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: Stocks rose yesterday in response to the Fed's "beige book" report on economic activity and strong earnings reports from Costco Wholesale, Yum Brands and McDonald's. The DJIA rose 0.8%, the Nasdaq Composite 1.6% and the S&P 500 0.95%. Beige book details: Four of 12 Fed districts said business activity "firmed", 2 said it "cooled" and the rest said growth was "moderate or mixed"; sharply slowing housing activity and weak auto sales; labor shortages spreading to unskilled workers, but still little upward pressure on wages.
Related links: Fed's Beige Book Report • Bloomberg coverage
Potentially impacted broad market ETFs: S&P 500 SPDRs (SPY), iShares S&P 500 ETF (IVV), DJIA ETF (DIA), Nasdaq 100 ETF (QQQQ).
Summary: U.S. Fed President William Poole emphasised Thursday the risks to U.S. growth and implied that rate cuts may be required, while the same day Chicago Fed President Michael Moskow said the risk of excessive inflation outweighed the risk of insufficient growth. Quotes as follows. Poole: "If we came to the conclusion that the economy was really running in the direction that the bond market is currently predicting, then it seems to me that considering rate cuts is going to be highly appropriate". Moskow: "The risk of inflation remaining too high is greater than the risk of growth being too low. Thus, some additional firming of policy may yet be necessary." Moskow said that the September unemployment rate of 4.6% was "very low", that there were signs of labor shortages, and that the core personal consumption expenditures index (an inflation measure) has been running at or above 2% for 29 months, above the Fed's preferred zone of 1-2%. Moskow's comments bring to 5 the number of Fed officials who have played down the probability of rate cuts since October 4th.
Related links: Full text of Moskow speech • Bloomberg coverage • Bill Gross: Bond Prices Have Bottomed
Related ETFs: iShares Lehman TIPS Bond Fund (TIP) • iShares Lehman 20+ Year Treas Bond Fund (TLT)
A New High — for the Trade Deficit [Business Week] and China's Foreign Currency Reserves Surge to Almost $1 Trillion [Bloomberg]
Summary: The dollar initially slipped in response to the trade deficit report, but then recouped its losses and remained in a narrow band. The trade gap widened to $69.9 billion in August, 2.7% higher than in July and higher than economists' median forecast of $66.6 billion. Imports rose 2.4% following a gain of 0.9% in July, while exports rose 2.3% following a decline of 1.3% in July. Import growth was driven by a rise in oil import volumes and pricing. Economists trimmed their Q3 GDP estimates as they revised up their import projections. China's trade surplus with the US rose 12% to a record $21.96 billion for August, pushing its reserves to almost $1 trillion. Chinese premier Wen Jiabao has admitted that reserves have caused a surge in the money supply that triggered a credit-fuelled investment boom.
More commentary on the dollar: ECB Raises Rates, Dollar Doesn't Weaken • Significance of the Surprisingly Weak Yen • Consumer Confidence is Helping the Dollar • Will Debt Payments Drag Down GDP or the Dollar? • Chart of Euro versus the dollar (via the ETF).
Potentially impacted currency ETFs: CurrencyShares Euro Trust Euro Currency (FXE), CurrencyShares Swiss Franc Trust (FXF), CurrencyShares Mexican Peso Trust (FXM), CurrencyShares Swedish Krona Trust (FXS), PowerShares DB G10 Currency Harvest Fund (DBV) , CurrencyShares Australian Dollar Trust (FXA) , CurrencyShares British Pound Sterling Trust (FXB).
TECHNOLOGY AND INTERNET
Sony Walkman Wants the Spotlight Back [BusinessWeek]
Summary: While announcing five new Walkman music players on October 12th (image left; click for larger size), Sony execs inadvertently mentioned that Sony is developing a video Walkman. To better compete with Apple, Sony CEO Howard Stringer hired Apple software engineer Tim Schaaff (formerly in charge of Apple's QuickTime product), beefed up its software development, and hopes to leverage its multimedia and gaming technology and huge library of TV, movie and audio digital content. However, Apple now has an entrenched user base due to the proprietary encoding of iTunes songs, and other companies which already offer or plan to offer video players, such as Creative and Microsoft, aren't getting much traction. Audio Walkman details: size of a cigarette lighter; price is higher in Japan than iPods for equivalent memory ($240 for 4 GBs); Sony views superior audio quality as key competitive advantage, due to (1) noice cancellation technology built into the headphones, (2) "clear stereo," a system that better separates the left and right channels and stops audio bleed between channels, and (3) "clear base," which improves the bass response.
