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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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Yahoo's dilemma: Deal or no deal? [Fortune via CNN Money]

Summary: Fortune magazine is reporting that Yahoo recently approached Time Warner about the possibility of buying internet behemoth America Online [AOL] from it. And while sources close to Yahoo and at Time Warner deny that direct talks have taken place ("Time Warner has a new strategy for AOL and is not contemplating any deals," says a Time Warner spokesman), just the notion that Yahoo! would approach AOL and propose a merger is indicative of the current state of affairs at Yahoo.terry semel With shares down 35% this year and CEO Terry Semel (pictured) coming under increasing pressure to pull off a large acquisition to follow up Google's recent YouTube grab, shareholders are growing impatient. For now, Yahoo's party line is they will "stay the course." According to CEO Semel, if Yahoo can do better at monetizing search ads and exploit new areas like ads on cellphones, videos and social-networking sites, it will do just fine. However, with Google continuing to increase its internet advertising market share, Yahoo will consider one of the following options:

1. Pull off a major acquisition. AOL and web 2.0 site Facebook come immediately to mind.
2. Allow themselves to be acquired by Microsoft. Unclear how these two companies would mesh.
3. Merge with eBay. Both companies share a mutual "Google-phobia."
4. Stay the course. The question is how long the board can endure this option.

Related links: Yahoo! Q3 2006 Earnings Call TranscriptMerrill: Yahoo Assets Could Be Attractive to MicrosoftYahoo!'s Not As Richly Valued As It SeemsHow Yahoo Can Beat Google: Start By Conceding SearchA Yahoo Acquisition of Facebook Would Be No PanaceaSome Practical Suggestions For Yahoo's Terry SemelWho Could Acquire Yahoo?Time-Warner Considers Cutting AOL LooseAOL Restructures - Again
Potentially impacted stocks and ETFs: Yahoo! (NASDAQ:YHOO), Time Warner (NYSE:TWX), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), eBay (NASDAQ:EBAY) • Internet HOLDRS (NYSE:HHH), First Tr DJ Internet Index (NYSEARCA:FDN)

Line Losses Vex Verizon []

Summary: Despite posting solid overall numbers during the recent quarter, investors sent Verizon's shares down $1.19, or 3.06%, in trading yesterday amid concerns that its more traditional telephone business is in trouble. On the whole, net income rose slightly to $1.92 billion, or 66 cents a share, on increased revenue of nearly 26 percent to $23.25 billion. Much of the increase in revenue came from the addition of MCI and its consumer long-distance and corporate telecom businesses, which Verizon acquired during this year's first quarter. During last year's 3Q, Verizon earned $1.87 billion but pulled in 68 cents per share since the company increased its share count when it issued more stock in 1Q'06 to pay for the MCI acquisition. Also, last year's revenue was just $18.49 billion meaning that profit margins slipped significantly. Additionally alarming, Verizon's total-access line count fell 7.5% from last year (the industry's shrinkage rate is just 6%). The company also saw a 9.8% year-over-year decline in residential lines, another sign its traditional telephone business is in trouble. The company also announced that the already heavy cost of building its new high speed internet and cable TV fiber optic network (called "FiOS") to replace its current 'old school' copper-wired network would cost an additional 2 cents per share. In the good news department, Verizon Wireless accounted for $9.87 billion of Verizon's total revenue, up 18.2% year-over-year, as the company saw its wireless customer base swell by 1.9 million subscribers to 56.7 million. It now trails industry leader Cingular (owned by AT&T) by just 2 million subscribers. The operating profit margin for Verizon Wireless was 26.2% - the highest ever for Verizon's cellular business, which is co-owned by Vodafone Group PLC.
Related links: Verizon Q3 2006 Earnings Call TranscriptVerizon Trading Down Following EarningsVerizon to Outlay $18 Billion for Upgraded Fiber Optic Network, Cable TV AccessCiti: Buy AT&T and Sell VerizonAnnals of Accounting: A Look at AT&T and Verizon's MethodsMicrosoft, Wal-Mart, Verizon Paced the Dow During Its Historic RiseVerizon 3Q Profit Rises, but Shares Fall [ - AP]
Potentially impacted stocks and ETFs: Verizon (NYSE:VZ), Vodafone (NASDAQ:VOD), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), BellSouth (BLS), Qwest Communications (NYSE:Q), Sprint Nextel (NYSE:S) • PowerShares Dynamic Lg. Cap Value (NYSEARCA:PWV), First Tr Morningstar Div Leader (NYSEARCA:FDL)

