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MACRO AND HOUSING
Summary: Investors inferred that the Fed will keep interest rates unchanged for the rest of the year at 5.25% from comments in Q&A following a speech yesterday by Chairman Ben Bernanke. Bernanke said, "There is currently a substantial correction going on in the housing market," one of the, "major drags that is causing the economy to slow," and that, "we do believe that inflation is going to be coming down gradually over time." Kansas City Fed President Thomas Hoenig said in a speech in Albuquerque, New Mexico that, "Inflation, honestly, right now is too high," but that monetary policy is, "not tight, but modestly restrictive." Bernanke's speech was devoted to the fiscal challenges of the aging U.S. workforce, and concluded that entitlement programs needed to be "reformed", taxes boosted, spending cut, or a combination of all three. Separately, the Institute for Supply Chain Management reported that its service industries index fell to 52.3, the lowest since April 2003, but still indicative of expansion.Full article • Full text of Bernanke speech • Note similar but more detailed remarks in a speech yesterday by Fed Vice Chairman Donald Kohn
Summary: Moody's forecasting outfit Economy.com issued a report predicting that median existing-home house prices will fall 3.6% next year in the U.S., with some areas falling as much as 20%. Regions most susceptible to sharp house price declines are the southwest coast of Florida, and the metropolitan areas of California, Arizona, Nevada, greater Washington D.C. and Detroit. Specific numbers: Cape Coral, FL to fall 18.6% from peak, Reno, NV 17.2%, Merced, CA 16.1%, Stockton, CA 15.7%, Sarasota, FL 14%, Naples, FL 13.8%, Tucson, AZ 13.4%, Las Vegas, NV 12.9%, Chico, CA 12.6% and Fresno, CA 12.5%; 11 other metros to suffer double-digit declines. Prices are likely to keep falling until 2008 or 2009 in some areas.
Related links: (1) Background: Full article • More detail from Realty Times's write-up • WSJ's coverage of the same story adds context from other recent data • Economy.com's web site (2) Other recent data: Housing and Durable Goods Flip-Flop • Housing Bubble and Real Estate Market Tracker • House Prices Decline Year-Over-Year, More to Come? (3) Commentary: Don't Believe Advocates of a Soft-Landing for Housing • Housing Weakness Good for REITs? • Follow HouseValues' CEO Out of Company Shares • Barron's: Time to Buy Housing Stocks.
Potentially impacted stocks and ETFs: Realtors and Realtor Services Stocks: Realogy (NYSE:H), HouseValues (SOLD) • Lenders: Countrywide Financial Corp. (CFC), H&R Block Inc. (NYSE:HRB) • Furnishings: Ethan Allen Interiors (NYSE:ETH), Home Depot Inc. (NYSE:HD), Sherwin Williams Co. (NYSE:SHW), Mohawk Industries Inc. (NYSE:MHK) • ETFs: streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB)
TECHNOLOGY AND INTERNET
Ex-Leader Among 5 Charged in Hewlett Case (New York Times)
Summary: Yesterday, California’s attorney general office filed felony charges against five people involved in Hewlett Packard’s (NYSE:HPQ) leak investigation scandal. One of those charged, Patricia C. Dunn, HP’s former chairwoman, was the person who authorized the investigation into board leaks at HP. The other people charged were Kevin T. Hunsaker, a former senior HP lawyer who supervised one stage of the internal investigations, and three outside private investigators. According to California’s attorney general Bill Lockyer, “We plan to aggressively prosecute this case ... However, the investigation into this matter remains active and still incomplete.” Mr. Lockyer added that “There currently is no evidence that Mark Hurd engaged in criminal conduct,”. Also not charges was HP’s former general counsel Ann O. Baskins, who resigned last week. Each of the accused was charged with four separate felony charges, including a conspiracy charge. Ms. Dunn’s attorney responded to the charges, saying “These charges are being brought against the wrong person at the wrong time and for the wrong reasons. They are the culmination of a well-financed and highly orchestrated disinformation campaign.”
