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Summary: With both stocks and bonds making new highs, the markets are giving traders mixed messages. Stock traders seem to believe the economy is strong enough to promote continued growth, and that interest-rate increases are over as inflation has ceased to be a concern. In 1995 the Fed stopped raising short-term rates, and the Dow rose 33%. Bond traders have pushed yields on 10-yr Treasury notes down to about 4.5%, well below yields on shorter-term securities. Known as yield-curve inversion, it indicates investors foresee economic weakness in the future, which would lead the Fed to drop interest rates to revive it. (In '95 long-term yields were well above short-term yields; the bond traders and the stock traders were on the same side of the fence.) Some traders feel the bond guys have it wrong; they're obsessed with the struggling housing market (less borrowing) and ignoring the broader picture.
Related links: Full WSJ article • Waltz of the Stocks and Bonds • Stock Earnings Yields vs. Bond Yields 1/85-8/06 • This Rally's Got Legs • Don't Bet on the Markets Until They Outpace T-bills • Avoid the 10-year Treasury like the plague • Will Bond Yields Continue Falling? • A weak housing market may indeed have broader implications
Potentially impacted stocks and ETFs: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF) • iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT) • S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM)
Summary: In Russell Investment Group’s recent Investment Manager Outlook quarterly survey, 35% of money managers think that U.S. stocks are undervalued. While none of those surveyed believe that the U.S. is headed towards a recession, half see economic growth below the 2.9% annualized rate realized in the second quarter. 58% of money managers favored U.S. large-cap growth stocks, 29% favored cash, and real estate trailed the pack, with only 5% of manager favoring the sector. Believing that the Fed will need to cut rates, 36% of the survey participants were bullish on Treasuries and 53% were bullish on financial services stocks. On the international scene, the survey showed that 52% of money managers were bullish on developed markets and 37% were bullish on emerging markets.
Related links: Full WSJ article • Barron's Analyst Roundtable Q4 Forecast • Four Questions to Ask Yourself in this Market Climate • Markets Back Off: Taking a Breather or Rolling Over? • Will Mega-Caps Lead the Way? • John Hussman: Stocks Need to Shed 10% Before Initiating Speculative Positions • The Economy's Wake-Up Call: Are Investors Listening? • The Internal Strength of This Market Is Absent
Potentially impacted stocks and ETFs: iShares S&P 1500 Index (ISI), iShares Russell 3000 Index (NYSEARCA:IWV), iShares NYSE Composite Index (NYSEARCA:NYC), streetTRACKS Total Market ETF (TMW), iShares Lehman 1-3 Year Treasury Bond (SHY)
Summary: Increases in cancellations, incentives, and price discounts were blamed for homebuilder Lennar's (NYSE:LEN) announcement that it is lowering its fiscal fourth quarter outlook. Some statistics from the company's quarter: net income was down 39% last quarter from $337.3 ($2.06 per share) in Q3 last year to $206.7 million ($1.30 per share). Q4 earnings are projected to be $1-$1.30 per share, and the full year outlook dropped from $8-8.25 to $5.88-6.18 per share. With orders falling only 5%, Lennar did outperform competitors which announced order losses of 20-50%.
Related links: Full WSJ article • Seeking Alpha's Housing Bubble and Real Estate Market Tracker • Contrarians Moving Into Housing Stocks
Potentially impacted stocks and ETFs: Lennar Corporation (LEN). Other Homebuilder Stocks: Beazer Homes (NYSE:BZH), Centex Corp (CTX), KB Home (NYSE:KBH), Toll Brothers (NYSE:TOL). ETF: streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB)
TECHNOLOGY AND INTERNET
Summary: Microsoft announced a deal with privately-held Control Room to broadcast 36 live-music events over the Web, to be offered free on MSN. Control Room was formed from the now dissolved Network Live, a year-old joint-venture between Time Warner's AOL, XM Satellite Radio and Anschutz Corp's AEG. Network Live broadcast 59 shows for Web, radio and TV during the last year, but coordination proved too hard.
