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MACRO AND GLOBAL
Summary: Three macro data points: (1) The Philadelphia Fed published its index of business conditions in the Mid-Atlantic states, which is strongly correlated with industrial output, at noon yesterday. The results were surprisingly poor: the index fell to negative 0.4 in September (implying contraction) versus positive 18.5 in August. This is the first negative reading since April 2003 and below economists' expectations of 15. The DJIA immediately fell 50 points -- see the chart for the Diamonds ETF (DIA). (2) The Conference Board's index of leading indicators showed a decline of 0.2% in August, the same decline as July and the fifth decline in the last eight months. (3) The Labor Department reported that initial jobs claims rose a seasonally adjusted 7,000 to 318,000; the 4-week moving average was unchanged at 315,000. Full WSJ article >
Related links: The Philadelphia Fed's press release and data • The Conference Board's full press release in PDF • Wider context: Fed Pauses Again, Rate Cut on the Horizon? • Wednesday's Fed Release: Where's The Analysis of the Economy?! • Trading: What a U.S. Recession Would Mean for Sectors, Foreign Stocks -- discusses potential impact on the iShares Materials ETF (IYM).
Summary: Treasury Secretary Henry Paulson finishes his four-day visit to China today. Despite what appears to have been good dialogue with senior Chinese leaders, Paulson emphasized that, "... (he'd) like even more flexibility (in the yuan's value)." He also told Chinese officials, "My view is that the economy has now changed to the point where it's big and complex enough that I think the risk is not moving fast enough (with reforms)." Paulson is pushing for liberalization of China's foreign-exchange system. Since China revalued the yuan in July 2005 by 2.1% it has only risen by slightly more than 2.0%. China's central bank governor commented that China will eventually liberalize the yuan, but didn't provide a timetable. Full WSJ article >
Related links: Beijing's Revised Export Tax Rebate Policy Boosts Stocks • Feedback on the Chinese Bubble -- A Point-by-Point Refutation • Bloomberg: Paulson's Clout, China Contacts May Move Debate Beyond Currency • Dept. of Treasury: US-China Statement on the Strategic Economic Dialogue • Dept. of Treasury: Strategic Economic Dialogue Press Briefing Transcript
Summary: The current slide in oil prices has OPEC ministers bickering over if and when to cut output in an effort to shore up tumbling prices -- and who should bear the pain of doing so. Supply cutbacks had originally been slated for early next year, but if prices continue to slide, OPEC could be forced to take immediate action. Points of contention: 1) What price to defend -- some ministers say $55/barrel; others say it depends on the speed of the drop. 2) Who cuts first, and how much each nations cuts -- no one likes to lose market share, and it is a question of how much pain they can bear before they are forced to settle their differences. The kingpin in the equation is Saudi Arabia, and its oil minister Ali Naimi. The kingdom accounts for close to 30% of OPEC output, making Naimi the cartel's de facto leader. On Tuesday, with prices around $61, Naimi offered a clue as to his stance, telling reporters, "The oil industry is convinced that this price is reasonable." WSJ bottom line: "Saudi Arabia has let its output fall this year in line with demand for its oil. But OPEC officials acknowledge that there is a limit to how much the Saudis will cut supply unilaterally. When the kingdom reaches its pain threshold, OPEC officials say, Mr. Naimi will insist others also reduce output. That is likely to be when the fighting erupts in earnest." Full WSJ article >
Related links: Bulls Versus Bears on the Oil Outlook • As Oil Prices Slide the Pundits are Playing it Slick • OPEC Ministers Trying to Gauge How Far Oil Can Slip • Related ETFs: Oil Service HOLDRs ETF (OIH) invests in oil-service companies such as drillers and well-site managers. United States Oil Fund ETF (USO) invests in crude oil futures, gasoline, and other petroleum-based fuels.
