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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Euro Zone May Take Break on Rates [Wall Street Journal]
Summary: After raising its benchmark interest rate in December to 3.5% as it has signalled it will, the European Central Bank may be ready to take the same approach as the Fed and freeze short-term interest rates. The ECB -- which oversees monetary policy for the 12 nations that share the euro -- has raised rates five times in 10 months, from a historic low of 2% in December to its current 3.25% -- a low-end-neutral rate that economists feel is still low enough to stimulate economic growth. There are some essential differences in how the Fed and ECB approach their respective economies. The Fed is attempting to keep the inflation rate low while simultaneously promoting economic growth, whereas the ECB's focus is on price stability. Says Ken Wattret, chief euro-zone economist at BNP Paribas in London, "The Fed decided to take rates back to a more neutral level, then do some fine-tuning. I don't think what the ECB's doing is all that different."
Related links: • Goldman Sachs and JPMorgan Debate Economy, Fed Rate Cuts • Bond Traders Now View the Fed as Unlikely to Cut Rates • Fed Officials Disagree, But Number of Hawks Growing • When Does the Fed Cut Rates, With the Dow This High? • ECB Raises Rates, Dollar Doesn't Weaken
Potentially impacted stocks and ETFs: BLDRS Europe 100 ADR (ADRU), streetTRACKS Dow Jones EURO STOXX 50 (FEZ), iShares S&P Europe 350 (IEV)
TECHNOLOGY AND INTERNET
Microsoft Tries to Raise 'Candiosity,' Aims at Kid Market with 'Viva Piñata' [Wall Street Journal]
Summary: Microsoft is setting its sights on the 6-11 year old market this holiday season, and has built a team of corporate partners to help. Fox TV's new show Viva Piñata is at the core of this strategy; Microsoft aims to launch an Xbox 360 game based on the show this holiday season. Other partners include 4Kids Entertainment (the media company behind Pokemon and Yu-gi-oh), and Playmates Toys, which is developing the next generation of trading cards personified in $6.99-$14.99 interactive figurines. According to MSFT's VP of Franchise Development Ed Ventura, "The younger audience is certainly our future business because they turn into our hard-core gamers". Expect a gaming-advertising battle this season; analysts project video game manufacturers will spend $100M in game and console advertising in Q4. Microsoft is risking alienating its traditional thirty-something consumers in favor of a much younger audience.
Related links: Who Will Profit from Console Gaming Wars? • Gaming Wars Continued • Sony Playstation Mania • Microsoft's Viva Piñata Site
Potentially impacted stocks and ETFs: Partners: Microsoft (MSFT), 4Kids Entertainment (KDE), News Corporation (NWS). Competitors: Nintendo (NTDOY), Sony (SNE)
Start-Ups Hope Web Ad Boom Spreads Wealth [Wall Street Journal]
Summary: In the first half of 2006, internet advertising revenue ($7.9B) was up 37% from last year. Hundreds of internet start-ups targeting a diverse range of audiences (women, music fans, dog-lovers, geeks) are hoping to cash in on the online-ad frenzy that drives the current internet boom. Not necessarily based on complex technology, the sites hope to make it big by attracting enough visitors (or "hits") to catch the attention of advertisers. But the online ad-market is dominated by the big players; the top-10, including giants Google and Yahoo, control 71% of all ads. Tiny start-ups, lots of them funded by venture-capitalists, are competing for a pretty small piece of pie, and many won't survive. Some start-ups have begun moving away from traditional ads and are looking at alternative revenue streams. On the upside, today's web start-ups can turn profitable faster due to cheaper/free software and low-cost, outsourced programming.
