Summary: 56% of U.S. retailers missed sales growth targets for the month of November. The world's largest retailer, Wal-Mart, saw same-store decline of 0.1%, the first such fall since 1996, and delivered disappointing December guidance of flat to 1% growth. Federated Department Stores (+8.5%) and Target (+5.9%) were bright spots, posting better than expected November sales. J.C. Penney (+1.4%) and Gap (-8%) delivered sales figures below previous projections, and Pier One saw a big 15.3% decline. Overall November same-store sales have shown a 2.1% rise from a year ago. For December, retailers are optimistic that Christmas falling on a Monday will give a last-minute weekend sales boost.
Related links: WSJ interactive retail sales chart and November results chart • Media coverage: CNNMoney, WSJ. Commentary: Retailers' Heavy Discounting Should Pressure Q4 Margins, More Bad Data From The National Retail Federation?, David Strasser's Long Case For Lowe's Corp. Conference call transcripts: Wal-Mart F3Q07 (Qtr End 10/31/06), Federated Department Stores Q3 2006 .
Potentially impacted stocks and ETFs: Wal-Mart (WMT), Federated Department Stores (FD), J.C. Penney (JCP), Nordstrom (JWN), Target (TGT), Sears Holding (SHLD), Pier One (PIR), Kohl's (KSS), Saks (SKS) • ETFs: Retail HOLDRs (RTH), Consumer Discretionary SPDR (XLY)
Summary: H&R Block said Thursday that it almost doubled its second quarter loss and that its mortgage lending arm suffered massive losses. Overall 2Q loss came to $156.5 million or 49 cents/share, as compared to 2Q05's $81.3 million or 25 cents/share. Revenue shrank 7% to $563.2 million. Analysts had expected $582.2 million in revenues or 32 cents/share. Second quarter losses are the norm for H&R Block, as most of their revenue comes from the U.S. tax season. Option One, its mortgage lending subsidiary, suffered a 40% drop in sales, to $140.6 million. It had a $39 million loss compared to last year's $48.8 million profit. The company is closing 12 branches of Option One. It will also start selling a new refund-anticipation loan called "Instant Money" in order to compete with similar products from competitors. H&R Block's tax business reported revenue of $82 million, a 2% increase and a pretax loss of $167.4 million.
Related links: Press release: Business Wire. Media coverage: BusinessWeek, TheStreet.com, CNNMoney.com. Commentary: A Chip Off the Block Won't Cut it for H&R Anymore • H&R Block Beset by Everything but Locusts • Highest-Yielding 'Magic Formula' Stocks • Mortgage Buyers Finding More Bad Loans.
Potentially impacted stocks:H&R Block (HRB), Jackson Hewitt Tax Service Inc. (JTX), Intuit (INTU), PRG-Schultz International, Inc. (PRGX), Ameriprise Financial, Inc. (AMP).
TECHNOLOGY AND INTERNET
AMD Gets Subpoena in Graphics Chip Probe [Business Week] and AMD Tries To Leapfrog Intel By Showing Single-Die, Quad-Core Server Processor [Information Week]
Summary: The Justice Department issued a subpoena to Advanced Micro Devices Inc. Thursday regarding an investigation into possible antitrust violations in the graphics processors and cards business. AMD bought ATI Technologies Inc. earlier this year and entered into the graphics processor business. According to AMD, the Justice Department has not yet leveled any specific allegations against AMD or ATI and the scope of the Justice Department investigation is as of yet unclear. In other news, AMD tried to close the gap that rival Intel created when it came out with its line of quad-core processors this fall on Thursday by demonstrating the first native quad-core x86 server processor at its annual Industry Analyst Forum in Berkeley, though AMD's new processor family won't be ready to ship until mid-2007.
Related links: Press Release Media coverage: MarketWatch. Commentary: ATI Technologies Acquired by AMD • AMD's ATI Purchase Means an Edge Against Intel • How Will Advanced Micro Devices Come Up With the Money for the ATI Acquisition? • AMD Earnings Squeezed By ATI Acquisition? • Intel's New Chips May Reduce R&D Outlays; Can AMD Compete?. Conference call transcripts: AMD Q3 2006 • AMD Q2 2006.
Potentially impacted stocks and ETFs: Advanced Micro Devices (AMD), Allegheny Technologies Incorporated (ATI) • Copetitors: Intel (INTC), Nvidia (NVDA) • ETFs: iShares Goldman Sachs Semiconductor (IGW), Semiconductor HOLDRs (SMH).
