One Page Annotated WSJ Summary, Friday, Sept. 15

by: SA Editors
SA Editors
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Retail-Sales Growth Eases to 0.2%

  • Summary: Several economic reports came in yesterday, foremost a report saying overall retail growth eased to just 0.2% in August. Excluding retail figures from auto dealers, growth was also 0.2%, slightly below expectations. But the cooling figures do not worry most Wall Street analysts, who feel that with gas prices falling dramatically at the pump over the last month, retail spending is bound to recover quickly. Every cent less in gas prices, sustained for a year, means an additional billion dollars in disposable cash - money that will likely be poured back into retail. "I think sales could come ripping right back," said Brian Jones, senior economist at Citigroup Inc. "Any talk about us having a soft holiday season is way premature." With a hurting housing market, analysts are relying on retail spending to keep the economy vibrant and growth on pace. In other economic reporting yesterday, the Labor Department said jobless claims fell in the week ended Sept. 9, putting the four-week average at 314,250. The Labor Department also reported that import prices rose 0.8% in August from July. Excluding a jump in the price of imported fuels, import prices were up just 0.2%.
  • Comment on related stocks/ETFs: Who stands to gain the most from falling gas prices? A recent WSJ piece posits its discount retailers like Wal-Mart (NYSE:WMT). The combination of a housing slump and falling gas prices means homeowners will have less to spend, while lower income individuals, for whom gas is a larger segment of their overall budget, will have more. The Result: With a squeeze at the top and a loosening at the bottom, discount retailers win in both cases.

News Corp., Liberty Weigh a Swap

  • Summary: After taking control of DIRECTV (DTV) in 2003, News Corp. (NASDAQ:NWS) is now in negotiations with Liberty Media (LCAPA) to swap its interest in DirecTV for Liberty’s stake in NWS. This will enable NWS Chairman John Malone to strengthen his control of News Corp. Murdoch currently controls about 30% of News Corp.’s voting shares, and Liberty has increased its stake to 18%. Liberty Chairman John Malone recently said, “I had always coveted being in the satellite business,” and this transaction will be a homecoming of sorts. A few years ago he sold his stake in Tele-Communications, Inc.
  • Comment on related stocks/ETFs: As previously posted on SeekingAlpha, both Murdoch and Malone have been looking for a way to get rid of each other. The WSJ article mentions that both DIRECTV and EchoStar (NASDAQ:DISH) are experiencing rising customer acquisition costs and slower subscriber growth. The question then, is why Malone wants to go (back) into this business? The deal from News Corp.’s side makes a lot more sense; aside from enabling Murdoch to solidify his control on the voting shares, News Corp. can get out of a slowing business and concentrate on areas it believes have greater potential, like myspace.com and rolling out WiMax networks. Here is another angle: News Corp’s subsidiary NDS (NNDS) is developing IPTV technology – technology which enables local telcos to provide “Electronic Program Guides (“EPG”), interactive TV applications (“iTV”), Video on Demand (“VOD”), digital video recorder (“DVR”) or network DVR capabilities, and interactive games, in either standard (“SD”) or high definition (“HD”)…”. In addition to the slowing growth problem, satellite TV companies are burdened with the high expense of launching new satellites. Cable companies have been offering “triple play” packages (phone, TV, internet access), while telcos have had to team up with either DirecTV or Echostar to offer a competing product. Utilizing IPTV will remove the telcos dependence on satellite TV providers – and transfer that dependence to News Corp’s (i.e., Murdoch’s) NDS. Related: Q2-2006 earnings conference call transcripts for News Corp. & DIRECTV.

Caterpillar, China Are to Promote Remanufacturing

  • Summary: Caterpillar, Inc. (NYSE:CAT), the Illinois-based engine, mining and construction equipment manufacturer, is aggressively pursuing the Chinese market, which it estimates could become as big as $10 billion a year. To that end, it signed an agreement with the Chinese government to assist in the development of a remanufacturing industry, making it the first foreign company licensed to perform such a process in the country. In August, the company opened a plant in Shanghai that will function as its Asian remanufacturing center. At that plant, the company will recycle and refurbish old motors and hydraulic pumps, which will then be sold at a deep discount. Caterpillar group vice president Stu Levenick said the agreement is central to the company's goal of quadrupling its business in China by 2010. "This fits with China's strategy," he adds, since China's explosive growth has left it beset by problems of pollution and depleted resources and in need of industries that will protect its environment. Concerns include regulations that complicate the importing of old engines and parts, the possibility of a backlash in China against foreign relationships, and the threat of a trade-war that could result from tensions over trade and currency issues. Caterpillar's profits have benefited from high demand for commodities in places like China and India, with second-quarter net profits rising 38% over the previous year.
  • Comment on related stocks/ETFs: On September 5, Jeff Miller wrote that the picture continues to improve for Caterpillar, notwithstanding market apprehensions about the stock. Options trader Phil Davis points out that truck maker Man might buy Scania, which should boost Volvo (VOLV) -- a result that could in turn "ignite" Caterpillar.

