Seeking Alpha's one-page summary of this morning's key market-moving and stock-moving stories. Headlines link to the original article. Use Wall Street Breakfast as your starting point, and make sure to check the original before trading.
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MACRO AND HOUSING
Business Wins Its Battle to Ease A Costly Sarbanes-Oxley Rule [Wall Street Journal]
Summary: Business has won the battle to ease the most disputed section of the Sarbanes-Oxley corporate-reform law, which passed in 2004 in the wake of the Enron scandal: that companies must review their systems for ensuring accurate financial reports and then have them tested by outside auditors. The U.S. business lobby has complained the section is too broad, and results in huge expenses to document things that "have nothing to do with the integrity of their financial statements." A study documented that companies spent an average $3.8M in 2005 to comply. Section 404, as it's known, has been blamed for discouraging companies from going public in the U.S.; of 20 top IPOs this year, only three have been in the U.S. Of course some business have been netting huge profits helping big business comply with the law: The Big Four accounting firms (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG); and IBM, Oracle, SAP AG and Microsoft have all released software to help businesses adhere to the rule. The SEC, which has admitted the law might be overly conservative, said it will unveil its changes next month; until then it remains to be seen just how broad they will be.
Related links: Background: Wikipedia, SEC Rules of Sarbanes-Oxley Act. Commentary: Politics and The Market • Maybe Regulation Costs Aren't As Excessive As Everyone Thinks
Potentially impacted stocks and ETFs: International Business Machines Corp. (IBM), Oracle Corp. (ORCL), SAP AG (SAP), Microsoft Corp. (MSFT)
Trade Deficit Narrowed in September [Wall Street Journal]
Summary: The U.S. trade deficit shrank 6.8% to $64.3 billion in September, but the widening trade gap with China cast a pall on the good news. The fall-off in oil prices eased the U.S. import figure and exports continued to be strong, but the deficit with China hit a record $22.96 billion in September, up $1 billion in only a month. The gap with China, combined with the fact that the overall deficit -- though shrinking -- is still among the largest in history, could prompt the newly Democratic Congress to get tough on trade policy. The Democrats advocate legislation that protects workers' rights and the environment in trade talks with other countries, an approach that would contrast sharply with what Michigan Rep. Sander Levin [D] calls the "hands off, anything goes" approach of the Bush administration.
Related links: Press Release. Commentary: U.S. Trade Deficit: Not as Ominous as it Sounds • It's Still The Economy, Stupid • China's Trade Surplus Keeps Growing and Growing • Dollar Rangebound as Trade Deficit Higher Than Expected
Potentially impacted stocks and ETFs: Euro Currency Trust ETF (FXE)
TECHNOLOGY AND INTERNET
HEARD ON THE STREET: Dell Loses Lead, And Investors Can Take Heart [Wall Street Journal]
Summary: Six months ago, then global PC market share leader Dell, Inc., was taking a beating from Wall Street sell-side analysts for its declining margins and profits. As a result, shares traded for as low as $19 - a five-year low. Since share prices bottomed in July, they are up more than 20%. The reason: Dell is now focusing on profits as opposed to gaining market share. And while the company has fallen out of 1st place in global PC market share - replaced by rival Hewlett-Packard - the company's margins have started climbing again, as has the average price-per-unit of PC sales. Analysts have taken note and several have recently upgraded the stock's rating. Last week, UBS upgraded Dell to "neutral" from the equivalent of a sell rating, and upped its 12-month target price. Goldman Sachs also removed Dell from its list of sell targets and upgraded it to neutral, due to more disciplined product pricing at the company. While some skeptics remain, the overall tide seems to be turning favorably for Dell.
Related links: Additional media coverage: Reuters. Seeking Alpha commentary: Is Dell Hitting a Turning Point? • Currently, the Smart Bet's Against Lenovo • Dell Improving Its Margins? • Fitch: Convergys, CA and Dell Are Buyout Candidates • Dell Admirers Make Their Case • Dell’s Problems Run Deeper • Cramer's Take on DELL.
Potentially impacted stocks and ETFs: Dell (DELL), Hewlett-Packard (HPQ) • Competitors: Gateway (GTW), Sun Microsystems (SUNW), International Business Machines (IBM), Apple (AAPL), Lenovo Group (OTCPK:LNVGY) • ETFs: Internet Architecture HOLDRS (IAH), Vanguard Information Technology (VGT).
