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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AHEAD OF THE TAPE: Long Walk Back [Wall Street Journal]
Summary: A few weeks ago Wall Street odds were that the Fed would cut short-term interest rates between now and next March; now bond investors think the Fed will not cut rates, and may even begin raising them again by 2007 to battle inflation. The pervasive thinking now is that the economy will not need much help from the Fed, making cuts in the 5.25% federal-funds rate are unlikely. The coming week's events will play a big role in shaping the bond market's next move: Fed Chairman Ben Bernanke delivers a speech today, and a Labor Department report is due later in the week on new consumer and wholesale price inflation data. There are expectations the Labor Department data will keep the Fed cautious about the inflation outlook, which could push yields on Treasury bonds higher.
Related links: • The Case for Bonds, and the Problem With Bond ETFs • Will Bond Yields Continue Falling, Spurring a Soft Landing? • Bill Gross: Bond Prices Have Bottomed • Philly Fed Chief Believes Fed May Have to Reraise Rates in the Near Future
Potentially impacted stocks and ETFs: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman TIPS Bond (TIP).
Summary: There is a surprisingly large gap in the economic outlooks of two of Wall Street's biggest investment firms. Goldman Sachs Group (GS) believes the Federal Reserve's benchmark rate will fall from its present 5.25% to as low as 4% by the end of 2007; JPMorgan Chase & Co. (JPM) sees it rising to 6 percent. Accordingly, Goldman recommends equities, while JPMorgan prefers an overweight cash position as a defensive strategy. Nicholas Sargen, chief investment officer at Fort Washington Investment Advisers in Cincinnati: "It's not unusual for firms to have different views, but the difference in magnitude and direction between Goldman and JPMorgan is unusually large." Goldman believes the worst U.S. housing slump in a generation will force the Fed to cut rates sending stocks upwards; JPMorgan remains bullish on the economy due to cheap credit and falling oil prices, and sees the Fed raising rates to battle inflation.
Related links: • Revenge of the Bonds Bulls: Wall Street Now Views the Fed as Unlikely to Cut Rates • Remaining Bullish, Despite the Storm Clouds • Fed Officials Disagree, But Number of Hawks Growing • When Does the Fed Cut Rates, With the Dow This High?
Potentially impacted stocks and ETFs: iShares Lehman 1-3 YR Treasury Bond (SHY), S&P 500 Index - "Spiders" (SPY), iShares Dow Jones U.S. Total Market (IYY), Vanguard Total Stock Market ETF (VTI), streetTRACKS Total Market (TMW)
TECHNOLOGY AND INTERNET
Intel Struggles to Bring Viiv Alive [Business Week]
Summary: What's the Intel Viiv you might ask? According to Intel's website it is, "Intel's premier brand for PCs designed for the enjoyment of digital entertainment in the home..." Some might say that Viiv is a failed effort to build a new brand in a hot consumer segment -- PC-centered entertainment -- following the firm's retirement of its once flagship Pentium brand. Intel's Viiv competes with AMD's Live. So far Viiv has failed to capture Dell customers, but is said to be doing better with HP, which is the leading seller of Media Center PCs. An IDC analyst says demand for Media Center PCs has nearly doubled since 2004 as the segment has been growing faster than the overall consumer PC market. Intel could benefit from peripheral companies entering the market expanding the capabilities of PC entertainment (eg. Netgear's "Digital Entertainer" set-top box and Seagate's media servers.)