Petrie Parkman Sets IPO, Aiming for $115 Million

  • Summary: Investment-banking boutique Petrie Parkman & Co. (NYSEARCA:PDP) announced plans to sell partial equity through an IPO, planning to raise up to $115m. The company raises capital for energy-industry corporations. There has been a recent wave of energy-industry mergers and public financings, some of which the company has been a part: They were Western Gas Resources' (formerly WGR) advisor in their $5.3b merger with Anadarko Petroleum Corp. (NYSE:APC). It was a co-manager in the $141m IPO of refiner Calumet Specialty Products Partners LP (NASDAQ:CLMT). The industry's have been largely successful: Thomas Weisel Partners Group Inc. (TWPG) rose 33% in its first day of trading (presently it's only 4% above IPO price). Evercore Partners Inc. (NYSE:EVR) went up 18% (now 45%). Petrie Parkman's revenue was up 79% in the first half of this year to $62.3m (largely due to its participation in industry mergers).
  • Comment on related stocks/ETFs: Kris Tuttle points out that Petrie Parkman's high compensation overhead (avg. $1.2m/employee) drained its otherwise healthy revenue growth in the first half of 2006; the value in investing in such a company, or lack thereof, will depend on their ability to grow revenues through high investment activity. See highlights of Petrie Parkman's S-1 filing, and Bill Simpson's in-depth analysis of Evercore's recent IPO, and comparison to other investment banking IPOs this year.

Booming Municipalities Defy China's Effort to Cool Economy

  • Summary: China's provincial governments don't seem to be getting the message from Beijing. As the central government attempts to slow investment, its provinces are hard at work spending and building away. For instance, Zhengzhou, the capital city of Henan province -- one of China's poorest -- could see as much as $35 billion invested in its surrounding business district as its mayor seeks to triple the city's size. In Q2 China's economy expanded 11.3% or 3.3% more than Beijing's annualized target. While China is in an envious position compared to other economies around the world there are rising concerns that "the boom could cause property bubbles that weigh down banks with bad debt when they burst." Inflation continues to remain low at 1.3% but the rate of fixed-asset investment is still outpacing the earlier high growth years of neighboring Asian economies. Some economists warn of higher inflation in China and its potentially far reaching effect on the global economy. The persistent migration of labor from the countryside to cities is one reason cities have continued to invest as they must somehow accommodate the inflow while increasing revenue.
  • Comment on related stocks/ETFs: One take away from this article is that commodity prices will be kept high by the feverish fixed-asset investment in China almost regardless of Beijing's desire to slow things down. A potential investment play assuming China could be one of the greatest bubble economies ever, is in the banking sector and handling of bad loans. Note that China's first formal corporate-bankruptcy law was recently passed which should help the likes of some of the largest foreign banks operating in China: Bank of America (NYSE:BAC), Citigroup (NYSE:C), and HSBC (HBC). A WSJ article from late August commented on the Bank of East Asia (OTCPK:BKEAY), a leading non-local lender which has a comparatively very low nonperforming loan rate.

FISCALLY FIT: How Low Will Home Prices Go? and Home Mortgage Rates Decline

  • Summary: WSJ personal finance writer Terri Cullen went house hunting with her sister in Monmouth Country, N.J. What they found: houses for sale on every block, declining house prices versus a year ago, vacant homes for sale (an indication that the original purchase was likely speculative), and a willingness among sellers and agents to consider offers dramatically below their asking price. Using her sister as a case study, Ms Cullen demonstrates that incomes haven't kept up with house prices, and with mortgage rates now rising, the affordability of a first time home is lower. Her sister's conclusion was anecdotally important: don't buy now; wait until the spring. Separately, Freddie Mac reported that the average 30-year fixed rate mortgage rate fell by 0.4 percentage points last week to 6.43%.
  • Comment on related stocks/ETFs: Terri Cullen is an outstanding journalist, but her editor chose the wrong headline for this one. In no way does her article answer the question of how low house prices will go. At most, it suggests that savvy first time buyers should wait longer before buying. Andew Mickey argues that there's too much cash waiting on the side lines for the housing market to fall sharply. And recent Hitwise data suggest that August existing home sales data could surprise on the upside. If so, that would be good for the individual homebuilder stocks, including Beazer Homes USA, Inc. (NYSE:BZH), Centex Corporation (CTX), DR Horton (NYSE:DHI), KB Home (NYSE:KBH), Lennar Corp. (NYSE:LEN), Pulte Homes, Inc. (NYSE:PHM), Toll Brothers (NYSE:TOL) and The Ryland Group, Inc. (NYSE:RYL). Note that the SPDR Homebuilders ETF (NYSEARCA:XHB) started to rise recently. More analysis of the housing sector here.

