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Summary: The dollar and euro climbed against the yen yesterday. As Japanese confidence in their economy grows, Japanese wealth ventures abroad looking for investments. Yesterday, a Japanese economic report showed business sentiment among small and midsize companies improving, suggesting the country's economic recovery has spread beyond large firms. The dollar was also the beneficiary of a strong stock market and higher crude prices, both potential signs of inflation, which would preclude a Fed interest rate cut, which would in-turn damage the dollar. However, the dollar lost some of its initial gains late in the day after two U.S. senators cancelled their plans to have the senate vote on tariffs on Chinese-made goods in order to strongarm the Chinese into dealing with their undervalued yuan, one of the main causes for China's massive trade surplus with the U.S.
Related links: Full WSJ article • Japanese Business Sentiment Highest Among Large Co's • Paulson Wants Even More Flexibility in Yuan • The Paulson Effect: China Hawks in Senate May Delay Vote • China's Latest Attempt to Cut Its Trade Surplus • Will Debt Payments Drag Down GDP or the Dollar? • U.S. Trade Deficit: Not as Ominous as it Sounds • Consumer Confidence is Helping the Dollar
Potentially impacted stocks and ETFs: Euro Currency Trust ETF (FXE), iShares MSCI Japan Index ETF (EWJ)
TECHNOLOGY AND INTERNET
Summary: Research In Motion Ltd. (RIMM) surprised the markets, reporting a 27% Q2 jump in profits coupled with an upbeat earnings outlook. RIM beat the street, which had pegged its earnings at $0.71/share, earning $0.74. After closing down $0.14 at $86.06, shares jumped above $100 in after-hours trading. RIM said it added about 705,000 BlackBerry subscribers in the quarter, for a total of 6.2m. It said it expects new subscriptions to grow even faster in Q3, forecasting revenues between $780-820m. Earlier this month RIM launched the BlackBerry Pearl, which sports a camera and music player; their most serious attempt to go after the non-corporate consumer and compete with wireless' biggest players, Motorola Inc. (MOT) and Nokia Corp. (NOK). While share trading was relatively benign prior to the announcement, RIMM options were a hot item: 79,000 puts and 89,000 calls changed hands. With shares closing at $86.06, call trading was heaviest in the October 90 calls; 21,600 changed hands (open interest beforehand was 14,800).
Related links: Full WSJ article • Earnings Call Transcript • Earnings: RIMM Jumps; Corel Beats; ESIO Dives; Tibco Inline • Research in Motion Comments on Blackberry Pearl Reception • Mossberg Likes Pearl • Another Flop From Nokia, Another Win for RIMM
Potentially impacted stocks and ETFs: Palm Inc. (PALM)
Summary: When Dell (DELL) and Apple (AAPL) issued major battery recalls in August, Lenovo (OTCPK:LNVGY) claimed its battery packs were designed to "fail safely" by shutting down before extreme overheating. As it turns out, they were wrong. Yesterday, Lenovo announced plans to recall 526,000 batteries manufactured by Sony Corp. (SNE) for use in Lenovo's IBM ThinkPad laptop computers. Following Lenovo's recall announcement, Sony said it will initiate, "a global replacement program" for certain battery packs using Sony-made lithium ion cells. People familiar with the move said it signals that Sony is planning a large battery recall on the scale of those recently done by Dell Inc. and Apple Computer Inc.
Related links: Full WSJ article • Sony Q1 2007 Earnings Conference Call Transcript • Zinc Miners to Benefit from Dell Battery Recall? • Sony Should Remain On Track Despite Dell Battery Recall • Another Headache for Sony
Summary: In a bid to enter the highly lucrative PC gaming market, Hewlett-Packard (HPQ) announced it would purchase specialty-gaming computer company Voodoo Computers. The closely-held company with just 30 employees expects $115 million in revenues this year selling its specialty computers for an average of $5,000 a pop - compared to the $800 average of no-gaming PCs. The PC gaming market is a niche market which pulls in as much as $1 billion a year, and is a market HP has apparently wanted to enter for some time. Todd Bradley, executive vice president for HP's PC group, said the company has looked at the gaming space as an expansion area over the past year. The move comes on the heels of Dell's (DELL) purchase of Alienware Corp. in March, a PC company also popular with gamers.
