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MACRO AND HOUSING
Summary: The last time the DJIA (Dow Jones Industrial Average) traded at present levels was in January 2000. Of course we now know the markets were then perched on the edge of a precipice; within two years the Dow had plummeted over 4,000 points (almost 40%). But in 2000 P/E ratios were averaging 26 (stocks were trading at prices 26 times their forecasted earnings); today the Dow's 30 component stocks trade at just 19 times earnings. Can stock prices continue to rise? Two potential bullish resolutions: 1) Earnings soar, taking prices with them. This is unlikely; we have already seen four consecutive years of strong earnings growth, and profits margins are at record numbers. 2) Earnings remain stable, but investors fork-out ever-higher prices to buy-in to their favorite stocks, driving P/E up. This is similar to what happened in the 1994-2000 run up. But then, a) long-term interest rates were plummeting -- today it seems unlikely they can fall much more, and b) there was an insatiable hunger to get into the markets -- since dampened by the aftertaste of the ensuing bear. Says Byron Wien, chief investment strategist at Pequot Capital Management, "My view is that both earnings and interest rates will be pushing against you."
Related links: Full WSJ article • This Rally's Got Legs • Value Stocks Can Be Found -- Beyond U.S. Borders
Potentially impacted stocks and ETFs: Broad-market stock and index rate ETFs: Diamonds Trust Series 1 ETF (NYSEARCA:DIA) • S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM) • 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)
Summary: Both of yesterday's major economic numbers surprised pundits -- one to the upside and one to the flipside: 1) Orders for durable goods declined 0.5% in August, following a (revised) 2.7% decline in July, the first back-to-back decline in more than 2 years. The report showed demand fell for machinery, computers/electronics, metals, and aircraft; car orders were up. Economists are counting on business investment to counteract the cooling housing market and soft consumer spending. Yesterday's numbers, which were, "far more bearish than expected," have some analysts asking, "soft landing or hard one?" 2) Sales of new homes rose 4.1% in August, an unexpected jump. Still, compared to Aug-05, sales are 17.4% lower. Some builders say conditions actually worsened in August. Lennar Corp. (NYSE:LEN) CEO Stuart Miller called it, "the weakest month yet." Economists attributed the jump to a easing in mortgage rates and enticing new buyer-incentive programs offered by homebuilders in an attempt to boost sales.
Related links: Full WSJ article • There’s a Housing Slowdown -- And Business Spending's Not Picking Up the Slack • Message From Today's Durable Goods Report: Time To Get Defensive
Potentially impacted stocks and ETFs: Major homebuilder stocks: KB Home (NYSE:KBH), Beazer Homes USA Inc. (NYSE:BZH), Centex Corp. (CTX), Toll Brothers Inc. (NYSE:TOL), Hovnanian Enterprises Inc. (NYSE:HOV), Pulte Homes Inc. (NYSE:PHM) • Home sales: H&R Block Inc. (NYSE:HRB) • Furnishings: Ethan Allen Interior (NYSE:ETH), The Home Depot Inc. (NYSE:HD), Sherwin Williams Co. (NYSE:SHW), Mohawk Industries Inc. (NYSE:MHK) • ETFs: streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB)
Summary: While new home sales rose 4.1% in August, the figures for the prior three months were revised downward (those three months already showed a declining market). This caused the dollar to decline slightly against the Euro yesterday. The currency market has been carefully watching the housing market. A declining housing market could trigger a cooling US economy, which in turn would trigger a rate cut, which in turn would increase selling pressure on the dollar. As High Frequency Economics chief economist Ian Shepherdson put it: “So, overall this report is worse than it first appears.”
Related links: Full WSJ article • Housing Bubble and Real Estate Market Tracker • Consumer Confidence is Helping the Dollar • Will Debt Payments Drag Down GDP or the Dollar?