Bear Stearns Profit Jumps 16%

  • Summary: Bear Stearns Companies Inc. (NYSE:BSC) announced 3Q earnings rose 16% from last year, bettering estimates, but fell 19% from Q2. Net earnings were $437m, $3.02/share. Earlier this week, Goldman Sachs Group Inc. (NYSE:GS) and Lehman Brothers Holdings Inc. (LEH) bested estimates, causing a pre-earnings rise in BSC. Yet it seems the news was even better than hoped for; BSC was up $3.46 (2.5%) on the day. Commodity and energy trading, and solid mortgage gains, were cited as revenue-boosters. Breakdown of revenues by division: Institutional equities $436m (+31%); Fixed income $878m (+19%); Wealth-management $231m (+36%); Investment banking $232m (-23%); Global clearing services $269m (+4.4%)
  • Comment on related stocks/ETFs: While the article notes that GS and LEH beat estimates earlier this week, it is noteworthy that they did so in the form of a better-than-expected decline; BSC's was based on increased profits. CrossProfit was underwhelmed by BSC's beat, finding it unreasonable to extrapolate its current commodity and energy trading successes into the future. He's not the first person to think such thoughts. The next IB to report earnings is Morgan Stanley (NYSE:MS), which does so next Wed., Sept. 20. Of the four, MS has the highest EPS-surprise-ratio at 28.16% (BSC is next highest at 19.46%). Trading is a game of percentages, and while there's no sure-thing, the following chart, in which MS lags behind the other three, indicates the market is still reserved about MS's chances to beat the street. Given its past record, and the fact that the other three have already come in ahead, this may be a bet astute traders consider taking.

BSC vs. LEH vs. GS vs. MS 5-day 1-hour Chart

China Revamps Taxes on Exports In Effort to Ease Trade Imbalance

  • Summary: China's trade surplus hit another monthly record in August at $18.8 billion, and its year-to-date surplus of $95.7 billion is almost as much as last year's full year surplus of $101.9 billion. China now plans to use revised export tax rebates to encourage exports in IT, biotech, pharma, and heavy machinery over the low-end products that it is most synonymous with. Economists are skeptical of the impact of the new policy on its trade surplus. China charges a 17% VAT on almost everything made in-country, regardless if it's designated for export, but it also offers rebates depending on the product and industry. From now on however, rebates will be reduced for product categories such as: steel, some nonferrous metals, plastics, furniture, lighters, textiles, ceramics, cement, and glassware. And a full rebate will be given to IT, biotech, pharma, and heavy machinery products.
  • Comment on related stocks/ETFs: China's new tax policy is a positive development for the stocks of companies involved in manufacturing and exporting higher value added products from China. China's trade surplus data was released earlier this week and coverage by the WSJ mentioned an interesting analysis by Lehman Brothers (LEH). In short, all the focus on the value of the Chinese yuan could be of lesser importance for China's exporters since fewer of its foreign-funded exporters are in price-sensitive industries. Thus, even if the yuan strengthens and China's exports become more expensive, the cost of imports (such as components for electronic devices) will decrease, and actually help exporters higher up the value chain -- the same ones that will receive a full VAT rebate. Motorola (MOT) was mentioned in a WSJ article from Monday as an example of a U.S. company set to benefit from China's surging exports to Europe.