Nokia Chief Sees Opening in China [Wall Street Journal]
Summary: Nokia CEO Olli-Pekka Kallasvuo on a trip to China this week, noted the potential of a maturing mobile phone market in China, where replacement phones (which are usually "upgrades" to higher-end phones) make up an estimated 55% of the market and are seen growing to 80% by 2010. At the same time, China's mobile phone market is emerging because Nokia expects the number of subscribers to grow by 160 million over three years, in addition to the 443.2 million current subscribers. There were nearly 50 million new subscribers y-t-d through October. Kallasvuo also commented on the mobile phone being a substitute for a PC in China -- emphasizing the opportunity for people to get their first Internet experience with a mobile phone -- adding, "I think we can take value from the PC market in this domain..." Nokia has a partnership with China's leading search engine Baidu.com.
Related links: Additional coverage: People's Daily Online. Commentary: Nokia to Reclaim High-end Handset Throne • Nokia's Results -- Key Facts & Analysis • Merrill Lynch Ups Handset Sales Forecasts Believing 2006 Could Be Peak Year for Global Sales • Baidu Takeover Rumors: What Google and Yahoo Would Gain • Baidu Reports Strong Q3, But Stock Tanks on Lower Q4 Revenue Forecast. Earnings conference call transcripts: Nokia Q3 2006 and Baidu Q3 2006.
Potentially impacted stocks and ETFs: Nokia (NOK) and Baidu (BIDU) • Competitors: China Techfaith Wireless (CNTF), Motorola (MOT) • ETF: streetTRACKS Morgan Stanley Technology (MTK) -- Nokia is a 3% holding
Expedia 3Q Profit Falls On Charges [Business Week/AP]
Summary: Online travel bookings portal Expedia.com reported decreased profits of 28% in its recent quarter, balanced by an increased revenues of 5%. The company's earning break down as follows: net earnings were $59 million, or $0.17 per share, compared with $82 million, or EPS of 23 cents a year earlier. Excluding one-time items including the elimination of interest income from its former parent company, IAC/InterActiveCorp., Expedia's income was $117.2 million, or $0.34 a share, compared with $126.9 million or 35 cents per share, a year earlier. Analysts polled by Thomson were expecting EPS of just 30 cents. Revenue rose 5% to $613.9 million from $584.7 million in the year-ago quarter. Analysts were expected slightly lower revenue of $612 million. Expedia cited weakening profits from air travel booking as the main factor in its lowered net earnings, as airlines squeezed profits from 3rd party booking agencies by offering less compensation per ticket. This was balanced out by a 14% worldwide increase in hotel revenue, which translated into 5% growth in revenue per room night for Expedia. Shares responded by gaining 2.5% yesterday, before giving up 1.71% in after hours activity.
Related links: Expedia Q3 2006 Earnings Call Transcript. Additional earnings coverage: Reuters • WSJ • Eye For Travel.com. Seeking Alpha commentary: Expedia's Stock Fall Means Debt Covenant May Be Violated • Expedia Comments on Revenues in Europe • Priceline: Strong Growth, But That Doesn't Look Sustainable • The End of Orbitz as a Public Company.
Potentially impacted stocks and ETFs: Expedia (EXPE), IAC/InterActiveCorp. (IACI) • Competitors: Travelzoo (TZOO), priceline.com (PCLN), eLong (LONG), Ctrip.com (CTRP).
ENERGY AND MATERIALS
Summary: Crude prices may rise next week due to surging U.S. consumption as winter approaches. Twenty-one of 43 analysts surveyed by Bloomberg news expect prices to rise, 5 expect a drop and 17 were neutral. World oil demand normally peaks in Q4 as refineries increase heating fuel production. And in a Nov. 6 statement, Saudi oil minister Ali al-Naimi said OPEC may cut production when it meets on Dec. 14 by 1.2M barrels/day in an effort to stem the current price slide. Phil Flynn of Alaron Trading: "We've seen incredible demand for products, which has caused inventories to fall at a dramatic rate... We've been complacent about inventories for a while now but that may be changing as the surplus padding disappears. At the same time we are seeing OPEC cut output." On the neutral side, Gerard Burg of National Australia Bank: "Crude oil continues to fluctuate within a relatively narrow trading range... In the absence of a major disruption to supply, prices will remain range-constrained until demand builds toward the winter."