Summary: General Motors (GM) remains skeptical of the merits of a proposed three-way alliance with Renault and Nissan (OTCPK:NSANY), an alliance that is to be discussed next week by GM CEO Rick Wagoner and Renault and Nissan head Carlos Ghosn. Mr. Wagoner is under pressure from investor Kirk Kerkorian, who holds a 9.9% stake in the company and is aggressively pushing for the alliance. Mr. Ghosn and his team favor the proposal because of its potential to save costs and create value, while Mr. Wagoner's team would rather give its turnaround strategy time to show results. Mr. Ghosn hopes for, "a comprehensive alliance, including shared equity stakes, or none at all" -- an approach unlikely to tally with Mr. Wagoner's preference for limited cooperation on a narrow scale. Full WSJ article >
Related links: Message to GM Investors: Whoa! • Going, Going, Ghosn? GM-Nissan-Renault Merger Seeming Increasingly Unlikely • GM Slowing SUV Production; Wagoner Comments on Nissan-Renault
Summary: FedEx' (FDX) fiscal Q1 (3 months ending August 31st) results: Revenue up 11%, package volume up 5% (largest gain in five quarters), international air deliveries up 17% (strength in China), U.S. ground shipment revenue up 13%, profit up 40%. Results from FedEx and UPS (UPS) are viewed as broad economic indicators. Guidance for the current quarter was cut by $0.20 to EPS of $1.45-1.60 due to bonuses and benefits for pilots. CFO Alan Graf said the U.S. economy is, "slowing but nothing I would characterize at this point as a headwind." The stock traded down 1.4% by close yesterday. Full WSJ article >
Related links: Detail: Full FedEx press release • Conference call transcript • Bloomberg's write-up of the FedEx results • Context and stock: A Transport Slowdown? Landstar's Recent Conference Call Points to Yes • The Final Countdown: FedEx vs. Teamsters • More commentary on FedEx stock • On FedEx competitor UPS: UPS: The Market May Be Ahead of the Analysts • FedEx or UPS? Depends On the Market's Strength
Summary: Yesterday, Toyota Motor Co. (TM) boosted its half-year profit forecast by 32% and announced plans to increase global sales by more than 10% over the next two years. Toyota expects to hire 8,000 engineers while struggling competitors Ford (F) and General Motors (GM) are spending billions to reduce their workforces. Similarly, Toyota is developing new models and technology while rival DaimlerChrysler (DCX) is cutting production. One blip on Toyota's otherwise rosy outlook is the imminent reduction of tax incentives on energy-efficient hybrids. Federal tax credits for Toyota hybrids will be halved beginning in October. Full WSJ article >
Related links: Will Ford and GM Forever Take a Back Seat to Toyota? • Toyota Ups Guidance, Sets Global Production Targets • Persistence Pays at Toyota, But Lacking at Ford
TECHNOLOGY AND INTERNET
Summary: While HP (HPQ) CEO Mark Hurd is acknowledged as the catalyst behind HP’s recent resurgence, investors are becoming concerned that he had more knowledge of HP’s internal leak investigation than previously thought. This concern helped drive down HP shares by 5% yesterday. Although the leak investigation started before Hurd joined HP, a January 2006 email was discovered (written by an HP PR manager) stating he recommended the investigation of five directors. The question is: When did Hurd become aware of the investigations, and did he know (or approve) of the tactics that were employed to gather evidence? Mr. Hurd is scheduled to address these issues today (at HP headquarters), and will join the group of HP executives previously scheduled to face questioning by the House Energy and Commerce Committee. Aside from dealing with the investigation, management experts agree that Hurd’s main focus has to be to convince investors, employees and customers that the scandal will have minimal impact HP’s day to day business. Full WSJ article >
Related links: Previous WSJ summaries on the scandal (dating back to September 6th.) • The Wall Street Journal: Tracking the H-P Controversy • Conference call transcripts: Hewlett-Packard Q3 2006
