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MACRO AND HOUSING
Summary: After 17 consecutive quarter-point rate hikes the Fed has now paused in its last two rate decision meetings keeping its fed fund target at 5.25% but still signaled a bias toward raising rates. In its accompanying statement the Fed attributed "(continued) moderation in economic growth ... partly ... (to) a cooling of the housing market." It commented that it sees inflation pressures likely moderating over time due to "reduced impetus from energy prices" as oil futures have fallen 22% since mid-July. There's no consensus among economists regarding the Fed's next move but in their eyes the Fed appears more comfortable pausing even though it still mentioned "some inflation risks remain" over the longer-term. The Fed next meets on Oct. 24-25. There's growing market speculation it will cut rates once by June.
Summary of economists' reactions: 1) Economic Outlook Group: Bernard Baumohl says the soft landing outlook persists but warns growth could quicken, which will have "significant implications for interest rates, stock prices and currency values." 2) BNP Paribas Market Economics: Expects housing decline induced economic slowdown forcing Fed to "cut rats rapidly ... (from) around the turn of the year." 3) MFR Inc.: Joshua Shapiro cites the similarity of the last two Fed accompanying statements. Sees monetary policy on hold unless there's a big change in either direction in economic growth or more stubborn core inflation readings. 4) RBS Greenwich Capital: Stephen Stanley expects another rate hike by year's end due to increased consumer spending from lower energy prices. Views early-'07 monetary easing as aggressive versus Fed's outlook. 5) Insight Economics: Steven Wood says the Fed could be on hold for an "extended time." He says further tightening would require "several months of worse-than-expected readings." 6) Morgan Stanley U.S. Economics: Expects recent plunge in fuel prices to cause reacceleration of growth bringing the Fed back in the game by year end. Says even if economic growth continues to slow "it's hard to conceive of the Fed easing before mid-2007." 7) Bear Stearns U.S. Economics: Forecasts eventual Fed rate hike with target of around 5.75%. Cites Fed's consistent view of elevated core inflation and some risks of inflation remaining. 8) Global Insight: Brian Bethune says it's very likely the Fed holds at 5.25% through summer '07. Also says there's a very high probability of rate cuts late next year to 4.75% target rate. Read full article >
Related links: Wednesday's Fed Release: Where's The Analysis of the Economy?! • S&P 500 Movement and Fed Rate Decisions: No Visible Correlation • Fed's Not Done Raising Rates • The Wall Street Journal: PARSING THE FED: Pause, or Stop? • FRB: September statement, August statement
Summary: Royal Dutch Shell (RDS.A) and Exxon Mobil (XOM) are among several oil companies determined to retain the terms of contracts signed with oil-producing nations in the early 1990s, despite the wrath of governments that expect to be compensated for the subsequent rise in oil prices. Chevron (CVX) and France's Total S.A. (TOT), on the other hand, have expressed a willingness to share profits. Russia has indicated its displeasure at existing contracts by revoking an environmental permit for Shell's $20 billion Sakhalin-II project -- a move that could shut down the project completely. Developing countries are unilaterally increasing royalties and taxes on oil revenue, and companies that balk, like Italy's Eni and France's Total, are seeing their fields confiscated. Read full article >
Related links: Commodities' Downward Trend • Why We Continue to Expect Exorbitant Oil Prices • McDep Buy Recommendations: Chevron, Encana and Marathon • Russian Government Muscling In on Anglo-Russian Gas Field Venture • Conference call transcripts: Exxon Mobil Co. Q2 2006
TECHNOLOGY AND INTERNET
Summary: Two software companies, Adobe (ADBE) and Symantec (SYMC), have appealed to the EU to take antitrust actions against Microsoft's (MSFT) new operating system, Vista. The companies claim features in Microsoft's Vista system, which will likely run 90% of the world's computers, will serve to directly undercut their own products. In Adobe's case, Vista will include an XML document reader which it feels will steal market share from its Acrobat pdf reader. In Symantec's case, the company feels Microsoft has built in security measures that will make it impossible for its own virus protection software to operate properly on a Vista-run system. Microsoft counters in the latter case that the security features are necessary to provide users the safest possible computing and web-surfing experience. Microsoft was fined $600 million by the EU after its last operating system was released in 2004 for antitrust violations - charges the company is still fighting. Read full article>
Related links: • Antitrust Chief Barnett: Innovators Should Be Left to their Own Devices • Why The EU's Fines Against Microsoft Aren't So Significant • Adobe: Microsoft's Vista, PDF not a Threat • Symantec and McAfee Have Little to Fear From Microsoft Antivirus Software • Wall Street Journal: Microsoft Fined By the EU; Stock Implications • Conference call transcripts: • MSFT F4Q06 • ADBE F3Q06 • SYMC Q1 2007
