AHEAD OF THE TAPE: False Bottom? [Wall Street Journal]
Summary: Since hitting their lows in July, homebuilders stocks are up 23%, but still trail July 2005 highs by 39%. The Commerce Dept. today reports on housing starts and building permits: Consensus estimates are that starts fell 5.6%, but that permits are up 0.1%. If correct, that would be the first up month since February. Yesterday, the National Association of Homebuilders reported that its "builders' assessment" number, while still low, rose for the second straight month. Recently, the University of Michigan saw a sharp swing higher in the number of consumers who say now is a good time to buy a house. Economists differ on where we're going from here: Lehman Brothers economist Ethan Harris sees housings sales stabilizing, while Bollinger Capital's John Bollinger says to be wary of the god-of-the-pits, who, "will allow you to pick the top once, pick the bottom once, and be wrong as often as you choose."
Related links: Commentary: Fed Minutes: Watching Inflation, Comfortable With Housing • Housing Bubble and Real Estate Market Tracker • Housing Bubble and Real Estate Market Tracker
Potentially impacted stocks and ETFs: ETFs: streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB), iShares Dow Jones US Home Construction (NYSEARCA:ITB), iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), iShares Cohen & Steers Realty Majors ETF (NYSEARCA:ICF)
Summary: The Consumer Price Index fell 0.5% in October, more than the expected 0.3%, thereby calming Fed concerns on inflation. The CPI was up 1.3% from a year earlier, the smallest y/o/y increase in four years. Many traders and economists see this as evidence the Fed won't raise rates further than the current 5.25% and may even begin cutting. Minutes of October's policy meeting indicate that inflation remained very much a matter of concern; there was no discussion of a rate cut. The core inflation figure (excluding food and energy) rose a less than expected 0.1%. Energy prices fell 7% in October, following September's 7.2% decline. Natural gas was down a record 7.7%.
Related links: Minutes from the Fed's October meeting • WSJ coverage of the inflation announcement • Commentary: CPI Report Shows Commodity Prices and Inflation Integrally Linked , Use Common Sense To Decipher Fed Comments , David Fry's Daily Market Outlook
TECHNOLOGY AND INTERNET
H-P Reaps Reward [TheStreet.com]
Summary: HP's Q4 earnings grew to $1.69b, or $0.60/share, from $416m, or $0.14/share last year, on sales of $24.6 billion, vs. $22.9b last year. To be fair, HP had $1.1b in restructuring costs last fiscal Q4. Excluding restructuring charges this Q4, HP earned $0.68, vs. analyst estimates of $0.64. Sales came in ahead of analysts polled by Thomson, expecting $24.1b. CEO Mark Hurd is credited with controlling costs as the company expanded its share in key markets. Still, Hurd commented, "We certainly aren't taking any victory lap here." According to Gartner research, HP overtook Dell as the world's largest PC maker. And its FY2006 revenue of $91.7b surpassed IBM to become the world's largest IT company. HP's shares closed 0.85% higher at $40.13, after hitting a 52-week high of $40.85 on Wed. Its shares fell about 1% in after-hours trading.
Related links: HP press releases: Earnings announcement and Earnings presentation [PDF]. • Media coverage: BusinessWeek and Forbes. Commentary: Citigroup: HP Should Outperform Dell Through Year-End • HP Ahead of Earnings: Price May Include a 'Mark Hurd Premium' • Dell Stonewalls Investors - Mum on SEC Investigation, Earnings • Now They're Really Upset With Dell • Dell Losing PC Market Share - And Wall Street Doesn't Care. Conference call transcripts: Hewlett-Packard F4Q06, Dell Q2 2007.
Potentially impacted stocks and ETFs: Hewlett-Packard (NYSE:HPQ) • Competitors: Dell (NASDAQ:DELL), Gateway (GTW), Canon (NYSE:CAJ), Lexmark Int'l (NYSE:LXK), IBM (NYSE:IBM), Sun Micro (SUNW) • ETFs: Technology Select Sector SPDR (NYSEARCA:XLK), Internet Architecture HOLDRs (NYSE:IAH), iShares Goldman Sachs Tech. (NYSEARCA:IGM), iShares S&P Global Tech. (NYSEARCA:IXN), iShares Dow Jones US Tech. (NYSEARCA:IYW), streetTRACKS Morgan Stanley Tech. (NYSEARCA:MTK)
Blog Entrepreneur Leaves AOL [New York Times]
Summary: Jason Calacanis, who sold his company Weblogs Inc. to AOL last year and ran AOL's Netscape division, resigned his position following AOL's firing of CEO Jonathan Miller yesterday. Calacanis called Miller's ousting 'perplexing' and declared 'I'm not inclined to start over with a new guy.'
