A one-page summary of this morning's key market- and stock-moving stories. Headlines link to the original article. Use Wall Street Breakfast as a starting point, and check the original before trading.
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Summary: The Korea Central News Agency reported North Korea has, "safely and successfully conducted an underground nuclear test." Details were not provided, but this follows its July 5th failed launch of the Taepodong-2 long-range ballistic missile. In both instances North Korea went against the urging of the U.S., South Korea, Japan, China and Russia. News of the nuclear test put downward pressure on Asian currencies and equities. The yen dropped to 119.30/$1, an 8-month low, and the S. Korean won fell 1.6% for its biggest one-day drop since Dec. '04. The Morgan Stanley Capital Int'l Asia-Pacific ex-Japan Index fell 1%, while S. Korea's Kospi lost 2.4%, and the Hong Kong Hang Seng Index fell 1.3%. Stock exchanges in Japan and Taiwan were closed for a public holiday.
Related links: Full article • Additional Bloomberg coverage • Posts related to July 5th failed N. Korean launch [I, II, III] • UPI: Raytheon to Sell Patriots to S. Korea • Raytheon to Benefit from New U.S.-Japan Defense Cooperation
Potentially impacted stocks and ETFs: Aside from all the negative stock implications, Raytheon (NYSE:RTN) could benefit if Japan and South Korea opt to buy more protection. The two most commonly cited Japan defense-related stocks: Mitsubishi Heavy Industries (MHVY.PK) (Tokyo: 7011) and Kawasaki Heavy Industries (OTCPK:KWHIY) (Tokyo: 7012). ETFs impacted: iShares MSCI Pacific ex-Japan Index (NYSEARCA:EPP), iShares MSCI Hong Kong Index (NYSEARCA:EWH), iShares MSCI Japan Index (NYSEARCA:EWJ), iShares MSCI S. Korea Index (NYSEARCA:EWY), iShares MSCI Singapore Index (NYSEARCA:EWS), iShares MSCI Taiwan Index (NYSEARCA:EWT) and iShares FTSE/Xinhua China 25 (NYSEARCA:FXI). Note that mainland China-traded stocks actually gained today with the Shanghai Composite Index closing at a 5-year high.
Summary: According to Ned Davis Research investors have reached a level of 'extreme' optimism. The firm's optimism gauge showed a reading of 65.5; above 61.5 is considered an extreme reading. In addition, the CBOE's SPX Volatility Index, or VIX, closed the week at 11.56, well below its five-year average of 18.85, demonstrating the market's current lack of concern for volatility. According to chief investment strategist Tim Hayes, "The market is vulnerable to a pretty swift decline. Earnings are the big risk here with the economy slowing down." Still with analysts usually underestimating earnings many feel the upcoming earnings season will not be the disappointment the bears are predicting. Says Michael Cuggino, manager at Pacific Heights Asset Management, "People think the economy is going to slow to some degree, but it doesn't have to be a significant slowdown. Stock prices haven't recognized the good economic growth that's been reflected in corporate earnings."
Related links: Full article • Looking at the Yield Curve: Time to Reconsider Stock Market Exposure? • Richard Berner: This Time Fading Earnings Growth is For Real • U.S. Large Caps Trending Positively
Potentially impacted stocks and ETFs: iShares Dow Jones Select Dividend (NYSEARCA:DVY), NASDAQ 100 Trust Shares (QQQQ), S&P 500 Index (NYSEARCA:SPY), ProShares Short Dow30 (NYSEARCA:DOG)
Summary: Large-cap stocks have been on a tear lately: The Dow Jones Industrial Average was up 4.74% and the S&P 500 was up 5.17% for the three months ending September 30th. Small caps have not fared as well: The Russell 2000 index was up only 0.13% for the same period. Health care, telecommunications and information technology sectors experienced the strongest growth, with Q3 gains of over 8%. Winners included Apple (NASDAQ:AAPL), Pfizer (NYSE:PFE), AT&T (NYSE:T), Microsoft (NASDAQ:MSFT) and General Motors (NYSE:GM), which saw gains of 33%, 21%, 17%, 16% and 13% respectively. Losing sectors were air freight, construction, raw materials and energy sectors, which were hurt by the slowing economy and declining commodity prices. Big losers included Halliburton (NYSE:HAL), United Parcel Service (NYSE:UPS), ConocoPhillips (NYSE:COP) and 3M (NYSE:MMM), which were down 23%, 13%, 11% and 8%.
