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Summary: There are indications that manufacturing growth is slowing. The Institute for Supply Management, a private group of corporate purchasing managers, said its manufacturing index (pictured -- click to enlarge) fell to 52.9 last month from 54.5 in August. Although readings above 50 indicate expansion, the September measure suggests that factories experienced slightly weaker growth as the third quarter progressed. Recent data on industrial production and factory orders have also pointed to slower growth -- largely the result of a weak housing market and high interest rates. Slower economic growth is likely to damp inflationary pressures, and makes it more probable that the Federal Reserve will leave interest rates frozen or even cut them. Despite the slower growth rate, September was the 40th consecutive month of expansion in the manufacturing sector -- the longest uninterrupted growth streak since the 1970s.
Related links: Full WSJ article • Industrial Output Climbs Strongly -- Good News for Industrial Equipment & Component Stocks • What a U.S. Recession Would Mean for Sectors, Foreign Stocks • Bear in Disguise?
TECHNOLOGY AND INTERNET
Summary: Many internet media sites are faced with the decision whether or not to pre-roll, and if so how much. A pre-roll is the short advertising spot which is immune to fast-forwarding, unlike regular TV ads for those with DVRs. Currently, YouTube and Google (GOOG) eschew pre-roll advertising, while pre-rolls abound on Yahoo (YHOO), AOL (TWX), Microsoft's (MSFT) MSN, and MTV's Overdrive. Although pre-rolls mean huge revenues for advertisers, media outlets could lose internet viewers who may simply go elsewhere rather than sit through video ads. Companies which use pre-roll advertising are finding ways to make them more appealing to viewers: Time Warner's AOL does not use pre-rolls that are longer than 15 seconds, and usually allots one per program; CBS balances pre-rolls with mid-roll ads in the middle of a program; and General Electric's (GE) NBC Universal is trying out different lengths for pre-rolls.aQuantive Comments On Graphical Ads, Rich Media and User-Generated Video • Cisco to Offer YouTube-like Service for Businesses • Downloadable Video: Will Anyone Actually Buy It? • NBC's Streamed Online Video Lands Ad Partners • Microsoft and Time Warner Ahead of Google in Web Video Ads • Forbes: Web Video Takes Off, Ads Trail • MarketingVOX: Study: Pre-Rolls Top Transitional Ads in Brand Awareness, but Not Buy Intent
Related links: Full WSJ article •
Potentially impacted stocks and ETFs: aQuantive Inc. (AQNT)
Summary: Nintendo raised its first-half and full-year profit outlook as well as increased its year-end dividend based on strong sales of its DS handheld game console and related games, in addition to seemingly higher estimated sales for its forthcoming Wii console. Nintendo also cited larger-than-anticipated profits from a weaker yen. Group net profit for its fiscal year ending next March is now expected to be 20% higher at 100 billion yen ($850m). Group sales are seen coming in at 740 billion yen or about 16% higher than its prior estimate. It boosted its dividend by 25% on an annual basis.
Related links: Full WSJ article • Reuters coverage • Significance of the Surprisingly Weak Yen • Why PlayStation 3 Will Bankrupt Sony • Nintendo: Solid Business, Share Price Too High • Sony's Headache: Nintendo Wii Launch Dates, Prices Announced • Nintendo Wii Anticipation Drives Shares to Multi-Year Highs • MoSys and Nintendo: A Match Made in Gaming Heaven • Nintendo Posts Strong Q1, Boosts Full-Year Forecast • Nintendo Dominates First Half Game Sales in Japan
Potentially impacted stocks and ETFs: Microsoft (MSFT), Sony (SNE), Konami (KNM) and MoSys (MOSY)
TRANSPORTATION AND AEROSPACE
Summary: General Motor's (GM) turnaround saw another milestone yesterday as its shares traded at a 52-week high of $33.97 during intra-day trading before settling at $33.50, up 24 cents. Still, many investors feel the stock's fundamentals are worsening, while questioning GM's ability to sustain its improving revenue structure -- the company has increased its per-vehicle revenue by nearly $4,000 from the year-ago period -- especially now that the economy is showing signs of slowing down and GM has planned for significant production cuts in the second half of the year. Also, despite the revenue improvements, the company still lags far behind its Japanese counterparts. For example, despite dropping losses per-vehicle by nearly $1,000 from last year, GM still earns $2,000 less per vehicle than Toyota (TM), due to much higher employee health care costs and per-vehicle warranty costs. And this is all after narrowing the gaps significantly.
