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MACRO AND HOUSING
Summary: U.S. net debt payments to foreigners turned positive for the first time in over 90 years in the second quarter. The Q2 gap of $2.5 billion is equal to a debt payment of $22 for each American household. A rising debt burden could pressure U.S economic growth or the dollar. However, the linkage between net interest payments and rising U.S debt is not clear: the U.S. seems to be paying only 0.4% annualized interest rate on its debt as of Q2, yet it earns a higher rate on its own foreign investments; some economists even argue that the U.S. is in fact a net creditor, if currently unmeasured income-producing assets are included. Nonetheless, U.S. net debt payments are highly leveraged to rising interest rates and the current account deficit: a one percentage point rise in the relative return on U.S foreign debt could increase net debt payments by 1.1% of GDP, and estimates of the debt burden in 10 years range from 0.5% to 2% of GDP depending on the current account deficit. U.S. foreign debt equaled 20% of GDP at end-2005, versus 15% for the 12-nation euro zone, 17% for the UK and 44% for Mexico. Full WSJ article >
Related links: The Dollar is Rallying For a Good Reason • Soft Landing? Not Yet • John Hussman: Little To Be Optimistic About • Budget Deficit Shrinking; Implications for Investors and Traders • Choosing Between Bad and Worse: The Fed's Unenviable Position • See also commentary on the Euro Currency Trust ETF (FXE).
Summary: The CRB Index is down 15% since its mid-May peak; casualties include oil (-21% since July 14th), natural gas (-59% in 2006), gold (-18% from 12-month high) and copper (-14% since May). Commodities-rich economies that have done well during the boom are beginning to feel tremors in local currencies: the Canadian dollar, up 42% since 2001, is down 1.7% since hitting a high in June, and the Australian dollar up 48% since 2001, is down 2.6% from its high in May. Chile's strength in copper resulted in 22% currency appreciation against the dollar since the end of 2001, however Chilean central bank recently lowered its 2006 GDP projections due to the fall in copper prices and the peso fell from a peak of 510 to the U.S. dollar to about 540. Full WSJ article >
Related links: When Diversification Just Isn't Enough • Morgan Stanley Expects Sharp Australian Slowdown • Outlook for Copper Far From Rosy • Bloomberg: Australian Dollar May Fall on Global Economic Slowdown Concerns
Summary: The National Association of Manufacturers will today announce a new program to train up to four million new American workers in fundamental skills like reading blueprints, arranging electrical circuits and machine tooling. This, despite workers flowing out of the auto sector and U.S. manufacturing employment standing at a multi-decade low. With wages for blue-collar manufacturing workers lagging behind inflation, some economists question the claim for a skills shortage in this sector, pointing instead to a possible shortage in the advanced production sphere alone. Full WSJ article >
Related links: Do You Believe in Miracles? Look at GM • Ford Lowers the Axe
Summary: Oil for November delivery briefly fell below $60 a barrel in Asian electronic trading on the New York Mercantile exchange and in trading on London's ICE Futures exchange Monday. The oil price is now down 23% from its high of $78.40 in mid-July, due to (1) easing concerns about Iran, Middle-East conflict and hurricane risk to Gulf Coast refineries, (2) signs of economic weakness in the US, and (3) ample global inventories -- the U.S. Energy Department says that crude oil inventories are 5% higher than a year ago and diesel and heating oil inventories are 11% higher. Full WSJ article >
Related links: OPEC's Dilemma: When and How to Cut Production • Oil Hits 6-Month Low; Oil Services ETF A Profitable Short • Crude Contrarian To the Extreme: Philip Verleger's At It Again • Ethanol and Oil Sands Stocks at Risk? • Also: Chart and commentary on the U.S Oil Fund ETF (USO).