Related links: Full WSJ article • ZDNet News: HP to acquire Voodoo PC • Hewlett-Packard Q3 2006 Earnings Conference Call Transcript • Comparative Valuation: Price/Sales (Trailing 12 Months) for Computer Hardware Companies •Dell Goes for the Gamers With Alienware Acquisition
Potentially impacted stocks and ETFs: Companies like HP and Dell would love to grab a share of the console gaming business. Potentially affected companies include Sony (SNE) - PS3, Nintendo (OTCPK:NTDOY) - Wii and Microsoft (MSFT) - XBox360.
Summary: Despite the recent drop in oil prices, OPEC denied any intention to cut production. Oil prices reacted positively to the news, dropping $0.20/barrel yesterday to close at $62.76/barrel. In other commodity markets, the November natural gas futures contract fell $0.277/million BTU, but December wheat futures rose to a four month high of $4.455/bushel.
Related links: Full WSJ article • OPEC Keeping Its Eye on Prices • OPEC: Lemonade Cartel • The Significance of Oil's Drop Under $60 • Oil vs. Dow: 1987 Deja Vu All Over Again? • Cheaper Oil's Downside (Part I) • Cheaper Oil's Downside (Part II) • BusinessWeek: The Downside Of Cheaper Oil
Potentially impacted stocks and ETFs: Oil majors: ExxonMobil Corp. (XOM), ConocoPhillips (COP), Chevron Corp. (CVX), BP PLC (BP) and Royal Dutch Shell (RDS.A) • ETFs: U.S. Oil Fund ETF (USO), Oil Service HOLDRs ETF (OIH).
Summary: President Bush explained his dedication to help the U.S. find alternatives to oil even as oil prices have eased of late in an interview with The Wall Street Journal. He focused mostly on the benefits and ongoing challenges of expanding the use of ethanol. Two key areas are the transportation of the fuel and increasing the number refueling stations that sell it. There are reportedly only 1,000 stations selling ethanol out of 170,000 across the U.S. Mr. Bush mentioned federal government efforts such as funding for a project to build fueling stations on a highway that connects Indiana to the Gulf Coast. His vision consists of ethanol availability expanding on a regional basis related to locally grown fuel sources. He commented that private-sector and venture-capital investment will continue to play an important role.
Related links: Full WSJ article • WSJ: President Bush Interview Transcript • Imperial Sugar: 'Sweet' Ethanol Long Play, or Commodity Boom Bust-in-Progress? • Back to the Fuel of the Future: Top Seven Ethanol Plays • Ethanol IPO Hype is Gone • Ethanol and Oil Sands Stocks at Risk?
Potentially impacted stocks and ETFs: Ethanol stocks: Archer Daniels Midland (ADM), Aventine Renewable Energy Holdings (AVR), Green Plains Renewable Energy (GPRE), MGP Ingredients (MGPI), Pacific Ethanol (PEIX) and VeraSun Energy (VSE) • ETFs: PowerShares WilderHill Clean Energy (PBW), United States Oil (USO) and Energy Select SPDR (XLE)
TRANSPORTATION AND AEROSPACE
Summary: Investor Kirk Kerkorian and General Motors (GM) Chairman and CEO Rick Wagoner Jr. are sparring again over the direction the North American auto giant's restructuring should take. Kerkorian continues to push the merits of a proposed merger between GM and European automaker Renault and its Japanese partner Nissan Motor Co. (OTCPK:NSANY), while Wagoner believes that without specific guaranteed benefits of such a merger, GM should go about its restructuring on its own. The disagreement, which is already months old, has forced Kerkorian and Wagoner to take their respective cases to the board, which seems to be snugly in Wagoners pocket at this point in opposing the deal for the time being. Kerkorian has responded by filing with the SEC yesterday a bid to buy an additional six million shares with the option to buy an additional six million. The move would increase Kerkorian's Tracinda Corp.'s investment size in the company from 9.9% to upwards of 12%.
Related links: Full WSJ article • GM/Nissan-Renault Alliance Talks 'Bog Down' • Message to GM Investors: Whoa! • Do You Believe in Miracles? Look at GM • Position Movement Among GM's Major Shareholders • GM to Renault & Nissan: Show Me the Money • Is GM Stalling With Renault-Nissan Alliance?