Potentially impacted stocks and ETFs: Euro Currency Trust (NYSEARCA:FXE)
TECHNOLOGY AND INTERNET
Summary: Hewlett-Packard (NYSE:HPQ) is actually doing quite well. Despite all the attention being paid to the leak investigation scandal its stock has been holding its value, down only 1.3% since the scandal broke. In fact, since Mark Hurd took over as CEO last year, HP shares are up 72%. In the past year HP’s PC business managed to both increase its world-wide market share by 0.4%, to 14.8% (during the same period Dell only managed to eke out an 0.1% increase to 17.7%), and improve operating margins from 2.6% to 4%. Its printer business (which controls about half of the North American inkjet-cartridge market) operating profit increased by 15% in the fiscal third quarter, compared with a 7.8% decrease for the same period last year. HP's server/storage division doubled its fiscal third quarter operating profit by increasing its market share in both external storage (to 19.3%, probably at EMC's (NYSE:EMC) expense) and blade servers (to 38.9%), where it now runs neck and neck with IBM (NYSE:IBM). However, not all of HP’s divisions are doing this well. Its services group posted only a 1% increase in revenue in the last two quarters, and in the third quarter its software unit contributed only 0.8% ($13mm) to HP’s total operating profit, despite seeing a 30% increase in software sales during the same period.
Related links: Full WSJ article • All of Seeking Alpha's WSJ summaries on the HP scandal • Analysts Rallying Around H-P, Hurd • Comparisons Between Hewlett-Packard and Dell are Faulty at Best • Bear Stearns: Hewlett-Packard's Turnaround Story Continues With Another Strong Quarter • Canon and HP Weathering the Perfect Storm in Printing Market • HP's Purchase of Mercury: Both Sides Win • PC Shipments for 2Q06 Better Than Expected: Dell, HP and Apple Gain Share • Conference call transcripts: Hewlett-Packard Q3 2006
Potentially impacted stocks and ETFs: Dell Inc. (NASDAQ:DELL), Gateway Inc. (GTW), Apple Computer Inc. (NASDAQ:AAPL), Canon (NYSE:CAJ) • ETF: Technology SPDR (NYSEARCA:XLK)
Summary: With the growing prevalence of online video options from sites such as YouTube and My Space, pay-TV companies are coming up with ways to compete and not lose market share to the online providers. "Whether the Internet is a friend or foe depends on what we do," says Steve Burke, COO of Comcast Corp. (NASDAQ:CMCSA). To keep pace with online content providers who offer on-demand viewing, cable TV providers like Time Warner (NYSE:TWX) have begun offering an HBO-type on demand service that lets customers watch programs they missed in the past 24 hours. Another worry for the cable companies is that online distribution of movies could sidestep them, cutting into the steady revenue stream from on-demand movie fees they have come to expect. Sony Corp. (NYSE:SNE), for instance, has mulled adding broadband capability onto its high-end high-definition TV sets, allowing consumers to download movies from Sony Pictures directly to their TV sets.
Related links: Full WSJ article • Comcast's Stock Performance Demonstrates the Resilience of the Cable Operators • Diversified Media Stocks: Enterprise Value / EBITDA • Disney and Apple's Movie Success Means Competitors Must Get With the Program • Downloadable Video: Will Anyone Actually Buy It? • Google, Yahoo Testing Cable-TV Model Online -- Where Will it Lead?. Mercury News: How will YouTube make money? • BusinessWeek: Online Video: Tasty Takeover Targets? • Most popular online video sites: YouTube • MSN Video • MySpace
Potentially impacted stocks and ETFs: Viacom (NASDAQ:VIAB), Cablevision (NYSE:CVC), Apple (AAPL), Google (NASDAQ:GOOG), News Corp. (NASDAQ:NWS), Yahoo (NASDAQ:YHOO), Disney (NYSE:DIS)
Summary: All good things must come to an end. Kobi Alexander, co-founder and former CEO of Comverse (NASDAQ:CMVT) who turned fugitive in August has been arrested in the Namibian capital of Windhoek. Mr. Alexander founded the voice mail technology company in the early 80's. CMVT currently has 5,000 employees and $1.2 billion in annual revenue. Mr. Alexander faces a 32-count indictment: On July 31 the FBI issued a warrant for his arrest due to options back-dating, and he and the former CFO were also accused of creating a secret options slush fund with grants to phony employees. In July, apparently knowing about the investigation, he transferred $57 million to an Israeli bank account. Then, about a month ago, he wired tens of millions of dollars to an account in Namibia where he'd arrived just days earlier. A Namibian official reported the suspicious transfer to Interpol which updated the FBI. Yesterday, Namibian officials filed with the parliament to seek his arrest.