Related links: Full article • Dow, S&P 500 Have Momentum to Drive Through All-Time Highs • Stock Market Health Improved, But Concerns Remain • U.S. Large Caps Trending Positively • Large Cap Stocks Provide More Safety than Small Caps in the Current Environment
Potentially impacted stocks and ETFs: Diamonds Trust, Series 1 (NYSEARCA:DIA), S&P 500 Index - "Spiders" (SPY), iShares Russell 2000 Index (NYSEARCA:IWM)
HEARD ON THE STREET: Whistling Past Housing's Graveyard? (Wall Street Journal)
Summary: Home builder stocks have risen about 15% since July 18th, just before the Fed announced a pause in its two-year string of rate increases. Bulls argue: (1) the stocks are cheap -- Pulte, Lennar, Horton and Toll Brothers trade at less than 6x earnings, (2) the stocks have stopped reacting to bad news, (3) housing inventories may have peaked in some markets, (4) year-over-year comparisons will get easier in Q4 and 2007 Q1, and (5) cancellation rates should fall in Q4. Bears argue that (1) fundamentals are horrible, (2) news isn't improving and there's no visibility when it will improve, (3) companies are still reducing earnings estimates, (4) valuations are unattractive, particularly given the recent run-up in the stocks, (5) book values may be reduced downwards as land values are re-assessed, and (6) profitability will deteriorate as builders develop land bought recently at higher prices. The article's conclusion seems to be negative for the homebuilder stocks.
Related links: Full article • Don't Believe Advocates of a Soft-Landing for Housing • NAR Housing Report: Declining Home Prices Induces Heavy Spin • Contrarians Moving Into U.S. Housing Stocks • Bill Miller on Why Housing Stocks Are a Buy
Potentially impacted stocks and ETFs: Stocks mentioned in the article: Lennar Corp. (NYSE:LEN) just cut estimates again; Banc of America recently downgraded Pulte Homes Inc. (NYSE:PHM) and D.R. Horton (NYSE:DHI); Credit Suisse upgraded M.D.C. Holdings Inc. (NYSE:MDC) due to its lean land inventory; Pulte, Lennar, Horton and Toll Brothers (NYSE:TOL) trading at low P/Es.
Why Slowing Housing Sales May Be Good News For Developers: Falling Prices in Commodities (Wall Street Journal)
Summary: The recent fall in commodities prices, led by oil, has been a relief for developers and government builders struggling under construction inflation that has outpaced overall inflation by up to 30% in the past two years. The vibrant home construction market largely offset these costs over the period, with construction spending rising over 10% annually, but many municipal and business projects have been canceled or cut back due to runaway material costs. With petroleum a key component in building materials, metals prices falling, and a softer home construction market lessening demand, many analysts expect construction costs to fall to a level that permits development to return to more cost-efficient levels.
Related links: Full article • More on the housing market • Forget about a Soft Landing for Housing • NAR Housing Report: Declining Home Prices Induces Heavy Spin
Potentially impacted stocks and ETFs: Building materials companies who should be able to expand margins and control costs more efficiently if the trend continues -- American Standard (ASD), Illinois Tool Works (NYSE:ITW), Griffon (NYSE:GFF), Lennox Intl. (NYSE:LII), Terex (NYSE:TEX)
TECHNOLOGY AND INTERNET
Web Video Search Site Blinkx Signs Microsoft Pact (New York Times)
Summary: Video search site Blinkx is announcing a deal with Microsoft (MSFT) which will use Blinkx technology for searches on MSN sites and Live.com. Blinkx already powers video search on AOL, ITN, Lycos and Times Online, and indexes video from BBC, Reuters, MTV and Fox among others. The company has already indexed 6 million hours of audio and video, and is slated to be the biggest video search engine on the Web. Microsoft intends to pay Blinkx a licensing fee based on the number of visitors who use the search engine. Blinkx has been an innovator in using voice recognition and contextual analysis to locate images and recordings.
Related links: Full article • Blinkx website • The Beginning of Online Video's Long S-Shaped Curve Towards Innovation and Monetization • Lycos targets video search with Blinkx partnership • Search providers seek video, find challenges
Potentially impacted stocks and ETFs: Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO)
Summary: Hewlett-Packard (NYSE:HPQ) stands out as the so-called poster child for corporate investigations gone "rogue," as described in testimony by HP CEO Mark Hurd. Former HP Chairman Patricia Dunn declared that the tactics used at HP, "may ... be quite common ... at companies around the country." Sarbanes-Oxley is cited as the reason for an increase in internal corporate investigations. Experts comment that even though companies themselves might not be using aggressive investigation methods, the investigators they hire often use them. What's even more worrisome is that investigators likely have more than one client.