Related links: More detail: Full WSJ article • Bloomberg's write-up of the same story • Control Room's website Microsoft's media strategy: Microsoft's Strategy To Grab iPod Market Share: Subsidize Zune To the Tune of $150 • iPod Wars: Microsoft and Toshiba Team Up Against Apple • What Happened to Microsoft's Trojan Horse? Free Web content: AOL's Free Content Plan: Negative for Four Internet Stocks Microsoft's latest acquisition: Microsoft Buys Gteko for $100-120 Million
Potentially impacted stocks and ETFs: Previous Network Live partners: Time Warner's (NYSE:TWX) AOL, XM Satellite Radio (XMSR). Online media competitors: Yahoo (NASDAQ:YHOO), News Corp's (NASDAQ:NWS) MySpace. Ticketing: IAC's (IACI) Ticketmaster.
Summary: Creditors of the failed satellite telecom company Iridium LLC are suing its former parent company Motorola for $3.7 billion plus interest. The plaintiffs claim that rather than building a going concern, Motorola developed a scheme to charge billions for contracts to construct and service a satellite network without taking on the risks of investment. At the heart of the matter is why Motorola charged Iridium $5 billion to build a satellite telecom system worth a fraction of the price, and did so when Iridium had already declared bankruptcy. Motorola's counsel responded in court filings in February that, "At bottom, the... claims are not based on facts, but on a wish to rescind what turned out to be an unprofitable investment." Recently, some hedge funds have been purchasing Iridium bonds, convinced that Motorola will either come to an outside agreement with the creditors or lose in court.
Related links: Full WSJ article • Analysts Remain Bullish on Motorola • Motorola Has Really Turned Itself Around • Analysts Applaud Motorola's Buyout of Symbol • Conference Call transcript: Motorola Q2-06
Potentially impacted stocks and ETFs: Broadband HOLDRS (NYSE:BDH) has an almost-20% weighting in Motorola.
Summary: Intel provided details of it quad-core processors at its Developers Forum yesterday. Quad-core chips for gaming and other high-end PCs, consisting of two dual-core processors in a single package, are slated for November delivery, and should be 70% faster than Intel's dual-core chips, while quad-core Xeon chips for servers should be delivered by year-end and quad-core chips for mainstream PCs by mid-2007. Intel also announced that it has shipped five million dual-core chips since they were launched 60 days ago and a million dual-core server chips since their launch 3 months ago. AMD's product manager said that Intel's quad-core chips consume more power than AMD's forthcoming quad-core product.
Related links: More details: Full WSJ article • NY Times: Intel Fires Back at A.M.D. Over Bragging Rights on Chip Competition with AMD: Intel vs. AMD: What Intel's Layoffs Mean Going Forward • Intel & AMD: Where the Chips Fall • Intel & AMD: Both Are Long Term Buys • AMD's ATI Purchase Means an Edge Against Intel Other commentary on Intel: Two Takes on Intel • Disappointment from Intel's Communications Semi Unit Sale Conference call transcripts: Intel Q2 2006 Earnings Call • Intel Q1 2006 Earnings Call • AMD Q2 2006 Earnings Call • AMD Q1 2006 Earnings Call
Potentially impacted stocks and ETFs: Stocks: Intel (NASDAQ:INTC), AMD (NYSE:AMD). ETFs: Intel comprises about 17% of the Semiconductor HOLDRs (NYSEARCA:SMH) and 9% of the iShares Goldman Sachs Semiconductor Index Fund (IGW).
Summary: SmartMoney columnist James B. Stewart is maintaining his holdings of the Internet Big-3: eBay (NASDAQ:EBAY), Google (NASDAQ:GOOG) and Yahoo! (YHOO). He notes that more than anything else surrounding struggling Internet stocks it's the lack of buzz for them among investing trendsetters and the media. He admits to missing some of the excitement and gains of years past, but having made a long-term commitment, he says, "I don't see that so much has changed except a predictable slowing in the growth rate of what have become more mature, large businesses." Stewart is optimistic on Yahoo! citing the importance of search ads (think Yahoo!'s forthcoming Panama search-engine program) over display ads. And he likes eBay's monopoly status and advertising opportunities. He concludes, "At these levels I'd be a buyer of Yahoo and eBay, and even Google if it drops further." Stewart suggests buying shares instead of options given high premiums.