Related links: Intel Viiv webpage • Semi Capacity Growth Needs To Slow Down • AMD: ThinkEquity Flips To Buy From Sell • Semiconductor Stocks To Benefit From Application Cycle Refresh • Microsoft Media Center To Benefit From Movie Download Craze • Conference call transcripts: Intel Q2 2006 • AMD Q2 2006
Potentially impacted stocks and ETFs: Intel (INTC), Advanced Micro Devices (AMD), Microsoft (MSFT), Hewlett-Packard (HPQ), Dell (DELL), Netgear (NTGR), Cisco (CSCO), Seagate (STX)
Verizon May Spin Off Its Directories Unit [New York Times]
Summary: In a move that would allow it to focus on its faster-growing wireless business and its new fiber-optic network, Verizon Communications is close to deciding to spin-off rather than sell its directories division, which will cost less in taxes. Verizon’s board could make a final decision in about a month, and Verizon Information Services could be independent by year's end. The division, which publishes Verizon SuperPages directories in 35 states, generated $3.4B in revenue and $1.03B in profits last year, and has 7,100 employees. Verizon stockholders would receive shares in the new company tax-free. The new division would assume as much as $9B in Verizon debt, according to estimates. According to Jeffrey Halpern who covers the company for Sanford C. Bernstein & Company, if a spinoff takes place, Verizon’s profits would decline by between 18 and 20 cents a share, while also lowering the company's debt substantially. Halper believes that, "Ivan G. Seidenberg, Verizon’s CEO, is not going to sit on $8 billion. It sets them up to buy out Vodafone and increase their long-term growth.”
Related links: • Verizon Communications Q2 2006 Earnings Conference Call Transcript • Verizon to Outlay $18 Billion for Upgraded Fiber Optic Network, Cable TV Access • Annals of Accounting: A Look at AT&T and Verizon's Methods • Chart: Telecom Stocks - Annual Earnings Growth
Potentially impacted stocks and ETFs: Verizon Communications Inc. (VZ), Vodafone Group plc (VOD), AT&T (T), Sprint-Nextel (S), iShares Dow Jones U.S. Telecommunications Index (IYZ), Vanguard Telecommunication Services ETF (VOX), PowerShares Dynamic Telecom & Wireless (PTE)
Summary: In just two months Intel has already reached their sales target of 5 million new dual core processors. The world's leading chip maker released its Core 2 Duo chipsets on July 27, and the increased demand for PCs has led to a rise sales which should continue as executives predict a strong fourth quarter. Intel is confident that it will not suffer a major setback from the recall of Sony's batteries, which has affected competitors such as Toshiba, Dell, and HP. Intel's recent job and price cuts and new product releases help stave off rival Advanced Micro Devices' progress in grabbing market share.
Related links: Intel Sales Chief Readies Industry With New Products, Technologies Ahead Of Widely Anticipated Processor Introductions • Intel sales chief readies industry with new chipsets • Intel's Continuing Folly: Capacity Expansion That's Too Fast For its Own Good • Intel's Message That It's Winning the Core War Feels Disingenuous
Potentially impacted stocks and ETFs: Intel Corp. (INTC), Toshiba (T), Dell (DELL), Hewlett-Packard (HPQ), Sony (SNE), Advanced Micro Devices (AMD)
Summary: At this Thursday's emergency meeting OPEC members will likely discuss how (and when) to implement a cut in production in order to counter a sharp fall in oil prices since a mid-July peak of $78.40/barrel. Since then, prices have fallen in 10 of the last 13 weeks. It is mostly agreed among members that 1 million barrels per day of output, or 4%, needs to be cut in order to counter falling prices. OPEC president Nigerian oil minister Edmund Daukoru said earlier this month that oil below $55 was a "trigger" for action. This could be OPEC's first production cut since April 2004, but over the past week the discussion has become focused on whether to cut real output or its notional ceiling, and what impact quotas will have. Daukoru says, "The time to do something is... now because we don't know where the floor of this drop will end."