Related links: Full article • Felony Charges Filed in HP Investigation Scandal • H-P's He Said, She Said: House Committee Releases Full Dunn and Hurd Testimony • H-P: Of Red Flags and Black Holes • Analysts Rallying Around H-P, Hurd • Conference call transcript: HP Q3 2006
Potentially impacted stocks and ETFs: Aside from the universe of technology and large-cap stocks in the U.S. in which there could be internal investigations underway using tactics similar to those in HP's, consider the implications for consumer/personal data-related companies such as Acxiom (NASDAQ:ACXM), ChoicePoint (NYSE:CPS), Equifax (NYSE:EFX), Fair Isaac (FIC), First Advantage (FADV) and infoUSA (IUSA).
Summary: November delivery crude oil futures are up about 1.2% to $60.50 in response to the decision of OPEC members to cut output approximately 3.4% overall. OPEC, responsible for about 40% of world oil production, now has six member nations (Saudi Arabia, Libya, Algeria, Kuwait, Venezuela and Nigeria) committed to the cut. Coming amidst the N. Korean nuclear test, many analysts believe the production cut will establish a $60 floor for crude oil prices in the near future.
Related links: Full article • Phil Davis: Crude Reality: Supply > Demand , Inflated Oil Prices: Your Tax Dollars at Work • Barry Ritholtz: Discussions on Oil • Debunking the Bear Case for Energy
Potentially impacted stocks and ETFs: Oil Service HOLDRs ETF (NYSEARCA:OIH), United States Oil Fund ETF (NYSEARCA:USO), Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (COP) Royal Dutch Shell (NYSE:RDS.A),
TRANSPORTATION AND AEROSPACE
Toyota Loses Ground to the Competition (Business Week)
Summary: While Honda (NYSE:HMC) held on to its lead in Strategic Vision’s annual vehicle value survey, Toyota (NYSE:TM) fell in the rankings, winning only three categories, down from seven in 2005. Hyundai and General Motors (GM) both gained ground, winning three categories each, and sharing honors for the best small SUV (GM’s Saturn Vue and Hyundai’s Tucson). GM was the only domestic car manufacturer to win any category. According to Strategic Vision’s president Alexander Edwards, Honda’s "perceived reliability and durability" has helped it create the strongest brand equity. Toyota’s brand equity comes in second, but suffers from a perception that they are not innovating as fast as other brands. The best performing company in the survey was actually luxury car maker BMW, but they are not considered to have a complete line of vehicles.
Related links: Full article • Toyota Unveils Capital Spending Strategy • Why Japanese Cars Earn $2400 More Profit Each • Japan's Big-3 Auto to Further Expand Fuel Efficiency • Toyota's Development Slowdown and Quality Improvement Are Smart Moves • Honda Pulls Ahead of the Pack • JD Power: Lexus and Toyota Together Capture 11 of 19 Initial Quality Model Awards
Potentially impacted stocks and ETFs: Ford (NYSE:F), DaimlerChrysler (DCX), Nissan (OTCPK:NSANY).
Toyota Has Multi-Year Plan To Elevate Capital Spending (Wall Street Journal)
Summary: Toyota's (TM) executive vice president Mitsuo Kinoshita announced the company would continue its record level of capital spending, which exceeds $10 billion a year, for the next several years -- a move which will challenge its competition, particularly U.S. automakers. The money will be spent beefing up the company's manufacturing capacity, with 50% of the funds allocated outside of Japan, chiefly in North America where demand for the cars is high. Toyota's goal is to increase its auto-manufacturing capacity by 470,000 vehicles to 2 million a year by 2008; the company is planning to build vehicle manufacturing plants in the Midwest, the South and Canada. Mr. Kinoshita is confident the company can sustain this level of spending; he sees Toyota gaining 10% in its operating-profit margins.
