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- Summary: The two biggest U.S. auto makers, General Motors (NYSE:GM) and Ford (NYSE:F), recently initiated and then abandoned talks of an alliance -- a notion that reflects dramatic changes in the auto industry. GM shareholder Kirk Kerkorian is pressing the company to open similar alliance talks with Renault and Nissan. Ford CFO Don Leclair, while refusing to address the aborted discussions with GM, cited Ford's arrangement with competitor PSA Peugeot Citroën SA for six- and eight-cylinder diesels as, "the kind of cooperative venture that you need to be looking at." Ford, GM and DaimlerChrysler's (DCX) Chrysler Group are competitors of old, but the growing threat from foreign rivals like Toyota (NYSE:TM), "has left all three facing shrinking market share, declining profit margins and rising pressure to rethink their strategies." Although a full merger between Ford and GM would raise antitrust concerns, the companies have already cooperated on a six-speed transmission and are open to further engine and transmission cooperation. GM would also like to involve more participants in its gas-electric hybrid technology venture with DaimlerChrysler and BMW.
- Comment on related stocks/ETFs: John Bethel cites sector analyst Jerry Flint's reflection that Detroit's luck has run out; he doubts a GM/Renault/Nissan confederation will ever become a reality. Rob Zenilman identifies Toyota as a major threat to GM and Ford, citing Bill Allen's observation that Toyota's development slowdown and quality improvement are signs of strength.
- Summary: Walt Disney Co. (NYSE:DIS) will today unveil the "Mix Max," a portable music and video player similar to Apple's (NASDAQ:AAPL) iPod, but aimed at a younger demographic; the 9-13 age bracket. The player will retail for $99 and should hit the market in late October. In addition to the option of downloading music and videos from the Internet, the Mix Max offers the option of viewing movies stored on memory cards. Disney plans to offer its own movies on these cards for $19.99 -- much more than movies offered by Sprint Nextel Co. for viewing on cellphones, and more than Disney movie downloads from Apple's iTunes. In an unusual move, Disney has left the Mix Max technology open. "There's nothing tying it to Disney," says Chris Heatherly, global vice president of Disney global electronics. "We intentionally left the platform open because we knew kids would want other video material." The "'tween" demographic is increasingly appealing to retailers like Disney, Hasbro (NASDAQ:HAS) and Mattel (NASDAQ:MAT): for the 12 months ended in July, this demographic was responsible for over $975 million in sales in the U.S., over 10% more than a year earlier.
- Comment on related stocks/ETFs: Apple has plenty of competitors clamoring to enter the iPod-wannabe market (for instance, RealNetworks (NASDAQ:RNWK) and SanDisk (SNDK)), but Disney is among the first in the field to come out with a device targeting middle-school-aged children. Travis Johnson has some observations about Microsoft's (NASDAQ:MSFT) attempt to break into the iPod space with the forthcoming Zune. Carl Howe notes that the Zune's target market has been "buying Apples for years."
- Summary: Napster said it has hired the services of UBS AG's Investment Bank to review interest by unnamed parties in forming strategic partnerships and/or acquiring it. Napster has struggled to turn a profit, while Apple's iTunes download service and iPod have dominated the market. In its first-quarter ended in June it narrowed its net loss to $9.8 million on sales of $28.1 million, compared to a loss of $19.9 million on sales of $21 million in Q1 last year. At the end of Q1 Napster said it had 512,000 subscribers. The firm's CEO declined to provide any names of potential investors. An analyst at Forrester Research suggested an Internet portal or retailer that lacks its own music store such as Amazon would be a good match.
- Comment on related stocks/ETFs: Coverage of this story by Reuters on Yahoo! Finance noted that Apple's (AAPL) iTunes has 88% of the market for legal music downloads in the U.S. The same article reports that Napster's (NAPS) number of subscribers reported in Q1 fell from Q4 following its transition to offering free downloads with advertising on its website in an effort to control marketing costs. Coverage by Businessweek.com on Yahoo! Finance mentions RealNetwork's (RNWK) Rhapsody service has 1.61 million subscribers. The article lists Creative (OTCPK:CREAF), Samsung, and Motorola (MOT) as possible acquirers. Yesterday the WSJ reported on the plans of Apple's rivals to imitate its success and grab some market share. Speaking of imitating, see this unrelated story on Credit Suisse's (NYSE:CSR) 'copy cat syndrome' in relation to UBS AG (NYSE:UBS). Lastly, see Napster's latest conference call transcript.
