Fed Leaves Short-Term Rates at 5.25%
The Fed has left short-term interest rates unchanged at 5.25% for the fourth consecutive time, and has reiterated its belief that inflation is the greatest threat to the country's economy. Ten-year Treasuries rose and the yield fell, indicating that bond traders believe the Fed is succeeding at containing inflation. Though traders in the Fed funds market are betting that rates will be cut in the relatively near future, many economists believe the economy will have to weaken much more before the Fed takes that step. In August, the Fed took a breather after two years of rate increases in the belief that the slowing economy would keep inflation under control -- a gamble that seems to have paid off, as prices have indeed come down since then. Still, growth might slow too abruptly for such a strategy, due to what Fed Chairman Ben Bernanke terms the "substantial" housing slowdown (among other factors). If that occurs, a rate cut is likely. The economy has already slowed to 2.2% in the third quarter, in sharp contrast to the 5.6% figure posted in the first quarter.
• Sources: New York Times, Business Week, Bloomberg, Wall Street Journal
• Related commentary: Key Word From the Fed Statement: 'Substantial', Bernanke Sounds Positive, Yet Cautious Note on the Economy, CPI Report Should Calm Bernanke's Inflation Concerns, Bernanke Comments Reinforce Stable Interest Rates View
• Potentially impacted ETFs: Total Stock Market VIPERs (VTI), Standard & Poor's 500 Index Depository Receipts (SPY), DIAMONDS Trust (DIA), iShares S & P 500 (IVV)
U.S. Trade Deficit Narrows To Near Five-Year Low
Lower imported oil prices and robust international demand for U.S. goods narrowed the U.S. trade deficit to $58.9 billion (8.4%) in October -- a nearly five-year low. This despite a record shortfall with China, which will soon surpass Mexico as America's second-largest trading partner behind Canada. The weaker dollar may continue to spur U.S. exports to Asia and Europe, which continue to show strong demand for U.S. goods. This may be enough to keep the U.S. economy expanding despite ongoing weakness in the domestic housing sector. Imports of goods and services fell 2.7% in October, the most since December 2001, to $182.5 billion; exports rose 0.2% to $123.6 billion. Economists had expected the October trade deficit to be $63 billion. Treasury Secretary Paulson will travel to Beijing this week to address the broadening trade gap, among other issues.
• Sources: New York Times, WSJ, Bloomberg, MarketWatch, Reuters
• Related commentary: WSJ: Economists react, U.S. Trade Deficit: Not as Ominous as it Sounds, Why The Dollar Hasn't Collapsed Amidst The Trade Deficit, Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future
TECHNOLOGY AND INTERNET
Google To Issue Transferable Stock Options
Google announced it will issue its employees 'transferable stock options' which will allow bids from other investors and financial institutions. Morgan Stanley is setting up the innovative program which may pave the way for other companies. Google has been in the midst of an intensive hiring spree since 2004 which is likely to continue as the company grows. Google has already seen its stock climb from an IPO of $85 to a recent $512. Stock options allow the holder to purchase the stock for up to ten years at the price set when the options are granted. The transition may lower Google's profit next year, but it isn't expected to affect the company's market value. What's in it for Google? Some employees will be enticed to settle for fewer options in pay packages, and the options may lure high-profile employees with their appeal.
• Sources: Associated Press , New York Times, CBS News. Conference call transcripts: Google Q306
• Related commentary: Google Earnings Growth To Settle At 28%, Google Finance Has a New Look, Trying to do Business with Google.
• Potentially impacted stocks and ETFs: Google (GOOG), Morgan Stanley (MS). Competitors: Yahoo (YHOO). ETFs: Internet HOLDRs (HHH)
Yahoo Expands Panama Launch to Newcomers
Following the successful initial launch of its Panama advertising system to existing Yahoo ad customers, the company began yesterday to allow use of the system by newcomers in hopes it will begin to draw competitors' business. Long second to Google in the online search ad market, Yahoo has been banking on Panama to even the playing field with Google. According to Yahoo advertising SVP Steve Mitgang, "In the past two months, we have gotten nothing short of extraordinarily positive responses... The systems are obviously at a level of scale, performance and stability we think we can take on all comers." Yahoo shares were up nearly 1% yesterday on news of the expanded release of Panama to close at $26.75.