Related links: Oil Economics in a Nutshell • Oil: Prices and Producers -- Where They're Headed • China's Oil Demand in Perspective • OPEC Waffles on Production Cut
Potentially impacted stocks and ETFs: Energy Select Sector SPDR ETF (XLE), U.S. Oil Fund ETF (USO), Oil Service HOLDRs ETF (OIH)
Summary: Shares of Friday's celebrated IPO, SAIC Inc., Boeing Co.'s partner in creating new combat vehicles for the U.S. Army, soared as much as 21 percent. The offering sold 75M shares (19% of its stock) at a price of $15, raising $1.13B, and valuing the entire company at over $6B. Founded in 1969, SAIC has $7.8B in annual sales; it says it will used the funds for expansion and acquisitions in a environment of surging defense spending. SAIC has about 9,000 active contracts, including the $2.7B joint venture with Boeing on the U.S. Army's Future Combat Systems. The project, which includes a series of manned and unmanned battle vehicles, is the second largest U.S. defense program. In June SAIC won part of a U.S. Homeland Security Dept. computer services contract worth up to $45B over seven years. 89% of current revenues are from the government. Profits more than doubled to $927M last year. The company has a contract backlog of $16B. It expects to see at least 10% growth in its intelligence, national security, and logistics units over the next 3-5 years. Paul Nisbet of JSA Research: "The war on terror has almost doubled our defense spending and it doesn't look like it's going down in 2008, it's definitely not going down in 2007... Lockheed Martin, General Dynamics and Northrop Grumman are heavily in that market and doing very well. There's no reason it wouldn't be the same for SAIC." Shares Friday traded as high as $18.34, and settled at $18.18.
Related links: Jim Cramer's Mad Money Stock Picks, Oct. 13 (SAIC is "good to go") • Jim Cramer's Mad Money In-Depth Stock Picks, Oct. 9 (A great way to play the "military industrial complex" since 89% of its revenue is generated from the government... predicts that it will go to $20.)
Potentially impacted stocks and ETFs: SAIC Inc. (SAI) • Defence stocks: Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC), General Dynamics Corp. (GD), Armor Holdings Inc. (AH), Boeing Co. (BA), Orbital Sciences Corp. (ORB) • ETFs: PowerShares Aerospace & Defense (PPA)
TRANSPORTATION AND AEROSPACE
Dealers Balk as Chrysler Strains to Cut Inventory [Wall Street Journal]
Summary: DaimlerChrysler AG's Chrysler Group, which recently warned it will report a loss of $1.5B for the quarter (more than double its previous forecast), is encountering difficulties from auto dealers who are not interested in taking on unordered cars. Chyrsler has approximately 50,000 cars in storage. Many dealers, including AutoNation Inc., the largest auto retailer in the U.S., are balking, despite new sales incentives intended to clear Chryslers from their lots. In addition to approaching dealers, Chrysler is also halting production temporarily at several plants. Many of the unordered cars are pickup trucks, minivans and sport utility vehicles -- cars that have suffered a drop in popularity in the wake of rising gas prices.
Related links: Jerry Flint Believes Detroit's Luck Has Run Out
Potentially impacted stocks and ETFs: DaimlerChrysler (DCX), General Motors (GM), Ford (F), Toyota (TM) • Auto Dealerships: AutoNation Inc. (AN), Group 1 Automotive Inc. (GPI), Sonic Automotive Inc. (SAH), United Auto Group Inc. (UAG)
Oshkosh Truck Agrees To JLG Industries Pact [Wall Street Journal]
Summary: Oshkosh Truck’s pending acquisition of JLG Industries will be Oshkosh’s 15th acquisition since 1996. Oshkosh stock is up five-fold since 2001; its heavy duty trucks are being used to transport tanks, missiles, ammunition and fuel for U.S. combat units. JLG’s specialty is building aerial platforms that are used to position workers in construction and building maintenance projects. Despite a slowdown in new home building, commercial construction remains strong. Aside from stabilizing the cyclical (i.e. defense) nature of its business, Oshkosh contends that the JLG acquisition will give it stronger leverage when negotiating for raw materials and parts. Oshkosh also wants to incorporate JLG’s aerial platform technology into its line of fire trucks. JLG’s platform technology would enable firefighters to ascend both faster and at less risk.