U.S. Justice Dept. Probing Sony Unit [AP]

Summary: Sony Corp. (NYSE:SNE) said today it received a subpoena from the U.S. Justice Department's antitrust division requesting information about Sony's SRAM, or static random access memory. Sony intends to cooperate with the investigation, calling it an "industrywide probe" but did not elaborate. SRAM is faster, more reliable, and more expensive than DRAM (dynamic RAM); it is used in PCs, disk drives, communications equipment and SRAM Chiip 31 10 06networking devices. Sony sold $28M of SRAM in 2005; the memory is made by outside manufacturers for Sony, which resells it at a profit. Sony would not say who made or bought the memory. Earlier this month, Cypress Semiconductor Corp. said its SRAM operations were also under investigation by the Dept. of Justice. A separate U.S. Justice investigation into price-fixing among DRAM companies has resulted in more than a dozen charges against individuals, and more than $731M in fines against Samsung Electronics Co., Elpida Memory Inc., Infineon Technologies AG and Hynix Semiconductor Inc.
Related links: SRAM Price-Fixing Scandal Brewing [iTnews]Mitsubishi Drawn Into SRam Investigation []
Potentially impacted stocks and ETFs: Sony Corp. (SNE), Cypress Semiconductor Corp. (NASDAQ:CY), Infineon Technologies AG (IFX)

Microsoft Sues Counterfeit Software Dealers [Reuters]

Summary: Microsoft announced Tuesday that it had launched 55 separate legal actions around the world against software counterfeiters and the websites who assist them in selling pirated Microsoft products. The breakdown of the legal actions by nation is as follows: 15 in the United States, 10 in Germany, 10 in the Netherlands, 5 in France and 5 in Britain, as well as proceedings in Argentina, Australia, Belgium, Korea, Mexico and Poland. Besides the fact that counterfeit software cuts into Microsoft's profits, a senior attorney at the company, Matt Lundy, voiced concerns that, "Counterfeit software is defective and dangerous because counterfeiters tamper with the genuine software code, which leaves the door open to identity theft and other serious security breaches." A survey conducted by independent market research group IDC and sponsored by Microsoft found 25% of Web sites offering counterfeit product keys, pirated software, key generators or crack tools, attempted to install either malicious software or potentially unwanted software upon activation.
Related links: Microsoft F1Q07 (Qtr End 9/30/06) Earnings Call TranscriptMicrosoft Cracks Down on Counterfeit Software Auctions Worldwide [PR Newswire] • Microsoft Toughens Anti-Piracy Actions [AP] • Microsoft's Built-in Vista Security is "So" Safe It Will Disrupt Legal Users
Potentially impacted stocks and ETFs: Microsoft (MSFT) • iShares S&P 500 Index (NYSEARCA:IVV), iShares Russell 1000 Index (NYSEARCA:IWB), streetTRACKS DJ Wilshire Large Cap (ELR)


AHEAD OF THE TAPE: The Case for Valero [Wall Street Journal]