Related links: Full article • H-P's He Said, She Said: House Committee Releases Full Dunn and Hurd Testimony • H-P: Of Red Flags and Black Holes • HP: Baskins Resigns as General Counsel; Hurd, Dunn Statements to Congressional Panel Posted • Analysts Rallying Around H-P, Hurd • Previous WSJ summaries on the scandal (dating back to September 6th.) • The Wall Street Journal: Tracking the H-P Controversy • Conference call transcripts: Hewlett-Packard Q3 2006
Potentially impacted stocks and ETFs: Apple (NASDAQ:AAPL), Dell (NASDAQ:DELL), Gateway (GTW), IBM (NYSE:IBM), Sun Microsystems (SUNW) • ETF: iShares Dow Jones U.S. Technology Index (NYSEARCA:IYW)
Jobs Knew Apple Manipulated Some Option Grants (Wall Street Journal)
Summary: Apple (AAPL) released a statement yesterday reporting findings of an internal investigation on its option grant practices. The statement indicated that Steve Jobs knew that some of its options grants were manipulated, but that neither he nor any other existing members of management were guilty of "misconduct" in these grants. Apple's statement did not address whether Steve Jobs was aware that backdating is wrong, how many cases of backdating occurred, and what the board's role was. The behavior of two former executives--unnamed in the statement--raised "serious concerns" in Apple's internal probe. On Saturday night, former CFO Fred Anderson resigned from the company's board to "avoid even the appearance of any conflict of interest". While Steve Jobs did not have options in Pixar, executives there were granted options at lows in the share price at the time when he was chairman. Aitan Goelman from Zuckerman Spaeder LLP estimates that there are "infinitesimal" chances Steve Jobs will face criminal prosecution, however he did not rule out the possibility that he'd face civil action from the SEC.
Related links: Full WSJ article • Updated WSJ Options Scandal Scorecard • Apple's Press Release on Options Investigation Findings • Options Backdating Hits Cupertino • Apple's Options Problems Deepen - Likely To Restate Results • Cost of Options Backdating • Editor's note: On June 30th, David Jackson wrote: "Apple is the highest profile stock so far to be hit by the options scandal. The risk for investors isn't only the reputational damage and potential fines; it's that CEO Steve Jobs may be forced to resign if it is proved that he knowingly took an option grant at below market prices. The stock impact would be dramatic because Mr Jobs has been responsible for turning around Apple over the last few years."
Summary: In a candid televised interview Viacom (NASDAQ:VIA) chairman Sumner Redstone (pictured) disclosed the reason he fired the company's well-liked CEO Tom Freston in early September: Redstone apparently ordered Freston to purchase MySpace for the $500 million the company was asking. After Freston balked, Rupert Murdoch of News Corp. (NASDAQ:NWS) stepped in and picked up the company for $580 million. Since then, MySpace's valuation has nearly tripled to around $1.5 billion. "It was a humiliating experience," Redstone said of losing the deal to Murdoch. Still, Redstone has no plans to pick up Facebook, another popular social site currently up for sale, claiming the billion dollar asking price is too high. For now, Viacom aims to purchase early stage Internet businesses. "We would look at companies on the cutting-edge of greatness and (where) we could make it grow," Redstone said.
Related links: Full article • Viacom Q2 2006 Earnings Conference Call Transcript • Redstone Shakes Up Viacom -- Shares Respond Downward • Freston's Firing a Big Step Backwards for Viacom
Potentially impacted stocks and ETFs: Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT)
Indonesia Joins Call for Opec Production Cut (Financial Times)
Summary: Indonesia is the latest OPEC member to publicly announce support for a cut in oil production, joining Iran, Kuwait, Libya, Nigeria and Venezuela. The nation's OPEC governor stated, "OPEC policy is to stabilise price. Indonesia will have no problem if OPEC were to cut production." OPEC meets in mid-December in Nigeria. At this point no formal decisions have been made regarding production but all members seem to agree that there is a global oversupply and that at least 1 million barrels or 4% needs to be cut. An OPEC official commented, "Opec is going to defend a price floor for its oil of $50-$55 a barrel." OPEC members are reportedly most concerned about Q2 next year when a sizable capacity glut is projected.
Related links: Full article • Oil Prices Decline on Increasing Supply • Discussions on Oil • Inflated Oil Prices: Your Tax Dollars at Work • OPEC Denies it will Cut Output • The Significance of Oil's Drop Under $60
Potentially impacted stocks and ETFs: Energy Select Sector SPDR ETF (NYSEARCA:XLE), U.S. Oil Fund ETF (NYSEARCA:USO), Oil Service HOLDRs ETF (NYSEARCA:OIH)
TRANSPORTATION AND AEROSPACE
G.M.’s Talks on a Partner Fall Apart (New York Times)
Summary: Talks between General Motors (NYSE:GM), Renault and Nissan (OTCPK:NSANY) about a potential alliance fell apart yesterday after Nissan refused to make "dowry" payments to its American counterpart in return for a stake in G.M. Although the deal would have benefitted the European and Japanese companies, Renault's Carlos Ghosn called the idea 'ridiculous,' especially since the market value of his company was higher than GM's. GM CEO Richard Wagoner commented that working with three companies could slow down GM. Mr. Wagoner now needs to mind Kirk Kerkorian, the largest indvidiual GM shareholder, who pushed for the alliance talks in an attempt to raise GM's share price. Renault and Nissan might approach Ford (NYSE:F) as another potential alliance partner.