Related links: Full WSJ article • Comverse Charged in Options Backdating Probe • Comverse CEO Goes AWOL After Being Charged by the Feds • 'Heart of Darkness' Redux: Comverse CEO Found Hiding in Sri Lankan Fishing Village • WSJ Options Scandal Scorecard WSJ: Unsealed Indictment
Summary: Nokia (NYSE:NOK) dominates global mobile handset sales, outpacing its nearest competitor by almost double. It likewise leads in sales of phones with music capability, because a basic music player comes as a standard in many of its phones. The problem Nokia faces is reclaiming the high-end segment as competition intensifies from new super-thin handsets like those by Motorola (MOT) and Sony Ericsson's popular Walkman phone. Nokia just released its latest high-tech handsets, which it calls "multimedia players," this past Tuesday. Market research firm iSuppli estimates the market for music-enabled phones is about $44.6 billion versus around $19 billion for music devices. Ansi Vanjoki, head of Nokia's multimedia unit, says Apple (AAPL) only competes with "part of" his firm's products, adding, "you can't make calls [and] you can't download music wirelessly" with an iPod. Nokia's acquisition of Loudeye, a digital music distributor with a catalog of over 1.5 million songs suggests it could introduce its own branded music store, which will undoubtedly upset wireless carriers.
Related links: Full WSJ article • Looks Like Nokia's Margins are Getting Squeezed • Nokia Press Releases: New Nseries shines spotlight on music and Nseries delivers latest in mobile multimedia • Nokia's Q2 Results -- Key Facts & Analysis • Who's Phones Are They? Nokia's and Motorola's Features Challenge the Wireless Providers • Conference call transcripts: Nokia Q206 • Motorola Q206 • Palm F1Q07
Potentially impacted stocks and ETFs: Other Nokia competitors: Ericsson (ERICY), Kyocera (NYSE:KYO), NEC (NIPNY), Palm (PALM), Research in Motion (RIMM), Sanyo (OTC:SANYY), and Sony (SNE)
Summary: Verizon (NYSE:VZ) yesterday disclosed precise financial details of its attempt to enter into the cable TV business, as well as to provide customers high speed internet access. Because many companies offer package-deals to customers which include telephone, internet and cable TV service, Verizon has found it necessary to make major infrastructure improvements to continue to compete. The project is expected to cost the company an investment fee of $18 billion; they are expected to start turning profits on their new offerings in 2009. By then, Verizon hopes to have 20% to 25% percent of the U.S. cable TV market signed up, accounting for 18 million homes.
Related links: Full WSJ article • Press Release: Verizon Provides New Financial and Operational Details on Its Fiber Network as Deployment Gains Momentum • Verizon Communications Q2 2006 Earnings Conference Call Transcript • Chart: Telecom Stocks - Annual Earnings Growth • Sprint and Time Warner's Quadruple Play • Fiber to the Home: A World of Headaches for Comcast • Investor's Business Daily: Some Investors Still Wary Of Pricey Verizon Fiber Plan
Potentially impacted stocks and ETFs: Telecom: AT&T (NYSE:T), Sprint (NYSE:S), Time Warner Telecom (NASDAQ:TWTC), Bell South (BLS). Cable providers: Comcast (CMCSA), Cablevision (CVC), Time Warner (TWX).
