OPEC Opts for Delayed Production Cut
OPEC plans to shave its output by 2%, or 500,000 barrels a day, in February in the second production cut decision in two months. The decision, made despite the fact that commercial inventories are down around the world, suggests that the oil cartel is determined to aggressively defend a $60 floor on the oil price. That price fell from a July high of $77 to $55 in the fall, reflecting the easing of tensions over Iran's nuclear program and the mild hurricane season. The price has stabilized at about $61, however, since the October production cut of 1.2 million barrels a day. Front-month New York light sweet crude contracts for January delivery are up $0.31 to $62.80 a barrel this morning after rising $1.14 to settle at $62.51 yesterday. OPEC's determination to maintain the $60 floor creates the possibility that consumers will reduce consumption, but the cartel apparently believes that is a risk worth taking -- particularly as the winter months are the time when consumption is generally highest. In addition to deciding on the February cut, OPEC has accepted Angola, Africa's fastest-growing oil exporter, as its first new member in 31 years.
• Sources: New York Times, Bloomberg, Reuters, Forbes
• Related commentary: OPEC Cuts Production: Crude Prices May Still Fall, Oil Traders Testing the OPEC Cartel, Oil Rises to Over $60/Barrel on OPEC Production Cut, OPEC Waffles on Production Cut
• Potentially impacted ETFs: Oil Service HOLDRS (NYSEARCA:OIH), United States Oil Fund LP (NYSEARCA:USO)
Bernanke Ratchets Up Pressure On China Over Exchange Rate
Economic talks between China and the US opened aggressively, with Fed Chairman Bernanke and Treasury Secretary Paulson arguing that China needed to accelerate liberalization and stop fixing its currency, and Chinese Vice Premier Wu Yi countering that American misconceptions about China aren't conducive to good relations. Bernanke criticised China's price controls on fuels and electricity prices, which he said have contributed to the 50% rise in China's oil consumption since 2000 and led to half of 2006 world oil demand growth coming from China, and claimed that China's capital markets "remain distorted and underdeveloped". But the greatest tension was over China's currency, with has appreciated only 5.7% since the yuan-dollar peg was ended in July 2005. China's exchange rate policy distorts the allocation of resources between sectors, and "the situation has likely worsened recently'' because in the last 5 years the yuan has dropped 10 percent on a trade-weighted basis after inflation. "The principal imbalance lies in the composition of Chinese GDP, which is heavily tilted toward investment and net exports and away from domestic consumption and government provision of social services."
• Sources: Full text of Bernanke's speech, Bloomberg, New York Times, WSJ,
• Related commentary: Chinese Stocks Hit All-Time Highs, U.S. Trade Deficit Narrows To Near Five-Year Low, Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future; Full Seeking Alpha Coverage of China.
• Potentially impacted stocks and ETFs: China Fund (NYSE:CHN), Greater China Fund (NYSE:GCH), iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI), JF China Region Fund (NYSE:JFC), PowerShares Golden Dragon Halter USX China (NYSEARCA:PGJ).
TECHNOLOGY AND INTERNET
Back To Black: Ciena Turns First Profit in Six Years
In what may be the turn-around story of the year, telecom equipment maker Ciena Corp. posted its first profitable quarter since 2001, good for EPS of 16 cents on net income of $13.1 million on revenues of $160 million. Consensus estimates had been for 12-13 cents a share; Ciena shares responded to the good news by jumping 11.5% to close at $27.83. And there's more good news: Ciena expects to remain profitable into 2007 giving forward EPS guidance of 19-24 cents a share for 1Q'07 (estimates are for 19 cents a share). Its profitable quarter means that Ciena closed out a fiscal year in the black for the first time since 2000, bringing in just under one cent a share. Underlying Ciena's success: its ability to adapt to a changing marketplace. Says President and CEO Gary Smith, "We've become specialists in that transition from voice to IP networks... when you have a lot of networking migration going on, that suits us." By aiding many of the big telecom player transition into high speed, fiber optic networks including AT&T and British Telecom, Ciena has managed to cap an improbable run back to profitability.