Related links: Commentary: Oil Industry Dropped Ball on Investment, IEA Claims • Saudi Threatens Further Production Cuts to Defend $60 Oil Price • Oil Prices Continue To Rise As U.S. Stockpiles Unexpectedly Fall • The Rise and Fall of Oil : Roach Motel Theory • Oil Economics in a Nutshell • Crude Reality: Supply > Demand
Potentially impacted stocks and ETFs: United States Oil Fund ETF (USO), Oil Service HOLDRs ETF (OIH)
New Clothing Lines and Rising Profits at Penney and Kohl’s [New York Times]
Summary: J.C Penney and Kohl's both posted strong third quarters yesterday. JCP's net income rose 23% to $287 million, or $1.26/share, beating analyst estimates of $1.23/share. Kohl's profits soared 45 percent, to $224.5 million, or 68 cents/share, beating analyst estimates of 64 cents/share. Sales at J.C. Penney climbed 6.7%, to $4.78 billion. Sales at Kohl’s rose 17%, to $3.64 billion. The sales increases have been pinned on the new exclusive brands that both stores have introduced for this year's holiday shopping season.
Related links: Earnings conference call transcripts: JCPenney Q3 2006. Press releases: JCPenney Third Quarter Results, JCPenney Comparable Store Sales Increase, Kohl's Corp. Third Quarter Results . Additional Earnings Coverage: Forbes, MarketWatch.com. Commentary: Where is the Retail Carnage? • Retail Beat: Merchandising is Key.
Potentially impacted stocks and ETFs: Kohl's (KSS), J.C. Penney (JCP) • Competitors: Target (TGT), Wal-Mart (WMT) • ETFs: PowerShares Dynamic Retail (PMR), iShares Russell Midcap Index (IWR) both have JCP as a top ten holding. Retail HOLDRS (RTH) has KSS as a top ten holding.
Summary: Genentech Inc., the world's #2 biotech company, said it plans to buy Tanox Inc. for about $919M ($20/share) in an effort to boost income through a jointly-developed anti-asthma treatment. Tanox shares jumped 43% in the post-market; Genentech shares were unaffected. As a result of the deal, Genentech will no longer need to pay royalties to Tanox in the sale of Xolair asthma treatment, as well as profiting from receiving Tanox royalty payments from Novartis AG, another Xolair partner. Genentech is holding a webcast at 8:30am to discuss the transaction.
Related links: Press release, webcast. Additional coverage: TheStreet.com. Commentary: Biotech Investing is Volatile, Unpredictable and Dangerous • Barron's Looks at Wall Street's Most Respected Companies. Conference call transcripts: Genentech Q3 2006
Potentially impacted stocks and ETFs: Genentech Inc. (DNA), Tanox Inc. (TNOX), Novartis AG (NVS). Genentech's main competitor is Amgen Inc. (AMGN) • ETFs: Biotech HOLDRs (BBH) has a 38% holding in DNA.
AIG Breezes by Estimates [TheStreet.com]
Summary: American International Group, the world's biggest insurance company, reported a more-than-doubling of Q3 earnings to $4.02bn, ahead of Street forecasts. Like its competitors, AIG was helped by the absence of any serious hurricanes or other weather catastrophes this season. EPS came in at $1.53 vs. analyst expectations of $1.43. Revenue, at $29.2 billion, also beat expectations by a whisker, and policy premiums rose 9.3%. Shares of AIG rose $0.81 to $68.85 on the news in after-hours trading.
Related links: Additional coverage: Reuters, MarketWatch • Commentary: Insurance Stocks: Wall Street's Biggest Secret
Potentially impacted stocks and ETFs: American International Group Inc. (AIG) • Competitors: Allianz AG (AZ), AXA (AXA), Chubb Corp. (CB), Hartford Financial Services Group Inc. (HIG) • ETFs: iShares Dow Jones US Insurance (IAK) [AIG represents 24% of its assets], iShares Russell 1000 Value Index (IWD), iShares Russell 3000 Value Index (IWW), DIAMONDS Trust, Series 1 (DIA), streetTRACKS DJ Wilshire Large Cap Value (ELV)
Summary: Generic drug manufacturer Perrigo Co. is recalling 11 million bottles of 500-mg. over-the-counter acetaminophen after metal fragments were discovered in some caplets. No one has been harmed by the contaminated pills. The bottles were distributed to various Wal-Mart, CVS and Safeway locations as well as dozens of other stores, although the FDA is not specifying a geographic concentration. Perrigo's shares dropped 6% on the news to $16.92. Acetaminophen is the active ingredient in Johnson & Johnson's Tylenol. The FDA and Perrigo are investigating the source of the fragments; both say there is no evidence as yet that it was an intentional contamination. The recall is expected to cost the company $2.9 million. Fiscal Q1 results will now include an after-tax charge of $667,000, or $0.01/share, because of the recall, reducing quarterly earnings to $0.18/share; but the company reiterated its fiscal 2007 full-year EPS forecast of $0.86-0.91.