Summary: Stronger demand and tighter supplies mean improving prices for LCD panel makers and will likely translate into better earnings in Q3 and Q4 -- especially for Asian manufacturers. An analyst at market research firm iSuppli comments, "The monitor market was strong starting from July with prices increasing from August, while the notebook market improved from September, and such panel prices are just starting to increase. The TV market is also starting to pick up in September. We expect to see an improvement [in earnings] over the second quarter. But stronger results are expected in the fourth quarter." Samsung's VP of its LCD business comments, "There isn't a significant increase in capacity these days, and demand is rising, which is good news for the LCD industry." Full WSJ article >
Related links: LCD Update: Despite Some Good News, Our Bearish Outlook Stands • More TV Owners Looking to Purchase Flat Panel Models • Conference call transcripts: AU Optronics Q206 • Corning Q206 • LG Philips LCD Q206 • Philips Electronics Q206 • Sony Q107
Summary: Wal-Mart (WMT) will cut the price of some 150 older generic drugs to just $4 for a 30-day supply, beginning with its Florida stores and extending to its nationwide stores beginning later next year. The price point on some drugs will be up to 75% cheaper than competitors such as Walgreen (WAG). If Wal-Mart expands the price cuts to the most popular generic drugs, as many expect, pressure will be felt along the entire pharma retail drug chain. Stocks of generic drug makers and drugstore chains fell on the news -- CVS (CVS) was down 8% and Walgreen 7%. The big pharmacy-benefit managers, or PBMs, should also be squeezed if Wal-Mart expands the plan. Full WSJ article >
Related links: Wal-Mart's press release • Wal-Mart's Generic Prescription Plan: The Connection to Pharmacy Benefit Managers and The Big Drug Chains • Wal-Mart's Prescription Drug Plan Could Impact Entire U.S. Health Care System • Conference call transcripts: WMT 2Q07 1Q07
Summary: The Dow Jones index of retailing stocks climbed 4.8% this month, outperforming the Dow Jones Industrial Average's 1.3% gain. While this might in part reflect a consumer response to lower gasoline prices, it is more likely due to the cool autumnal temperatures. In September, retailers are fully stocked with fall merchandise, and consumers are much more likely to make such purchases when the temperatures drop. Comparisons are also favorable right now, because last year's combination of an extended warm season and Hurricane Katrina resulted in a poor September performance. Full WSJ article >
Related links: Retail Spending, Up Only Slightly in August, Should Rebound Soon • Retail, Semis the Most Overbought ETFs • Retail Stocks Have a Snapback Tendency • Why is Consumer ETF XLY at 52 Week High? • Related ETFs: Retail HOLDRS ETF (RTH) simulates ownership in companies that sell retail merchandise through stores, the Internet, and mail order catalogs. Consumer Discretionary SPDR ETF (XLY) invests in industries such as automobiles, hotels, restaurants and leisure, household durables, Internet and catalog retail, leisure products, media, apparel and luxury goods.
Summary: Nike reported a 13% decline in fiscal-first-quarter net income ($377.2 million versus $432.2m) despite a 9% increase in revenue ($4.2 billion versus $3.9b) largely due to stock-options expenses and marketing costs related to this year's World Cup Soccer tournament. Its gross-profit margin fell by 1.2% to 44.1% as a result of higher transportation costs. CEO Mark Parker said in the firm's earnings conference call that Nike is trying to cut product development cycles from 18 months to 12 months in order to be quicker to market. CFO Don Blair said he expects earnings per share to increase in the fiscal year despite this quarter's decline and stands by his forecast of high-single-digit revenue growth. Full WSJ article >
Related links: Nike's New Sneaks Should Give Some Lift • Shaq's China Shoe Deal Bad News for Nike and Adidas • Nike: Earnings Press Release • Bloomberg: Nike Shares May Rise After Orders Beat Analysts' Estimates • Conference call transcripts: Nike F1Q07
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Notable articles on Seeking Alpha today: More on Yahoo's potential Facebook buyout; Neal Shanske sees big value in Cadus Corp.; Nike, Palm, 3Com, and Rite Aid earnings conference call transcripts; Eddy Elfenbein explains the stocks/bonds relationship; Jim Cramer's latest stock picks.
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