Summary: Ken Kutaragi, developer of Sony Corp.'s PlayStation game console, stepped down from management of the unit after production delays have forced the company to slash shipment targets. Kaz Hirai, head of the U.S. game division, will take over as president of Sony Computer Entertainment. Sony CEO Howard Stringer says PlayStation 3 is "the most important product in the Sony Group," and is counting on PS3 sales to revive Sony's slumping shares, which have lost almost half their value in the past 6 years. The company likely missed its goal of having 400,000 players on sale in the U.S. Nov. 17, analysts said. On Oct. 20 Sony cut its income forecast to a five-year low of 80 billion yen ($688 million), down from an earlier estimate of 130 billion yen, due to a PlayStation 3 price cut and its battery recall, the largest in the history of consumer electronics. According to one pundit, Kutaragi's demotion signals that PlayStation 3 will be Sony's last console: Yuta Sakurai, an analyst at Nomura, believes that dropping an engineer like Kutaragi from day-to-day management of PlayStation is a sign Sony is shifting its focus from hardware to software. Sony's American depositary receipts closed down $0.10 to $39.41, and have fallen 3.4 percent this year. Each ADR is worth one ordinary share.
Related links: Media coverage: Financial Times, NY Times. Commentary: Tips on Buying a New Gaming Console • An Ugly Firsthand Account of Sony's PS3 Launch in Tokyo • Nintendo Takes an Early Lead Against Sony. Conference call transcripts: Sony F2Q06
Potentially impacted stocks and ETFs: Sony Corp. (SNE), Microsoft Corp. (MSFT) • ETFs: BLDRS Asia 50 ADR Index (ADRA)
MySpace Is in Talks on China Entry [Wall Street Journal]
Summary: News Corp.-owned MySpace.com is currently working with International Data Group's Chinese venture arm as well as former China Netcom CEO Edward Tian to gain a foothold for the social networking website in China though no deal has been completed yet. If the deal goes through, News Corp. Chairman Rupert Murdoch's wife, Wendi Deng, will probably join the board of MySpace China. MySpace's U.S. traffic growth has slowed as of late and the company has sought growth opportunities overseas to continue its strong growth. In the case of Chinese expansion, questions remain as to how successful a company like MySpace can be in comparison to native social networking sites. Google and eBay have both had trouble making in-roads in China due to local competition.
Related links: Commentary: MySpace Looking to Find Space in China • Web 2.0: What's Hot and What's Not • News Corp: Pay Attention to the MySpace Factor. Conference call transcripts: News Corp F1Q07 (Qtr End 9/30/06).
Potentially impacted stocks and ETFs: News Corp. (NWS).
Summary: Intuit announced it will purchase Digital Insight Corp., a banking software firm, for $1.35 billion in cash. Intuit will pay $39 per share, an 18% premium, for the company which makes TurboTax and Quicken software. Digital Insight will retain its CEO Jeff Stiefler as president of the new financial institutions business unit under the aegis of Intuit, which is taking on $1 billion in debt to finance the purchase. Dilutions of earnings by 2 to 3 cents a share excluding charges is expected for 2007, but the acquisition may increase earnings for Intuit in 2008. Shares of Digital Insight closed up 16% at $38.15. Intuit shares were down $0.37 (-1.2%) to $31.52.
Related links: Media coverage: BusinessWeek.com . Commentary: Intuit Opens Its Wallet For Banking Software • Intuit: Innovation and the Bottom Line • Intuit Shares Follow Seasonal Patterns • Google-Intuit Deal Should Bring in Small Businesses. Conference call transcripts: Intuit F1Q07
Potentially impacted stocks and ETFs: Intuit (INTU), Digital Insight (OTC:DGIN) • Competitors: H&R Block (HRB), Oracle (ORCL)
Summary: VeriSign announced the U.S. government approved a contract extending its lucrative management over ".com" internet domain names until 2012. The stock jumped 7.5% on the news. VeriSign's deal with ICANN (Internet Corporation for Assigned Names and Numbers), which required Federal approval, permits the company to raise its pricing by up to 7% for 4 of the next 6 years. The U.S. Commerce Dept. decision had been delayed almost a year following criticism from VeriSign competitors. As manager of the .com registry, VeriSign translates the words in an internet address into numbers that a server understands. Other domain name registrars pay VeriSign a fee for this service. A CIBC analyst says the VeriSign price increases will mean "an additional 10 cents in 2008 earnings, potentially growing to 94 cents, additive, in 2012."