Summary: Besides telco giants like ATT (T) and Verizon (VZ), there are about 1,100 small local telephone companies that have been upgrading their networks in order to provide television over their fiber-optic lines. Equipment suppliers that target these small telcos are also much smaller than major equipment provider such as Lucent (LU). APA Enterprises (OTCPK:APAT) and Occam (OCNW), niche suppliers to the local telcos, had sales last year of $15.7 million and $39 million, respectively (Lucent had $15.44 billion in sales). While spending on fiber upgrades and Internet protocol television (“IPTV” – technology to provide television over high speed Internet) equipment has been flat this year, analysts are expecting sales to at least double by 2010. Nevertheless, there are doubts whether these small equipment vendors can grow profitably over the long haul. According to Patrick Pfeffer, chief network architect for telecom consulting firm Detecon, “Telco TV is a game of numbers … Because of the scale issues, the suppliers will never be able to make money serving the rural companies alone." Read full article >
Related links: Fiber to the Home: A World of Headaches for Comcast • AT&T's Project Lightspeed -- Too Little, Too Late • News Corp. Looks to Dump DIRECTV • Wikipedia: IPTV
Summary: Advanced Micro Devices (AMD) is taking an open source-like approach with its Opteron microprocessor that differs from rival Intel's approach (INTC), which doesn't help companies connect their products with Intel's chips. By creating a common socket for connecting chips and sharing the technology with other companies, AMD expects the cost of using Opteron will decline and thus, likely expects an increase in its sales. AMD will also charge undisclosed licensing fees. An AMD executive said he doesn't think it's risky to lower costs for competitors and rather sees the opposite. So far it has received a warm welcome from the likes of International Business Machines (IBM), Sun Microsystems (SUNW), Cray (CRAY), and Fujitsu Siemens Computers, a Fujitsu (OTCPK:FJTSY), Siemens (SI) joint venture. Read full article >
Related links: Intel & AMD: Where the Chips Fall • AMD: Chipping Away at Customer Loyalty • Intel & AMD: Both Are Long Term Buys • IBM Expands Use of AMD Server Chips; Stock Implications • Conference call transcripts: Advanced Micro Devices Q206 • Intel Corp Q206
Summary: Mark Zuckerberg (pictured) started Facebook, a website that allows students to post pictures, create custom pages, and communicate, while in Harvard in 2004 (he since dropped out). By early 2005, the site had spread to other universities, and had 1.6M monthly U.S. visitors; today it boasts 9M, who spend on average an hour a month (an eternity in internet-time). Most of those users are young; they gather on the site to personalize their web pages, look for friends, and instant-message. Social networking sites such as Facebook have recently become big business as marketers have realized the access they offer to the sites' demographic: News Corp. (NWS.A) bought MySpace last year for $650M and in August, Google (GOOG) guaranteed MySpace a minimum of $900M in ad revenue over the next 3.5 years. Insiders say Zuckerberg has already held acquisition talks with Yahoo! Inc. (YHOO), Microsoft Corp. (MSFT), and Viacom Inc. (VIA). Now, say some, he is in serious negotiations with Yahoo to sell-out for close to $1B. Concerns: 1) Networking sites' users are a fickle bunch - sites can flame out as fast as they ignite. 2) Facebook management has been accused of sophomoric behaviour; Zuckerberg reportedly refused to meet with MSFT because 8 a.m. was too early. Facebook is debating whether to sell out or stay independent in the hopes of becoming another Google. Zuckerberg: "I would never say that at no point in the future would we go public or become part of a larger company... but what I would say is, it's not our priority. There's so much more to do here." Insiders say Zuckerberg holds a roughly 30% stake. Venture capitalists who funded Facebook include Accel Partners, who invested around $13 million in Facebook in 2005. Insiders say Facebook will soon top $100M in annual ad revenue, which is considered the minimum for a high-tech IPO these days. Read full article >
Related links: How a Facebook Acquisition Would Benefit Yahoo • Message from Yahoo's Warning • Facebook's User Experience Error, and Why Yahoo and Viacom Tried to Acquire It • WSJ: Facebook launches Election 2006 network • The Crimson White: Facebook becomes twisted tool for hate • eBay and Yahoo are Losing Talent to Smaller Internet Startups • Conference call transcripts: Yahoo! Q2 2006 . MSFT Q4 2006
Summary: Dell's (DELL) new XPS 700 is not shaping up to be the revenue booster the company had hoped for. The product was specifically developed to crack the burgeoning gaming market, which has consumers willing to pay up to $5000 for a new PC. Sales of customized gaming PCs are expected to approach 1.9 million units, up 45% from last year, according to Endpoint Technologies Associates. However, Dell's new PC has left many consumers more rankled than satisfied. Many features that are common to high end PC's are missing from Dell's, including automatic memory capability, called SLI Memory, dual ethernet connections and Raid 5, a software-based storage technology. These are all standard features of the Nvidia (NVDA) chipset used in the Dell computers, however Dell has disabled them due to technical problems. The lack of these features and other problems has significantly disappointed consumers, some of whom doubt that they will ever buy another Dell product. Dell currently lags behind Apple (AAPL) and Hewlett Packard (HPQ) in consumer PC sales, and had hoped that this product would be its ticket into that market. Read full article >