Potentially impacted stocks and ETFs: Ford (F), DaimlerChrysler (DCX), Toyota (TM), Honda (HMC)
Summary: Yesterday the Dow finished just a smidgin away from all-time highs. Altria Group Inc. (MO), parent company of Philip Morris USA, the nation's largest cigarette maker, has been its best-performing stock over the past six years, going from $24 in 2000 to its current $76.97. Its climb has been fueled by a string of legal victories: MO's strategy was simple: Appeal every losing judgement. And it has worked, resulting in reduced plaintiff awards, and in disallowing suits to be treated as class actions. The victories have been setting the stage for a spinoff of MO's 88%-owned Kraft Foods Inc. (KFT): the U.S.'s biggest food company. The spinoff would allow Kraft to trade without apprehension over the long-term prospect of the tobacco business -- and that has investors drooling. Separating the two was considered impossible as long as MO was under the shadow of serious litigation; it could have been construed as transferring assets out of cigarette plaintiffs' reach. Some investors predicted the split would be announced at the company's Oct. 25 board meeting. Now it looks like the wait may continue: This week a federal court granted class-action status to tens of millions of smokers of "light cigarettes" -- exposing tobacco companies to a fresh $200b legal claim.
Related links: Full WSJ article • Light Cigarette Suit Could Exact a Heavy Price on Tobacco Companies. Background: Altria Stock Jumps on Judge's Ruling Against Smokers (MO) • The Dow Then and Now - Gainers (Altria, Caterpillar) and Losers (Intel, GM) • Barron's: MO's huge gains make it one of Wall Street's most respected companies
Potentially impacted stocks and ETFs: More tobacco stocks: British American Tobacco (BTI), Imperial Tobacco Group (ITY), Gallaher Group Plc (GLH), Vector Group Ltd. (VGR). ETFs: iShares Dow Jones US Consumer Goods ETF (IYK), Vanguard Consumer Staples ETF (VDC), and Consumer Staples Select Sector SPDR (XLP) all have a major holding in tobacco producers. Kraft competitors: H.J. Heinz Company (HNZ), Campbell Soup Co. (CPB), ConAgra Foods Inc. (CAG), Group DANONE (DA).
Summary: America's second largest poultry company, Pilgrim's Pride (PPC), has launched a hostile takeover bid for America's third largest poultry company, Gold Kist Inc. (GKIS). Word of the offer first became public several weeks back, when Gold Kist's shares were trading for significantly less than they are today. The tender, which is for $20 a share, caused prices to skyrocket as investors who hoped to turn a quick profit unloading Gold Kist shares came on board (shares closed at just under $21 in composite trading yesterday). Gold Kist management has advised its shareholders to temporarily reject Pilgrim's Pride's offer until October 12 when a decision on how they should proceed will be reached. The tender offer doesn't expire until October 27. Were the deal to go through, Pilgrim's Pride would be in position to give the nations top poultry producer, Tyson Foods (TSN) a run for their money. Also, Tyson would likely be control more than 30% of the U.S. poultry market making them a target for U.S. meat industry antitrust regulators.
Related links: Full WSJ article • SEC: 8-k filing • Pilgrim's Pride Trying to Pull a Fast One With Proposed Gold Kist Acquisition • Pilgrim's Pride -- "The Sky is Falling!" • The Bull Case for Tyson Foods
Summary: Similar to what many drug makers have done in recent years, Johnson & Johnson (JNJ) is hoping to rework an older, successful drug that is about to lose its patent and go generic. Risperdal, a schizophrenia drug, was J&J's best-selling product last year, bringing in $3.55 billion. J&J is now attempting to market paliperidone, which it claims is a significant improvement over Risperdal, and if approved by the FDA today could add five years of marketing life to what otherwise would have gone generic. A generic version could hurt sales of paliperidone -- which doesn't have a marketing name yet -- by up to 30% or the amount that was sold to Medicaid. Both Wall Street and the medical community are voicing their doubts over paliperidone, saying J&J has largely failed to prove it's any better than Risperdal. In addition to its clinical tests of paliperidone versus a placebo, J&J said it has begun a test against AstraZeneca's (AZN) Seroquel, which is the most widely prescribed antipsychotic drug in the U.S. Still, critics contend that J&J has not put paliperidone directly against Risperdal.