Related links: Background: Sony Press Release Announcing New Walkmans • Commentary: Seeking Alpha has an entire section devoted to iPods and Portables stocks.
Potentially impacted stocks and ETFs: Sony (SNE) • Portable music and video competitors: Apple Computer (AAPL), Creative (OTCPK:CREAF), Microsoft (MSFT), RealNetworks (RNWK), Sandisk (SNDK).
Bankrate Settles Loan-Pitch Suit, Spurring a 5.2% Jump in Shares [Wall Street Journal]
Summary: Bankrate agreed to pay $3 million in order to settle a lawsuit regarding alleged “bait-and-switch” advertisements that were appearing on the Bankrate.com site. Former advertiser American Interbanc Mortgage accused Bankrate of removing its ads from the site after American Interbanc claimed that other advertisers were promoting loan rates that were not honored. Customers who went to those sites were quoted higher rates than appeared in the advertisements, according to the claim. While Bankrate denied the allegations, testimony was presented indicating that Bankrate received hundreds of complaints about those “bait-and-switch” advertisements. Aside from the cash settlement, Bankrate agreed to bring back American Interbanc as an advertiser on the site.
Related Links: Online Content Buyout Candidates Include Bankrate, YouTube • Bankrate.com Sued for Deceptive Online Mortgage Ads • How to Invest in Seniors' Online Spending? • Conference Call Transcript: Bankrate Q2 2006 (August 2, 2006).
Potentially impacted stocks and ETFs: Ameritrade (AMTD), Bank of Internet (BOFI), CheckFree (CKFR), eLoan (EELN), E*trade (ET), Netbank (NTBK), Charles Schwab (SCHW).
IBM Goes Global [Forbes]
Summary: IBM is moving its global procurement division to Shenzhen, China. This is a significant event because it's the first time IBM has relocated a division of corporate HQ overseas. Shenzhen -- where IBM already has its main purchasing office and most of its regional procurement staff -- is just north of Hong Kong and has elevated its global status as a supply-chain capital and is increasingly moving up the value-chain. IBM hardly resembles the hardware manufacturer of its past and now focuses mostly on software and services. And Asia already accounts for a third of the $40 billion it spends annually on procurement among its 3,000 suppliers in the region. In conjunction with its expansion in India, IBM is seeking out low-cost suppliers in Asia to boost value-added.
Related links: Sell-Side: IBM Will Beat On Earnings • Multi-Core Processors Challenging Traditional Software Pricing Models • IBM's Push in Patent Reform is a Very Big Deal • IBM's Acquisition Philosophy: Opportunity and Long Term Value • IBM Purchase of Security Vendor ISSX is "No Sea Change" • Conference call transcript: IBM Q2 2006 • Editor's note: IBM announces Q3 earnings Oct. 17th
Potentially impacted stocks and ETFs: International Business Machines (IBM)
AT&T: Waiting for the FCC's Call [BusinessWeek]
Summary: The Justice Department gave the nation's largest telecom company, AT&T (T) the go-ahead to acquire Bell South (BLS) for $67 billion in a no-strings-attached deal that has left some at the FCC baffled. Had the Justice Department let the FCC move first, the deal would have likely went through with AT&T able to avoid most of the antitrust and pro-consumer concessions that usually accompany such large, industry-shaking deals. Now, the FCC feels it is in a bind and must protect other smaller telecom companies as well as U.S. consumers from the possibility of price gouging and an AT&T quasi-monopoly. Of the FCC's five commissioners, Chairman Kevin Martin and fellow Republican commissioner Deborah Tate support the concession-free deal while Democratic commissioners Jonathan Adelstein and Michael Copps, say the company will require at least some concession making to get the green light from them. Said Copps, "With the lights off at the Justice Dept., it becomes all the more important for the FCC to ensure that consumer interests have a seat at the table." The fifth commissioner, Republican Robert McDowell, was once a lobbyist with COMPTEL, a telecommunications association that represents AT&T's competitors and therefore will abstain from voting meaning the deal can only be passed through compromise. Among the compromises on the table are that AT&T might have to agree to a price freeze on high-capacity business lines, a $15 billion business and it might also have to change how it bundles services such as digital subscriber lines [DSL].
