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MACRO AND HOUSING

Tuesday's Numbers: Strength in Service Sector, Labor Costs Falling

The service sector of the U.S. economy grew faster than analysts expected: According to figures released Tuesday by the Institute for Supply Management, activity in the sector rose to 58.9 in November from 57.1 in October -- analysts had forecast a drop to 55.5. Anything over 50 signals expansion, and below that contraction. This marked the index's 44th straight month of expansion. The service sector accounts for 2/3 of all U.S. economic activity. According to Stuart Hoffman of PNC Financial the 'surprise' reading "just reaffirms what the Fed and what the stock market have been saying: manufacturing and construction are weak, but there's strength in other parts of the economy." Construction had a decrease in business activity in October, but real estate and lending saw m/m growth. The prices paid index measures how businesses characterize costs of doing business, and is closely watched by Fed policymakers: the index rose to 55.6 from 51.9. New orders, employment indexes, and exports were up modestly. Separately, the Labor Department reported Q3 0.2% annual productivity growth in nonfarm businesses, vs. a 1.2% gain in Q2. Productivity measures the output for 1 hour of work, and is seen as a vital factor in long term economic growth, allowing companies to make greater profits, increase wages, without raising prices. Unit labor costs -- the cost of wages and benefits per unit of output -- were up 2.3% annually, after experiencing a 9% spike in Q1 and falling 2.4% in Q2. The overall slowdown in growth of unit labor costs is seen by the Fed as a welcome sign of slowing inflation.
• Sources: People's Daily, BusinessWeek/AP, WSJ (I, II)
• Related commentary: David Fry's Daily Market Outlook, Is Stagflation on the Horizon For 2007?, A Very Long Term Look at the Market, 'Goldilocks' Scenario in Danger
• Potentially impacted stocks and ETFs: S&P 500 Index (NYSEARCA:SPY), NASDAQ 100 Trust Shares ETF (QQQQ), iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

Toll Brothers' CEO: Housing Slowdown Is Stabilizing

Despite dismal Q4 results, Toll Brothers CEO Robert Toll announced on Tuesday that he's seen the bottom of the housing slump and it's in the northern Virginia/metro D.C. area. He also suspected possible stabilization in the Maryland TOL 6 12 06area. Analysts were surprised by Toll's boldness. Ivy Zelman of Credit Suisse: "I'm wondering which Kool-Aid you're drinking because I want some." Q4 company profits dropped 44%, to $173.8 million, or $1.07/share, from $310.3 million, or $1.84/share in 4Q05. Higher mortgage rates and declining demand for second and speculative homes sank new orders by 58%. Despite purchase incentives, new home cancellations remained at 42%. Toll Brothers' FY07 profit forecast was $260 million, or $1.58/share to $340 million, or $2.08/share. FY06 profit was $4.17/share. Company shares climbed $1.12, or 3.5 percent, to $33.03 on Tuesday.
• Sources: BusinessWeek, Bloomberg , MSNBC.com/Financial Times
• Related commentary: Toll Brothers' Single Digit P/E Out the Door, Bursting the Housing Bubble, David Fry's Daily Market Outlook. Conference Call Transcripts: Toll Brothers F4Q06 (Qtr End 10/31/06)
• Potentially impacted stocks and ETFs: Toll Brothers Inc. (NYSE:TOL) Competitors: Beazer Homes USA Inc. (NYSE:BZH), Lennar Corporation (NYSE:LEN), Centex Corp (CTX), KB Home (NYSE:KBH). ETFs: iShares Dow Jones US Home Construction (NYSEARCA:ITB), SPDR Homebuilders (NYSEARCA:XHB), and iShares Dow Jones US Home Construction (ITB) have either TOL or BZH as a top-ten holding.