Related links: Earnings Predictions: Yahoo and Google (today) • Web Video Market: Who Will Win The Big Ad Money? • Ready to (Pre-)Roll With Internet Ads • IAB Reports Strong U.S. Internet Ad Growth • Yahoo's Warning: Ad Growth Bumpier Than Expected • Launch of “Salesforce for Google AdWords” Demonstrates the Power of AppExchange • Click Fraud For Online Ads Quantified... Maybe • Online Advertising Should Pass Traditional Mediums by Year's End • Online Ads Versus Catalogs • Interactive Advertising Bureau: 2006 Second Quarter Results [pdf] and Internet Advertising Revenues Close to $4 Billion for Q1 2006 [pdf]
Potentially impacted stocks and ETFs: Google Inc. (GOOG), Yahoo! Inc. (YHOO) • Advertising facilitators: ValueClick Inc. (VCLK), 24/7 Real Media Inc. (TFSM), MIVA Inc. (MIVA), aQuantive Inc. (AQNT)
AHEAD OF THE TAPE: Calling Tech Bellwethers [Wall Street Journal]
Summary: Two leading semiconductor companies report today: Intel and Linear Technology. Intel, long considered a key indicator for both the tech industry and the general economy, is less likely to fulfill this role today given its battle with AMD. Linear Technology, a leading developer of analog chips, could be viewed as a replacement. According to Lehman Brothers semi analyst Romit Shah, Linear is likely to follow peers National Semiconductor and Maxim Integrated Products which warned last month about weakening demand for analog chips. Shah believes that Linear is a good indicator of the general state of the economy, as they are known for answering customer demand more quickly than their peers. A decline in sales, therefore, would more accurately reflect a real-time decline in market demand.
Related links: Latest Earnings Call Transcripts on Seeking Alpha • Semiconductors: Indicator for Tech and Broader Market • More Proof the Semis Are In Trouble
Potentially impacted stocks and ETFs: Intel (INTC), AMD (AMD), Linear Technology (LLTC), Maxim Integrated Products (MXIM), National Semiconductor (NSM). Semiconductor HOLDRs ETF (SMH).
KLA Tencor options investigation ends [Business Week]
Summary: After an internal investigation into previous stock-option grants, semiconductor equipment manufacturer KLA Tencor (KLAC) reports it will have to pay up to $400 million in charges when it restates its financial results. The company says it intends to sever its employment relationship with ex-President and CEO, Kenneth L. Schroeder, to cancel all of his backdated stock options, and has accepted the resignation of general counsel Stuart J. Nichols. Chief Operating Officer John H. Kispert's outstanding retroactively-priced stock options will also be repriced. KLA Tencor is one of around 88 companies being investigated for options backdating by the SEC. The investigation revealed inconsistencies in the dates of certain stock options; the company says that it will file restatements and appoint an interim general counsel soon. None of the current management was involved in options-backdating.
Related links: KLA-Tencor's Triple Whammy • KLA-Tencor Comes Under Options Microscope • Updated: Feds reportedly probing KLA-Tencor options grants
Summary: The major Japanese consumer electronics companies Toshiba, Fujitsu and Hitachi announced on Monday they are considering seeking compensation from Sony for the massive recall of their lithium-ion battery-packs. The companies are also looking into ways to offset damage to their brand names and their businesses. After discovering that Sony's batteries had a tendency to overheat and possibly catch fire, computer companies have been forced to recall nearly 7 million Sony batteries worldwide; the largest recalls have been from Dell and Apple. These companies, and Lenovo/IBM, are not currently seeking compensation. Sony was also forced to delay its release of PlaySation 3 in Europe due to production issues. Sony's stock dropped dramatically recently, but was up to $41 on Monday.
Related links: Sony's Recall Costs Mounting • Sony's PS3 Delay • Bloomberg: Sony's battery recall squeezes market • CNET: Sharp starts laptop battery recall
Potentially impacted stocks and ETFs: Sony (SNE), Fujitsu Limited (FJTSY), Toshiba (TOSBF), Hitachi (HIT), Dell (DELL), Apple (AAPL), Sharp Corp. (SHCAY), Lenovo (LNVGY), IBM (IBM)
Summary: Royal Dutch Shell, which recently had its environmental permit abruptly revoked by the Kremlin for its Sakhalin-2 liquified natural gas [LNG] project, announced that it has resolved the Russian government's concerns. Though some analysts claim the environmental concern was manufactured by the Russian government to constrain foreign involvement in the country's strategic energy sector, RDS CEO Jeroen van der Veer conceded that there were "significant environmental challenges" that have been "fully and transparently addressed." Sakhalin-2, which is 80% complete, will be one of the largest LNG producers in the world, and is expected to begin supplying Asian and American customers by mid-2008. Meanwhile, Russia's gas monopoly Gazprom, which agreed last year to acquire 25% of Sakhalin-2, has balked due to a doubling of project costs to $20 billion.