Summary: Valero Energy, which reports Q3 earnings later today, is trading 23% below its price at the start of August. The company has warned that earnings will be well below expectations, but investors, now conditioned to expect bad news from Valero, have bid the stock up 4% on the hope that results will be merely terrible and not devastating. The Wall Street Journal's Justin Lahart argues that this might be a good time to take a position in Valero. The stock took its hit this year because gasoline inventories had been beefed up to prepare for hurricanes that never happened, and too much gasoline on hand drove Valero Chart 31 10 06down profits. According to Lahart, however, the picture is not as grim as at appears. Refining margins may be low, but they are still far higher than they were in the late 1990s: producers of petroleum and coal products were running at 93% of capacity last month, versus 86% historically. Demand remains high enough to compel U.S. refineries to operate close to full capacity. Supply is outstripping demand for the moment, but because refiners are unlikely to build new refineries in the new future, demand should come back into line. Long term, the refinery business still looks attractive.
Related links: Philip Davis' Valero Rule on Oil Stock TradingValero Energy -- A Low Cost Refiner Turning Big ProfitsAvoiding the Slick: Hedged Oil PositionsRob Black's Energy Stock Report
Potentially impacted stocks and ETFs: Valero Energy Corp. (NYSE:VLO) • iShares Dow Jones US Oil & Gas Ex Index (NYSEARCA:IEO), Vanguard Energy ETF (NYSEARCA:VDE)

U.S. Drops Bid Over Royalties From Chevron [New York Times]

Summary: The Interior Department has dropped claims that Chevron underpaid the government for natural gas produced in the Gulf of Mexico. Although the government was claiming only a paltry $6 million, the decision to drop the case sets a precedent that could allow energy companies to avoid paying hundreds of millions in royalties in the future. The folding of the government in the case has fanned criticism of the Bush administration, seeming as it does to suggest a reluctance to take on big oil. In return for the right to drill on federal lands and in federal waters, energy companies are supposed to pay the government a percentage of proceeds. The administration has been lax, however, about collecting those payments. At the same time that it has "sweetened incentives" for exploration and allowed drilling in open wilderness areas, it has scaled back on royalty audits. The Interior Department has been publicly accused by government auditors of stonewalling their attempts to recover over $30 million from several major oil corporations, including Shell Oil. The problem appears to originate in error-filled leases signed during the 1990s that could permit oil companies to evade payment of over $7 billion. The government claims it is renegotiating those deals, but politicians on both sides of the aisle accuse the administration of foot-dragging. In this case, the Interior Department claimed Chevron had inflated processing costs, sometimes by as much as five times, in order to reduce the value on which royalties were based. Chevron paid the $6 million the government demanded but appealed the case.
Related links: Chevron Q3 2006 Earnings Call TranscriptBuyer Beware: Oil Stocks Headed for a CorrectionCramer's 'Mad Money' Recap: Chevron Chase
Potentially impacted stocks and ETFs: Chevron Corporation (NYSE:CVX) • iShares Russell 1000 Value Index (NYSEARCA:IWD), WisdomTree High-Yielding Equity (NYSEARCA:DHS), WisdomTree LargeCap Dividend (NYSEARCA:DLN), WisdomTree Total Dividend (NYSEARCA:DTD), iShares Russell 3000 Value Index (IWW)

BP Budget Cuts May Have Contributed to Texas City Blast: Safety Board []

Summary: CBS reports that John Manzoni, BP's chief executive of refining and a company director, was aware of potential danger in BP's Texas plant before a fatal explosion killed 15 workers and injured hundreds in March 2005. CSB Chairman Carolyn Meritt, appearing on the CBS news magazine "60 Minutes," blamed deep budget cuts, including a 25% reduction in fixed costs: "Our investigation has shown that this was a drastic mistake," she said. While Manzoni denied that cuts were made at the expense of safety and that he had any knowledge of potential problems, internal memos prove he was warned of the possibility of a "major site incident" at the refinery, and in an e-mail, he complained about missing a day of vacation to inspect the site following the disaster. The U.S. Occupational Safety and Health Administration fined BP $21.4 million for safety violations, and the company is putting aside $400 million to $1.2 billion to settle lawsuits. The U.S. Justice Department is currently investigating the disaster for criminal violations.
Potentially impacted stocks and ETFs: BP plc ADR (NYSE:BP) • Competitors: Chevron (CVX), Exxon (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A)