TECHNOLOGY AND INTERNET

Major Reorganization At Yahoo Aims To Regain Lost Momentum

Yahoo CEO Terry Semel announced major changes in the company's executive and organizational structure Tuesday evening. Three new operating groups will be formed: Advertiser and Publisher (to be run by current CFO Susan Decker), Technology (to be run by CTO Farzad Nazem), and Audience (to be led by a yet-unnamed executive). COO Dan Rosensweig and Media Group head Lloyd Braun will leave Yahoo, which has been struggling to overcome poor revenue growth, internal dissent and a sagging stock price. Yahoo stated that its four key objectives in the restructure will be (1) expanding customer-centric culture, (2) creating leading social media environments, (3) leading in next-generation advertising platforms, and (4) driving organizational effectiveness and scale. The move quiets speculation that CEO Semel himself may be on his way out while supporting the theory that Yahoo is priming Decker to eventually replace Semel at the helm.
• Sources: Yahoo press release, Terry Semel's blog post, Wall St. Journal, New York Times, Associated Press, Bloomberg, BusinessWeek, CNET
• Related commentary: TechCrunch, Charlene Li (Forrester), Tom Foremski, Om Malik, PaidContent, Paul Kedrosky, Silicon Valley Watcher, Yahoo's Shake-Up: Decker Is Up To The Challenge, Yahoo's Reorganization: Where's David Filo?, Yahoo Memo Urges Wake-Up Call: Enough of the "Peanut Butter" Strategy!, The Winds of Change at Yahoo!, Yahoo: Find Your Strategic Advantage Against Google, Top Ten Candidates To Take Terry Semel's Job At Yahoo. Conference call transcripts: Yahoo! Q3 2006
• Potentially impacted stocks and ETFs: Yahoo (NASDAQ:YHOO). ETFs: Internet HOLDRs (NYSE:HHH)

IBM Rings Up Another Software Acquisition

IBM announced yesterday its acquisition of Consul, a privately held Dutch IT tracking and security software firm which does most of its development in its Herndon, Virginia office. Terms of the deal were not disclosed and Consul referred all calls directly to IBM. Consul's software lineup includes applications to help companies monitor system access, automate compliance reporting, secure mainframe computers, track unauthorized database usage and keep an eye on employees with access to sensitive corporate information. ibmIBM continues to actively grow its software business with 41 of its 67 acquisitions over the last five years being software companies. In the most recent quarter, software sales accounted for a fifth of IBM's revenue and about 40 percent of its earnings, compared with 29 percent five years ago. Consul has a prestigious list of clients including Blue Cross/Blue Shield, Fidelity Financial Services, Ford, Kroger, The New York Times, Office Depot, Philadelphia Stock Exchange, Wachovia and several government agencies.
• Sources: Press Release, AP, The Washington Post, Information Week. Conference call transcripts: IBM Q3 2006
• Related commentary: Data Monitor/ComputerWire on IBM's acquisition of Consul, Goldman On IT Trends: What Tech Companies Stand To Gain?, IBM's Acquisition Philosophy: Opportunity and Long Term Value
• Potentially impacted stocks and ETFs: International Business Machines (NYSE:IBM). Competitors: Hewlett-Packard (NYSE:HPQ), Oracle (NYSE:ORCL), SAP AG (NYSE:SAP), Sun Microsystems (SUNW), Cisco (NASDAQ:CSCO). ETFs: Vanguard Information Technology ETF (NYSEARCA:VGT), Internet Architecture HOLDRS (NYSE:IAH)

MEDIA

Australian Media Merger Boom: Will It Be Good For Rupert Murdoch?

Recently loosened media ownership laws have created a sector acquisitions boom in Australia worth A$11.6 billion. Joining the fray is John Fairfax Holdings Ltd., Australia's second-largest newspaper publisher, which will purchase Rural Press Ltd. for approximately A$2.7 billion ($2.1 billion). Rural Press is a rural newspaper publisher and radio broadcaster. News Corp. bought a 7.3% stake in Fairfax in October to prevent any takeover attempts. This acquisition will also ward off takeover attempts by billionaires James Packer and Kerry Stokes. The purchase will reunite Fairfax Holdings with its original founding family, which had lost control of the company in 1990. Fairfax hopes the merger will offer expanded Internet positioning. Fairfax expects the merger to save at least A$35 million a year within the first year to 18 months. This is Fairfax CEO David Kirk's third major purchase since he took the position 14 months ago.
• Sources: Bloomberg, Reuters [I, II]
• Related commentary: ESPN To Expand Broadcasts in Europe with NASN Purchase, New York Times Shares Drop as Greenberg Denies Buyout, Merger Mania Hits Publishing World, Satellite Radio Sales Suffering: More Fuel for the Sirius-XMSR Merger Fire?
• Potentially impacted stocks and ETFs: News Corp. (NASDAQ:NWS)