Summary: The InterContinental Exchange (ICE), an all-electronic exchange that trades primarily energy, has had quite a run: the exchange went public in November at $26 a share and subsequently rose to $73.69, nearly 40X projected 2006 EPS and more than 100X EPS for the 12 months ending in June. However falling commodities coupled with the Amaranth troubles could spell trouble for the exchange. According to Prudential analyst Robert Rutschow, losing Amaranth could cost the ICE 1% or more of revenues. The WSJ suggests that "it might not be a bad time for investors to hedge against the expensive exchange itself." Full WSJ article >
Related links: Why I'm Long Term Bullish on the Exchanges • Amaranth: Tip of the Iceberg • Forbes: Combined ICE-NYBOT Looks Attractive • WSJ: Amaranth Natural-Gas Losses May Have Far-Reaching Effect
TECHNOLOGY AND INTERNET
Summary: Sony's (SNE) grand strategy: develop a technologically advanced next-gen video game console, the PlayStation 3, equipped with a Blu-ray disc drive and high-definition connectivity, which will boost sales of not only its video games, but also HD TVs and (Blu-ray) DVD movies from its Pictures division. A big problem: Blu-ray tech has resulted in delays for the PS3's launch and a much higher console cost than rivals. Ken Kutaragi, who oversees Sony's video game operations, gave into criticism of the PS3's high price last Friday by slashing the 20GB hard-disk model in Japan by 20% to about $410. Still, Microsoft's (MSFT) Xbox 360, which has been on the market almost a year, and Nintendo's (OTCPK:NTDOY) forthcoming Wii, are both cheaper and are expected to widely outsell the PS3 by year's end: Xbox 360: 10 million (total since launch), Wii: 4 million, and PS3: 2 million. Kutaragi comments, "You could say that we could have avoided problems if we had gone with a regular DVD player. But then there would be no technology advancement." While it's still uncertain whether Sony's price cut will attract more consumers, there's no doubt it will have a negative effect on earnings. Its Game division has contributed as much as two-thirds of consolidated operating profit in years past. In a positive light however, if the PS3 approaches anywhere near the success level of the PS2, game developers will appreciate the high-capacity Blu-ray discs, while Microsoft and Nintendo may find their consoles becoming outdated. Full WSJ article >
Related links: Sony Cuts PS3 Price in Japan, Adds HDMI Connectivity • Sony's Headache: Nintendo Wii Launch Dates, Prices Announced • Sony's PS3 Will Underperform its Predecessor • Analysts React to Latest Sony PS3 Delay and Warning • Sony's PS3 Delay: Bad News, Good Risk Management • Conference call transcripts: Sony Q1 FY07 • Microsoft F4Q06
TRANSPORT AND AEROSPACE
Summary: The U.S. Air Force hopes to postpone until 2009 its decision between Boeing (BA) and a Northrop Grumman/EADS team for supplying a $20 billion next-generation aerial tanker contract. EADS (European Aeronautic Defence & Space), 80% owner of Airbus, has recently aimed to gain more U.S. defense contracts, and its A330 widebody in modified form is a leading candidate for this program. "The program has been watched closely because revelations of favoritism toward Boeing thwarted the Air Force's last attempt to replace its aerial tankers." In a related story, Airbus plans to overhaul its procurement practices in an effort to stem problems that have emerged in two major jetliner programs -- the A350 and superjumbo A380. Among other changes, Airbus will trim its supplier base, ask suppliers to design and produce some complex sections, and price contracts in dollars to lessen the impact of currency fluctuations. Full WSJ article >
Related links: Boeing is Set for Takeoff • Defense Aircraft and Parts Showing Potential • Spade Defense Index -- The NASDAQ of This Decade? Conference call transcripts: Boeing 2Q06 • Boeing 1Q06
Summary: American Airlines, Continental, Northwest and United are all lobbying hard for a single new daily flight to China that the Dept. of Transportation is opening up next year. With international routes the most profitable for the carriers and demand for China travel on the rise, the airlines are making their cases aggressively via civic groups, ads and politicians. The DOT will examine departure sites, among other factors: United proposes leaving from Washington D.C.; Northwest from Detroit; American from Dallas; Continental from Newark, NJ. Full WSJ article >
Related links: Business Air Travel Tipping Point: Part I and Part II • Opportunity in Airlines, But Not For the Fainthearted • You Don't Have to be Crazy to Buy Airlines
Summary: Regardless of the tone of Toyota's (TM) message to its Detroit rivals, its results are doing all the talking -- last week it upped its semi-annual guidance and announced larger global sales targets. And now, its newest Lexus, the LS 460 is attracting a lot of attention: industry first 8-speed automatic transmission, more horsepower and better gas mileage than the Cadillac STS, infrared sensor climate control, Mercedes top-class-like crash sensor system, and let's not forget the automated parallel parking feature. The LS 460 is an attempt to further expand its footprint in the luxury-class segment dominated by Germany's Mercedes and BMW. The latter sold 597,120 autos in the first half of this year alone versus Lexus' goal of 400,000 sales this year and possibly hitting 500,000 next year. Last week Toyota also signaled how serious it is in taking over General Motors (GM) as the world's largest auto company by sales and overall in becoming the world's most dominant auto maker, by announcing plans to hire 8,000 new engineers at an approximate cost of $1 billion per year. Full WSJ article >
Related links: Bullish Toyota Forecasts Raise the Heat Under Ford and GM • Chris Ceraso's Auto Industry Forecast and Stock Picks • Toyota Ups Guidance, Sets Global Production Targets • Toyota's Development Slowdown and Quality Improvement Are Smart Moves • Toyota Comments on U.S. Sales Outlook, Denies Tundra Production Cut • Dorchester's Seth Glickenhaus Picks Four Stocks for a Weak Economy
RETAIL, CONSUMER PRODUCTS AND RESTAURANTS