Looking for Stability Ford Will Slash Production in '07 [AutoWeek]

Summary: More depressing Ford news: Management announced production will be slashed by as much as 12% in the first half of 2007 and 5% for the full year. The production line will be turning out fewer trucks and SUV's, but the elimination of the Taurus will take the biggest chunk out of production numbers. CFO Don Leclair is careful to point out that, "we have a lot of new products coming, products that will be hitting their stride in the third and fourth quarter of next year." These include the Ford Edge and the Lincoln MKX. Third quarter losses reached a staggering $5.80 billion; fourth quarter results are expected to be worse. Analysts expect that the company will have the lowest year-end inventory since Ford Chart 31 10 062001, when Ford ran a post-Sept. 11 sale and ended that year with 631,800 units. They currently have 652,000 vehicles. The company expects earnings to start heading north only in the fall of '07, but warns investors they don't expect to see any profits until 2008.
Related links: Detroit Needs To Get RealThrowing In The Towel On FordFord Bleeds $5.8 Billion in Q3; SUV's, Foreign Competition To Blame • WSJ: Ford To Cut 1H '07 Output 8-12%, Full-Yr '07 5% • Bloomberg: GM, Ford May Say U.S. Sales Rebounded; Chrysler Extends Slide
Potentially impacted stocks: Ford (NYSE:F), General Motors (NYSE:GM), DaimlerChrysler (DCX), Toyota (NYSE:TM), Honda (NYSE:HMC), Nissan (OTCPK:NSANY)


Humana's Messy Mix []

Summary: Health insurance provider Humana Inc., which options trader Phil Davis calls a "sector mover," reported a more-than-tripling of Q3 profit as revenues increased 48% to $5.65 billion, but the results were short of expectations. Shares tumbled 6.2% to close at $61.74 after the report. The company reported net income of $159.2 million ($0.95/share) versus $46.8 million ($0.28/share) a year earlier, but the Street had forecast $0.97 EPS. The company attributed its dramatic quarterly profit growth to the success of Medicare Advantage, its comprehensive health care plan, which offers services additional to prescription drug coverage. Medicare Advantage has almost doubled in enrollment to nearly 1 million since Sept. 30, 2005. The higher enrollment drove up administrative services fees to $86.3 million from $66.1 million in the quarter while investment income reached $62.5 million from $38.8 million. New revenue from stand-alone drug plans for Medicare beneficiaries also played a role. Higher enrollment plus expansion into new geographical areas sent premiums up to $2.37 billion for the quarter, an increase of 82% over last year's $1.3 billion.
Related links: Jim Cramer's Mad Money In-Depth Stock Picks, Oct. 4
Potentially impacted stocks and ETFs: Humana Inc. (NYSE:HUM) • iShares Dow Jones US Healthcare Provider (NYSEARCA:IHF), iShares Morningstar Mid Core Index (NYSEARCA:JKG)


HEARD IN ASIA: Rio Tinto Investors Stay Upbeat Amid a Robust Iron-Ore Outlook [Wall Street Journal]