Related links: Additional coverage: Wall Street Journal, Associated Press
Potentially impacted stocks: Perrigo Co. (PRGO), Wal-Mart (WMT), CVS (CVS), Safeway (SWY) • Competitors: Taro Pharmaceutical Industries (TARO), Teva Pharmaceutical Industries (TEVA)
Summary: 3M, manufacturer of items from Post-Its to stethoscopes, is selling its branded drug business in three deals totaling $2.1 billion. Graceway Pharmaceuticals Inc., Swedish drug manufacturer Meda AB and Australian investment group Archer Capital will purchase the company's global pharmaceutical units in deals expected to close in Q4. Pharmaceuticals represent about 20% of 3M's healthcare division, which saw sales grow 4.7% during the first three quarters -- slower than any other 3M unit. Graceway said the purchase fits its strategy of providing products that address therapeutic specialties; Meda said the acquisition of 3M's European unit will broaden its product offerings and help it approach its goal of becoming the leading specialty pharmaceutical company in Europe; and Archer Capital said it bought 3M's pharmaceuticals unit because of its diverse, high-growth products, strong market positions and growing geographic reach.
Related links: Additional commentary: Wall Street Journal, Bloomberg
Potentially impacted stocks and ETFs: 3M Co. (MMM) • Competitor: Nucryst Pharmaceuticals Corp. (NCST) • ETFs: Vanguard Industrials ETF (VIS), iShares KLD Select Social Index (KLD), DIAMONDS Trust, Series 1 (DIA), iShares Dow Jones US Industrial (IYJ), and Industrial Select Sector SPDR (XLI) have MMM as a top-10 holding
Summary: Viacom reported a drop in earnings due to lower sales at the box office and a compensation payment of $62 million to former CEO, Tom Freston. The recent CBS spinoff also announced that CFO Michael Dolan was leaving and would be replaced by chief administrative officer, Thomas Dooley. Viacom, which owns MTV, Dreamworks and other entertainment businesses earned $356.8 million, or 50 cents per share, from July to September compared to $423.3 million, or 56 cents per share for the same time last year. However, the company beat estimates of 48 cents a share and saw revenue rise 7% to $2.66 billion. "Considering the short time that Philippe Dauman has been in place as CEO, I am truly impressed with our solid third quarter results," said chairman and controlling sharholder, Sumner Redstone, who dismissed Freston in September because he was unhappy with share prices and the company's performance after leaving parent company CBS earlier in the year.
Related links: Earnings conference call: ViacomQ32006. Additional coverage: Marketwatch. Commentary: Viacom Missed MySpace But Not Interested in Facebook • Has MTV Lost Touch With Reality? • Freston's Firing a Big Step Backwards for Viacom
Potentially Impacted Stocks and ETFs: Viacom (VIA), Time Warner (TWX), CBS Corp (CBS) • Select Sector SPDR Consumer Discretionary (XLY)
Summary: Walt Disney reported stunning Q4 earnings after yesterday's market close. Net income reached $782 million, or 36 cents/share, double last year's $379 million, or 19 cents/share. Disney shares initially fell 73 cents to $32.85 in extended trading, then rose 48 cents, or 1.5 percent, to a five-year high of $33.58. Analysts pin these dramatic returns on both the film division's successes with "Pirates of the Caribbean: Dead Man's Chest" and "Cars" in addition to the CEO Robert Iger's decision to move Monday Night Football from ABC to ESPN. Disney spent $225 million on "Pirates" and the movie has grossed $1.06 billion. The Monday Night Football move resulted in soaring cable ratings and significantly helped the media unit reap $883 million in profit. Analysts are pleased with these results but expressed come concern about theme park profitability, given the recent weakness in consumer spending.