ESPN To Expand Broadcasts in Europe with NASN Purchase

ESPN announced a deal to purchase London-based North American Sports Network (NASN Ltd.) in an effort increase broadcasts of American sports events in Europe. The popular U.S. Sports cable channel has agreed to buy NASN Disney Entertainment Chart 6 12 06 6 12 06from Benchmark Capital Europe and Setanta Sports Holdings Ltd. Although executives did not disclose figures, an anonymous source said that NASN's price tag is somewhere between $107 and $120 million, including debt assumption. "Growing our business in Europe is a key strategic initiative for us," said Russell Wolff, managing director of ESPN International. NASN currently has 6 million subscribers and is the only station in Europe dedicated to broadcasting American sports. Through NASN, ESPN will obtain rights to show National Hockey League and Major League Baseball games throughout Europe, as well as exclusive rights to the National Football League in some countries. ABC, which is headed by Disney, owns 80% of ESPN, and Disney's shares were up 1.3% or 44 cents to $33.88.
• Sources: Newsday, TheStreet.com, Motley Fool. Conference call transcripts: Walt Disney Company 4Q06
• Potentially impacted stocks and ETFs: Walt Disney (NYSE:DIS) Competitors: CBS Corp. (NYSE:CBS), News Corp. (NWS), Time Warner Inc. (NYSE:TWX). ETFs: Vanguard Consumer Discretionary VIPERs (NYSEARCA:VCR), PowerShares Dynamic Large Cap Growth (NYSEARCA:PWB), iShares Dow Jones US Consumer Services (NYSEARCA:IYC)

TRANSPORTATION

Autozone's Earnings Increase 8.3%

Autozone reported an 8.3% earnings increase for the quarter as the result of its cutting costs, raising prices and improvingAutozone 12-04-06 its selection of in-demand parts. The top U.S. auto parts maker saw a net income increase of $1.73 per share or $129 million beating analysts' estimates of of $1.68 per share on revenue of $1.39 billion, and was up from $114.4 million last year. Autozone's revenue climbed 4.1% to $1.39 billion and its same-store sales increased 0.3%. "AutoZone managed well in the fiscal first quarter despite a still struggling low-end consumer," said Credit Suisse analyst Gary Balter, and added, "We expect better results as the macro environment stabilizes." Autozone's shares rose $2.21 to $116.68 Tuesday on the New York Stock Exchange.
• Sources: Autozone F1Q07 Conference call transcript, Reuters.com, Bloomberg, Businessweek ,Motley Fool
• Related commentary: AutoZone, America's Car-Mart To Report This Week: Upside in Store?, Eddie Lampert Leaves AutoZone's BOD
• Potentially impacted stocks and ETFs: Autozone (NYSE:AZO). Competitors: Genuine Parts Co (NYSE:GPC), Wal-Mart (NYSE:WMT)

Bridgestone and Bandag to Merge, Shares Burn Rubber

The American subsidiary of Japan's Bridgestone (the largest tire maker in the world) will acquire Bandag, the leading U.S. tire retreader, for $1.05 billion, or $50.75/share in cash -- a 12.8% premium on Monday's close of $45.04. The CEO of Bandag-BDG-1yr-chart-12-05-06Bridgestone America said the merger would allow for better servicing of customers "by offering a comprehensive tire maintenance solution." A Bridgestone spokeswoman cited rising customer demand for retreads. Bridgestone will gain a global retreading network of 900-plus dealers spanning nearly 100 countries, with sales totaling $921 million last year. Bloomberg quoted Bridgestone's president in Tokyo, who said, "Higher fuel prices are prompting customers to cut costs [by using retreads]. It takes time and costs to develop this size of business. We were able to get that all at once." The merger is expected to close by early Q2 next year, pending approval by shareholders and regulators. Bridgestone's Tokyo-listed shares gained 3.5% today.
• Sources: Press release [pdf], Bloomberg
• Potentially impacted stocks and ETFs: Bandag (NYSEARCA:BDG), Bridgestone (Tokyo: 5108). Competitors: Goodyear Tire & Rubber (NASDAQ:GT), Michelin (trades on Euronext: ML)