Summary: The days of low quality videoconferencing are over. That is, if you adopt the latest high-end systems dubbed 'telepresence,' which feature big-screen plasma TVs, broadcast quality cameras, and high-speed phone lines. The retired chairman of BP describes his first experience with telepresence, "... they were almost life-size. It was perfect vision, perfect voice. You almost wanted to reach out and shake their hands." The systems can cost up to 50 times as much as traditional videoconference setups; as much as $1 million for two locations and $500,000 for each additional one, in addition to as much as $18,000 a month for the high-speed connection. Customers so far include: AMD, GlaxoSmithKline, Lazard, Merck, Nokia, Pearson and Pepsi. There doesn't seem to be any questioning of cost savings and/or return on investment from installing a telepresence system. But Andrew Davis, managing partner of Wainhouse Research, sees this mostly as hype, commenting that "It's a lot of publicity over stuff I don't believe will be that important. But it will drive interest in videoconferencing." He thinks potential buyers will instead opt for a system that is, "almost as good for one-10th the price."
Related links: Full WSJ article • Cisco: Official Networking Blog discusses telepresence • HP: Video Collaboration "Halo" website • Polycom: Investor relations website
Potentially impacted stocks and ETFs: Main competitors in telepresence: Teliris, closely held firm with dual HQ in NY and London • Hewlett-Packard (HPQ) and DreamWorks Animation SKG (NASDAQ:DWA) • Polycom (NASDAQ:PLCM), the market leader in traditional video-conferencing • Tandberg ASA, the number 2 video-conferencing firm trades in Norway • Cisco (NASDAQ:CSCO) to enter market this year • Airline industry could be negatively impacted from less business-class travel • Positive trend for plasma TV manufacturers: Matsushita (NYSE:MC), Samsung, LG Electronics, Philips (NYSE:PHG) and Hitachi (HIT)
ENERGY AND MATERIALS
Summary: Steel service centers, who buy 30% of the steel sold domestically, are reporting that their inventory has climbed to 15.9 million tons, the highest since January 2005. Adding to the supply, the U.S. is currently importing 40% more steel that it did last year. On the other side of the equation, the domestic auto industry has announced that it will be cutting back production. The result? UBS Research steel analyst Timna Tanners sees “At best, steel prices aren't going to be going up," with the worse scenario being steel prices dropping , as sellers unload inventory. UBS Research has issued downgraded on both U.S. Steel (NYSE:X) and Nucor (NYSE:NUE). While the price of hot-rolled-coil (used to make autos and appliances) has dropped by 3% in recent weeks, not all analysts are concerned: Some analysts believe steel prices will remain firm since manufacturers have already factored in the current supply (and anticipated demand) into their production levels.
Related links: Full WSJ article • A Commodity CEF That Lags Its Sector • What a U.S. Recession Would Mean for Sectors, Foreign Stocks • BusinessWeek: Steel Shares Slip on Softer Outlook • BusinessWeek: Analyst Note: Steel Sector
Potentially impacted stocks and ETFs: U.S. Steel (X), Nucor (NUE), AK Steel (NYSE:AKS), Algoma (ALGOF) • US Auto Makers: GM (NYSE:GM), Ford (NYSE:F), DaimlerChrysler (DCX) • ETFs: iShares Dow Jones US Basic Materials (NYSEARCA:IYM), Vanguard Materials (NYSEARCA:VAW)
Summary: EV Energy, a limited partnership with facilities in Ohio, West Virginia and Louisiana whose goal is to develop oil and gas properties had a disappointing first day of trade yesterday. Following an IPO where 3.9 million partnership units were sold at $20 per unit--the middle of the expected range-- EVEP closed down at $19.79 yesterday. As a limited partnership, EVEP does not offer the same rights as corporations, and suffers from the risk of potentially having to reduce dividends, the main source of cash flow to investors.
Related links: Full WSJ article • This Week's IPO Calendar • SEC: EVEP Prospectus
TRANSPORTATION AND AEROSPACE
Summary: There is growing competition among two private firms to be the first to offer private space travel to amateur astronauts. The two space tourism companies -- Benson Space Co. led by rocket entrepreneur Jim Benson and Virgin Galactic founded by Virgin Atlantic airline founder Sir Richard Branson and media mogul Paul Allen -- are hoping to offer private citizens the opportunity to travel beyond earth's atmosphere for around $200,000. The current price to travel on Russian spaceships and sleep on the Russian space station is a staggering $20 million. Benson's spaceship design (pictured) will hold up to six space tourists in addition to the crew and will be based on the NASA shuttle model. In addition to private companies exploring the possibility of space tourism, Aerospace giant Lockheed Martin Corp. (NYSE:LMT) recently announced plans to supply an improved version of its Atlas V rocket to a space entrepreneur planning a privately operated, orbiting hotel to house space adventurers. George Sowers, a senior Lockheed rocket executive, says the company will "try to do what we can to help this market take off."