Related links: TechCrunch's first report of the story • Calacanis' statement on his blog • Thomas Hawk comments
Related stocks: Time Warner (NYSE:TWX)
Summary: Justice Dept. antitrust chief Thomas Barnett brushed aside criticism from two Democratic congressmen of his agency's recent unconditional approval of AT&T's $80 billion BellSouth buyout. Stating 'the mere size of a company... doesn't tell you whether a merger is going to harm consumer welfare' in this era, Barnett said 'it's a pretty straightforward deal for us.' The last regulatory hurdle remaining is the FCC, which has delayed a final vote on it three times. Some consumer groups have criticized the merger as placing too much of the telecom infrastructure under one company's control -- AT&T would gain complete power over the nation's largest cellular provider, Cingular Wireless, jointly owned by the two companies.
Related links: Media coverage: WSJ article . Commentary: Citi: Buy AT&T and Sell Verizon • Apple's iPhone Would Undermine Carriers' Handset Domination . Conference call transcripts: AT&T Q3 2006 Earnings Call Transcript .
Potentially impacted stocks and ETFs: AT&T (NYSE:T), BellSouth (BLS) • ETFs: iShares DJ Telecom (NYSEARCA:IYZ), ML Telecom HOLDR (NYSEARCA:TTH)
Summary: Starbucks, the world's largest coffee retailer, posted earnings of $0.15/share ($117m), adjusted to $0.17/share after accounting changes, which was in-line with both last year's earnings and analyst estimates. Revenues were $2b, up 20%, and in-line with estimates. It opened a record 2,200 new stores in fiscal 2006 -- it now has 12,440 cafes worldwide -- and said it plans to open another 2,400 in 2007. Growth guidance for 2007 was 20%. In trading yesterday, shares were up $0.46 (1.2%), but fell $2.18 (5%) after hours on the news. Sharon Zackfia of William Blair: "It needed to be a perfect quarter, and it was a very good quarter, but it wasn't perfect." Some analysts expressed concerns about increased payroll costs; the company says they were due to staffing more stores with assistant managers, part of its strategy to ensure the company has enough trained managers to keep its growing number of stores running smoothly.
Related links: Media coverage: NY Times, MarketWatch. Commentary: Starbucks: The Sky's the Limit • Starbucks Increasing Stores, Not Concerned about Saturation • One Reason Starbucks Continues to Succeed: Partnering With Local Businesses Abroad • Hyperactive Starbucks Traders Need to Switch to Decaf. Conference call transcripts: F4Q06.
Potentially impacted stocks and ETFs: Starbucks (NASDAQ:SBUX) • Competitors: Diedrich Coffee (DDRX), New World Restaurant Group (NWRG.PK), Pete's Coffee and Tea (NASDAQ:PEET), Caribou Coffee Company (NASDAQ:CBOU), Green Mountain Coffee Roasters (NASDAQ:GMCR) • ETFs: PowerShares Dyn Leisure & Entertainment ETF (NYSEARCA:PEJ) and Consumer Discretionary SPDR ETF (NYSEARCA:XLY) have SBUX as a top-10 holding.
HEARD ON THE STREET: At Sears, Investing -- Not Retail -- Drives Profit [Wall Street Journal]
Summary: Sears Holdings posted a strong quarter, tripling earnings from the previous year period, by undertaking financial derivatives known as "total-return swaps," which are agreements that take on the big risks of highly leveraged investments in equities or other assets without actually buying them or assuming debt. For the quarter, net income was $196 million, or $1.27 a share, as compared to earnings of $58 million, or 35 cents a share a year earlier. Retail figures were weaker-than-expected: revenue fell 1.5% to $11.94 billion from $12.12 billion, largely a result of same-store sales falling 3% overall (including Sears and Kmart stores). Despite the highly improved earnings, investors fled the stock yesterday due to the poor retail figures sending shares down more than 5.5%, or $9.89, to $169.26.
Related links: Media coverage: Newsday.com/AP • Forbes.com. Commentary: Lampert May Turn Sears Into a Berkshire Hathaway • Sears: Don't Invest For Retail Alone • Sears Holdings: A Hedge Fund Struggling With Declining Retail • The Next Berkshire Hathaway? • Sears Holdings: Expect Growth Through Acquisitions.
Potentially impacted stocks and ETFs: Sears Holdings Corporation (NASDAQ:SHLD) • Competitors: Wal-Mart (NYSE:WMT), J.C. Penney (NYSE:JCP), Target (NYSE:TGT), Federated Department Stores (FD), Kohl's (NYSE:KSS) • ETFs: PowerShares Dynamic Retail (NYSEARCA:PMR), Retail HOLDERS (NYSEARCA:RTH).