Related links: Press release Media coverage: Reuters, Internet News. Commentary: RBC Upgrades Verisign After Jamba Sale, VeriSign's News Corp. Deal Signifies Renewed Focus - But Big Challenges Remain, 9 Reasons Why I'm Short Verisign (VRSN) . Conference call transcripts: VeriSign Q3 2006 .
Potentially impacted stocks and ETFs: Verisign (VRSN) • Competitors: Web.com Inc (WWWW), 24/7 (TFSM) • ETFs: First Trust Dow Jones Internet Index (FDN), Internet Infrastructure HOLDRs (IIH)
Activist Kerkorian Moves To Unload Entire GM Stake [Wall Street Journal]
Summary: According to "a person close to the matter" billionaire Kirk Kerkorian sold his last 28 million shares of General Motors Corp. yesterday at a modest profit. Sources say Kerkorian met with CEO Richard Wagoner Jr. a couple times since Kerkorian bought his stake last year, which he did in the hope of bringing about drastic change in the company. Mr. Kerkorian consistently said he was supportive of GM management, but grew increasingly frustrated that Wagoner rejected his proposals for bolder action to slim GM down. This summer Kerkorian proposed that GM form a global with Nissan Motor Co. and Renault SA. But in September Wagoner concluded the proposed alliance would benefit Renault and Nissan far more than GM; merger talks shut down after Mr. Wagoner said Nissan and Renault should pay GM billions of dollars up front to compensate for the disproportionate gains. Yesterday's sale amounts to Kerkorian's vote of non-confidence, having decided a major restructuring was impossible under the current management. Kerkorian's decision to sell of his holdings had been anticipated by some investors. Separately, GM closed a long-awaited deal to sell a 51% stake in the its finance arm, GMAC Financial Services, to a group led by Cerberus Capital Management LP. GM will receive $14 billion over three years that it can use to help restructure both its operations and those of former parts unit Delphi Corp., which GM has said could cost as much as $7.5b. GM's shares fell $0.27 (0.9%) to $29.23.
Related links: Commentary: Kerkorian Unloads General Motors While This Author Still Holds On • Kerkorian Sells Another 14 Million GM Shares • Kerkorian Sells Off 25% of His GM Stake In Exchange for MGM Mirage • Kerkorian 's Cut And Run in GM 's Cost-Cutting Story • With the GM Merger a No Go, What Kerkorian 's Next Move?. Conference call transcripts: GM Q3 2006
Potentially impacted stocks and ETFs: General Motors Corp. (GM), Nissan Motor Company Ltd. (OTCPK:NSANY). Competitors: Ford Motor Co. (F), DaimlerChrysler (DCX), Toyota Motor Corp. (TM), Honda Motor Co. (HMC)
Durect Inks Lucrative Nycomed Pact [Business Week]
Summary: Pharmaceutical company Durect Corp. recently announced a $200 million joint development contract with Danish drugmaker Nycomed to develop its Posidur postoperative pain treatment. Durect wil get an upfront fee of $14 million as well as future milestone payments of up to $188 million. Durect shares were up 20.3%, to $4.57 in aftermarket trading. According to Durect CEO James Brown, "Nycomed has an extensive hospital-based salesforce and will provide a dedicated salesforce to promote Posidur, which complements Nycomed's existing portfolio of pain management and hospital products." The companies will equally fund development of Posidur and Nycomed will hold exclusive marketing rights in Europe and other select countries, while Durect retains North American and Asian rights.
Related links: Commentary: Painkiller Deal Good News for Durect Corp..
Potentially impacted stocks and ETFs: Durect Corp. (DRRX).
Summary: Investors responded warmly to news that Pfizer expects its full-year adjusted earnings to be at least $2.05/share, from $2.00 previously, topping consensus estimates. Pfizer still expects '07 and '08 earnings to grow in the high single digits from the revised $2.05/share base. Furthermore, as part of its first R&D briefing for analysts since 2004, Pfizer said its drug pipeline of 242 trials across 11 therapeutic areas is its largest ever. Investors have been concerned about the threat of losing patent protection (by 2011) on drugs that drove almost half of Pfizer's $51b sales in '05. Pfizer said it will seek FDA approval in H2 '07 for torcetrapib, a cholesterol drug hailed as the most important drug in its pipeline. Also, Pfizer entered a $100m 5-year agreement with Scripps Research to collaborate in testing and treatments for diabetes, cancer and mental illness. Pfizer's shares gained 1.55% to close at $27.49.