AEROSPACE AND DEFENSE

Boeing Lands Big Lufthansa Order, Again Besting Airbus

In what continues to be an amazing year for Boeing, the board of German airline Lufthansa is expected to vote favorably on a deal for 20 upgraded Boeing 747 jumbo jets, the first to order Boeing's updated version of its commercial airliner. boeing 747 Though the deal has been expected for some time, it continues a run of bad news for Boeing's top competitor, Airbus, who continues to drop market share to Boeing while developing the world's largest jumbo jet, the A380. The A380 development program is currently two years behind schedule and 30% over its $12 billion budget leading to cancellations in orders and a loss of confidence in the European airplane manufacturer. In more good news for Boeing yesterday, Continental Airlines announced it was upgraded its order for 12 Boeing 737 jetliners to the 737-900ER -- bringing its total order to 24 jets.
• Sources: WSJ, Reuters, Business Week. Conference call transcripts: Boeing Q3 2006
• Related commentary: Boeing and Airbus Project Future Direction of Their Industry, Boeing One-Ups Airbus Yet Again With FedEx Contract, Airbus' Loss in Market Share is Boeing's Gain, Boeing: Get Ready to Fly, The Jumbo Jet (Airbus) is Fast Becoming Irrelevant
• Potentially impacted stocks and ETFs: Boeing (NYSE:BA). Competitors: Embraer-Empresa Brasileir de Aero. (NYSE:ERJ). ETFs: iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA), PowerShares Aerospace & Defense (NYSEARCA:PPA)

FINANCIAL

U.S. Housing Weakness Hits HSBC

HSBC provided investors with a year-end trading update, but its warning of slower revenue growth "attributable largely" to weakness in the U.S. housing market (and in its trading arm), did not bring out the holiday spirit in investors. HSBC's shares listed in Hong Kong lost 1.73% to close at HK$142.10. HSBC forecasts further near-term risk in its U.S. lending portfolio stemming from higher short-term interest rates having resulted in an increase in delinquencies and an unfavorable housing market, which could in turn affect consumption and employment. HSBC-HBC-1yr-chart-12-05-06 HSBC said its growth in Asia, including Hong Kong, "continues to offer the strongest growth prospects ... in the near term, together with the resource rich economies of Latin America and the Middle East ..." thanks to sustained strength in China's economy. Bloomberg notes HSBC's chairman seeks to grow business in Asia to offset its exposure to North America and the U.K., where it makes nearly half its profit.
• Sources: Press release, Bloomberg
• Related commentary: HSBC Struggles Against Global I-banks
• Potentially impacted stocks and ETFs: HSBC (HBC). Competitors: Citigroup (NYSE:C), Goldman Sachs (NYSE:GS). ETFs: iShares S&P Global Financials (NYSEARCA:IXG), BLDRS Europe 100 ADR Index (NASDAQ:ADRU), BLDRS Developed Markets 100 ADR Index (NASDAQ:ADRD), streetTRACKS DJ Global Titans (NYSEARCA:DGT)