• Sources: Conference call transcripts: Ciena F4Q06 (Qtr End 10/31/06).Reuters, Light Reading, Houston Chronicle
• Related commentary: Big Profit Gooses Ciena, Ciena Products in Demand by Telcos, Can These Cash-Burning Optical Networking Companies Survive?
• Potentially impacted stocks and ETFs: Ciena Corp. (NYSE:CIEN). Competitors: Juniper Networks (NYSE:JNPR), Tellabs Inc. (NASDAQ:TLAB), Sonus Networks (NASDAQ:SONS), JDS Uniphase (NASDAQ:JDSU), Alcatel Lucent (NYSE:ALU), Nortel (NT). ETFs: PowerShares Dynamic Networking (NYSEARCA:PXQ), iShares Goldman Sachs Networking (NYSEARCA:IGN)
Adobe Earnings In-Line, Challenges Lie Ahead in 2007
Adobe reported a solid quarter yesterday and predicted more good things to come in 2007, sending shares up nearly 8% in pre-market trading. Fourth-quarter net income rose to $181.9 million, or 33 cents a share after one-time charges, from $156.3 million, or 31 cents per share, a year ago while revenue rose to $682.2 million from $510.4 million in the year-earlier quarter. Consensus was for earnings of 33 cents on revenues of just $670 million. Sending shares up was Adobe's announcement that all its product upgrades for 2007 are on schedule; biggest among these is the company's Creative Suite 3 which includes updates to Photoshop and Dreamweaver Web development software. There are those who are skeptical about Adobe's prospects going forward, citing several worries about the software industry in 2007 including possible glitches in Microsoft's Vista operating system release, the reluctance of many customers to purchase upgrades when they are first rolled out and growing competition from open source software applications.
• Sources: Conference call transcripts: Adobe Systems F4Q06 (Qtr End 12/01/06). AP/MSN, Bloomberg, Reuters
• Related commentary: Adobe Up On Solid Revenue Report, In-Line Guidance, Listen To AmTech On Adobe: It's Time To Sell, Investors May Lose Interest Once Adobe's Current Product Cycle is Released
• Potentially impacted stocks and ETFs: Adobe (NASDAQ:ADBE). Competitors: Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL). ETFs: Software HOLDRS (NYSE:SWH)
Nokia-Siemens Telecom JV Delayed, But Not Dead
The 50-50 joint venture announced in June between the telecom equipment divisions of Nokia and Siemens is facing a delay following the recent raiding of Siemens' offices related to a corruption investigation. Instead of the deal closing by Jan. 1, it is now expected to close in Q1'07. According to a short statement published on Nokia's website, the two firms "... intend to adjust their agreements in order to have Siemens conduct an appropriate compliance review prior to closing of the transaction." Reports and estimates vary, but the JV would become the second, or third largest telecom equipment supplier with annual revenue between $21b-$23b. The JV has already received U.S. and E.U. antitrust approvals. Although a Gartner analyst commented Nokia could walk away from the deal without penalty, it does not seem to be in its best interest, since it needs the scale to compete in a highly concentrated industry. An analyst from Info-Tech Research points out not only the lost revenue from the delay, but also the negative implications for potential clients.