Related links: Full WSJ article • Lockheed Flying High After Winning Lucrative Shuttle Replacement Contract • SpaceDev a Finalist for NASA's $500m Program • Investment Lessons From the Space Shuttle Launch • Space.com: Going Private: The Promise and Danger of Space Travel
Potentially impacted stocks and ETFs: Boeing (NYSE:BA), Northrop Gruman (NYSE:NOC), Raytheon (NYSE:RTN)
Summary: The FDA approved Amgen's (NASDAQ:AMGN) colon cancer drug, Vectibix, the California-based biotech company's first cancer drug. The drug, which goes by the generic name panitumumab, is for use in patients who fail to respond to all other treatments. The upcoming release of Vectibix, slated for October, has set the stage for an unusual and aggressive price war with Erbitux, a rival drug from ImClone Systems Inc. (OTCPK:IMCL); Amgen plans to undercut its rival's price by 20%. Amgen Chief Executive Kevin Sharer believes the drug will generate as much as $2 billion in annual sales, an estimate that some analysts say is plausible, and others consider aggressive.
Related links: Full WSJ article • Conference call transcript: Amgen Q2-06 • Amgen Earnings -- Key Facts • Chart: Biotech Stocks - Annual Earnings Growth • ImClone Systems: Will It Benefit From a Dose of Carl Icahn?
Potentially impacted stocks and ETFs: Other competitors: Bristol-Myers Squibb Co. (NYSE:BMY), Merck (NYSE:MRK). ETFs: PowerShares Dynamic Biotech & Genome (NYSEARCA:PBE), Biotech HOLDRS ETF (NYSEARCA:BBH) carries a 25% holding in AMGN.
Summary: Goldman Sachs (NYSE:GS) is set to make a killing off its $2.58 billion, 5.75% stake in Industrial & Commercial Bank of China. ICBC's IPO is next month in Hong Kong and Shanghai and given current demand Goldman could see its investment double. However, it won't be able to cash out for three years and missed out in underwriting fees that could have been as much as $70 million. Nevertheless, investing in China's banks has been lucrative for overseas investors. Overall, Goldman has enjoyed success in China as it has in Japan for instance, especially from its investment in Sumitomo Mitsui Financial Group that gave Goldman access to its clients. ICBC by the way has 2.5 million corporate customers. However, some analysts warn of the unproven track record of Chinese banks, and point out their comparatively high nonperforming loan rates.
Related links: Full WSJ article • BusinessWeek: China's ICBC: The World's Largest IPO Ever • Goldman Sets the Standard This Investment Banking Season • Goldman's Exclusive Hedge Fund Drops By 10% - A Harbinger of Things to Come? • UBS To Benefit from Chinese Banking Restrictions • Conference call transcripts: Goldman Sachs F3Q06
Potentially impacted stocks and ETFs: American Express (NYSE:AXP), Bank of America (NYSE:BAC), Merrill Lynch (MER), Morgan Stanley (NYSE:MS) and UBS AG (NYSE:UBS) also have investments in Chinese banks.
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Notable articles on Seeking Alpha today: Market overview: Markets To Open Higher With Dow All-Time High in Reach • Today's Earnings Schedule & Estimates • Halliburton's Problems Are Spreading Like Kudzu • Everything You Wanted To Know About Shipping But Were Afraid To Ask • Overlooked Angles in the SEC’s New Comp Disclosures • Bulls and Bubbles Are Not Synonymous • Dow Components' Performance: 1/00-9/06 • A Long Oracle/Short SAP Strategy • Jim Cramer's latest stock picks.
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