on-line presence of its most popular titles, with the goal of increasing advertising revenue. The move is expected to eliminate 560 jobs, in addition to the 550 jobs cut since December.
  • Comment on related stocks/ETFs: Time Warner hopes to realize synergies between its (now) free AOL portal, publishing and its extensive library of movies and television shows. Read TWX's latest conference call transcript.

Merck's Vioxx Tied to New Threat; Heart Risks Start Early in Study

  • Summary: Two studies published online yesterday by the Journal of the American Medical Association have identified increased kidney and arrhythmia risks for Merck's (NYSE:MRK) Vioxx painkiller, which was withdrawn from the market in 2004. Cardiovascular risks were also identified for an older painkiller, diclofenac, marketed by Novartis (NYSE:NVS). The finding of an arrhythmia risk bodes more ill for Merck, while it faces thousands of outstanding lawsuits claiming Vioxx caused heart attacks. The first such court case, which took place last year, involved a man who took Vioxx and died of arrhythmia. Merck lost the case after arguing that Vioxx is not linked to the disorder.
  • Comment on related stocks/ETFs: Fredric Cohen looks closely at the probe into allegations of wrongdoing among Merck senior executives regarding the development and marketing of Vioxx. Glenn Curtis likes Merck stock as a defensive plan in this rocky market.

China's Media Curbs Aim to Bolster Xinhua

  • Summary: China's Xinhua news organization, with Beijing's backing, is looking to take control of economic and financial news and reporting in China by limiting the capabilities of foreign news vendors such as Reuters, Bloomberg, and Dow Jones. US and EU officials are already expressing concerns about Xinhua's plans to further restrict information flows from foreign newswires and also to charge fees related to the requirement that newswires use a Chinese sales agent. The president of Xinhua has close ties to China's president Hu Jintao. However, veteran Western media executives that have long experience dealing with Xinhua say internally the Chinese media giant is very bureaucratic, struggling with office politics, and feels the threat of the Internet.
  • Comment on related stocks/ETFs: This is a negative development on many fronts such as for companies like Bloomberg, Reuters (RTRSY), and Dow Jones (DJ), for Chinese citizens craving more financial news and coverage including financial industry employees who need better access to information, and in general for China's image ahead of the '08 Beijing Olympics. The WSJ article mentions a recent speech by Xinhua's president where he emphasized his firm's support from the government and said, "... it's truly a rare opportunity. We must grab it firmly. [The final goal is] basic replacement of the competition." The former head of Dow Jones in China remembers the attack Xinhua launched a decade ago and said, "[Xinhua] is using the excuse of information control to try to build a business. If the [foreign financial media] industry doesn't come back with a united and tough response, they will lose the battle this time." See related coverage by Notice how Chinese political and corporate leaders are sending mixed messages to the world. Just yesterday a senior energy policy executive spoke of "opposing the cold war mentality" and suggested collaboration in oil field development. See highlights of a speech by a senior Xinhua official who spoke of the worsening polarization of information rich and poor countries.

Bristol-Myers's Board Fuels Takeover Rumors

  • Summary: Having fired its CEO Peter R. Dolan and its General Counsel Richard Willard, Bristol-Myers Squibb Co. (NYSE:BMY) continues to fuel speculation that the drug maker could be opening the door to a takeover by selecting an interim successor, board member James M. Cornelius (pictured), who sold off the last company he led.james cornelius In his last job, Mr. Cornelius, also an interim CEO at the time, oversaw the sale of medical-device maker Guidant Corp. to Boston Scientific Corp. (NYSE:BSX) for $27 billion. Investors have long speculated about a takeover of Bristol-Myers, which is considered to have one of the best research pipelines in the pharmaceutical industry but is struggling to maintain profits from its blockbuster drugs. The choice of Mr. Cornelius, 62, gives such a scenario more credence, analysts say. Exasperated by the repeated missteps that occurred under Mr. Dolan's watch, some shareholders believe the time is right to sell the company and have been urging the board to do so. Chris Schott, an analyst with Bank of America, stated in a research note he sent to clients yesterday: "We believe, given Cornelius's background, that the market will continue to raise the possibility of Bristol as a takeover candidate." Shares of BMY responded by jumping nearly 4% to $24.32 in NYSE composite trading yesterday.
  • Comment on related stocks/ETFs: Read Jim Cramer's take on Bristol-Myers following the recent firing of the company's CEO. For more on the company's difficulties turning profits of late, read David Phillips' piece.