HEALTHCARE

Sanofi-Aventis Diet Drug Acomplia May Have Use in Treatment of Diabetes

acompliaEuropean pharmaceutical company Sanofi-Aventis reported results from its first non-obesity trial for its drug Acomplia (generically known as Rimonabant) and they were good: apparently the drug also reduces blood sugar levels in type 2 diabetics. Acomplia has been available in Europe for six months; it is still awaiting U.S. approval. Facts on the study: the drop-out rate due to side effects was 9.4% for patients receiving the drug vs. 2.1% for people receiving the placebo and the rate of "serious adverse events" was 6.5% for patients receiving Acomplia vs. 3.6% for patients taking the placebo. There are currently eight studies taking place worldwide which will help determine the true effectiveness of Acomplia in treating blood sugar levels of diabetes patients. snySanofi hopes the drug will ultimately be a $3 billion-a-year blockbuster. Shares climbed $1.13, or 2.6% on the news, to close at $45.09 on four times greater than average volume.
• Sources: Reuters, TheStreet.com
• Related commentary: Searching for Value Investments in the Drug Stock Universe, Cramer's take on SNY, Acomplia Report - Independent reporting on Acomplia/Rimbonabant
• Potentially impacted stocks and ETFs: Sanofi-Aventis (NYSE:SNY). Competitors: GlaxoSmithKline (NYSE:GSK), Novartis AG (NYSE:NVS), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Bristol Myers Squibb (NYSE:BMY), AstraZeneca (NYSE:AZN). ETFs: iShares S&P Global Healthcare Sect. (NYSEARCA:IXJ), Pharmaceutical HOLDRS (NYSEARCA:PPH), Vanguard Health Care ETF (NYSEARCA:VHT)

INTERNATIONAL

Bears Already Hibernating in Asia?

The bulls are out in full force in Asia and many indices are trading at multi-year and all-time highs. Bloomberg reports the Morgan Stanley Capital International Asia-Pacific Index is now trading at its highest level since mid-May. In Wednesday trading, Japanese stocks rallied as concerns over a weakening domestic economy eased with a Cabinet Office report which showed improving economic indicators. iSharesPacific-EPP-Japan-EWJ-SP500-1yr-chart-12-05-06 Investors bought back shares of Mitsubishi UFJ (+1.4%) and Toyota (+1.0%) after they traded lower earlier in the day. The only damper was in South Korea, where further strength in the won hurt stocks with large exposure to exporting. Meanwhile in Australia, BHP Billiton and Rio Tinto made nice gains of 1.5% and 2.0%, respectively.
• Sources: Bloomberg
• Related commentary: UBS: "We Are Very Bullish on Japan", Nikkei Primed for Big Rally, Surf's Up: Ride the Australian iShare Wave, International ETFs Gain From the Dollar's Loss
• Potentially impacted stocks and ETFs: BHP Billiton (NYSE:BHP), Mitsubishi UFJ (NYSE:MTU), Rio Tinto (RTP), Toyota (NYSE:TM). ETFs: iShares Hong Kong (NYSEARCA:EWH), Malaysia (NYSEARCA:EWM) and Singapore (NYSEARCA:EWS) are trading at their highest levels since summer 1997. iShares Taiwan (NYSEARCA:EWT) is trading a penny off its 52-wk and all-time closing high set this past May. iShares S. Korea (NYSEARCA:EWY) reflects the renewed bullishness in the region, having rebounded to $50/share, but is limited by forex impact; it reached an all-time high of $52.15 in May. iShares Australia (NYSEARCA:EWA) is trading near its all-time high set in recent trading, well above its May highs. iShares Japan (NYSEARCA:EWJ) is approaching its June trading level, after hitting a 6-year high in May. iShares MSCI Pacific ex-Japan Index (NYSEARCA:EPP) is trading at an all-time high as it continues to surge past May highs.

MUST-READS ON SEEKING ALPHA TODAY

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Software: What is Hyperion's Focus?
Consumer Electronics: Why Apple Gaming is a Necessary Evil
Media: "Sirius" Problems for Satellite Radio
Healthcare: Searching for Value Investments in the Drug Stock Universe
Biotech: Landmark Biotech Study Finds Challenges to Industry
Retail: I Don't Feel Like Chicken Tonight
Transport: In the Kerkorian Drama, GM is the Clear Winner
Gold: Promises, Promises: The Battle Between Novagold and Barrick Continues
Energy: Highest Yielding Utility Stocks: Electric Utilities
Financial: Bank of America: Looking Forward to 2007
Asia: Baidu Is Trying Way Too Hard To Please Wall Street
ETFs: Recognizing Leverage In The CEF-PGF Comparison
Small-Caps: TASE Luster Boosts Pointer and Top Image
IPO Analysis: Canadian Solar IPO Has Gone From Bad To Worse
Sound Money Tips: Tips on How to Perform a (Nearly) Free People Search
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Kroger, AutoZone, Toll Brothers, Novell

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