Related links: Despite Anonymity, Oshkosh Truck Just Keeps Rising • PCCAR: Emissions Fears Priced Into Stock • Keep On Truckin' with PACCAR • BusinessWeek: VW wants amical MAN-Scania solution
Potentially impacted stocks and ETFs: Caterpillar (CAT), Fiat S.p.A (FIA), DaimlerChrysler (DCX), AB Volvo (VOLV), Navistar International (NAV), General Motors (GM), Ford (F), Federal Signal (FSS), PACCAR (PCAR). ETF: iShares Dow Jones Transportation Average Index Fund (IYT)
Summary: UnitedHealth Chairman and CEO Dr. William McGuire holds options valued at $1.78B. Yesterday, after releasing the results of its options backdating probe, the company announced Dr. McGuire would be retiring as chairman role immediately, and that second-in-command Stephen Hemsley would replace him as CEO by December 1. Examiners concluded options grants had been backdated to the recipients' benefit: McGuire received twelve grants between 1994 and 2002; all were dated before sharp increases in the share price, and three were dated on the lowest price of the year. McGuire took over in 1991, and is credited with transforming UnitedHealth into a leading health-insurer valued at over $60B. UNH shares currently trade at close to 18X 2006 earnings, higher than competitors WellPoint and Aetna.
Investors are now presented with the choice of giving the stock "the Greenberg treatment or the Fiorina treatment": when AIG CEO Maurice Greenberg stepped down in 2005, the stock dropped 7% due to his centrality in the company; when Carly Fiorina was removed from Hewlett-Packard, share prices rose 7% due to relief in the change of management. Since the initial exposure of UNH's backdating probe in March, the stock has plummeted 23%. New CEO Hemsley also received significant grants, but was cleared by the probe.
Related links: UnitedHealth Group Press Release • WSJ Options Scandal Scorecard • UnitedHealth Under Fire • UnitedHealth Problems Continue • Findings of WilmerHale Probe
Potentially impacted stocks and ETFs: UnitedHealth Group Inc. (UNH) • Key competitors: WellPoint (WLP), Aetna (AET)
Summary: Credit Suisse (CSR) experienced a $120 million loss in Korean derivatives in the third quarter due to its failure to insulate itself against fluctuations in the value of Korean stock options. The mishap was not reported to shareholders, and comprises 13% of second-quarter revenues from equities trading for Switzerland's second-largest bank. Last year Brady Dougan, who was promoted to be the head of Credit Suisse's investment bank in 2004, expressed his determination to catch up with rivals in derivatives. The growth of the Swiss bank's revenues from equity-trading was only half as fast as that of Goldman Sachs and Morgan Stanley in the second quarter. In the aftermath of the Korean debacle, Dougan has dismissed a co-head of equities and has revamped the unit's management.
Related Links: Background: Credit Suisse launches joint venture in Korea • Memos: Credit Suisse shakes up equities • Credit Suisse shakes up leaders of equities trading
Potentially impacted stocks and ETFs: Competitors: Goldman Sachs (GS), Morgan Stanley (MS)
Olympic Contract Game [Wall Street Journal]
Summary: The figures are staggering, with China expected to spend more than $400B through 2010 on infrastructure projects. The 2008 Olympics will cost Beijing about $40B, compared to Athens' $12B spent on the '04 Olympics. And the spending doesn't stop in '08, with Shanghai expected to drop $40B for the 2010 World Expo and Guangzhou estimating $27B for the 2010 Asian Games. This is great news for global giants such as General Electric, Siemens AG and United Technologies, even though the bidding on some of these event-related projects is said to be as competitive as the Olympic games themselves. So far GE has won in excess of $150 million in contracts, and said it hopes to boost its revenue in China to $10 billion by 2010 from the $5 billion it earned last year.