Summary: The outlook for shares of Rio Tinto has changed drastically compared to a few months back. Instead of a 5%-15% decrease in iron-ore prices from next April, an increase of up to 15% is now expected, thanks to robust Chinese demand, and restricted production capacity at the Big Three in iron exports: Companhia Vale do Rio Doce, Rio Tinto and BHP Billiton. According to a Daiwa Securities analyst, Rio Tinto's 2007 earnings are nearly 50% "leveraged" to iron-ore, compared to 16% for BHP. Price negotiations are underway between the miners and Japanese mills, and China, led by Baosteel Group is expected join in late November. Morgan Stanley rates Rio Tinto a "buy," with a price target of A$95/share, J.P. Morgan "overweight" A$105, UBS "buy" A$95, Daiwa "buy" A$91, and Merrill Lynch "buy" A$95. Rio Tinto's ordinary shares closed at $78.47 today.
Related links: Earnings conference call transcript: Rio Tinto half-year 2006 • Rio Tinto: Q3 Operations ReviewMetal Miners Rattled by Fears of a Global Economic SlowdownMiners Want Their Fair ShareA Few Miner Adjustments: BHP Billiton & Phelps DodgeIs it Too Late to Buy Base Metal Miners Rio Tinto and BHP Billiton?
Potentially impacted stocks and ETFs: Rio Tinto (RTP) -- 1 ADR = 4 ordinary shares, Companhia Vale do Rio Doce (NYSE:RIO), BHP Billiton (NYSE:BHP) • SPDR Metals & Mining ETF (NYSEARCA:XME)


Daily Circulation Falls at U.S. Papers [Forbes]

Summary: The Newspaper Association of America reported on Monday that U.S. newspaper circulation is continuing its downward trend. Daily circulation for the six months ended September 30 fell 2.8%; Sunday circulation fell 3.4%. These were the sharpest drops in the last 15 years. The association blames both the Internet and Americans' busy schedules for this decline. The three newspapers that reported the highest circulation include USA Today, The Wall Street Journal and The New York Times. The Los Angeles Times suffered an 8% drop during this period, the largest of any newspaper. The L.A. Times said this was due to its efforts to reduce the number of free copies given to schools, hotels and hospitals, which advertisers consider to be less valuable than individual paid copies. Newsday, a Long Island based paper owned by the Tribune Co., The Dallas Morning News and the Chicago Sun-Times are all undergoing circulation audits due to previous misstatements regarding circulation, and did not report numbers for this period. The NAA also reported that 57 million people visited newspaper Web sites during the third quarter, up 24% from the same quarter last year.
Related links: Is the Newspaper Industry's Crying Just Crocodile Tears?Dow Jones: Maybe Our Online Business is Part of Yahoo's ProblemNewspapers: Another Slide Coming • NY Times: Newspaper Circulation Falls Sharply WSJ: Circulation Falls 2.8% at U.S. Papers
Potentially impacted stocks Dow Jones & Company (DJ), The New York Times Co. (NYSE:NYT), Gannett Co. (NYSE:GCI), The Washington Post Co. (WPO), Tribune Company (TRB), The McClatchy Company (NYSE:MNI), News Corp. (NASDAQ:NWS)

Clear Channel's Net Falls 9.5% and Clear Channel's Founders Stand to Get Windfall [Wall Street Journal]

Summary: Radio and outdoor-advertising company Clear Channel Communications, which is considering a possible sale or divestiture, announced Q3 earnings of $185.9 million, or $0.38 a share, on revenue of $1.79 billion. The EPS figure narrowly exceeded Street expectations of $0.37. Revenue jumped almost 7% during the quarter because of stronger radio advertising in the U.S., but higher costs drove down profit nearly 10%. In new guidance, the company anticipates an 8.8% gain for radio revenue in Q4, significantly exceeding analyst forecasts. Revenue at the company's biggest division, radio, rose 5% to $962.1 million, and 8% at the outdoor division to $720.3 million. Revenue also rose at smaller businesses including television. The international outdoor division, though, has performed poorly in comparison to the American division, which saw a 12% rise this quarter; the company is accordingly contemplating the sale of the international outdoor business as well as some smaller-market radio stations. Clear Channel has hired Goldman Sachs to assist it in considering various "strategic alternatives," including privatization. The company has attracted attention among various private-equity groups, including a consortium led by Kohlberg Kravis Roberts & Co., one led by Thomas H. Lee Partners LP, a group comprising Cerberus Capital Management and Oak Hill Partners, and one comprising Carlyle Group LLC and Apollo Management LP.. Management is not yet discussing details, but bids are due November 10.
Related links: Clear Channel Q3 2006 Earnings Call TranscriptClear Channel & Citadel: There's Still Life In RadioIn Clear Channel Buyout Talks, Billboards Loom Large
Potentially impacted stocks and ETFs: Clear Channel Communications (NYSE:CCU) • PowerShares Dynamic Media (NYSEARCA:PBS)