Summary: Retailer Gap Inc.'s woes continue: Profits dropped 11% in Q3 to $0.23/share ($189m), and it lowered its full-year guidance to $1.01-$1.06, down from $1.08-$1.12. Sales were unchanged at $3.86b, but same-store sales were down 5%. CEO Paul Pressler: "We are maniacally focused on our turnaround in the short run." But six months ago Pressler predicted Gap would by now already be headed up. This was Gap's ninth straight quarter of sales erosion, which has spurred rumors its board may fire Pressler. Some investors are positive, citing increased financial discipline and trendier clothing; others say the lack of concrete customer reaction proves Gap has missed the mark. The poor performance wasn't a surprise because Gap already warned two weeks ago. Gap shares were down $0.22 yesterday, and another $0.45 after-hours, to $19.35.
Related links: Press Release. Conference call transcript: Q3 2006. Media coverage: Reuters, Bloomberg, WSJ. Commentary: Holiday Sales: Will Retailers See Red? • Retailers Suffer Weak Sales in Run-Up to Holidays • Gap's Employee Productivity Lags its Peers • Jim Cramer's Take on GPS.
Potentially impacted stocks and ETFs: Gap Inc. (NYSE:GPS) • Competitors: Wal-Mart Stores Inc. (WMT), Hot Topic Inc. (NASDAQ:HOTT), Abercrombie & Fitch Co. (NYSE:ANF), American Eagle Outfitters Inc. (AEOS), Pacific Sunwear of California Inc. (NASDAQ:PSUN) • ETFs: PowerShares Dynamic Retail (PMR), ST SPDR RETAIL ETF (NYSEARCA:XRT), iShares Dow Jones US Consumer Goods ETF (NYSEARCA:IYK)
Nymex IPO Looks Stellar [TheStreet.com]
Summary: One of the last big exchanges to go public, The New York Mercantile Exchange [parent: NYMEX Holdings] is expected to jump in price when it goes public with this morning's bell (pictured: NYMEX crude-oil trading pit). Trading under the ticker NMX, the shares were priced at $59 last night - above the $54 -$57 range they were expected to be priced within. The IPO of 6.5 million shares is expected to raise $384 million for NYMEX Holdings; with a total of 89 million shares outstanding, NYMEX will start the day with a market cap of $5.25 billion.
Related links: Press Release. Commentary: Phil Davis' Comments on Nymex IPO and Oil Prices • Jim Cramer's Stop Trading! Nipping at Nymex • Nymex Energy Exchange Files for IPO.
Potentially impacted stocks and ETFs: NYMEX Holdings (NMX) • Competitors: CBOT Holdings (BOT), Chicago Mercantile Exchange Holdings (NASDAQ:CME), International Securities Exchange Hldgs (ISE), Nasdaq Stock Market Inc. (NASDAQ:NDAQ), NYSE Group, Inc. (NYSE:NYX).
Summary: Seventy-three percent of HCA Inc. shareholders voted to approve its $21.3b leveraged buyout yesterday which will take the #1 U.S. hospital chain private; it's the second largest LBO in history. While some shareholders filed lawsuits alleging they were not getting fair value, yesterday's vote, says CEO Jack Bovender, proves, "an overwhelming majority of the shareholders felt it was a fair price." Shareholders will get $51/share, an 18% premium on its price when the deal was first announced. Buyers will fund the deal with $16b of new debt, and assume HCA's existing $11.7b debt. HCA operates 172 hospitals and 95 freestanding surgery centers and outpatient service centers in 21 states, Britain and Switzerland. Recently, it has struggled with poor earnings, slow growth and escalating expenses. By going private and eliminating Wall Street scrutiny, buyers hope HCA will be able focus on cash flow rather than earnings. 17 years ago, a management-led buyout took HCA private for three years. Analysts say it's likely HCA could try to go public again in the next five to seven years. John Ransom of Raymond James: "The buyout investors have to realize their investment at some point. With a company like HCA, you either would have to take it public or sell it to another buyer."
Related links: Press release, website. Media coverage: Business Week, Boston Globe. Commentary: Credit-Default Swap Traders Profiting from Inside Info on LBOs? • Insider Trading Based on Credit Default Swaps Persists • Investors Watching Management-Led Buyouts • LBOs Making Executives Very, Very Rich • Jim Cramer on HCA
Potentially impacted stocks and ETFs: HCA Inc. (NYSE:HCA) • Competitors: Triad Hospitals Inc. (NYSE:TRI), Tenet Healthcare Corp. (NYSE:THC) • ETFs: iShares Dow Jones US Healthcare Provider (NYSEARCA:IHF)
In a Big Bet on Radio, Private-Equity Group Buys Clear Channel [Wall Street Journal]
Summary: Thomas H. Lee Partners and Bain Capital outbid a three-party group including Providence Equity, KKR and Blackstone to acquire Clear Channel Communications for $37.60/share. The latter party bid $36.85. The deal is valued at $26.7b including $8b in debt. Not contingent on the deal, Clear Channel announced it is divesting 448 non-top 100 radio stations and is exiting the TV business. The Mays family will stay on to manage the firm, and to assuage investor concerns over unfair compensation from the private-equity deal, has given up a sizable portion of their change-of-control benefits. Thomas Lee and Bain see annual returns coming in at 20%-30%. Despite problems in the radio business due to intense competition from other media and entertainment sources, private-equity is attracted to the steady cash flows and possibility of growth via new technology. Clear Channel's CEO commented yesterday, "The market was not appreciating the equity, and we didn’t see that turning around." Its shares gained 3.63% on the news to close at $35.36.