Related links: With Royal Dutch Shell, Size Really Matters • Russian Government Muscling In on Anglo-Russian Gas Field Venture
Potentially impacted stocks and ETFs: Royal Dutch Shell plc (RDS.A), BP PLC (BP) • iShares S&P Global Energy Sector Index Fund (IXC), Vanguard Energy ETF (VDE)
TRANSPORTATION AND AEROSPACE
Chrysler Sees '07 Gain in U.S. Share [Wall Street Journal]
Summary: DaimlerChrysler AG's Chrysler Group met with auto dealers yesterday in Detroit. The news: It expects to gain nearly a full percentage point of U.S. market share over the next year thanks to some improvement on previous models, and other brand-new versions that put them in markets they haven't competed in previously. Now they just have to figure out how to get rid of their current, bloated in-house inventory, and the cars and vans sitting in the hands of impatient dealers. New models: the redesigned Chrysler Sebring, a midsize sedan; a Dodge version of the same car, the Avenger, due in the first quarter; and a new line of Jeep vehicles next year. Chrysler expects to lose $1.5B in Q3; sales have been hurt by rising interest rates and fuel costs.
Related links: Chrysler's Attempt to Lower Inventory Hits Roadblock • Detroit Gets it Right This Time
Potentially impacted stocks and ETFs: DaimlerChrysler (DCX), Ford Motor Co. (F), General Motors Corp. (GM), Toyota Motor Corp. (TM) • iShares Dow Jones Transportation Index ETF (IYT)
Wal-Mart to Buy Chinese Retail Chain [Business Week]
Summary: The Asian Wall Street Journal reported Wal-Mart plans to spend $1 billion to buy 100 privately held hypermarkets (combined supermarket and department store in one facility) in China over the next three years, according to people familiar with the transaction. Wal-Mart reportedly outbid rival Carrefour of France, and as a result will overtake the latter to become China's largest hypermarket operator. A Wal-Mart China spokesman declined to comment. This move comes after having ended its retail operations in Germany and South Korea earlier this year. Wal-Mart is still trying to grow its business in Japan. Note the Financial Times reports that although Wal-Mart emerged as the leading bidder for the hypermarkets, an agreement has yet to be reached.
Related links: Wal-Mart's Same-Store-Sales Weak Compared to Rivals • Wal-Mart Finding it Harder to Expand • Wal-Mart to Offer Credit Cards in China • China to Foreign Companies: Be Good or Face Unionization • Wal-Mart Comments on Sale of South Korean and German Stores • Conference call transcript: Wal-Mart Q2 2007
Potentially impacted stocks and ETFs: Wal-Mart (WMT)
Summary: Pre-holiday season sales of Barbie and TMX Elmo were responsible for a 6.1% gain in Mattel's 3rd quarter profit. The parent company of Fischer-Price faced stiff competition this summer from "Cars" and "Superman Returns" products, in addition to higher raw-material costs and difficulty in the retail sector. TMX Elmo was unvielded in September to launch holiday sales early, and is Fischer-Price's top item. Barbie sales were up 1% for the third consecutive quarter, bolstered by the 12 Dancing Princesses line. Mattel reports that the third quarter saw the first rise in gross margins in two years.