Related links: Price Isn't Everything: Dell Is Still Problematic • Has Dell Hit Rock Bottom? • CNET Review: Dell XPS 700 ? Conference call transcripts: Dell Q2 2007 Earnings Conference Call Transcript
Summary: With daytime TV pulling in lower and lower ratings, broadcast TV companies are looking to new measures to reel in larger audiences. "There's no question that the business has changed dramatically," says Roger King, chief executive of King World, a unit of CBS Corp. (CBS), which distributes such hits as "Oprah" and "Wheel of Fortune." "Shows are coming out that are just bombing." With the viewers less likely to stay put on one channel for more than a single program and many more viewing options available on cable, the nation's 210 local networks are not taking chances on picking up new talk shows with their increased risk of failure. Enter Rachael Ray (pictured). Ms. Ray, a personality on cable's Food Network, reflects King World's belief that new shows need careful introduction and marketing to a broad daytime audience and a perfectly suited personality to attract a diverse audience. Ms. Ray has frequently popped up as a guest on "Oprah" to gain her added exposure and is considered to have a "down-to-earth" style suited to younger audiences. So far, Ms. Ray's ratings have been the strongest for a new talk show in four years. Read full article >
Related links: • TV Advertising's Ongoing Decline • Rachael Ray's web site • Media conference call transcripts
RETAIL, CONSUMER PRODUCTS AND RESTAURANTS
Summary: McDonald's (MCD) is trying to send a new message to its Chinese consumers: it's all about the beef. As it shifts from a chicken-heavy menu and tries to emphasize its upscale "Western image" and the appeal of beef -- which is considered a luxury -- McDonald's is promoting beef burgers such as the recently introduced Quarter Pounder on TV commercials and print advertising using an obvious sexual theme that plays on Chinese views that beef is manly, boosts energy, and increases sex appeal. McDonald's is in the middle of an expansion as it eyes an additional 230 restaurant openings by 2008 for a total of about 1,000 locations. Also, it recently signed a deal with the nation's largest gasoline retailer to open stores at existing and future gas stations. Although McDonald's still wants to incorporate local tastes in its menu, it also wants to diverge from rival Yum! Brands' KFC, which has twice as many restaurants but caters more to local tastes. McDonald's chief marketing and corporate-affairs officer in China comments, "People want McDonald's to be a Western brand. When people come to us, they want an alternative to what they can get everywhere else." Read full article >
Related links: McDonald's China TV ad (Windows Media) • McDonald's Discusses China Development Strategy, Sinopec Deal • McDonald's Exploring Tiered Pricing in China • McDonald's Discusses Chinese Car Ownership and Drive-Thrus • Conference call transcripts: McDonald's Q206 • Yum! Brands Q206
Summary: The market for flat panel televisions is currently dominated by electronics retailers such as Best Buy (BBY) and Circuit City (CC), with flat-panels accounting for up to 25% of their sales. Competition is about to increase for these retailers; many more stores are starting to sell flat-panels as prices decline and the number of manufacturers increase. Store chains who have recently entered or are planning to enter the market include Office Depot (ODP), Home Depot (HD), Kohl’s (KSS), Radio Shack (RSH) and Wal-Mart (WMT). Wal-mart, which entered the market two years ago, now carries six different Philips flat-screen models. Not everyone will succeed: While Costco (COST) had $1 billion of flat-panel sales for the 44 weeks ending September 3 (up 60%), Dell (DELL) and other on-line retailers have not done as well as was expected. Read full article >
Related links: LCD Market Update • Is LCD Market Overcapacity Being Reined In? • What Really Makes Money for Electronics Retailers? • Business Week: TV Madness at CES 2006
Summary: Thailand's bloodless military coup earlier this week may actually help the Thai economy, according to investors familiar with the matter. "A new government could be the incentive that has long been lacking in this market," said Shane Oliver, chief economist at AMP Capital Investors. As a result of the coup, Hong Kong research-and-securities firm CLSA Ltd. raised its recommended Thai holdings in an Asia portfolio to 4% from 3%, another indication investors believe the coup may indeed have a positive effect on the Thai economy. After being closed yesterday, Bangkok's stock exchange reopened today down 2.8%. Read full article >
Related links: Economic Lessons From The Thai Coup • CNN: Thai coup rattles Asia stocks
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Notable articles on Seeking Alpha today: Pre-open market commentary; Yaser Anwar's bull case for Devon Energy; Dell laptop explodes at Yahoo!; Novell receives delisting notice; BBBY Q2 earnings call transcript; Jim Cramer's latest stock picks.
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