Related links: Full article • GM/Nissan-Renault Alliance Talks 'Bog Down' • Message to GM Investors: Whoa! • Reuters: Renault-Nissan door open for Ford, analysts wary
Potentially impacted stocks and ETFs: iShares Dow Jones Transportation Average (NYSEARCA:IYT), Ford (F)
Summary: Ford (F) currently has about $23 billion in cash, down from $26 billion at the start of the year. As it embarks on its restructuring program, that cash cushion is expected to keep declining through 2007. CFO Don Leclair expects Ford to end 2006 with a cash position of about $20 billion, including $3.4 billion that was taken out from a retiree health care fund. As a result, Ford will start 2007 with $8.4 billion less cash than it had at the beginning of this year. Analysts expect that restructuring costs coupled with quarterly losses will force Ford to sell off Jaguar, Land Rover and possibly even Ford Motor Credit. If Ford continues to burn through its cash at anticipated rates, analysts are worried that cash could dwindle to less than $10 billion. According to KDP Investment Advisors credit analyst Kip Penniman, “We think they need in excess of $10 billion in actual cash to keep running... If it gets below that level, it gets quite concerning." As a cash conservation measure, Ford recently eliminated its dividend, which will save $374 million/year. This might not be good news for Ford shareholders. Cornell professor Roni Michaely published a paper showing that share prices generally decline for companies that stop paying dividends. This is in part due to fund and money managers who only hold dividend paying stocks.
Related links: Full article • How to Dodge the Dividend Cut • Why Japanese Cars Earn $2400 More Profit Each • Chris Ceraso's Auto Industry Forecast and Stock Picks • Throwing In The Towel On Ford • Jerry Flint Believes Detroit's Luck Has Run Out • Can Ford Survive? Stockholders Need to Know • Forbes: With GM Gone, Ghosn May Look To Ford • BusinessWeek: Arrogance and Complacency Damaged Ford • Bloomberg: Ford Likely Won't Seek Renault-Nissan Tie, People Say
Potentially impacted stocks and ETFs: DaimlerChrysler (DCX), General Motors (GM), Honda (NYSE:HMC), Nissan (OTCPK:NSANY), Toyota (NYSE:TM). ETF: iShares Dow Jones Transportation Index (IYT)
AHEAD OF THE TAPE: Retail Head Fake (Wall Street Journal)
Summary: Falling gasoline prices and cool weather brought shoppers into many national retailers like Kohl's (NYSE:KSS). Kohl's reported on Tuesday that its same-store sales increased 16.3% from last year, significantly beating analysts expectations. Most stores announce monthly sales today; analysts are looking for an average 5.1% gain. But Wal-Mart (NYSE:WMT) same store sales increased only 1.3% from last year. (The company revised down its estimate from the 1.8% number it issued only five days earlier due to discovery of an error.) The lack of hurricane activity could be blamed for this diminished growth, as the bulk of last year's sales were from Southern customers stocking up before and after the big storms.
Related links: Full article • Bloomberg article on Wal-Mart same store sales revision • Kohl's Introduces New Store and Apparel Designs • Discount Retailer Operating Income Growth
Potentially impacted stocks and ETFs: Vanguard Consumer Discretionary VIPERs (NYSEARCA:VCR), Costco (NASDAQ:COST), Target (NYSE:TGT), Federated Department Stores (FD), JC Penney (NYSE:JCP).
Business Is Good, but Kohl’s Still Seeks a Fresh Face (New York Times)
Summary: Despite Kohl’s (KSS) sales doubling to $13 billion over the past five years, executives are coming to grip with the fact that customers find the stores, “easy to shop, but not exciting.” After researching what makes shoppers tick, Kohl’s is scheduled to open new stores today that it believes will broaden its traditional customer base. Imitating department stores, new stores will have large glass windows with mannequins displaying the latest fashions. Kohl’s is also signing up designers to develop exclusive lines for the store; so far they have enlisted Daisy Fuentes and Vera Wang. Last year Kohl's sales hit $13.4B, up from $6.2B in 2000. During the same period profits rose from $372M to $842M. September same store sales are due out today. Analysts expect a 16% increase.