Related links: Mattel: A Game Worth Playing • Mattel: Compelling Products, Cash Flow, Valuation and Dividend • Mattel: Watch Elmo Laugh All The Way To The Bank
Potentially impacted stocks and ETFs: Mattel (MAT), Hasbro (HAS), Marvel Entertainment (MVL)
Summary: Chindex International, an American health care provider with hospitals and clinics in China, will offer full-coverage health insurance along with FESCO IB Insurance Brokerage to Chinese nationals. This is the first such service in China. Explains Chindex's president Roberta Lipson: "Until now there have been no health insurance products available to Chinese people that would allow them to access this hospital." Chindex plans to expand its presence in China to include two new 125-150 bed hospitals in Guangzhou and Beijing in addition to its two 50-bed hospitals one each in Beijing and Shanghai. Lipson said the insurance will cover patients at other hospitals in and out of China.
Related links: Chindex press release • WSJ Coverage • Chindex Q107 Financial Results • The Red Hot Market for Medical Devices in China • Big Prospects for China's Medical-Device Makers
Potentially impacted stocks and ETFs: Chindex International (CHDX), American International Group (AIG), China Medical Technologies (CMED), Mindray Medical Int'l (MR)
Profit at Wachovia Increases 13%, but Revenue Falls Short [New York Times]
Summary: Rising loan demand contributed to Wachovia's just-announced 13% profit in Q3, but a shrinking net interest margin (3.03% vs. Q2's 3.18%) has taken its toll on revenue. Shares dropped 2.2% on the news and dampened prices throughout the sector. Profit reached $1.19 a share, meeting expectations, but the 5% revenue increase to $7.04B fell short of the $7.26B forecast. Results do not include the bank's $24.2B purchase on Oct. 1 of Golden West Financial.
Related links: Wachovia: Bigger and Still Sound • Interest-Rate Pressure Damps Wachovia's Profit • Wachovia's Imprudent Takeover of Golden West
Potentially impacted stocks and ETFs: Wachovia Corp. (WB) • SunTrust Banks (STI) • iShares Dow Jones US Regional Banks Index Fund (IAT) • iShares Dow Jones US Financial Sector Index Fund (IYF) • iShares Dow Jones US Financial Services Index Fund (IYG) • Regional Bank HOLDRs Trust (RKH) • Vanguard Financials ETF (VFH) • Select Sector SPDR Financial (XLF)
Summary: 54 companies currently face delisting from the NASDAQ due to options backdating scandals foiling their ability to issue financial reports within NASDAQ's strict reporting timelines. Among them are some of America's best known companies such as Apple (AAPL), Altera (ALTR), BEA Systems (BEAS), Children's Place Retail Stores (PLCE) and Comverse (CMVT). It is unlikely that Nasdaq will take an extreme measure like delisting top-tier companies. Their rival, the New York Stock Exchange is far less strict in enforcing financial reporting deadlines; seven NYSE-listed companies have delayed quarterly or annual filings amid options probes, but only a missed annual report is grounds for NYSE delisting -- and only then if the filing is more than six months late. The NYSE, which is comprised of generally larger companies, feels their approach is more appropriate in balancing investor and corporate needs. But some analysts believe NASDAQ's policy is "more shareholder friendly" because "investors definitely need timely information." On the other hand, if NASDAQ relegates too many companies to the Pink Sheets, it could threaten hopes for a broad tech rally.
Related links: • Apple's Options Problems Deepen - Likely To Restate Results • Apple Shares Rise As Investors Express Relief Over Jobs' Retention • Take Two Interactive's Delisting Notice • Novell Receives Nasdaq Delisting Notice
Potentially impacted stocks and ETFs: Nasdaq Stock Market Inc. (NDAQ), NYSE Group Inc. (NYX), NASDAQ 100 Trust Shares (QQQQ), iShares NYSE 100 Index (NY)
Summary: According to CNBC television, Chicago Mercantile Exchange Holdings has agreed to acquire CBOT Holdings Inc. for $8B. CBOT shares are up 13% pre-market on the report. This is the latest in a surge of consolidation in global exchanges.