Related links: Full WSJ article • Drug Companies Threatened By Proposed Patent Legislation • J&J Sues Boston Scientific and Abbott Labs Over Guidant Deal • Johnson & Johnson -- 73 Consecutive Years of Sales Increases! • Changes to Berkshire Hathaway's Holdings: J&J in, Lexmark Out
Potentially impacted stocks and ETFs: The FDA's decision today has obvious implications for shares of both J&J and AstraZeneca. Other firms known to have "reworked" a drug to extend market life include: AstraZeneca (AZN), Forest Laboratories (FRX), Schering-Plough (SGP) and Wyeth (WYE). As of Aug. 31st, J&J was the second largest holding of iShares Dow Jones US Healthcare ETF (IYH) at 11.17% of net assets. It was also the 2nd largest holding of iShares S&P Global Healthcare ETF (IXJ) at 8.08% of assets; AstraZeneca was 6th largest at 4.29%. And it was the 2nd largest holding of Health Care Select Sect SPDR (XLV) at 12.54%. (Source: Morningstar.com)
Summary: Investors are starting to question recent leveraged buyouts ('LBO') that team corporate management with outside private equity funds. For example, Kinder Morgan (KMI) management took over two months to inform the board of directors that it was considering buying the company. Complicating matters, Goldman Sachs (GS) went from being a Kinder advisor to being one of the company’s buyers. In HCA’s (HCA) buyout, Merrill Lynch (MER) played a similar role, starting out as an advisor to the company and ending up as one of the buyers. Potential-conflict-of interest issues, coupled with the time it took for Kinder management to announce its buyout, are raising eyebrows: Investors want to make sure that companies which are going private in management/private equity deals are being sold at “fair” prices.
Related links: Full WSJ article • LBOs Making Executives Very, Very Rich • Investment Banks Have Too Much Money On Their Hands • 8 of 10 All Time Largest Corporate Buyouts Occurred Recently • Kinder Morgan: The Path Not Taken By Enron • Bloomberg: Arbitrage Profit in U.S. Takeovers Pending on Sept. 28 • Forbes: Kinder Morgan Shareholders May See Modest Near-Term Upside
Potentially impacted stocks and ETFs: Bear Stearns (BSC), Lehman Brothers (LEH), Morgan Stanley (MS)
Summary: Zhang Chunjiang, chairman of China Netcom Group (CN) probably heads one of the most Westernized corporate governance structures among majority government-owned Chinese firms. He can thank former Goldman Sachs (GS) president and now friend and Netcom board member John Thornton. Overseas listings such as in NY, Hong Kong, and London are encouraged by Beijing, not necessarily to raise capital, but rather to gain exposure to the demands of international investors. Zhang explains, "Of China's four big telecom companies, we are the one with the biggest difficulties. So under those circumstances, we thought, what can we do to make people feel confident about investing in Netcom?...We wanted to develop a corporate-governance system that could let investors relax." China Netcom has half as many provincial phone networks as rival China Telecom (CHA); as a double-whammy, many are located in less affluent provinces. However, 7 of China Netcom's 13 directors are outsiders, versus only 4 of 13 for China Telecom. Zhang and Thornton have worked closely and received help from outside consultants such as McKinsey to overhaul China Netcom's board. Zhang admits that, "governance isn't the only important factor" but stresses that, "you can't compete" without a modern governance system. His firm's business challenges extend beyond larger rival China Telecom to the threat of rapid growth by wireless carriers in which consumers are bypassing fixed-lines all together in favor of cellular service.
Related links: Full WSJ article • IRG Limited: China Telecom and Netcom dominate mainland broadband with combined 87% of subscribers • IRG Limited: China Netcom 1H earnings summary • IRG Limited: Mainland mobile operators to outperform fixed-line carriers • Andrew Schmitt of Nyquist Capital: "The Future of Fiber To The Home in China" [Part 1, Part 2, Part 3, Part 4]
Potentially impacted stocks and ETFs: China Mobile (CHL) 246.6 million mobile subscribers, China Unicom (CHU) 127.8 million mobile subs and China Telecom (CHA) 231 million fixed-line subs. China Netcom has 126.8 million fixed-line subs.
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