Summary: Responding to recent high-profile security breaches, MasterCard (MA) and Visa International are now cracking down on merchants who do not follow rules set in place to keep credit card transactions secure. MasterCard is already fining policy violators, and Visa is scheduled to start imposing fines this coming Saturday. Larger merchants are being targeted first, with smaller merchants targeted early next year. Concern has been growing about credit card security, especially regarding identity theft. Recently Citigroup (C) had to reissue thousands of credit and debit cards after it detected hundreds of offshore unauthorized cash withdrawals, and last year transaction processor CardSystems Solutions admitted that 40 million cards (whose transactions it processed) were at risk due to non compliant data storage procedures. Full WSJ article >
Related links: For Credit Card Issuers, The Sky's the Limit When It Comes to Rewarding Customers • An In-Depth Look At MasterCard's IPO • BusinessWeek: Analyst says MasterCard premium too high • Wikipedia: Credit card fraud
Summary: Last year, Wal-Mart (WMT) saw its sales jump 9.5%, but that was lower than the double digit growth rates investors had come to expect from the company. For the same period, its same-store sales growth was 3.4%, down from a record of 9.9% set in 1999. Target (TGT) and Sears (SHLD) shares are now trading at higher price/projected earnings ratios than Wal-Mart. What’s going on? While Wal-Mart has had some success overseas, domestic sales still constitute 78% of total revenue and it is having a harder time growing the domestic end. WMT faces some human obstacles: when it wanted to open a store in Boston, Mayor Thomas Merino joined local opposition, saying “Wal-Mart does not suit the clientele we have in the city of Boston …They don't pay wages that are sufficient. Their benefit structure is poor. I don't need employers like that in our city.” This, despite Mayor Merino actively wooing Target, which he feels has a better image. Other cities where Wal-Mart has lost similar battles are Leominster Massachusetts, Miami, Inglewood CA, and the New York City boroughs of Queens and Staten Island. It’s not just new store expansion that is giving Wal-Mart headaches. Last year Wal-Mart applied to open an Industrial Loan Corporation (“ILC”) in Utah. Despite promises that they would not use the ILC to open branch banks in Wal-Mart stores (the ILC would be mainly used to process Wal-Mart’s credit card transactions), the FDIC imposed a six month freeze on new applications following a wave of protests. Full WSJ article >
Related links: Wal-Mart's Prescription Drug Plan Could Impact Entire U.S. Health Care System • Discount Retailer Operating Income Growth • Wal-Mart Hits High End of Forecast - Is That Good Enough? • Wal-Mart on the Runway • BusinessWeek: Wal-Mart and Apple Battle for Turf
Conference call transcripts: Wal-Mart's Q2 Earnings Conference Call Transcript
Summary: Nashville based prison operator Corrections Corp (CXW) is up 45% since January 1st as the stock has begun to attract growth investors. According to AIM Capital Development Fund manager Paul J. Rasplicka "It's as if they run high-occupancy hotels where people can check in but they can't check out. State and federal governments' need exceeds available beds, and the company has them." With federal prisons operating at 130% capacity and a projected increase in demand from the Department of Homeland Security's Immigration and Customs Enforcement [ICE], CXW is at the heart of growth business. Full WSJ article >
Related links: Corrections Corp Could Lock In Some Mad Gains
Summary: Despite the recent war in Israel, the financial community remains optimistic about opportunities for local companies. Warren Buffett visited the country last week following Berkshire Hathaway's (BRKA) $4 billion acquisition of 80% of Iscar Metalworking Cos., his first acquisition of a company whose main activities were outside of the U.S. At the height of the war, Hewlett Packard (HPQ) announced that is was acquiring Mercury Interactive for $4.5 billion, and Sandisk (SNDK) announced its intention to acquire M-Systems. The Israeli economy is expected to remain relatively unscathed by the war, with the Bank of Israel projecting GDP growth of approximately 4.6% this year, down 0.8 percentage points from pre-war estimates. Security analysts do expect an increase of threats, however local business leaders tie movements in the economy more to the international economy than local events. Full WSJ article >
Related links: Bank of Israel's composite state of the economy index • Buffett Buys Israel's Iscar • HP's Purchase of Mercury • M-systems Investors, Don't be Disappointed by Sandisk Acquisition
Summary: Economic data ("all-industries index") reported by Japan's Ministry of Economy, Trade and Industry -- regarded as an approximation of GDP -- showed economic activity decreased slightly to 105.7 in July compared to 106.1 in June. Slower industrial output is largely to blame but the decline in the all-industries index was in-line with market expectations. Separately, the Ministry of Finance's large-company business-sentiment index came in at 10.5 for the July-Sept. (third-quarter) period -- meaning large companies have an optimistic economic outlook -- versus a much lower reading of 1.8 in the prior period ending in June. This optimism extends through the next two quarters with readings of 10.7 and 7.9, respectively. Full WSJ article >
Related links: Will Shinzo Abe Turn Back the Clock on Japan's Economy? • A Look at Japan ahead of Koizumi's Exit • Japan's Slightly Upward Revised Q2 GDP Overshadowed by Weak July Machinery Orders • Japan METI: Indices of All Industry Activity data sets • Japan Ministry of Finance: Business Outlook Survey
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Notable articles on Seeking Alpha today: A fund manager says Barron's buried the lede on newspaper stocks this weekend -- here are the names he's long and short; will Imclone benefit from a dose of Icahn?; comparing gross and operating margins at leading restaurant stocks; Phil Davis thinks Amaranth is just the tip of the energy iceberg; Hilary Kramer likes Chesapeake Energy; Palm is getting squeezed by its competitors; latest conference calls from Nike, Palm and 3Com; Jim Cramer's latest stock picks.
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