Related links: Clear Channel press releases: Merger Agreement with Private Equity and Radio Station Divestitures, Exiting TV Business. • Media coverage: New York Times. Commentary: Clear Channel Bidding War Rages On • In Clear Channel Buyout Talks, Billboards Loom Large • Clear Channel Shows Mixed Q3 Results Ahead of Possible Sale. Conference call transcripts: Clear Channel Q3 2006.
Potentially impacted stocks and ETFs: Clear Channel (NYSE:CCU) • Competitors: Citadel Broadcasting (CDL), Cox Radio Inc. (CXR), Cumulus Media (NASDAQ:CMLS), Entercom Comm. (NYSE:ETM), Sirius Satellite Radio (NASDAQ:SIRI), XM Satellite Radio (XMSR) • ETF: PowerShares Dynamic Media (NYSEARCA:PBS)
Reader’s Digest Agrees to Be Sold in $1.6 Billion Deal [New York Times]
Summary: The Reader’s Digest Association agreed to a $1.6 billion takeover offer yesterday which will end the company's run as a publicly-traded issue. While the nearly century old company is best-known for its pocket sized magazine of the same name, its holdings include several other magazines including the largest-selling North American food magazine Taste of Home and the fast-growing Everyday With Rachael Ray. The takeover is led by Ripplewood Holdings and represents a 43% premium over the company’s August year-low stock price of $11.83 (shares closed at $16.70 yesterday on news of the buyout). The investor group also includes Merrill Lynch Capital and the J. Rothschild Group; the acquisition can still be usurped by a higher bid.
Related links: Press Releases: PR Newswire • PR Newswire: Blue Harbour Group Comments on Reader's Digest Acquisition • 8K. Media coverage: Newsday.com/AP • LA Times. Commentary: Fewer Newspapers With Lower Circulation Is the Way of the Future • Newspapers: Another Slide Coming? • Barron's Buries the Lede on Newspaper Stocks.
Potentially impacted stocks and ETFs: The Reader's Digest Association (NASDAQ:RDA), Merrill Lynch (MER) • Competitors: Tribune Company (TRB), The Washington Post (WPO), Gannett Co. (NYSE:GCI), The McClatchy Company (NYSE:MNI), The NY Times Company (NYSE:NYT).
Citigroup's Risky Win in China [Wall Street Journal]
Summary: As expected, Citigroup confirmed its $3.1b deal with four Chinese companies, including a partial stake sale to IBM, to take 85.6% control of China's Guangdong Development Bank [GDB]. After a year of tough negotiations and bidding, Citi now must work on restructuring the bank to improve among other things, its assets and lending. Citi was forced to limit its stake to 20% per Chinese law and will sell an additional 5% to IBM. The deal is expected to close by the end of the year. Although this is a huge development for Citi expanding its operations in China from 6 branches to more than 500, GDB is believed to have nonperforming loans around 20% of its total lending. The figure is substantially higher for loans to its own government shareholders. Citigroup plans to play a key role in the bank's daily operations. GDB reportedly earned $210m in pre-tax profit in the first-half of '06, and has $48b in assets according to unaudited results.
Related links: Citigroup press release. • Media coverage: FT.com -- China's new banking regulations, MarketWatch and USAToday. Commentary: Citi Wins Bid for Chinese Bank; Advises US Airways in Hostile Bid for Delta • BofA, Citi Trade Lower after Q3 Earnings • China's Banking Sector Looks Better with New Law. Conference call transcripts: Citigroup Q3 2006.
Potentially impacted stocks and ETFs: Citigroup (NYSE:C), IBM (IBM) • Competitors: Bank of America (NYSE:BAC), HSBC (HBC) • ETFs: First Trust Morningstar Div Leaders (NYSEARCA:FDL), WisdomTree High-Yielding Equity (NYSEARCA:DHS), streetTRACKS KBW Bank (NYSEARCA:KBE), Vanguard Financials (NYSEARCA:VFH)
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