Related links: MarketWatch (Oct. 13): CME, CBOT get swept up in talk of exchange consolidation • Mating Season for the Big Exchanges • Why I'm Long-term Bullish on the Exchanges • Tokyo Stock Exchange Favors Euronext-NYSE Deal • Combined ICE-NYBOT Looks Attractive
Potentially impacted stocks and ETFs: Chicago Mercantile Exchange Holdings (CME), CBOT Holdings Inc. (BOT), NYSE Group Inc. (NYX), Nasdaq Stock Market Inc. (NDAQ), IntercontinentalExchange Inc. (ICE)
Vanguard, Barclays in ETF Scuffle [Wall Street Journal]
Summary: Two of the largest ETF providers, Vanguard and Barclays Global Investors [BGI], are scuffling over tax efficiency, one of the main selling points of ETFs. Vanguard Group recently told investors that several ETFs managed by rival BGI, who manages the iShares ETFs, were reporting relatively low levels of qualified dividend income, which can affect investors' bottom line. The tax rate on qualified dividends for investors in higher tax brackets was cut to 15% by Congress in 2004, and ETF providers have rolled out a parade of popular dividend-focused funds. The biggest and oldest is BGI's $7 billion iShares Dow Jones Select Dividend Index Fund (DVY). According to a Morningstar analyst, in 2004 only 86% of the dividends this ETF paid out qualified for the tax break. "That was a small but unpleasant surprise for those who bought this offering hoping to capitalize on the dividend tax cut." The ETF ran afoul of the rule in 2004, he said, because it was a new fund (launched in November 2003) that expanded quickly and saw heavy creation and redemption activity. A Barclays spokesman said the dividend ETF has since improved its qualified-dividend-income track record.
Related links: • Do Your ETF Dividends Qualify For the 15% Rule? • ETF Investing Guide: Combining Tax-Loss Selling & Rebalancing • ETF Investing Guide: Turning Taxes to Your Advantage
Potentially impacted stocks and ETFs: SPDR Dividend (SDY), First Trust Morningstar Dividend Leaders (FDL), Vanguard Dividend Appreciation ETF (VIG), WisdomTree Large Cap Dividend Fund (DLN), WisdomTree Dividend Top 100 Fund (DON)
China's Reserves Near Milestone, Underscoring Its Financial Clout [Wall Street Journal]
Summary: China's foreign reserves are expected to reach $1T sometime this week. While its massive accumulation provides greater assurance it can handle economic shocks on the mainland, it's also raising concerns over the power it can wield overseas. Some in the U.S. government worry whether China might someday sell-off a sizable portion of its dollar-based holdings. At present, however, it is credited with keeping a lid on interest rates to the benefit of Americans, while at the same time being the target of currency manipulation, even though the latter, if addressed, would result in higher prices for U.S. consumers. China is said to be diversifying and seeking higher returns. For instance, it's believed China is slowing its purchases of U.S. Treasury debt in favor of debt issues from U.S. mortgage lenders Fannie Mae and Freddie Mac.
Related links: China's Massive Infrastructure Spending for '08 Olympics and Beyond • China's Ever-Growing Trade Surplus • The Paulson Effect: China Hawks in Senate May Delay Vote • Paulson Wants Even More Flexibility in Yuan • Beijing's Revised Export Tax Rebate Policy Boosts Stocks • China's Latest Attempt to Cut Its Trade Surplus • Fannie Mae, Freddie Mac Mortgage Portfolios Escape Regulatory Caps
Potentially impacted stocks and ETFs: Fannie Mae (FNM) and Freddie Mac (FRE), both are constituents in the SPDR Financial ETF (XLF)
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Notable articles on Seeking Alpha today: A money manager details his Vitesse Investment Thesis • Envoy Global Research says New Leadership Makes Isolagen Attractive • Dan Carty: Drilling for Crude Profits With Fuel and Rig Indicators • Henry Blodget's earnings predictions: Yahoo and Google • Why Hillary Kramer feels good with Gaiam • Steven Roach on Oil Prices and the American Consumer • David Neubert's Ten Predictions for After the Upcoming Mid-Term Elections • Ezra Marbach asks: Are Yum!'s China Margins Sustainable? • IRG's Chinese Tech Stock Weekly Update • Today's Earnings Schedule & Estimates • Earnings conference call transcript: Koninklijke Philips Electronics Q306 • Jim Cramer's latest stock picks.
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