Nintendo to Charge Lower Price For Latest Videogame Console

  • Summary: Yesterday Nintendo announced launch dates and prices for its new Wii game console for the Japanese and U.S. markets. Launching on Dec. 2nd for 25,000 yen ($212) in Japan, and Nov. 19th for $249.99 in the U.S., the Wii is the last to market among the big-3 console makers, but is by far the cheapest. Microsoft's Xbox 360 launched in November of last year, and sells for $300-$400. Sony's PlayStation 3 launches Nov. 11th in Japan and Nov. 17th in the U.S., and will cost $499-$599. The Wii is admittedly less technologically advanced, but that is deliberate, as Nintendo's president explains: "Our goal is to increase the number of game players in every household. We want to create reasons for different members of the family to turn on the Wii every day." The Wii's unique wireless controller, easy-to-play games, and channels that allow legacy game downloads, digital picture viewing, and web surfing are some of the attractions for those new to gaming.
  • Comment on related stocks/ETFs: Nintendo's (OTCPK:NTDOY) ordinary shares (Tokyo: 7974) dropped 4.26% to 22,250 yen ($23.62 ADR equivalent) on higher than usual volume as its Wii launch-related announcements were mostly in-line with market expectations. Yesterday the case was made that although Nintendo is the last pure-play video game company and has a solid business, its share price is too high to make an interesting investment. However, if its shares sell-off heavily before the launch, they may be worth reconsidering. Nomura Securities notes that there was too much anticipation leading up to yesterday's game event conferences. However, it sees the Wii outperforming its predecessors (GameCube and N64) over the mid-term. Nikko-Citi meanwhile downgraded Nintendo to a "2H" from a "1H" rating given no positive surprises at yesterday's event, a higher-than-expected console sale price, and lower growth expectations of the Wii based on its low-price advantage. Nikko-Citi still sees Nintendo taking top market share as Sony (NYSE:SNE) struggles with its PS3 launch, and thus maintains its 25,200 yen ($26.75 ADR equiv.) target share price. A Reuters.com article quotes the president of Nintendo America who said, "We will make a profit on the entire Wii proposition out of the box -- hardware and software." Details on the Wii's Europe launch are expected sometime today.

Insurers Press for Terror-Backstop Renewal

  • Summary: Insurers paid out a cumulative $32.5 billion as a result of 9/11. As a result of the heavy pay outs, the U.S. government was forced to pass the Terrorism Risk Insurance Act, which assured the government would step-in in case another catastrophic terror attack occurs. In such a case, should insurers be required to make payments exceeding their deductibles, the government will act as a reinsurer, covering any additional liability that remains.mo greenberg With only a year remaining on the Terrorism Risk Insurance Act, a politically savvy group of lobbyists -- representing insurance companies, real-estate owners, financial services firms and former American International Group (NYSE:AIG) Chief Executive Maurice Greenberg (pictured) -- is working to renew the bill before it expires. Greenberg believes that while the insurance industry can meet the needs of the next 9/11, a guarantee is needed that the government will come to the assistance of the industry in the case of a WMD attack. While the administration has thus far opposed renewing the Terrorism Risk Insurance Act, other political forces may increase chances that the industry will succeed. The chief sponsor of the bill that created the program, Sen. Chris Dodd (D., Conn.), will be the senior Democrat on the Senate Banking Committee next year.
  • Comment on related stocks/ETFs: Many in the insurance industry feel that terrorism is one event that is simply too unpredictable to be fully liable for. Phil Davis takes a look at the lasting economic legacy of 9/11 - and discovers it's not all that bad.

Reshaping GE, Immelt Sells Unit

  • Summary: General Electric Co. (NYSE:GE) yesterday continued its transformation under Chairman Jeffrey Immelt, agreeing to sell its silicone and quartz business for $3.4 billion to private-equity firm Apollo Management LP. Immelt has taken the nation's second largest company (by market cap) in a new direction from that of former Chairman Jack Welch, conducting more than $100 billion in sales and purchases of new businesses since taking over five years ago. Yesterday's sale has brought up the prospect that GE may also be trying to sell its Plastic's Unit, responsible for $6.6 billion in sales last year. Immelt has mentioned in recent board meetings that the unit is ripe for review. In a note yesterday, Credit Suisse analyst Nicole Parent wrote that GE, "could be exploring strategic alternatives for its plastics unit." GE shares closed down $0.06 yesterday on news of the sale.
  • Comment on related stocks/ETFs: For an analysis of GE's most recent quarter, see the related conference call transcript. The WSJ (sub. req.) recently had a piece detailing the ways in which current GE Chairman Jeffrey Immelt has changed his company's direction since taking over for former Chaiman Jack Welch in the days leading up to 9/11. There are concerns that the GE profit making machine is headed for trouble in the upcoming months. The GE-owned NBC network is at the center of those concerns, having fallen into fourth (last) place ratings-wise, of the major TV networks. Miriam Metzinger highlights GE management's take on NBC's struggles. Frank Barnako sees a potential for strong advertising revenues from NBC's newly launched streaming online video with more than a dozen top advertisers already on board.