• Sources: Press release, Light Reading, Reuters, The Wall Street Journal
• Related commentary: Nokia: Expect Just 10% Handset Unit Growth, Narrower Operating Margins, China's Eventual 3G Rollout Could Favor EU Vendors, More Consolidation in Telecom Equipment, Nokia and Siemens Announce $31.6B Deal
• Potentially impacted stocks and ETFs: Nokia (NYSE:NOK), Siemens (SI). Competitors: Alcatel-Lucent (ALU), LM Ericsson Telephone (NASDAQ:ERIC)
Dell Delays Q3 Filing, SEC Investigation Continues
Dell announced it is delaying its 10-Q filing with the SEC for its fiscal Q3 ended Nov. 3, due to the ongoing SEC investigation over some of its accounting practices ("including issues relating to reserves and other balance sheet items that may affect the company’s previously reported financial results.") In its notice of late filing to the SEC, Dell said, "... no determination has been made as to whether restatements of prior period financial statements will be required." It also said it is cooperating with the SEC and other agencies, and is committed to resolving the investigation and becoming compliant with both the SEC and Nasdaq, as soon as possible. On Nov. 21, it announced preliminary Q3 earnings of $677m, or $0.30/share, beating analysts' consensus estimate of $0.24. Sales of "mobility products," which includes notebook PCs were particularly strong, growing 17%, compared to a 5% drop in desktop PC sales. Dell shares lost 1% in after-hours trading, after gaining 3.1% yesterday to close at $26.87.
• Sources: Dell SEC Form 12b-25
• Related commentary: Dell's Accounting Practices: No Cause For Concern, Dell Cooks the Books -- Barron's, Dell Over-Stating Profits, FBR Analyst Says, Is DELL Optimism REALLY Warranted?, Dell Beats in Delayed Q3, Margins Improve. Conference call transcripts: Dell Q2'07 [Dell did not host a Q3 CC.]
• Potentially impacted stocks and ETFs: Dell (NASDAQ:DELL). Competitors: Hewlett-Packard (NYSE:HPQ), Gateway (GTW), Lenovo (OTCPK:LNVGY), Sony (NYSE:SNE), Apple (AAPL). ETFs: Internet Architecture HOLDRS (NYSE:IAH), Vanguard Information Technology (NYSEARCA:VGT)
Intel Beware: AMD Expects Greater Market Share in 2007
At its analyst day yesterday, Advanced Micro Devices executives told Wall Street they expect 2007 to be a big year for the company with increased market share, gross margins of 50% "plus or minus" two points and sales growth of 20% versus expected market growth of just 10%. The market responded to the news by pushing AMD shares up 12.59% to $22.71; the predictions were the catalyst in pushing the Philadelphia Stock Exchange's Semiconductor Index [SOXX] up by 2%. The reasons for AMD's forward confidence are manifold: a new deal to supply Dell notebooks with processing chips will help boost AMD's market share, a new line of chips to challenge Intel's Core Duo will be on the market in the second half of 2007 and the ATI merger completed this year will yield additional cost savings and growth opportunities. But with growing competition with market share leader Intel that has led to wide and deep price cuts, there are those who doubt AMD's claims. Sumit Dhanda, an analyst with Bank of America, dropped his price target on AMD, citing an erosion of average selling prices and adding that the gross margins figure of 50% is actually below estimates.
• Sources: Reuters, Business Week, CNET. Conference call transcripts: AMD Q3 2006
• Related commentary: AMD Jumps 12%; B of A: It'll Be Short-Lived, Goldman Adds AMD To Its Least-Favorite Tech Stocks, Even Without Competition From AMD, Intel Cuts Quad-Core Prices, So Again, Why is Intel Cutting Prices Without Serious Competition From AMD? Beats Us
• Potentially impacted stocks and ETFs: Advanced Micro Devices (NYSE:AMD), Allegheny Technologies Incorporated (NYSE:ATI), Dell (DELL). Competitors: Intel (NASDAQ:INTC). ETFs: Semiconductor HOLDRs (NYSEARCA:SMH), iShares Goldman Sachs Semiconductor (IGW)
Costco Beats Consensus, Flat Screen TV Sales Strong
Costco's fiscal Q1 (ending November 26th) EPS of 51 cents beat the consensus estimate of 50 cents. But guidance for FQ2 was 62-66 cents, versus consensus of 67.5 cents, and full fiscal year guidance is now $2.50-$2.60, versus prior guidance provided in October of $2.50-2.65. Revenue for the quarter rose 9.4% and net income 9.8%. Same store sales rose 4%. CFO Richard Galanti said on the conference call that "the strongest department by far" was consumer electronics, as flat panel TV prices have dropped to the point where people are buying second and third TVs. Books, CDs, DVDs and videos were relatively weak. But returns of TVs hit profitability, and Costco is attempting to combat that by introducing an installation service. Costco launched a pharmacy program to sell 100 generic pills for $10, and said it would take a $45 million charge related to stock-option grants. Costco Online sales rose 59% and will "well exceed $1 billion in sales this year". Results were announced in the morning; the stock closed the day up 1.8%.