Related links: Full article • Where is the Retail Carnage Everyone Keeps Talking About? • Discount Retailer Operating Income Growth • WSJ.com: Retail Head Fake • Forbes: Kohl's Looks Good, J.C. Penney Looks Better: Analyst • BusinessWeek: Kohl's and TJX: Money in the Middle
Potentially impacted stocks and ETFs: Costco (COST), Target (TGT), Wal-Mart (WMT), Sears Holding (NASDAQ:SHLD), JC Penney (JCP), Federated Department Stores (FD). ETF: Retail HOLDRs (NYSEARCA:RTH)
Pepsi Sales Force Tries to Push 'Healthier' Snacks in Inner City (Wall Street Journal)
Summary: PepsiCo (NYSE:PEP) is trying to revamp its junk-food image by marketing healthier foods to inner-city kids; over 40% of African-American and Latino children are obese. The marketing strategy is greeted with skepticism; many cite evidence that products such as low-fat "Baked Lays" tend to remain unsold in urban stores. However, the company has seen a 15% increase in sales of its "Smart Spot" items which are lower in fat and calories, and hopes to continue this success with young, minority consumers of Pepsi products.
Related links: Full article • Pepsi's 'Smart Spot' Enjoys Strong Growth • Numbers Reveal Gravity of Obesity Problem • Pepsi pops with a snack-food empire
Potentially impacted stocks and ETFs: Coca-Cola (NYSE:KO)
Summary: Wal-Mart is blaming a "clerical error" for an incorrect calculation of same-store sales for the month of September. It had initially reported a same-stores increase of 1.8% for the month for stores open at least a year, a disappointment. Yesterday, the company said it expected the same-stores increase to be just 1.3%. The news sent shares downward by as much as 2.5% early in the day, before recovering to finish up $0.09 (0.18%). Wal-Mart's numbers are often indicative of how the retail sector will perform. The company has left general same-store sales expectations untouched for September at 3.5%.
Related links: Full article • Wal-Mart Q2 2007 Earnings Conference Call Transcript • Wal-Mart Finding it Harder to Expand • Cheaper Gas + Housing Slump = Increased Profits at Wal-Mart • Without a Wal-Mart-esque Competitive Edge, High Productivity Just Isn't Enough
Potentially impacted stocks and ETFs: PowerShares Dynamic Retail (NYSEARCA:PMR), SPDR Retail (NYSEARCA:XRT), Target (TGT)
Steve Wynn Betters The Odds for Bosses At Las Vegas Casino (Wall Street Journal)
Summary: In a recent lawsuit filed in Nevada, two Wynn Resorts dealers are suing their employer over the division and sharing of tips. The standard practice among Las Vegas casinos is for all dealers to split tips left at the tables. Tips are collected by the casinos (cameras watch the tables to make sure all tips are submitted), and added to the dealers’ pay checks as taxable income. Wynn Resorts pays dealers $6.15/hour, but tips can bring their annual salaries to almost $100,000. But CEO Steve Wynn recently changed the way tips are split and distributed by including supervisors in the pool, boosting their salaries from $50-$60k/year to about $95k. As a result, dealers will probably see their pay drop by 10%-20%. The lawsuit contends that Wynn is violating a Nevada law which places limits on how employers can modify tip-pool distribution arrangements. While competitors Harrah's (HET) and MGM Grand (NYSE:MGM) have no immediate plans to follow Wynn's lead in this case, Harrah's said that they "will look at what happens there."
Related links: Full article • Stepping Up to the Gaming Table • The Big Macau Gamble, Vegas Style • Valuing the Casino Industry: Are There More Harrah's Out There? • Harrah's Seems Underwhelmed by Buyout Offer • Harrah's Gamble Not Without Risk • Cramer's Take on Harrah's & MGM
Potentially impacted stocks and ETFs: Wynn (NASDAQ:WYNN); little impact on other gambling stocks Las Vegas Sands (NYSE:LVS), Trump Entertainment Resorts (TRMP), Monarch Casino & Resort (NASDAQ:MCRI), Pinnacle Entertainment (NYSE:PNK)
Veritas Challenges L-3 for $4.6 Billion Iraq Job (Bloomberg)
Summary: L-3 Communications (NYSE:LLL), which until now has dominated the market for military translation services, is facing new competition from Veritas Capital which has moved into military language services by purchasing McNeil Technologies and DynCorp International. Veritas is now bidding against a partnership of L-3 and Northrop Grumman (NYSE:NOC) for a U.S. Army contract worth $4.6 billion. L-3 generated $295 million from translation services in the first half of 2006, equivalent to 5% of total revenue. U.S. army translation contracts have grown dramatically in recent years, with $5.52 billion in contracts expected to be awarded next month versus $10 million for all of 1999.