Related links: Full WSJ article • Message to GM Investors: Whoa! • Jerry Flint Believes Detroit's Luck Has Run Out • Kerkorian Files With SEC to Up His Stake in GM • Do You Believe in Miracles? Look at GM • Toyota Ups Guidance, Sets Global Production Targets • Toyota's Development Slowdown and Quality Improvement Are Smart Moves • GM Daewoo Matiz commercial for the Korean market
Potentially impacted stocks and ETFs: Ford (F), Honda (HMC), DaimlerChrysler (DCX)
Summary: On Friday Coach (COH) filed a lawsuit against Target (TGT), claiming that Target is selling a bag which infringes on various Coach trademarks. According to Coach, not only do the bags in question have Coach's signature C-pattern printed on the bag, the word "Coach" is actually on the hand tag. According to Coach CFO Mark Devine, "We have gone into stores in Florida and purchased this ourselves. It isn't ours." Target, claims the bag is an authentic Coach product, stating, "Target has procedures in place to ensure that we do not sell counterfeit products to our guests... We have been assured that the Coach product showcased in our store is authentic, therefore we believe the lawsuit is without merit." This is not the first run-in Coach has had with Target. On September 21, Coach sent Target a letter claiming that target's Isaac Mizrahi tote bag infringed on a Coach design. More recently, Coach claimed that another Target product (this time selling under the Cherokee label) infringes on Coach's abstract "Optic C" design.
Related links: Full WSJ article • Lower Gas Prices Help Low-End Consumers, Retailers • Where is the Retail Carnage Everyone Keeps Talking About? • Solid Growth and Appealing Price Make Coach Attractive • Coach CEO Comments on China Growth Strategy • Gross Margin Kings -- Apparel & Accessory Stocks • Earnings Conference Call Transcripts: Target Q2 2006 (August 10, 2006), Coach Q4 2006 (August 1, 2006).
Potentially impacted stocks and ETFs: Wal-Mart (WMT), Kohl's (KSS), Sears Holding (SHLD), Costco (COST), Nordstrom (JWN), Saks (SKS), Tiffany (TIF). ETF: Retail HOLDRs (RTH)
Summary: Harrah's Entertainment Inc. (HET) received a $15.1 billion offer from private equity houses Apollo Management and Texas Pacific Group which, at $81-a-share, represents a 22% premium over Friday's closing price of $66.43. The stock responded strongly, jumping 14% to $75.68. Joe Greff, casino analyst at Bear Stearns wrote: "We suspect the board of directors will just seek a higher price, citing its global development pipeline and Las Vegas land bank as a reason that the current proposal is inadequate." The largest gambling operator by revenues, Harrah's holdings include casinos (Caesars Palace and others), as well as a substantial real estate portfolio. However licensing could prove to be the most significant hurdle ahead of any potential acquisition: Apollo and Texas Pacific do not hold gambling licenses, and officials in the states in which Harrah's operates expect that achieving these licenses could take two years. This hurdle has traditionally kept private equity investors out of the casino sector. However the past few years have seen an increase of private equity interests in casinos. Colony Capital bought Harveys Casino Resorts in 1999, and its principals Thomas Barrack and Kelvin Davis were awarded casino licenses. Kelvin Davis is now a partner at Texas Pacific.