• Sources: Costco Earnings Call Transcript, Bloomberg, WSJ, New York Times.
• Related commentary: Retail Sales Data: A Closer Look, LBO Fever -- Barron's Looks at Who May Be Next, When Goliath Stumbles: Wal-Mart, Target and Costco.
• Potentially impacted stocks and ETFs: Costco (NASDAQ:COST). Competitors: Wal-Mart (NYSE:WMT), Target (NYSE:TGT), BJ's Wholesale Club (NYSE:BJ), Amazon (NASDAQ:AMZN), Walgreen (NYSE:WAG), Best Buy (NYSE:BBY), Circuit City (CC). ETFs: Retail HOLDRs (NYSEARCA:RTH), Consumer Discretionary SPDR (NYSEARCA:XLY).
Penn National Bids For Much Larger Casino Peer Harrah's
Gambling company Penn National made a mostly cash bid for its much larger competitor Harrah's Entertainment, challenging the current bid for Harrah's placed by private equity partners Texas Pacific and Apollo Management. The private equity group earlier in the week submitted an all-cash bid of $87 a share, and sources indicate Penn is offering $88.50. Harrah's currently trades at $79.10 a share, with a market cap of $14.7 billion vs. Penn's market cap of just $3.3 billion. The Penn offer, backed by Lehman Brothers and Wachovia, would create a joint entity with substantial debt. Harrah's is also considering a leveraged recapitalization, taking on more debt while paying shareholders a dividend or buying back stock. Penn stock has climbed 18.4% year to date, while Harrah's stock still trades well below the takeover prices due to the long period expected for casino licensing clearance.
• Sources: Wall St. Journal, Las Vegas Gaming Wire, Associated Press
• Related commentary: Who Will Acquire Harrah's This Time?, Las Vegas Sands: Dicey Valuation, Valuing the Casino Industry: Are There More Harrah's Out There?
• Potentially impacted stocks and ETFs: Penn National (NASDAQ:PENN), Harrah's (HET) Competitors: Wynn (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), Trump Entertainment Resorts (TRMP), Monarch Casino & Resort (NASDAQ:MCRI), Pinnacle Entertainment (NYSE:PNK).
Lehman and Bear Stearns Report Impressive Q4 Numbers, But Overshadowed By Goldman
Lehman Brothers and Bear Stearns both posted record Q4 earnings above analyst estimates, as fixed-income trading revenue jumped over 25% at both firms. Corporate bonds, derivatives, and credit swaps contributed to Bear Stearns' earnings of $562.8 million ($4/share - 64 cents above estimates) and Lehman's $1 billion in profit ($1.72/share - 4 cents above estimates). Revenue at Lehman rose 23% to $4.53 billion, while Bear Stearns' revenue was up 13% to $2.41 billion. Both firms seek to expand domestic and international investment banking - Bear Stearns managed 58% growth in this business, while Lehman grew only 5% in investment banking, and corporate consulting fees at Lehman fell 7.2%. While both I-banks beat quarterly expectations, neither managed to approach Goldman Sachs' report of a 93% jump in quarterly profit on Tuesday, the highest profit ever reported for a Wall St. firm. Bonus schemes were outlined as well: Lehman plans to pay an average of $335,441 per employee in total compensation, Bear Stearns $321,740 - both far below Goldman's $622,000 per employee announced earlier in the week.