Ford Aims to Cut Union Work Force Through Buyouts

  • Summary: In its quest to lower payroll costs by about a third, Ford (NYSE:F) announced that it will present buyout offers to all its 75,000 domestic factory workers. Similar to the packages offered to General Motor’s (NYSE:GM) factory workers, Ford’s package will require the workers who leave to relinquish their retiree health benefits. The eight different buyout packages will pay as much as $140,000 to a departing worker, with the richest packages going to workers who have been at the company for 30+ years, or workers at least 55 year old with 10+ years at Ford. These buyouts are on top of accelerated plant closing and the recent announcement of the goal to exact 30% savings from its white-collar work force. Separately, Ford announced that it was retaining all its domestic brands (there has been speculation on Mercury’s future), and that Anne Stevens, the auto industry’s highest ranking female executive, will be departing the company.
  • Comment on related stocks/ETFs: Aside from the workers, the big loser here is the United Auto Workers (“UAW”). The Ford and GM buyouts will reduce their membership by as many as 50,000 workers, the same number of UAW workers currently at DaimlerChrysler (DCX). While Ford has its share of bulls and bears, the question remains – is that enough? As they transform themselves into smaller companies, can Ford & GM build cars that the public will want to buy. The big threat is Toyota(NYSE:TM), which just announced they are delaying some new model rollouts in order to focus on improving vehicle quality. Toyota can afford this “luxury” – they made $12.6 billion last year.

HEARD ON THE STREET: Viacom Plays to Be Market Prize

  • Summary: Following Viacom (NASDAQ:VIA) Chairman Sumner Redstone's ouster of CEO Tom Freston earlier this month, fears spread on Wall Street that there would be a mass exodus from the company, especially from MTV, which is far and away Viacom's biggest asset and most consistent money maker. The fears appear to be unfounded as Judy McGrath, the head of MTV Networks, has indicated she will stay on. The result: Investors have started to again favor the company. After poor first quarter results, many had backed off recommending Viacom shares. Now several have added a 'Buy' rating arguing that with share price down 12% since January and Viacom trading at a lower P/E multiple (16) than other media companies like Disney (NYSE:DIS) and News Corp. (NWS), the stock presents a value investment opportunity. New CEO Philippe Dauman is promising his investment focus will be similar to the approach taken by venture capitalists -- that is, to invest in start-ups with new ideas or technologies that would bolster Viacom's core media operation -- before they take off, rather than making a large acquisition.
  • Comment on related stocks/ETFs: Despite Wall Street's general excitement with Viacom's new CEO and its willingness to trust veteran media titan Sumner Redstone's convictions, Geoff Gannon argues that the firing of Tom Freston is a big step backwards for Viacom. For a comparative analysis of how Viacom stacks up against its competitors, see Rob Zenilman's chart.

AHEAD OF THE TAPE: Reality Check

  • Summary: According to a quarterly survey of CFOs released this week, a great many tech companies are facing problematic inventory levels. National Semiconductor (NYSE:NSM), for example, plans to bring down inventory levels to compensate for an order slowdown, and Best Buy's (NYSE:BBY) recently announced solid earnings results were marred by inventories that increased more than sales. Tech CFOs anticipate inventories to be 2.6% higher in the next year than they were in the last -- an increase exceeded only by that of construction companies, which are suffering the results of the housing slowdown. If a tech slowdown is in the cards, tech companies are likely to rein in production until inventory levels have come down. This would mark a significant change, as tech output is up more than 22% from a year ago. Today's report on August industrial production and capacity utilization may be an indicator whether a production pullback has begun. Though high inventories are forcing a reality check, not all is grim for the sector. Tech companies are operating at fuller capacity, which helps profits; and they are displaying more caution and realism than they did during the 1990s boom, which will cushion them somewhat from a slowing economy.
  • Comment on related stocks/ETFs: Semiconductor-equipment maker Applied Materials (NASDAQ:AMAT) pointed out during their third-quarter conference call that next year's order outlook depends on the success or failure of the semiconductor makers to cut their inventories. William Trent believes that that bodes ill for AMAT. On August 11, Jim Cramer recommended Best Buy (BBY) -- the best hard goods retailer in the US... make that the world" -- but said he would buy the stock only if it remains cheap.

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Notable articles on Seeking Alpha today: Phil Davis calls current oil prices nothing less than robbery; Eric Savitz takes a look at who's gaining and who's losing the Search Engine wars; David Andrew Taylor worries that if commodities continue to slide, we could be in for deflation; David Jackson examines the latest housing data and wonders if it's time to pick up some bargains on homebuilder stocks?; Adobe's Q3 earnings conference call transcript; Robert Nusbaum wonders what Morningstar has against ETFs; Jim Cramer's latest stock picks.

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