Related links: Full WSJ article • Internet Advertising Stocks: Quarterly Revenue Growth • Where Was Yahoo When The Ads Were Handed Out? • Piper Jaffray: Yahoo Selloff 'Creates Buying Opportunity' • Yahoo! Lowers Guidance Expectations - Investors Unload Shares • eBay's Core Listings Remain Solid - Shares Remain Materially Undervalued • eBay: Runaway SG&A Expenses Dragging Down The Stock • eBay/Google Ad Deal Takeaways: Little Upside for 2006 • Phil Davis' Google Play -- Round Two Update • A Long Google/Short Yahoo Paired Trade Revisited • Conference call transcripts: eBay Q206 • Google Q206 • Yahoo! Q206 •
Potentially impacted stocks and ETFs: Internet HOLDRs (NYSE:HHH); Other "big" Internet stocks: Amazon (NASDAQ:AMZN), CNET Networks (NASDAQ:CNET), IAC/InterActive (IACI), Monster Worldwide (NASDAQ:MNST) and Time Warner's (TWX) AOL
TRANSPORTATION AND AEROSPACE
Summary: A-three way alliance between General Motors (NYSE:GM), Nissan (OTCPK:NSANY) and Renault was originally suggested by Kirk Kerkorian (who controls 9.9% of GM) in July. Since GM now deems that Renault and Nissan need the alliance more that it does, it is demanding a multi-billion dollar “equalizing contribution” from the other automakers as an incentive for GM to join the alliance. GM believes it has turned the corner, and might not need Nissan’s and Renault’s help. GM also knows that alliances don't always work; it experienced a failed alliance with Italy’s Fiat (NYSEARCA:FIA). Aside from the turnaround, GM executives assert that it has greater global-reach than the other two companies; Nissan’s sales surged in 2005 but have fallen in 2006, and Renault has only four new models scheduled between now and late 2007. Nissan & Renault CEO Carlos Ghosn is now trying to portray the benefits of the alliance as a defensive move against Toyota (NYSE:TM), which continues to fire on all cylinders.
Related links: Full WSJ article • GM/Nissan-Renault Alliance Talks 'Bog Down' • Jerry Flint Believes Detroit's Luck Has Run Out • GM's New 100,000 Mile Warranty Plan: Pie in the Sky • Is GM Stalling With Renault-Nissan Alliance? • Strange Bedfellows: GM-Ford Alliance Talks Reflect Shift in Auto Industry • BusinessWeek: Lutz Says GM Is Over the Worst • Forbes: Ghosn Sees GM Reluctant Ahead Of Meeting
Potentially impacted stocks and ETFs: Other auto stocks: Ford (NYSE:F), DaimlerChrysler (DCX), Honda (NYSE:HMC)
Summary: Nelson Peltz, who represents a 5% stake in Heinz, recently moved from the dissident's seat to a board seat. Mr. Peltz has considerable experience in turning around underperforming businesses: in 1997, he bought Snapple for $300 million and quickly made a $700 million profit. Traditionally, he has taken control positions. In Heinz, however, he'll be one of 12 directors, and WSJ's Nik Deogun asks if he can be effective: "A muzzled Nelson Peltz is an ineffective Nelson Peltz." One of his first moves could be changing the CEO. PepsiCo (NYSE:PEP) is thought by insiders to be a source of potential candidates including Vice Chairman Michael White and Pepsi Bottling Group (PBG) Chairman John Cahill.