- Summary: The free market is working. As oil prices climbed, companies were willing to spend more on oil exploration. So far the results are impressive. Earlier this month Chevron (NYSE:CVX), Devon (NYSE:DVN) and Statoil (NYSE:STO) announced the discovery of “Jack”, a huge oil field five miles beneath the Gulf of Mexico. Even though Jack won’t be on-line for a few years, oil prices have been sliding since the announcement. Drilling deeper, while expensive, is the new frontier in oil exploration. Almost half of the oil fields coming on-line in the next four years are at least 2,500 feet deep. A consequence of all this deep drilling activity is that there is not enough deep drilling equipment to satisfy current demand, causing prices to skyrocket. Exploration equipment companies are responding by accelerating their construction of new floating rigs (23 under construction) and drill ships (6 under construction). Increasing the available supply of oil should not be a problem - "Oil prices could get cut in half and the economics of these projects would still be attractive," noted analyst C.K. Poe Fratt, who covers drilling rigs for A.G. Edwards & Sons.
- Comment on related stocks/ETFs: Earnings are expected to double at the four companies whose specialty is leasing deepwater rigs. While the consumer will be happy about falling gasoline prices, a rapid decline in oil prices can have negative implications for the U.S. economy.
- Summary: Toyota, despite its seemingly perfect execution, has not exactly gotten it right with every model, every time. A good example is in the minivan segment where it and the rest of the market struggled to come up with an answer to Dodge's Caravan for many years. Persistence paid off however, as its redesigned Sienna minivan in 2004 started to win over consumers. Ford on the other hand, has lacked persistence. It has effectively abandoned various segments of autos that showed weakness, instead of investing more and trying to improve them. Consider its Freestar minivan. which it will stop making next year; the sharp fall in sales of Ranger small-size pickups; and the disappearance of the once best-selling Taurus midsize sedan. Toyota is relentless in its pursuit of market share, and although there are other reasons aside from persistence why Toyota is enjoying more success than Ford, this is a critical time in which Ford must prove it can innovate or it will eventually find itself a niche player.
- Comment on related stocks/ETFs: Continued downsizing is what's making news at Ford (F) these days. See if you agree with Jerry Flint that Detroit's luck has run out. Barron's recently offered nine tips for Alan Mullaly, Ford's new CEO. The threat of Toyota (TM) is growing even as it plans to slow things down to focus more on quality. Year-to-date share prices of both Ford and Toyota are about flat, although Ford's shares have fallen nearly 20% after gaining almost 40% over about the past two months.
- Summary: Ford's (F) restructuring has a new twist: Starting next quarter, the U.S. automotive giant will no longer pay shareholder dividends, the first time since 1982 the company wouldn't offer dividends. In addition, Ford cut this quarter's dividend from 10 to 5 cents a share. The elimination of the dividend is part of a massive restructuring plan announced Friday in which the company plans to cut about 14,000 jobs and offer buyouts to its 75,000 hourly workers. In the U.S., shares dropped 2.5% on the news in addition to the 12% they had already shed after Ford announced the layoffs Friday. The move raises the question of how many share owners will now part with the stock as a result of the dividend cancellation. "For older clients, or those holding on to [the stock] for the dividend -- especially those who were reinvesting it or taking it as income -- this is something that will require a lot of scrutiny," says Brian Orol, a certified financial planner with Strategic Wealth Management Inc. in Raleigh, N.C. Before the announcement was made, Ford's stock had an annual dividend yield of 2.2%, compared with the Standard & Poor's 500 yield of 1.9%. So it shouldn't be that difficult to find a replacement. The automobile industry has a history of offering dividends: General Motors (GM) pays an annual yield of 3.0%, and DaimlerChrysler AG (DCX) 3.4%, according to Standard & Poor's.
- Comment on related stocks/ETFs: For more on Ford's broad-based plans to cut costs, see prior WSJ and Barron's summaries. Things are not looking pretty at Ford: Jerry Flint believes Detroit's luck has run out, while The Stock Masters feel investors need to know if Ford can recover. On the whole, not a good sign.
- Summary: BP (NYSE:BP) announced a further postponement for the opening of the Thunder Horse oil field which it jointly owns with Exxon (NYSE:XOM). The 6,000 foot deep oil field in the Gulf of Mexico is now expected to come on-line in 2008, a year later than previously planned. This is not the first delay for Thunder Horse – in early 2005 BP expected the field to start pumping oil in the latter part of that year. This is also not the only problem costing BP money. Its Texas City refinery is still running at reduced capacity since it was closed last year due hurricanes and equipment problems. In addition, BP’s Alaskan oil field is running at 50% of regular production, due to corrosion problems.