• Sources: Lehman Brothers F4Q06 (Qtr End 11/30/06) Earnings Call Transcript, New York Times, Associated Press, Wall St. Journal
• Related commentary: Goldman Posts Its Best Quarter (and Year) Ever, Yesterday's News: Time To Short Goldman? Conference call transcripts: Goldman Sachs F4Q06
• Potentially impacted stocks and ETFs: Lehman Brothers (LEH), Bear Stearns (NYSE:BSC) Competitors: Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Merrill Lynch (MER) ETFs: iShares Dow Jones US Broker-Dealers Ind. (NYSEARCA:IAI), Vanguard Financials (NYSEARCA:VFH), Financial Select Sector SPDR (NYSEARCA:XLF), iShares Dow Jones US Financial Svc. (NYSEARCA:IYG)
Japan Tobacco Agrees to Buy Gallaher; More Japanese Firms Seeking Overseas M&A
Japan Tobacco's just-confirmed bid for Gallaher, valued at £7.5b ($14.8b), or £9.75b ($19.2b) including debt, is part of a growing trend among Japanese firms looking overseas for acquisition targets, after a long period of silence post Nikkei bubble bursting. Reuters quotes a Japan-based analyst who asked to remain anonymous, saying, "I'm sure JT does not want to pay this much, but it has probably judged that it would be better to pay than to lose Gallaher to another company." JT will use its cash and borrow from Merrill Lynch, its advisor in the deal, to fund the acquisition. This is the largest overseas deal ever by a Japanese firm, topping NTT DoCoMo's $9.8b stake in AT&T Wireless purchased in Nov. '00, and bigger than the $7.8b paid by JT in Mar. '99 for RJ Reynolds Intl. The Wall Street Journal reports that year to date, Japanese firms have initiated 294 foreign acquisitions valued at $18.1b, more than calendar year '05, and double '04, but still far from the 429 deals in '90 worth $25.3b.
• Sources: Forbes, Reuters, The Wall Street Journal
• Related commentary: Gallaher's Shares on Fire Following Japan Tobacco Bid, UBS: "We Are Very Bullish on Japan", Bridgestone and Bandag to Merge, Shares Burn Rubber, Nomura's Agreement to Buy Instinet from Silver Lake a Win-Win
• Potentially impacted stocks and ETFs: Gallaher (GLH), Japan Tobacco (Tokyo: 2914). Competitors: Altria (NYSE:MO), British American Tobacco (NYSEMKT:BTI)
U.S. Markets: Money Market Cash Horde Grows
Housing: Housing Bubble and Real Estate Market Tracker
Long Idea: Cadbury: A Deliciously Undervalued Stock
Short Idea: First Marblehead: Little Risk Priced In
Internet: Yahoo Will Surpass Google In 2007: Here's Why
Telecom: Why I Am Now Considering BCE
Hardware: Rackable Systems: Should Be a Bumpy Ride
Software: Interview With DivX CEO Jordan Greenhall
Consumer Electronics: It's Game Time: Game Console and Software Stock Update
Healthcare: Pfizer Trading Well Below Its Intrinsic Value
Retail: Credit Suisse Suggests Cable Pair Trade: Long EchoStar, Short DirecTV
Transport: Hybrid Vehicle Marketing: Toyota Leads Here As Well
Energy: Focus on SunPower: A Clearly Successful Spin-off
Asia: Credit Suisse Maintains Rating on Japan's Mega Banks, Lowers Targets
ETFs: Interview: Luciano Siracusano, Director of Research for ETF Firm WisdomTree Asset Management
Small-Caps: Avalon Holdings: Smallcap With Promise
Sound Money Tips: Tip: Top Three Secret Sources for Gift Discounts
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Adobe Systems F4Q06, Lehman Brothers F4Q06, Costco Wholesale F1Q07, Ciena F4Q06
Have Wall Street Breakfast emailed to you every morning before the market opens.