Related links: Full WSJ article • HET Press Release • Harrah's Seems Underwhelmed by Buyout Offer
Potentially impacted stocks and ETFs: Boyd Gaming Corp. (BYD), MGM Mirage (MGM), Trump Entertainment Resorts Inc. (TRMP)
Summary: This year's Nobel Prize for medicine was awarded to Andrew Fire and Craig Mello for research they did back in 1988. Their research, known as RNA Interference ('RNAi'), focused on natural methods used by cells to destroy harmful genes (for example genes carried by an invading virus). RNAi is now seen as an approach to create new pharmaceuticals that will directly target genes of specific diseases. This technology is attracting the interest and capital of both private industry and the federal government. Investors have funded Biotech companies pursuing RNAi technology to the tune of $500 million, and the major pharmaceutical companies have pledged an additional $2 billion if the drugs live up to their potential. The government has gotten into the act, awarding a $23 million contract to Alnylam Pharmaceuticals (ALNY). The contract calls for Alnylam to develop pharmaceuticals which could be used to defend against a bio-terrorist attack. Alnylam also received $700 million from Novartis (NVS) to develop drugs using Alnylam's RNAi technology. The big winners here could be the Carnegie Institution (Dr. Fire's former employer) and the University of Massachusetts, which share patent rights on RNAi. They have already collected $5 million in royalties, and experts believe that the potential income stream is huge, given the technology's commercial potential.
Related links: Full WSJ article • Drug Companies Threatened By Proposed Patent Legislation • Rob Black's Healthcare Stock Report • Biotech IPO: Highlights from Rosetta Genomics' F1 Filing • BusinessWeek: Biogen and Alnylam to collaborate • Wikipedia: RNA Interference
Potentially impacted stocks and ETFs: Merck (MRK), GlaxoSmithKline (GSK), Alnylam (ALNY), Sirna Therapeutics (RNAI), Novartis (NVS). ETFs: Pharmaceutical HOLDRs (PPH), Pharmaceutical HOLDRs (PJP), Health Care Select Sect SPDR (XLV)
Summary: Biopharmaceuticals company Gilead Sciences Inc. (GILD) agreed to acquire Myogen Inc. (MYOG) for about $2.5 billion, in an attempt to gain ownership of Myogen's main drug candidate, Ambrisentan, a treatment for pulmonary arterial hypertension that is in late-stage clinical trials. The $52.50-a-share offer represents a 50% premium over Myogen's share price of $35.08 on Friday. Share prices shot up 47%, or $16.36, to $51.44 in trading yesterday. At the same time, Gilead shares were off $4.49, or 6.5%, at $64.28. While the Pulmonary hypertension pharma market generated just over half a billion dollars in sales in 2004, it is expected to be worth upwards of $2 billion by 2014, with Ambrisentan expected to be the top revenue generator of the group. Myogen expects to file a new-drug application for Ambrisentan with the Food and Drug Administration as early as the fourth quarter, Gilead said. Asked why they paid a 50% premium for Myogen shares, Gilead Chief Financial Officer John Milligan said: "We felt that the premium was a fair value for what we were doing here, and that this was in fact a product that we could build a franchise around."
Related links: Full WSJ article • Gilead Sciences, Inc. Q2 2006 Earnings Conference Call Transcript • Jim Cramer's Take on GILD • SF Chronicle: Gilead's purchase expands its scope • How Myogen Grew Its Market Cap More Than 7X Last Year
Potentially impacted stocks and ETFs: GlaxoSmithKline (GSK)
Summary: September has historically been the worst month for hurricanes in the U.S., and only 16 Category-3 or higher storms have hit in October since 1851. So while it may still be a little early for reinsurers that bet on a calm summer to start counting their profits, as there are formally two months left to hurricane season, a number of players including Berkshire Hathaway (BRK.A) and RenaissanceRe Holdings (RNR) appear to have done very well in this non-catastrophe year. After last year's stormy season, reinsurance premiums have skyrocketed 76% in the U.S. Two BRK.A divisions in the hurricane reinsurance business recorded underwriting losses of $2.02 billion in Q3 last year; if the weather holds, Glenn Tongue of hedge-fund T2Partners LLC predicts that they will record underwriting gains of $400 million in the comparable quarter this year. RNR had revenues of $886.5 million for U.S. hurricane policies last year, and a net loss of $246.8 million in the year. This year, catastrophe premiums are projected to grow more than 40% as the risk doesn't change. A Deutsche Bank analyst projects that the company's after-tax operating income this year will be $612 million.