Related links: Full article • L-3 Communications Officially Put Up for Sale • DynCorp International IPO: Beware the Debt • Elbit Leads in the Smart Defense Niche • Defense Aircraft and Parts Showing Strong Potential as Shipment Orders Increase
Potentially impacted stocks and ETFs: Harris Corp. (NYSE:HRS), Rockwell Collins (NYSE:COL), Raytheon (NYSE:RTN), Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD).
HSBC Stumbles In Bid to Become Global Deal Maker (Wall St. Journal)
Summary: In reaction to lackluster profitability from commercial banking products and the incursion of investment banks competing for share in its core markets such as Brazil, Russia, India, China, the Middle East and Asia-Pacific, HSBC (HBC) began a push into global investment banking in winter 2004. Former chairman Sir John Bond created a 5-year expansion plan, set a two-year budget of almost $1 billion, and hired John Studzinski, former head of Morgan Stanley's European investment banking practice. Studzinski was to work closely with HSBC veteran trader Stuart Gulliver. But after a spending spree hiring bankers from rivals and aggressively seeking deals around the world, costs soared and deals wins were few. Newly-hired bankers blamed HSBC's slow procedures and aversion to risk, such as the absense of a leveraged-finance team. Studzinski left recently. Under Gulliver's sole leadership, HSBC's pre-tax profits from investment banking jumped in the first half of this year by 37%. HSBC has advised on some large deals this year but mostly in a secondary role.
Related links: Full article • WSJ: Videos of Studzinski and Gulliver discussing strategy [I, II, III] • WSJ: Video of Sir J. Bond discussing HSBC's goals • HSBC: Presentation at Merrill Lynch Conference • Global Growth Drives HSBC's First-Half Net Profit • The View from Hong Kong: What to Buy and Sell • Developments in China's Banking Sector
Potentially impacted stocks and ETFs: HSBC's inability to develop its global i-banking business has helped the likes of Credit Suisse (NYSE:CSR), Goldman Sachs (NYSE:GS), Merrill Lynch (MER) and Morgan Stanley (NYSE:MS) expand their business in traditional HSBC markets.
Weak Results Dim Hedge Funds’ Luster (New York Times)
Summary: Archeus Capital is the latest hedge fund to fall from grace. By 2005 investors had poured $3 billion into the fund. But in the last year bad bets and administrative troubles resulted in a spate of investor withdrawals, leaving assets down to $682 million. The fund is down 1.9% on the year and several partners have left. Archeus' troubles highlight the troubles hedge funds in general have been having this year. While the S&P 500 is up more than 12% on the year, the average hedge fund is up just 7%. Volatile energy markets decimated Amaranth, the hedge fund that lost $6B in a single week. In Archeus' case, bad bond bets and administrative issues sideswiped the company. Now the question is: Will investors continue to pour money into the funds, or seek out other, safer alternatives.
Related links: Full article • Hedge Funds Are Risky Business • Activist Fund Managers Often Do More Damage Than Good • Get Out of Your 'Bedrock' Fund Before It's Too Late • SEC: SEC Filings for Archeus Capital
Summary: Bank of Japan Deputy Governor Toshiro Muto commented today in Japan that, "Christmas sales numbers will be an important indicator to assess the U.S. economy. But it doesn't mean that we won't be able to make any policy changes until we see those results." Muto also said the BoJ doesn't base its policy decisions solely on consumer prices, referring to the forthcoming November Japanese consumer price data due out in December. While Muto doesn't think financial markets will react negatively to an immediate rate hike, he did maintain the BoJ's stance that rates will be raised "gradually."
Related links: Full article • Significance of the Surprisingly Weak Yen • BoJ's Tankan Surprises to Upside, Investment Implications
Potentially impacted stocks and ETFs: Mitsubishi UFJ Financial Group (NYSE:MTU), iShares MSCI Japan Index ETF (NYSEARCA:EWJ) and iShares S&P/TOPIX 150 ETF (NYSEARCA:ITF)
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