New Data Casts Doubt on Japan's Economy [AP]

Summary: The economic data out of Japan is causing concern because of a consistent slowing in consumer spending -- it fell more than 3x the amount it was expected, 6.6% y-o-y, for the ninth-consecutive monthly y-o-y decline. Also, unemployment rose by 0.1% over August to 4.2%. Despite the increase, Bloomberg quotes Merrill Lynch Tokyo chief economist Jesper Koll, who said, "The stickiness of the unemployment rate at about 4 percent is a sign of strength. The question is how many jobs are being created." Bloomberg notes the jobs-to-applicants-ratio was steady at 1.08 in September, near a 14-year high set in July. Government officials remain optimistic on the state of the economy. Some analysts and economists however, are worried, such as Morgan Stanley's Masaaki Kanno, who said, 'consumer spending remains the worrisome wild card in Japan's economic comeback.' Hiroshi Shiraishi of Lehman Brothers commented, "The data point to the economy losing some momentum and are a bit of a warning sign at a time when the Bank of Japan is inching toward raising interest rates." Meanwhile, the Bank of Japan's closely watched semiannual Outlook for Economic Activity and Prices report was released today. It confirmed Japan's continued economic expansion, while acknowledging the corporate sector has been "somewhat stronger than projected," whereas the household sector has been "somewhat weaker." GDP is forecast to decline to around 2% from 2.5% in FY2007 and hold steady. Core CPI is seen at around 0.5% in 2007, 0.3% lower than projected in its April report.
Related links: Bloomberg: Japan's Jobless Rate Rises; Jobs Available Near 14-Year High • Bank of Japan: Outlook for Economic Activity and PricesWeak Core CPI Keeps Pressure on BoJ to Hold RatesBoJ Keeps Rate Unchanged; Producer Prices Up SharplyBoJ's Tankan Surprises to Upside, Investment Implications
Potentially impacted stocks and ETFs: iShares MSCI Japan Index ETF (NYSEARCA:EWJ)

China's Thirst for Diesel, Kerosene Stays Strong [Wall Street Journal]

Summary: China's diesel imports soared 99% y-o-y in September to 47,280 metric tons, and kerosene imports jumped 80% to 580,717 tons. Some of the increase is attributed to a weeklong national holiday at the beginning of October, higher demand amid the fishing season and for crop harvesting. Data was not provided for China's shipments of these fuels to North Korea, but separate customs data for September is disturbing as it shows gasoline and jet fuel shipments more than tripled. China's imports of diesel and kerosene meanwhile, could be sustained at a high growth level due to lower import duties to be implemented in November, at 0%-3%, from a prior rate of 3%-6%. A Deutsche Bank analyst says demand for fuel oil could rise, and smaller refineries stand to benefit against major refineries such as PetroChina Co. and China Petroleum & Chemical Corp.
Related links: Oil Inventories On the Rise: Where's the Shortage?Asian Energy FundamentalsCNOOC: Chinese Energy Stock Worth a Close LookOil Traders Testing the OPEC CartelChina's Potential Collaboration with U.S. in Oil Field Development
Potentially impacted stocks and ETFs: PetroChina (NYSE:PTR), China Petroleum & Chemical (NYSE:SNP) • BLDRS Emerging Markets 50 ADR Index ETF (NASDAQ:ADRE), PowerShares Golden Dragon Halter USX China ETF (NYSEARCA:PGJ)

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