- Comment on related stocks/ETFs: While the new Jack oil field shows the rewards of deep sea drilling, Thunder Horse highlights the risks in this high stakes game. Even though the Alaskan oil field shutdown should only cause short term losses, investors have a right to be nervous, given the most recent delay at Thunder Horse and the U.S. Commodity Futures Trading Commission’s investigation of BP for price fixing.
- Summary: Wall Street is reeling from its latest energy-trading fiasco. While the exact details remain sketchy, Brian Hunter, a 32-year-old Canadian energy trader working out of Calgary, AL, for the Amaranth Advisors hedge fund managed to lose $5B in about a week, halving the fund's managed assets from $9B to $4.5B. Hunter traded natural gas, the most volatile of all energy markets, claiming he was able to identify "mispriced options." Hunter traded for Deutsche Bank's energy desk from 2001-2004, but eventually left the company after a disagreement over who was responsible for a one-week loss of $51 million (Hunter blamed problems with DB's software); they are still in litigation. In May, his position dropped nearly $1B, giving investors fits. But with 6% gains in June and August, Hunter appeared to be proving doubters wrong. Brokers said that Wall Street firms Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), Merrill Lynch & Co. Inc. (MER) and JPMorgan & Chase Co. (NYSE:JPM) were among the winners in recent price action. Centaurus Energy, run by former Enron trader John Arnold, is up more than 100% trading the same markets that scorched Amaranth. The firms say they weren't actively trading against Amaranth. But Vince Kaminski, a risk-management expert who protested risky trades while at Enron Corp. said yesterday Hunter's mistakes were, "typical of inexperienced and aggressive traders." Mr. Hunter, "appeared to have a position that the entire market knew about. The markets are very cruel." Citing a well-known adage, Mr. Kaminski added, "The market can stay irrational longer than you can stay solvent." Just one month ago, Amaranth initiated plans to offer investors an energy-only portfolio; not-surprisingly the plans have now been scrapped. Congress recently entered the debate on whether hedge funds exacerbate volatility. The Commodity Futures Trading Commission [CFTC] argued in a 2005 report that hedge-fund trading didn't increase volatility, and even improved market function by giving energy firms more trading partners. But a recent report by the Senate Investigations Committee contended energy markets were badly undermonitored. Amaranth can impose limits on investors' ability to withdraw funds. The massive losses are likely to renew calls for greater transparency among hedge-funds. Many money managers say they declined to invest with Amaranth because of its lack of disclosure.
- Comment on related stocks/ETFs: Phil Davis posted a detailed analysis of Congress' recent foray into energy-price-fixing and the CFTC's shortcomings as an industry watchdog; it is a must-read. Never-to-be-scooped, he already has what to say about the current debacle. Roger Nusbaum, an outspoken advocate of diversification and risk management, calls out hedge funds who chase unproportionally big returns by taking on unreasonable exposure to select markets.
- Summary: The FCC auctioned more than 1,000 radio-spectrum licenses to provide new wireless services, generating almost $13.9 billion in gross proceeds and handing T-Mobile USA Inc. the capacity it needs to compete with larger rivals. The company, which is a unit of German telecommunications provider Deutsche Telekom AG (DT), was the top bidder, offering almost $4.2 billion for 120 licenses. Verizon Wireless (NYSE:VZ) agreed to pay $2.8 billion for 13 licenses, and a consortium that includes cable operators Comcast Corp. (NASDAQ:CMCSA) and Time Warner Inc. (NYSE:TWX), along with cellular-phone carrier Sprint Nextel Corp. (NYSE:S), agreed to pay almost $2.4 billion for 137 spectrum licenses. Many potential new players were squeezed out of the game before it got going as a result of the high bidding prices. "The dream of new entrants that would shake up the market died," said Roger Entner, an analyst for technology research firm Ovum. "The usual suspects have won." Some smaller carriers were able to expand their coverage from select cities to a much larger area. For example, Leap Wireless International Inc. (LEAP), a smaller, regional company based in San Diego, won 99 licenses, bidding $710 million for airwaves covering cities including Washington, Philadelphia, Baltimore and St. Louis. Until now, T-Mobile lacked the capacity to upgrade its network to run 3G wireless services. The new licenses will put T-Mobile in a more competitive position.
- Comment on related stocks/ETFs: Barron's weekly had an enlightening piece on the spectrum auction and CMCSA's role in this yet-unexplored market. Barron's looks at some of the possible reasons the U.S.'s biggest cable player is foraying into unchartered territories; in our comments, we look at even more.