Related links: Full WSJ article • Stocks Hurt By Katrina Doing Well One Year Later • Ramifications of a Quiet Hurricane Season • Five Small Cap Hurricane Plays
Potentially impacted stocks and ETFs: Other insurers: Endurance Specialty Holdings (ENH), Axis Capital Holdings (AXS), Monpellier Re (MRH).
Summary: Seeking to expand its China operations, Morgan Stanley (MS) acquired Nam Tung Bank, a small commercial bank located in the southern city of Zhuhai from Bank of China for an undisclosed amount. Nam Tung only has one branch and 30 employees, but what's important is its commercial-banking license and thus Morgan's ability to apply for and offer more products such as structured derivative products, home mortgages and corporate loans. Morgan's China CEO commented, "This platform will allow us to provide a wider array of new product capabilities that are currently offered only by commercial banks with a presence within China."
Related links: Full WSJ article • GolDMAn Knows China... • Morgan Stanley, A Solid Long Term Opportunity • UBS To Benefit from Chinese Banking Restrictions • China's Banking Sector Looks Better with New Corporate Bankruptcy Law • An Interesting Play on China's Banking Sector: Bank of East Asia • Developments in China's Banking Sector
Potentially impacted stocks and ETFs: American Express (AXP), Bank of America (BAC), Citigroup (C), GolDMAn Sachs (GS), HSBC (HBC), Merrill Lynch (MER) and UBS AG (UBS) are among the largest foreign banking competitors in China.
Summary: The yen's weakness over the past two years and especially of late has surprised both economists and corporate executives. The dollar has gained about 15% against the yen since the start of 2005, while the yen is now trading near an all-time low against the euro. Even against the S. Korean won the yen has weakened nearly 23% in the past two years. A weak yen results in a dual benefit for Japan's major exporters: improved price competitiveness of exports, and higher repatriated profits. Stephen Jen, Morgan Stanley's head of research in London, says, "I now recognize that there are genuine, and possibly lasting, forces holding up" the dollar and the euro against the yen -- referring mainly to heavy outflows of capital from Asia into overseas financial assets. Nomura Securities estimates that every one-yen rise in the dollar's value results in a 0.6% increase in pre-tax profit at Japan's 400 largest firms. Given that profits are seen rising 7% to 8% this year based on an average exchange rate of US$1/Y113 versus the prevailing rate of near US$1/Y118, a Nomura analyst says, "We could well see a double-digit increase this year."
Related links: Full WSJ article • BoJ's Tankan Surprises to Upside, Investment Implications • Yen Falls as Japanese Investors Go Shopping Abroad... • Japan Auto Saved by Exports • Yen Carry Trade Not Over Yet
Potentially impacted stocks and ETFs: Major exporters mentioned in WSJ article: Canon (CAJ), Matsushita Electric Industrial (MC) and Toyota (TM). • Most actively traded Japan ETF: iShares MSCI Japan Index (EWJ) • Other Japan ETFs and CEFs: iShares S&P/TOPIX 150 (ITF), Vanguard Pacific (VPL), Japan Equity Fund (JEQ), Japan Smaller Cap Fund (JOF), WisdomTree Japan Small Cap Dividend (DFJ), WisdomTree Japan High-Yield Equity (DNL) and WisdomTree Japan Total Dividend (DXJ). • Editor's note: Returns for U.S. investors in the aforementioned stocks and funds can be negatively impacted by a weakening yen, meaning gains can be limited whereas losses can be exacerbated. Should the yen strengthen from the time of your share purchase however, the opposite is also true.
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Notable articles on Seeking Alpha today: The Stalwart asks: Is Housing Weakness Good for REITs? • Rob Black's Financial Report • Why Chad Brand says, Expect Weaker Than Average Fourth Quarter • An In-Depth Look at Shutterfly's IPO • The Long Case for Pacer International • TickerSense's Guaranteed Up Days • Why Shopzilla Will Wow Audiences • Jim Cramer's latest stock picks.
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Summary of this morning's Wall Street Journal with comments on related stocks.