Related links: Pfizer press release. Media coverage: Forbes and Reuters. Commentary: Pfizer's Sales Force Cut: Like 'The End of an Arms Race' • GlaxoSmithKline Likely To Cut Salesforce Next • Pfizer's Wake Up Call • Pharmaceutical Shares Slip on Concerns Over Democratic House.
Potentially impacted stocks and ETFs: Pfizer (PFE) • Competitors: Merck (MRK), Eli Lilly (LLY), Novartis AG (NVS), Wyeth (WYE) • ETFs: iShares Dow Jones US Pharmaceuticals (IHE), iShares Dow Jones US Healthcare (IYH), Pharmaceutical HOLDRs (PPH), Vanguard Health Care (VHT), Health Care Select SPDR (XLV), First Trust Morningstar Dividend Leaders (FDL)
Summary: Cardinal Health, the second largest U.S. drug distributor by revenue, announced plans to sell its manufacturing/packaging unit and focus on hospital and pharmacy customers. Proceeds from the manufacturing unit, which generates $1.8 billion in annual revenue, will be used to buy back up to $3 billion in company stock. The manufacturing unit employs about 10,000 at more than 30 worldwide sites. Earlier in the month Cardinal sold its healthcare marketing services business to a private equity firm. Cardinal stock rose 4.5% on news of the planned sale and buyback program and Deutsche Bank upgraded the stock, stating the manufacturing unit "has been a drag on the company's overall performance."
Related links: Media coverage: WSJ, Reuters. Commentary: Multiple Symptoms of Excessive Pay at Cardinal Health, Jim Cramer's take on Cardinal Health
Potentially impacted stocks and ETFs: Cardinal Health (CAH) • Competitors: AmerisourceBergen (ABC), McKesson (MCK)
Summary: Improving economic data supported a positive finish in a strong week for Japanese stocks in which the broad TOPIX Index had its best weekly performance in a year, gaining 4.4%. CPI rose 0.1% y-o-y in October, the fifth-consecutive increase, but did fall short of economists' estimate of 0.2%. October unemployment fell by 0.1% to 4.1%. Household spending declined 2.4% in October, but was better than an expected 4.0% drop. The debate continues whether the Bank of Japan will raise rates this month or wait until next year. A Mitsubishi UFJ Securities analyst commented, "There's no need to keep procrastinating as long as the central bank has already decided it's going to do it." Banks stand to benefit the most as lending margins would improve. Some analysts argue a 0.25% hike to a 0.50% target is too insignificant to move the market.
Related links: Media coverage: Bloomberg . Commentary: Bullish on Japan -- Nikkei Primed for Big Rally • What Happened to the Bull Market in Japan? • Weak Yen to Persist, BoJ Not Seen Hiking Rates Until Q1'07 • BoJ Keeps Target Interest Rate at 0.25% • Japan's Q3 GDP Surprises to Upside, Stocks Rebound.
Potentially impacted stocks and ETFs: Mitsubishi UFJ Financial Group (MTU), Mizuho Financial Group (MFG) • ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 Index (ITF)
China Tech Firms Gain Ground [Wall Street Journal]
Summary: A survey by McKinsey and Tsinghusa Univ. (China) shows Chinese tech firms are becoming increasingly competitive in terms of productivity and are moving to higher-end product segments. A Shanghai-based McKinsey director commented, "This is a major wakeup call for multinationals." Note the survey included Chinese subsidiaries of foreign companies, but one of the survey's surprising findings was private Chinese companies are particularly increasing productivity, matching or exceeding foreign rivals. Another development is Chinese firms expanding overseas largely "under the radar." Tech industry average ROE in China is almost double that of Germany, 12.1% vs. 6.8% respectively (in 2005), but still lags the U.S. average at 15.7%.
Related links: McKinsey publications on China. Commentary: Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future • BusinessWeek: Beyond Beijing - Selling Across China • IRG's Chinese Tech Stock Weekly Update (click for IRG archive).
Potentially impacted stocks and ETFs: ETFs: Based on data from ETFConnect.com, China Fund (CHN) has 13.2% of assets in IT (as of 10/31/06), iShares FTSE/Xinhua China 25 Index -- 21.4% Telecom (as of 10/31/06), Greater China Fund (GCH) -- 9.3% Technology, JF China Region Fund (JFC) -- 13% Semiconductors and 8.3% Electronic equip. (as of 6/31/06), PowerShares Golden Dragon Halter USX China (PGJ) -- 22.5% Telecom, 13.1% Internet, 5.8% Tech (as of 9/30/06)
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