• Sources: Reuters, MarketWatch. Conference call transcripts: Yahoo! Q3 2006
• Related commentary: Panama Now Open to New U.S. Advertisers, Headlines Aside, Internet Advertising Growth Has Stalled, Major Reorganization At Yahoo Aims To Regain Lost Momentum
• Potentially impacted stocks and ETFs: Yahoo! (YHOO). Competitors: Google (GOOG), Microsoft (MSFT), IAC Interactive (IACI). ETFs: First Tr DJ Internet Index Fd (FDN), Internet Architecture HOLDRS (IAH).
Fox Interactive/MySpace Beats Yahoo in November Page Views
Fox Interactive, a division of News Corp which includes the prominent MySpace, reported a 9% increase in the number of pages viewed last month, beating out internet giant Yahoo. Rupert Murdoch's company reported an increase of 39.5 million pages viewed in November from 38.7 million in October, while Yahoo's total pages viewed decreased from 41.6 million in October to 38.1 million in November. MySpace, plays a large role in News Corp's success; Yahoo counters that visitors spend an average of 5.5 hours on Yahoo compared with 4 hours on MySpace, and that pages viewed is not a reliable measure of its popularity because the company's new Web 2.0 technology fits more content onto fewer pages. Yahoo is still the leader in unique visitors with 129.9 million in November, while MySpace had 57.2 million.
• Sources: RedHerring.com, Search Engine Watch. Conference call transcripts: News Corp. F1Q07, Yahoo F3Q06
• Related commentary: And the Top Media Company of 2006 Is..., Will Yahoo!'s Xie Wen Jump to MySpace China?, Social Networks Now Driving Significant Retail Traffic, Open Letter To Terry Semel Of Yahoo!
• Potentially impacted stocks and ETFs: News Corp. (NWS), Yahoo (YHOO). Competitors: Time Warner (TWX), Microsoft (MSFT), Google (GOOG).ETFs: PowerShares Dynamic Media Portfolio (PBS), Internet HOLDRs (HHH)
The Apple iTunes Debate Rages On
A Forrester Research Inc. report claims sales at Apple's iTunes store fell off significantly during the first half of 2006. Monthly iTunes transactions declined 58%, while the average dollar-amount per purchase declined 17%, leading to a 65% overall drop in monthly iTunes revenue. Forrester analyst Josh Bernoff says it's too soon to tell whether the decline is seasonal or if demand for digital music is tailing off. He sees no serious implications for Apple, which continues to make most of its profits selling iPods, computers and other gadgets. While the report sent Apple shares down $2.61 (2.9%) to $86.14 in trading yesterday, the company and several analysts questioned its validity. Apple spokeswoman Natalie Kerris said, "The conclusion that iTunes sales are slowing is simply incorrect," adding that iTunes sales are 6% of all music sold in the U.S., making it the fourth largest music retailer. Pacific Crest analyst Steve Lidberg said in a note yesterday that he doesn't see a slowdown in digital music sales, citing data that shows weekly digital album sales have more than doubled. Advertising analyst Carl Howe concluded based on independent analysis that iTunes sales growth continues to improve dramatically, with a billion songs sold over the last year and songs sold per iPod nearly doubling over the last three years. During an October conference call, Apple Chief Financial Officer Peter Oppenheimer told analysts, "Our view continues to be that selling music and TV shows and now movies helps us to sell iPods and accessories."
• Sources: Reuters, TheStreet, Bloomberg, PaidContent.org. Conference call transcripts: Apple F4Q06 (Qtr End 9/30/06)
• Related commentary: High School Math 101: iTunes Sales Not Collapsing, Apple Stock Slips: iTunes Slowdown? iPod Peaking?, Survey Shows There May Be Hope for Microsoft's Zune After All, No Growth In Digital Music Sales?
• Potentially impacted stocks and ETFs: Apple (AAPL). Competitors: Microsoft (MSFT), SanDisk (SNDK).