Related links: Full WSJ article •HNZ Quarterly Conference Call Transcript • No Wonder Heinz Investors are Discontented • The Battle for Heinz Ownership Begins • Houston Chronicle: Standard & Poor's Downgrades Heinz
Potentially impacted stocks and ETFs: H.J. Heinz Company (HNZ). Competitors: Kraft Foods Inc. (KFT) • Campbell Soup Co. (NYSE:CPB) • ConAgra Foods Inc. (NYSE:CAG) • Group DANONE (DA)
Summary: Johnson & Johnson (NYSE:JNJ) is suing Boston Scientific (NYSE:BSX) and Abbott Laboratories (NYSE:ABT) for alleged breaches of J&J's prior agreement to acquire Guidant Corporation. In April, Boston Scientific won a bidding-war for Guidant, acquiring the company for $27 billion, then avoiding antitrust claims by selling Guidant's cardiac-stent unit to Abbott. J&J claims that Boston Scientific, in violation of the J&J/Guidant agreement, "leaked confidential information about itself to Abbott in the process of arranging Abbott's purchase." Ongoing legal and regulatory problems at Guidant have left many J&J investors happy the deal didn't go through; J&J received a $705 million breakup fee from Guidant.
Related links: Full WSJ article • Barron's: Most Respected Companies • Failed Guidant Bid Creates Buying Opportunity in Johnson & Johnson • Drug Companies Threatened By Proposed Patent Legislation • J&J Added to Berkshire Hathaway Holdings
Potentially impacted stocks and ETFs: Pfizer (NYSE:PFE), Merck (NYSE:MRK), iShares Dow Jones US Healthcare (NYSEARCA:IYH), Health Care SPDR (NYSEARCA:XLV)
Summary: J.P. Morgan's (NYSE:JPM) hedge fund assets under management have surged in the past year to $28.8 billion as of the end of July, placing it second in size behind Goldman Sachs (NYSE:GS). Last year it ranked 12th with assets of about $16 billion. Jes Staley, head of JPM's asset-and wealth-management division comments, "We were very sensitive to what the ultra-high-end individual was doing. We just saw so many of our clients going off to invest in hedge funds, and we wanted to go where our clients are going." Overall, JPM's funds have performed well this year while rivals Goldman and Citigroup (NYSE:C) are struggling with some of their funds. Although hedge fund assets total only about 3% of JPM's asset-management arm's $898 billion in assets as of June 30th, they bring in higher fees and margins than traditional asset-management, and are among the firm's largest alternative-investment offerings.
Related links: Full WSJ article • Amaranth: Tip of the Iceberg • Brokerage Stocks - Have They Topped? • So Far, the Dow Dog are Stars
Potentially impacted stocks and ETFs: The only other bank stock competing in hedge fund asset-management ranked in the top-10 is Barclays (NYSE:BCS).
Summary: Treasury Secretary Henry Paulson seems to have made quite an impression on Senators Charles Schumer (NY - Dem.) and Lindsey Graham (SC - Rep.), two of the Senate's most outspoken against China's control over its yuan currency. Following Paulson's high-level meetings in China last week and a discussion with the senators yesterday, it seems Schumer and Graham may agree to postpone a vote on a measure calling for a 27.5% tariff on Chinese exports to the U.S. Paulson's knowledge of China and his contacts in the country have influenced Schumer and Graham to consider his claim that China is 'embarking on real reform' ahead of further discussions this week with the Treasury as details of the Bush administration's new strategy for China economic-related issues are unveiled.
Related links: Full WSJ article • Paulson Wants Even More Flexibility in Yuan • Beijing's Revised Export Tax Rebate Policy Boosts Stocks
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Notable articles on Seeking Alpha today: EYE's Poor Vision Means Investors Are Getting Burned • Skype Banned at San Jose U. -- Sign of Trouble for P-to-P? • Internet Advertising Stocks Quarterly Revenue Growth • Will Housing Carnage Hit Oil? • Red Hat's Results In Its Own Words (conference call excerpt) • Jabil Circuit Q4-06 earnings conference call transcript • Tips On Small Business Insurance • Chinese Tech Stock Weekly Update • Not Enough Focus on Commodities For a True Bubble To Have Formed • Jim Cramer's latest stock picks.
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