Related links: * AT&T Q2 2006 Earnings Conference Call Transcript * AT&T/ BellSouth Merger: Is Ma Bell Calling Back Her Babies? * Citi: Buy AT&T and Sell Verizon * Annals of Accounting: A Look at AT&T and Verizon's Methods * Trailing 12 Month P/E for Telecom Companies * AT&T Merger Vote Possible Today
Potentially impacted stocks and ETFs: Verizon (VZ), iShares Dow Jones US Telecom (IYZ), Sprint Nextel (S), Time Warner Telecom (TWTC), Vanguard Telecom Services VIPERs (VOX)
TRANSPORTATION AND AEROSPACE
Summary: Delta Airlines CEO Gerald Greenstein announced that although he plans to retire after Delta emerges from bankruptcy, he would consider staying on in the role of nonexecutive chairman in order for Delta to continue to benefit from his experience. Delta plans to emerge from bankruptcy during the first half of next year as an independent airline despite merger overtures from both United and US Air. Though analysts view mergers as an effective way to solve the industry’s overcapacity problem, strong labor unions and government regulations have complicated past mergers. Delta’s restructuring includes plans to expand international flights so that they will account for 40% of revenue. Delta’s international flights currently contribute 35% of total revenue, up from 20% last year. Legacy airlines are emphasizing international travel, as they are more profitable than their domestic routes which compete against the discount carriers. Delta is currently focused on adding European & African routes and is looking to become a presence in the Latin America and Asia markets.
Related Links: Lower Oil Helping Airlines • Airlines Vie for Lucrative New China Route • You Don't Have to be Crazy to Buy Airlines • BusinessWeek: Delta faces $4B in plane-lease claims
Potentially impacted stocks and ETFs: Airtran (AAI), Alaska Air (ALK), AMR (AMR), Continental (CAL), JetBlue (JBLU), US Airways (LCC), Southwest (LUV), Northwest (NWACQ), UAL (UAUA). ETF : iShares Dow Jones Transportation Index (IYT).
Summary: Coke has introduced Enviga, a “calorie burning” green tea soft drink. Coke claims that drinking three 12 oz. Envigas over a 24 hour period will burn off 60-100 calories. To put it in perspective, if you drink one can of Coke, you will need to drink 7.3 cans of Enviga to burn off the regular Coke’s calories (assuming a 20 calorie loss per can, the low end of the range). At $1.29 - $1.49 per can of Enviga, this will set you back at least $9.42. Burning off the calories contained in a 10 oz. sirloin will cost over $34 ( a little over 26 cans). Although nutritionists question whether drinking 3 cans of Enviga a day is worth it, Coke’s chief scientist promotes Enviga as a “gentle boost” to a healthy lifestyle. In other beverage market news, Pepsi raised their full year profit forecast to at least $2.98/share, $0.05 higher than their previous forecast. This comes after Pepsi shares came under pressure following the release of their results for the last quarter. Analysts were concerned that soda sales fell by 2% and that Pepsi’s North American drinks division saw its operating profit drop by 4%. Profits were squeezed by both higher orange prices and higher production costs for its Gatorade sports drink. Related: orange juice futures hit a 16 year high yesterday after the Agriculture Department announced that the 2006-2006 orange crop is estimated to be lowest since the 1989-1990 season.
Related Links: Coke Introduces Calorie-Burning Enviga Drink • Coca Cola's Dilemma: Company Suing its Former General Counsel • Pepsi Markets Healthy Alternatives to Inner City Kids • Milk a Substitute for Cola in China? • BusinessWeek: Lawyer: Throw out Coke case wiretaps • Forbes: Cola Makers Get A Break In India
Potentially impacted stocks and ETFs: National Beverage (FIZ), Cadbury Schweppes (CSG), Hansen Natural (HANS), COTT (COT). ETF: iShares Dow Jones US Cons Goods (IYK).
Summary: German-owned Boehringer Ingelheim GmbH agreed to buy the U.S. rights to the drug Zantac from Pfizer (PFE) for $509.5 million. The heartburn medication was sold as part of Pfizer's spinoff of its consumer unit -- a move necessary to receive approval from federal antitrust regulators for the overall sale of its consumer health-care business to Johnson & Johnson (JNJ). The sales of Zantac and Pfizer's consumer-health unit are expected to close by the end of the year, according to Johnson & Johnson spokesman Marc Monseau. Monseau declined to comment on whether other product sales would be needed to gain the necessary FTC approval.