IBM, Yahoo To Challenge Google's Enterprise Search With Free Product
IBM and Yahoo will together offer a free enterprise search product, a move designed to challenge Google's Mini search products priced between $2,000-$30,000 and similar midrange products from Microsoft, SAP and Oracle. "IBM OmniFind Yahoo Edition" will combine Yahoo internet search with a scaled-down version of IBM's proprietary OmniFind, which helps workers at businesses and organizations find internal files. IBM appears to be making the move to convince small to midsize businesses of the power of enterprise search, while Yahoo appears interested in increasing its web-search marketshare in the workplace. While the challenge will certainly impact Google, the company receives less than 1% of its revenue from its enterprise search products.
• Sources: Associated Press, TheStreet.com, WSJ
• Related commentary: IBM: You Don't Need a Computer to See Its Growth Potential, coverage of enterprise software • Conference call transcripts: IBM Q3 2006, Yahoo! Q3 2006, Google Q3 2006
• Potentially impacted stocks and ETFs: Google (GOOG), Yahoo (YHOO), IBM (IBM) Competitors: Microsoft (MSFT), SAP (SAP), Oracle (ORCL)
The Chandler Family Takes Tribune Co.'s Fate Into Its Own Hands
The Chandler Family, 20% owners and long-time critics of the Tribune Company, have begun talking with several private equity firms about forming a consortium to become majority shareholders in Tribune, the New York Times reported this morning. The family, one of Southern California's most powerful has clashed with Tribune's management for years and six months ago, got the company to agree to put itself on the auction block. However bids have been slow in coming, and for much less than the company anticipated, in large part due to the heavy tax payments that will accompany any transfer of the company. As insiders, the Chandlers can avoid many of the taxation issues while spinning off segments of the diversified media company, which owns two of the nation's largest papers - the L.A. Times and Chicago Tribune - two dozen TV stations and the Chicago Cubs. Neither the Chandlers nor the Tribune were available for comment.
• Sources: NY Times, Reuters, MarketWatch. Conference call transcripts: Tribune Q3 2006
• Related commentary: Tribune Could Be Bought Out By Two LA Billionaires, Fewer Newspapers With Lower Circulation Is the Way of the Future, Low-Balled in Its Bid to Sell, Tribune Company Ponders Its Options, Newspapers: Another Slide Coming?
• Potentially impacted stocks and ETFs: Tribune Company (TRB). Competitors: The New York Times Co. (NYT), Gannett Co. (GCI), The Washington Post Co. (WPO), The McClatchy Company (MNI).
AEROSPACE AND DEFENSE
Airline Consolidation Efforts Heat Up as United, Continental Discuss Merger
United Airlines and Continental Airlines are discussing a possible merger, which, if completed, would result in the largest domestic airline. The merger talks follow on the heels of US Airways' offer last month to purchase Delta for about $8 billion. A United/Continental deal is not considered imminent, in part because the parties want to see how U.S. antitrust regulators will respond to the proposed US Airways/Delta deal. The move toward consolidation is the latest indicator that the airline industry is trying to rebound from the sharp downturn triggered by the 9/11 attacks five years ago. Mergers would help the airlines by reducing overhead and eliminating overlapping routes, but would likely worsen the experience of consumers, who would have to contend with higher fares and overcrowded aircraft. Regardless, the United/Continental deal might be scuppered by the "golden share" in Continental held by Northwest Airlines, which gives Northwest the option to block any merger Continental might propose that would require shareholder approval.
• Sources: Wall Street Journal, MSN.com, Bloomberg, seattlepi.com
• Related commentary: Merger Mania Grips the Airlines, US Airways Surprises Delta With Hostile Bid, United Airlines: Even Q3 Profits Can't Seem to Please Wall Street
• Potentially impacted stocks and ETFs: UAL Corp. (UAUA), Continental Airlines, Inc. (CAL), Delta Airlines Inc. (DALRQ), US Airways Group Inc. (LCC), streetTRACKS DJ Wilshire Small Cap Growth (DSG)
Spitzer Not Done Yet, Sues UBS Over Fee-Based Accounts
NY Attorney General Eliot Spitzer, set to become governor of NY next month, sued the U.S. asset management arm of UBS yesterday, claiming it defrauded thousands of clients for "tens of millions of dollars" by placing them in inappropriate InsightOne fee-based accounts. The NY AG's office stated, "Asset-based fee accounts are inappropriate for investors who rarely trade securities or hold significant amounts of cash, no-load mutual funds or other similar assets." UBS however said it is disappointed with the suit, and published a statement saying, "UBS categorically denies that the program was part of a scheme to disadvantage clients, and intends to defend itself vigorously in this matter." A spokesman commented Spitzer "cherry picked incomplete information." UBS reported in its statement InsightOne accounts represented approx. 3.5% of its U.S. accounts. It also said in 2005, U.S. investors had more than $268b in fee-based accounts industry-wide.