Related links: Earnings conference call transcript: Walt Disney Company F4Q06 . Disney press releases: Disney Reports FY 2006 Earnings. Additional earnings coverage: The Street.com • WSJ. Commentary: Web Video Market: Who Will Win The Big Ad Money? • Disney Offering Free TV Programing at ABC.com.
Potentially impacted stocks and ETFs: Walt Disney Company (DIS) • Competitors: CBS Corp. (CBS), News Corp. (NWS), Time Warner Inc. (TWX) • ETFs: Vanguard Consumer Discretionary VIPERs (VCR), PowerShares Dynamic Large Cap Growth (PWB), iShares Dow Jones US Consumer Services (IYC) all have DIS as a top-ten holding.
Summary: The Global Strategic Equities Fund of Dubai, managed by Sameer al-Ansari, CEO of Dubai International Capital, says it may make investments in Airbus parent EADS and also in a number of German companies including: Siemens, Deutsche Lufthansa, BASF and MAN. The fund will include investors from Qatar and Abu Dhabi state agencies, and plans to raise $2 billion over the next 3-6 months. Ansari said the fund will leverage the $2b to be able to spend $10b-$15b. Regarding Airbus, Ansari commented, "Share prices are on their knees. Airbus is a major problem. Where there is a problem, there is usually an opportunity." The fund will be conducting due diligence and holding talks with the above mentioned companies, many of which said they welcomed interest from any investor. EADS shares in Paris initially surged on the news and closed higher by 1.13%.
Potentially impacted stocks and ETFs: Siemens (SI), Deutsche Lufthansa (OTCQX:DLAKY), BASF (BF), Boeing (BA) • ETF: iShares MSCI Germany Index (EWG) -- Siemens is 8.86% of assets, BASF 4.64% and MAN 1.34%
China's Tom Online 3Q Profit Sinks [Business Week/AP]
Summary: TOMO's Q3 net income down 59% y-o-y to $5.3m, on 15.2% lower sales to $39m, due to policy changes by the government and China's mobile carriers requiring longer free trials for new services, new billing methods, and other restrictions. Wireless Internet services made up 89% of TOMO's revenues. CEO Wang Leilei comments, "I am confident Tom Online will be able to successfully navigate through this difficult period together with our partners." Forecasts continued weakness in Q4 -- expects revenue to fall to $34.5m-$35.5m. TOMO reports its venture with Skype had 23.5m registered users as of the end of Oct.; hopes to begin collecting revenue in early '07.
Related links: Earnings conference call transcripts: TOM Online Q3 2006. Press release: TOMO Q3 earnings. Additional coverage: WSJ and newratings.com: Morgan Stanley rates TOMO "overweight". Commentary: Chinese Internet Stocks Earnings and "Barbelling" • eBay Update: China, Skype, Paypal and New Holiday Features • eBay Losing in Asian Online Auctions, Tom Group Could Buy eBay China • IRG's Chinese Tech Stock Weekly.
Potentially impacted stocks and ETFs: TOM Online (TOMO) • Partners: China Mobile (CHL) and China Unicom (CHU) • Competitors: NetEase.com (NTES), SINA Corp (SINA) and Sohu.com (SOHU).
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Long Idea: Cisco: Catalysts That Make it a Buy
Short Idea: How to Short Homebuilders: Look for the Fastest Growers
Internet: Google Checkout May Be a Dud
Telecom: Ntl: Positive Spin Put on Overleveraged Assets
Hardware: Network Engines Reaches Its Inflection Point
Retail: Peet's Coffee Joins the Wayback Restatement Club
Consumer Electronics: Microsoft To Give Portion of Zune Sales To Universal In Attempt To Hurt Apple
Biotech: Thermogenesis Corp. Doubles Revenue, Cuts Loss
Gold: Klondex Mines' Gold Resources Selling for a Big Discount
Financial: Delta Financial Delivers Strong Quarter, Looks Cheap
Asia: Mizuho's Quiet NYSE Debut; Japan's Mega Banks' Stocks Slump
ETFs: Rydex's New Equal Weight Sector ETFs
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Earnings Conference Call Transcripts: Marchex • Ctrip.com • Sonic Solutions • KongZhong • GigaMedia • BT Group • Viacom • Avis Budget Group • IMAX • JCPenney • TOM Online • TXU • Jupitermedia • Autobytel • Hecla Mining • Expedia • NVIDIA • Hollywood Media • Walt Disney Company • Dolby Labs • Shanda • 51job
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