Related links: * J&J, Pfizer Unload Zantac * With Pfizer Bigger is Better * Johnson & Johnson — 73 Consecutive Years of Sales Increases! * Drug Companies Threatened By Proposed Patent Legislation * ComCom to Assess Johnson's Pfizer Deal
Potentially impacted stocks and ETFs: Abbott Laboratories (ABT), Bristol Myers Squibb (BMY), Merck (MRK), GlaxoSmithKline (GSK), PowerShares Dynamic Pharmaceutical (PJP), iShares Dow Jones U.S. Pharmaceuticals (IHE)
Summary: GE earnings summary: EPS of $0.49 matched the consensus estimate. Revenue from units owned for over a year (ie. organic growth) up 10%, profit up 10%. Total orders up 15%, year-to-date, backlog up 21%. 5 out of 6 main units posted profit rise; the exception was NBC Universal, which was hit by lower advertising income due to lower ratings at the flagship TV network. Guidance: 2007 EPS from continuing ops guidance narrowed to $1.97-$1.99 from prior guidance of $1.94-$2.02.
Related links: More commentary on GE's stock.
Potentially impacted stocks: General Electric (GE).
Summary: In the midst of restructuring, the New York Times (NYT) has entered the rumor mill as speculation the company would be sold swirled throughout Wall Street yesterday. Shares closed up nearly a dollar, or 4.19%, in composite trading yesterday. The takeover rumors have increased the price for the company's credit default swaps, which jumped by 10 basis points yesterday to about 62.5 basis points, or $62,500 to insure $10 million in debt. Pete Najarian, co-founder of Web information site insideoptions.com, noticed increased options activity surrounding Times' stock yesterday as investors hope to profit from NYT shares should they succeed in climbing above $25 before the end of November (or should they fail). "The activity in the options market certainly grabbed attention," Najarian said. Shares closed at $23.86 yesterday, then gained an additional $0.09 in after hours trading. Yesterday, according to market research firm Track Data, a total of more than 8,500 calls and 2,957 puts changed hands in NYT shares - considerably more than the average volume of 242 contracts.
Related links: • The New York Times Company Q2 2006 Earnings Conference Call Transcript • Why Google Didn't Buy the New York Times • Real Value Remains In New York Times, But Is the Will There? • Cramer's Take on NYT • Chart: Diversified Media Stocks - Annual Earnings Growth • Options, Credit Markets Move on N.Y. Times LBO Speculation
Potentially impacted stocks and ETFs: New York Times (NYT), Gannett (GCI), Knight-Ridder (KRI), The McClatchy Company (MNI), Tribune Company (TRB), Washington Post (WPO)
Summary: The Bank of Japan voted unanimously to keep interest rates unchanged at 0.25%. In July it raised rates from effectively zero for its first hike in six years. The BoJ's accompanying statement that "(t)he economy is expanding moderately" remained unchanged for the third consecutive time. Meeting minutes will be released on Nov. 21st. The BoJ's strategy of gradual, non-consecutive rate hikes that are mostly data dependent remains in tact. Weakness in the yen will likely continue given that another rate hike is not expected until Q1 next year at the earliest, political urging by the Cabinet for BoJ support and rate gaps between the U.S. and EU where rates are 5.25% and 3.25% respectively. Separately, producer prices increased 3.6% in September for their highest rise in more than 25 years. To make matters worse, a trade ministry report said, 'More than two-thirds of Japan's biggest companies struggle to pass rising costs on to consumers.' This puts downward pressure on corporate profit and wage growth. However, Morgan Stanley economist Takehiro Sato suggests that PP will dip below 3% y-o-y as early as this month due to "... the lagged effect of lower commodity prices." A senior economist at Mizuho Securities warns: "The number of companies that can raise prices remains small, and the economy hasn't produced sufficient demand to stimulate price increases. Even if companies choose to raise prices, there's no guarantee that'll spur profits."
Related links: BoJ Deputy Governor Hints at Possible Rate Hike by Year's End • Nikkei Quietly Rallying - Expect a Repeat of '05? • Stephen Roach on German and Japanese Productivity Growth • Significance of the Surprisingly Weak Yen • BoJ's Tankan Surprises to Upside, Investment Implications • July GDP-related Data Down Slightly; Business Sentiment Highest among Large Co's • Bank of Japan website
Potentially impacted stocks and ETFs: iShares MSCI Japan Index ETF (EWJ), iShares S&P/TOPIX 150 ETF (ITF)
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Notable articles on Seeking Alpha today: Conference call transcripts from Costco and Yum Brands • CNET's Traffic Collapse and TheStreet.com • Envoy Global Research: New Leadership at Autobytel Could Create Significant Upside • Hilary Kramer: With Pfizer, Bigger is Better • New Structured Note Strategy for Large Cap Bulls • Harley's Huge Quarter • Alpha Found: VitalStream Acquired by Internap • Jim Cramer's latest stock picks.
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