- Summary: The privately held and widely popular video-sharing site YouTube is taking measures to make its platform a win-win for all parties. By developing a new business model and accompanying distribution system YouTube can compensate media companies for the playing of their content by sharing ad revenue. YouTube's new technology can automatically flag copyrighted material that has been uploaded without permission from media companies and then either share ad revenue or offer means to have the content taken down. In this manner, both YouTube and the media companies get paid, while viewers get to continue to watch videos for free. So far Warner Music Group is the first to sign up. In June, NBC Universal and YouTube reached agreement on an advertising and content deal. Media industry insiders say revenue from online video licensees is small, for instance amounting to about $15 million or less than 0.5% of Vivendi SA's Universal Music Group revenue. However, the growth rate of the value of deals is said to be growing rapidly. Despite its efforts YouTube still faces some legal challenges and opposition from some media companies.
- Comment on related stocks/ETFs: Monetary benefits from signing ad revenue sharing deals with YouTube are not significant at current levels but as mentioned above, they are growing rapidly in value. This can be viewed as a positive development for publicly traded media firms such as Warner Music Group (NYSE:WMG), General Electric's (NYSE:GE) NBC Universal, and News Corp (NASDAQ:NWS). Vivendi (OTCPK:VIVEF) is most notably showing opposition to YouTube and the on-line audio/video sharing sites. It seems there is more potential in agreeing to ad sharing deals and having a growing inflow of revenue as opposed to attracting all the publicity of putting up a fight and possibly having to deal with legal fees. Read Bambi Francisco's positive take on the YouTube-Warner deal. Frank Barnako says YouTube was on an investment banker's list of candidates for buyouts of online content providers. In News Corp's latest earnings conference call Rupert Murdoch responded as follows to a question about whether his firm is interested in acquiring YouTube: "No. We don't think so. We already have about 55% as many as they do of downloads of videos and we expect that to increase as we improve that part of MySpace. We are working hard at that right now."
- Summary: There is speculation that Sears Holding's Corp. (NASDAQ:SHLD) Chairman Eddie Lampert (pictured) is trying to invest in other businesses now that Sears appears to be on sound footing. Among companies that have been mentioned as possible takeover targets for Sears are Home Depot (NYSE:HD) and The Gap (NYSE:GPS). Both companies declined to comment, saying they don't comment on market "chatter." There is also hearsay that Lampert may attempt to enter the auto industry. He sold about a million shares of General Motors (GM) during the first quarter, and his hedge fund ESL owned about 30% of AutoZone Inc. (NYSE:AZO) at the end of the second quarter, and approximately 24% of AutoNation Inc. (NYSE:AN). Lampert's moves are hard to track -- he is one of a few individuals who has SEC permission allowing him to delay filing financial statements, meaning all Wall Street can do is wait and guess what Lampert's next move may be.
- Comment on related stocks/ETFs: Speculation about Eddie Lampert's next move is nothing new. A month ago, William Trent speculated that Lampert's Sears Holding may be in the hunt for another retailer, BJ's Wholesale (NYSE:BJ). Who is Eddie Lampert, the man? The Stalwart paints a picture and it's not pretty, saying (among other things): "Everyone hailed the man a genius for unlocking hidden value, declaring Lampert a latter-day Warren Buffett. Like Buffet he even writes folksy letters to his shareholders. Only Lampert doesn't have Buffett's self-effacing style or his modesty... So while Eddie Lampert wants to sound like Buffett, he actually sounds more like the Enron guys." Ouch! Also, see Wikipedia on Eddie Lampert, especially the external links section for a wealth of articles on the man.
- Summary: KFx Inc. (NASDAQ:KFX), a company which offers combined energy, environmental and economic solutions to coal-fired power generating facilities and industrial coal users, aims to make low-quality coal burn better. KFx's share price has more than quadrupled since 2002 on the tails of the commodities bull market. On Sept. 1, KFx shares fell 5% after Pacific Growth Equities analyst Michael Horwitz said he'd heard that one of KFx's industrial customers had rejected a delivery of coal because it didn't produce enough heat and its dust content was high and unsafe. The company fired back with a press release saying Mr. Horwitz's report was an "apparently malicious attempt to damage our stockholders" without "any attempt to verify the facts." Mr. Horwitz responded that he tried to contact KFx's management prior to his comment; he failed to comment further. Last week, KFx's share prices fell even more after it announced a test-run at a different customer, utility operator FirstEnergy. Investors initially felt the release was short on details leading to the fall in share price. Then, in a follow-up, KFx said there had been excess dust in a delivery to FirstEnergy (NYSE:FE) and that a few of the coal cars it shipped arrived with "elevated heat content."
- Comment on related stocks/ETFs: According to the WSJ article, "One critic, Manuel Asensio, has posted videos and pictures on the Web purporting to document KFx's problems." Arsenio's critiques of the company are not new, as George Gutowski pointed out in February. He provides links which allow you to decide for yourself who is right.
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