Related links: GE Reports Strong Growth, With NBC Universal Unit Lagging • AccessIT Is Starring in the Analog-to-Digital Cinema Revolution • Chinese 3G Adoption Imminent: Who Stands to Benefit? • Conference call transcript: General Electric Q3 2006 (note CEO Immelt and CFO Sherin's Olympic-related comments)
Potentially impacted stocks and ETFs: General Electric (GE), Siemens AG (SI), United Technologies (UTX)
ACTIONABLE BARRON'S CALLS
- Wall Street is pumped about water. Globally the $365B business is booming as countries spend billions to repair and build infrastructure to funnel clean water. Some experts think $1.5T in capital spending could flow into the sector in the next 5 years, promising a steady stream of business for a host of companies from pump makers to water utilities. Tickers mentioned include Aqua America Inc. (WTR), Pentair Inc. (PNR), Watts Water Technologies Inc. (WTS), Veolia Environnement SA (VE), Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), General Electric Co. (GE), Suez (SZE), ITT Corp. (ITT), American States Water Co. (AWR), United Utilities plc (UU), PowerShares Water Resources ETF (PHO)
- U.S. Steel (X) shares, recently in the mid-60s, could fetch up to $100 in a takeover bid. But even if none materializes, good profits should propel them past $80 within a year.
- At 64.50, J&J (JNJ) trades for 16x '07 estimates. Based on historical multiples of earnings and cash flow the shares could be worth $77.
- Enterra Energy Trust (ENT) shares are at $8.80, down from $24 last October. Possible reasons: Sympathy with JED Oil Inc. (JDO) who suspended production, the collapse of natural gas prices, dividend cuts, difficulties with its profitable revenue-sharing deals, big debt problems. Barron's: At the current price of 8.80, refinancing could mean as much as a 40% increase in shares outstanding. This would painfully dilute current unit holders and make another dividend cut likely.
- Barron's interviews Charley Maxwell, 50-year veteran of the oil and gas industry. He warns that peak oil is much closer than most people and even industry players realize. Oil company peaks: Marathon Oil Corp. (MRO) will peak in 2009. Royal Dutch Shell (RDS.A) 2009. Hess Corp. (HES) 2010. Exxon 2011. BP PLC (BP) 2012. Total S.A. (TOT) 2012. ConocoPhillips (COP) 2013. EnCana Corp. (ECA) 2020. Suncor Energy Inc. (SU) 2045. He recommends buying companies with long-life reserves such as Suncor, EnCana, Nexen Inc. (NXY), and Canadian Natural Resource Ltd. (CNQ).
- NetRatings (NTRT) received a buyout offer last week from majority owner VNU. The market believes $16 is too low a price, pulling the stock up on the news to $16.76. One money manager calculates that an acquisition would be accretive to VNU up to $25/share. Barron's expects some of the gap between $16 and $25 to close before the story concludes.
- After at least 2 years of delay, 3G's moment of truth in China may be only a few months, or even weeks, away. And that could mean a rush of orders for mobile gear makers next year, boosting earnings and stock prices. Only U.S. listed company mentioned is China GrenTech Corp. Ltd. (GRRF) that sells equipment to boost mobile signals.
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Notable articles on Seeking Alpha today: James Milton Marsh gives the short case on Journal Register • Rob Zenilman says: Detroit's got it right this time • Yaser Anwar is bullish on Starbucks' same store sales • Tom Taulli tells us about MSC.Software's Friday the 13th Nightmare • James Nicholson: LoopNet Has a Compelling Model • Brian Hozian asks: Is Sears Holdings on a beer run for Budweiser? • Bill Allen says Yahoo has work to do before it recovers • Caleb Sevian remains bullish despite the storm clouds • Rob Black's Retail Stock Report • Phil Davis: Voting With Your Wallet: Breaking Down the Numbers by Party and Oil Economics in a Nutshell • Seeking Alpha: Earnings Schedule & Estimates and One Page Barron's Summary and Tips on Buying Duty-Free • Earnings Conference Call Transcripts: General Electric Q306 • Costco Wholesale F4Q06 • Yum! Brands F3Q06 • Genzyme Q306 • Lam Research F1Q07 • Jim Cramer's latest stock picks.
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