• Sources: Press release, Bloomberg, Reuters, New York Times
• Related commentary: UBS, Credit Suisse Under SEC Investigation for Bonds Trading Irregularities
• Potentially impacted stocks and ETFs: UBS AG (UBS). Competitors: Ameriprise Financial (AMP), Charles Schwab (SCHW), Merrill Lynch (MER), Morgan Stanley (MS), Raymond James Financial (RJF). ETFs: Europe 2001 HOLDRs (EKH), streetTRACKS Dow Jones STOXX 50 (FEU), BLDRS Europe 100 ADR Index (ADRU)
EU Chemicals Regulation REACH To Have Far Reaching Impact
The European Parliament approved controversial new legislation today, effectively putting 30,000 chemicals under regulation beginning next year, with full implementation to be phased in over the next decade. REACH, as the law is known -- stands for Registration, Evaluation and Authorization of Chemicals -- is seen increasing costs not only for the chemical industry, but for any firm involved in manufacturing and importing. Until now, the burden has been on government agencies to test chemicals. From next year however, companies will have to disclose chemicals they use, and if any are on the "dangerous" list (estimated at 1,500 chemicals), possibly have to cease using them and find substitutes. The financial costs of compliance are unknown, but expected to be significant. The Wall Street Journal reports both BASF and Dow Chemical have set aside hundreds of millions of euros. The paper also says many U.S. manufacturers are banking on being considered "downstream" users of chemicals and therefore, not be responsible for disclosure. Reuters reports the European Commission estimates chemical industry compliance costs to total $2.3b euros ($3b) over the next decade, and total industry costs to reach between 2.8b-5.2b euros.
• Sources: IHT-AP, Reuters, The Wall Street Journal
• Related commentary: DuPont All But Guarantees Forward Earnings, DuPont: Modifications Will Spur Growth -- Barron's, Dubai Fund Eyes Stakes in EADS and German Giants
• Potentially impacted stocks and ETFs: BASF AG (BF), Dow Chemical (DOW), E.I. DuPont de Nemours (DD). ETFs: Vanguard Materials (VAW), iShares Dow Jones US Basic Materials (IYM), Materials Select Sector SPDR (XLB)
U.S. Markets: Key Word From the Fed Statement: 'Substantial'
Long Idea: Best Buy: An Industry Leader on Top of the Electronics Game
Short Idea: Not Much to Worship at True Religion
Internet: Mamma and Looksmart: Buy the Rumor, Sell the News
Telecom: Nokia-QUALCOMM's Battle Royale
Hardware: Goldman Removal of Unisys from Least-Favorite Stock List Lacks Guts and Logic
Software: Salesforce.com Announces Plans for AppStore
Consumer Electronics: Apple iPhone: Not The Game-Changer Many Expect
Media: Blockbuster: Sinking Stock, High-Flying CEO
Healthcare: Osiris: Good News (But A Few People Died)
Retail: Chipotle Mexican Grill: A Distinguished Spin-off With Great Potential
Transport: AutoZone: Sooner Or Later, Sales Growth Matters
Energy: Boardwalk Pipeline Partners: An Energy Spin-off Worth Noting
Financial: Google Finance Has a New Look: Will Yahoo Lose Out?
Asia: The9 Ltd.: Play This Chinese Online Gamer
ETFs: Water ETFs Are Going Global
Small-Caps: eMagin - Virtual Reality Clashes With The Real World
IPO Analysis: An IPO Resurgence
Sound Money Tips: How to Have an Eco-Friendly Holiday
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Best Buy, Goldman Sachs, ADC Telecommunications
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