Related links: Full article • Toyota Ups Guidance, Sets Global Production Targets • Toyota Comments on U.S. Sales Outlook, Denies Tundra Production Cut • Forbes: Toyota To Maintain Heavy Capital Expenditure • Bloomberg: Toyota Still Studying Adding Another N. America Plant
Potentially impacted stocks and ETFs: General Motors (GM), Ford (F), Daimler Chrysler (DCX), Nissan (OTCPK:NSANY), Honda (HMC)
Dolan Family Offers $19 Billion in Bid to Take Cablevision Private (New York Times)
Summary: The powerful New York Dolan family has made a $19 billion bid, or $27 a share (shares closed Friday under $24), to acquire Cablevision Systems Corporation (NYSE:CVC), in which they currently have 22.5% ownership and 74% voting power. Cablevision owns several cable TV channels, the New York Knicks and Rangers, Madison Square Garden (pictured) and Radio City Music Hall. In the past, the Dolans have feuded over how best to run the company, with father and son breaking ranks last year over the fate of a satellite business that was ultimately sold. Now they appear unified in their bid to take the company private, writing, “We continue to feel that succeeding in this fiercely competitive environment requires a long-term, entrepreneurial management perspective that is not constrained by the public markets’ constant focus on short-term results.” The move to privatize Cablevision comes on the heels of several other large, family-operated businesses becoming privatized, and is sure to draw the ire of shareholders in the form of lawsuits.
Related links: Full article • Cablevision Systems Q2 2006 Earnings Conference Call Transcript • Aiming To Go Private • Cramer's Take On CVC • Cable TV Bundling and The Tyranny of Too Much
Potentially impacted stocks and ETFs: Comcast (NASDAQ:CMCSA), Viacom (NYSE:VIA), Time Warner (NYSE:TWX)
Bad Loans Draw Bad Blood (Wall Street Journal)
Summary: Over $2 trillion worth of mortgage backed securities were issued by Wall Street last year. When loans are purchased for securitization, one of the provisos is that lenders must buy back loans that either defaulted early, or had underwriting errors. As housing slows, mortgage buyers are finding more loans that were not up to snuff, and are calling on the originators to buy them back. A recent study by Credit Suisse Group (NYSE:CS) analyzed 208 bond pools which contained subprime mortgages. Almost half had loan repurchases in 2006, up from less that one third in 2005, although the repurchases represented less than 1% of total mortgage value within the pool. Analysts do not consider this to be a serious problem at this point, but warn that the number of repurchases can increase, even if real estate has a “soft landing.” The effect of increased loan purchases is starting to affect companies that originally underwrote the loans. H&R Block (NYSE:HRB) recent $131.4 million dollar quarterly loss was largely driven by its adding $102 million to its reserves to cover loans issued by its Option One mortgage subsidiary. And Bear Stearns’ (NYSE:BSC) mortgage subsidiary is suing MortgageIT (MHL) to force it to buy back $70 million worth of defaulted loans.
Related links: Full article • Record Number of Foreclosures on the Horizon • How to Play Property Repossessions • Housing Bubble and Real Estate Market Tracker • BusinessWeek: H&R Block Taxes Investor Patience
Potentially impacted stocks and ETFs: Fremont General (FMT), Fannie Mae (FNM), Freddie Mac (FRE), Clayton Holdings (CLAY), IMPAC Mortgage Holdings (NYSEMKT:IMH)
Summary: Danaher (NYSE:DHR) outbid two companies to buy Australian medical-technology developer Vision Systems (ASX: VSL) for approximately $520 million including transaction costs or $3.75/VSL share. Best known for making Craftsman tools and Fluke electronic equipment, Danaher has been on an acquisition spree since CEO Lawrence Culp took command in May 2001. Its medical and dental business is now its largest unit. Robert W. Baird analyst Richard Eastman who has an "outperform" rating on Danaher comments, "Moving into medical technology, they can utilize their manufacturing expertise and production capabilities, and you'd have less cyclicality." The deal is pending board and government approval, but is expected to close by the end of the year.
Related links: Full article • Danaher: Tender Offer Press Release • After Sybron Dental's Acquisition, What's Left In Dental Equipment?
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Notable articles on Seeking Alpha today: One Page Barron's Summary • Asif Suria's long play on Mattel • Why Brian Hozian's kissing his shares in American Eagle goodbye • Phil Davis's Google Play: Round Three Update • How to capture tech's traditional year-end rally with ETFs • Book Review: The Little Book of Value Investing • Conference call transcript: Micron Technology F4Q06 (Qtr End 8/31/06) • Jim Cramer's latest stock picks.
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