AHEAD OF THE TAPE: Pump Priming Wal-Mart

  • Summary: The combination of cheaper prices at the pump and a softening housing market means that discount and low-end retailers like Wal-Mart (WMT) should continue to see an upswing in profits relative to high-end retailers. Gas prices are already down 14% since August highs and with wholesale prices decreased by nearly a third, pump prices should continue to plummet. This means that lower income families, who have minimal cushion between daily needs like gas vs. non-essential retail items, should now have some extra cash to unload at stores like Wal-Mart. The nation's wealthy, on the other hand, may have to continue to tighten the purse-strings with the housing slump in full swing -- they will less frequently visit upscale retailers and will have to settle for discounters. The market has begun to take notice with Wal-Mart shares up 8% since August lows. WMT shares are now also outperforming luxury retailers like Coach (NYSE:COH), Tiffany (NYSE:TIF) and Williams-Sonoma (WSM).
  • Comment on related stocks/ETFs: We've seen a slew of bullishness surrounding discount retailers since pump prices began to fall last month. Neil Shanske makes the long case for BJ's while Hilary Kramer is bullish on both Costco and Target.

HEARD IN ASIA: Sekisui House Branches Out

  • Summary: Sekisui House is Japan's largest home builder and with the Japanese economy approaching its longest period of growth in ten years it is expanding into the real estate development business. Late last month Sekisui said it plans to invest 300 billion yen ($2.6b) over the next 2.5 years in commercial real estate development, which will also help Sekisui counter growth challenges from a shrinking Japanese population. A Goldman Sachs analyst comments, "We seem to be coming to a stage where [the market] should reevaluate Sekisui House as a comprehensive housing developer." A Japanese investment fund manager sees the nation's forecasted stable growth as reason to believe home sales could increase with a "good possibility of further growth in house makers' earnings." And a Merrill Lynch analyst recently raised his target on Sekisui to 2,100 yen ($17.85) from 1,900 yen with a "buy" rating.
  • Comment on related stocks/ETFs: Sekisui House (OTCPK:SKHSY) (Tokyo: 1928) trades on the Pink Sheets with thin but decent volume for an ADR. Always remember to use limit orders when trading. Yahoo! Japan Finance shows its ordinary shares trade at 27.66 times trailing earnings with a dividend yield of 1.15% and closed today down 0.3% at 1,741 yen ($14.80) versus its ADR close yesterday of $14.90. Its daily trading volume in Japan is well-over one million shares and it trades about 1.6x book value. The Bank of Japan left the overnight call rate unchanged at 0.25% with Sekisui standing to benefit as potential home buyers look to buy as the possibility of further rate hikes looms. Real estate or JREIT investing has grown in popularity in Japan. Nomura Real Estate Holdings October 3rd IPO will be Japan's largest this year. And Macquarie's CEO recently said, "We [also] see good opportunities to invest in real estate and offer this [through Japanese real-estate funds] to investors globally." Visit Sekisui's IR website. Also see's detailed quote page of Sekisui.

HEARD ON THE STREET: Hedge Funds Miss Their Target

  • Summary: Many hedge funds run by "superstar" managers have been providing investors with meager returns for the year to date, with some funds, such as Jack Meyer's $6 billion Convexity Capital, returning as little as 1%, after the funds take their fees. Still, other hedge funds are up as much as 30%, such as Todd Deutsch's $800 million Galleon Captains Offshore Fund. With the DJIA up 7% and the S&P 500 up 4.2% on the year, the question remains why some "superstar" funds have managed to outperform these indexes so impressively while others are struggling to break even. The answer: Hedge funds that focus on stock picking - so-called long-short managers who buy some stocks and bet against others - are up a meager 1.4% so far this year while on the whole, hedge funds are in-line with market returns. This means that for the year to date, funds that stay away from heavy stock picking are greatly outperforming their stock picking cousins.
  • Comment on related stocks/ETFs: For insight on hedge fund databases, see Steven Town's WSJ summary from a week ago. Also see Richard Kang's piece. Want to use hedge fund strategies in your personal portfolio? Read David Jackson's 2-part series and you'll be well on your way.

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Notable articles on Seeking Alpha today: Conference call transcripts from Best Buy and Goldman Sachs; how to take advantage of China's booming e-commerce sector; security software leader Check Point is misunderstood by Wall St.; Hilary Kramer sees long term opportunity in Morgan Stanley; is Sears' stock buyback program a good idea for investors?; Dean Bubley looks at Telecom Italia; Jim Cramer's latest stock picks.

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