November Home Sales Data Propel Homebuilder Stocks, Suggest Bottoming of Housing Market
Homebuilder stocks rose strongly after the Commerce Department reported Wednesday morning that new home sales rose 3.4% sequentially in November, higher than the 1.6% rise forecast by economists and a sharp rebound from the 3.8% decline in October. The supply of unsold homes at the current sales rate fell to the lowest since May, and the median price of a new home rose 5.8% versus a year earlier (to $251,700 from $237,900), the largest increase since June. Still, sales of new homes were down 15.2% year-over-year, and economists weren't ready to call an end to housing market pain. ING economist Dimitry Fleming, for example, stated that "although the rebound in sales is consistent with the housing slowdown bottoming out... supply is still high”, and Lehman Brothers' Michelle Meyer said "We look for further weakness in prices as homebuilders continue to slash prices to encourage sales." According to the WSJ, while November's new sales numbers are encouraging, "the estimates are difficult to interpret with unclear calculations of sales cancellations making the true sales and inventory numbers difficult to pinpoint." The SPDR Homebuilders ETF closed the day up 1.6% and the iShares Dow Jones US Home Construction ETF up 1.9%. The National Association of Realtors reports on existing home sales Thursday. New home sales are arguably a better barometer of current market conditions because they are recorded when contracts are signed. In contrast, existing home sales, which account for about 85% of the residential real estate market, are recorded when contracts close, often months after buying decisions were made and contracts signed.
• Sources: Bloomberg, Wall Street Journal, NY Times, Wall Street Journal II, AP
• Related commentary: Housing Bubble and Real Estate Market Tracker, Housing Market At Its Worst Since 1997, Hovnanian Enterprises Suffers Gruesome Fourth Quarter.
• Potentially impacted stocks and ETFs: Hovnanian Enterprises (HOV), DR Horton (DHI), KB Home (KBH), Centex (CTX), Toll Brothers (TOL). ETFs: SPDR Homebuilders (XHB), iShares Dow Jones US Home Construction (ITB).
IMF: Investors Too Blase in Face of Downside Risk
The IMF has warned that investor complacency in the face of risk could trigger a destabilizing upset to the market if some unforeseen circumstance caused them to panic. While the market appears confident that the global economy is sound and that inflation should remain under control, the IMF maintains that investors are paying insufficient attention to significant risk factors, including the debt level of many private equity funds and the options exposure of hedge funds. While the overall outlook is relatively positive -- the U.S. housing slowdown, for example, has not yet affected the country's overall economy to any dangerous extent -- a sharp drop in market volatility or a widespread lack of risk diversification could spell trouble. Triggering factors that could raise volatility might include lowered growth expectations or higher inflationary pressure.
• Sources: Reuters
• Related commentary: Housing Market At Its Worst Since 1997, U.S. Economy Just Beginning to Sizzle -- Barron's, How Long Can Consumer Confidence, Earnings Weather the Housing Bust?, It's Still The Economy, Stupid, Global Markets: Currency Imbalances and Trade Are Driving Forces, Comparing Economies of Key Countries Using Purchasing Power Parity
• Potentially impacted ETFs: Total Stock Market VIPERs (VTI), Standard & Poor's 500 Index Depository Receipts (SPY), NASDAQ 100 Trust Series I (QQQQ), iShares Russell 2000 (IWM), iShares MSCI EAFE Index (EFA)
The Grinch Stole Christmas from Brick and Mortar Retailers...But Online Sellers Are Smiling
The housing slowdown and higher energy costs took their toll on holiday spending this year, with retail sales rising only 3% over last year. Sales were also hurt by the relatively warm temperatures, which cut into apparel sales. The last-minute weekend rush on December 23-24 gave the sector a 23% boost, but revenues were still the slowest they have been since 2002. Wal-Mart, which will issue a preliminary report on December's results this weekend, is forecasting a slim gain of "up to 1%." The S&P 500 Retailing Index remains stable, however, falling less than 1% since Oct. 31. Apparel fell behind overall retail during the holiday season, but no individual category did particularly well this year. Retailers are hopeful that the post-Christmas week will bring some cheer to the season as gift-card recipients come to stores to redeem their certificates. The only bright spot in the sector was online retail, with Amazon.com posting its best holiday season ever and Yahoo Shopping seeing a 34% rise in December over a year earlier.
• Sources: Bloomberg, Wall Street Journal, USA Today, MarketWatch
• Related commentary: U.S. Retail Sales Relatively Strong as Holiday Season Ends, Retailers' Heavy Discounting Should Pressure Q4 Margins, Holiday Retail Sales Falling Short
• Potentially impacted stocks and ETFs: Wal-Mart (WMT), Federated Department Stores (FD), Target (TGT), Amazon.com Inc. (AMZN), Yahoo Inc. (YHOO). ETFs: Retail HOLDRs (RTH), Consumer Discretionary SPDR (XLY), Internet HOLDRs (HHH), First Trust Dow Jones Internet Index (FDN)
TECHNOLOGY AND INTERNET
Tuesday's Asian Earthquake Highlights Need For Stronger Underwater Communications Networks
Tuesday's 7.1 earthquake off the coast of Taiwan may have killed only two people and caused minimal physical damage but it underscored in a big way the vulnerability of the world's communications networks. Parts of Taiwan, China, Singapore and Hong Kong had their telephone and internet service disrupted yesterday as underwater network cables were damaged by the quake. Asian telephone and internet companies such as China Telecom scrambled yesterday to reinstate service to customers who were unable to conduct business as usual by rerouting service through other, undamaged providers. Meanwhile, companies like Verizon and AT&T stand to gain from yesterday's disrupted service as the need for more underwater communications cables between Asia and the U.S. becomes more apparent.
• Sources: Map of Global Communications Networks [pdf file], Bloomberg, Wall Street Journal, NY Times, Reuters
• Related commentary: Options Trader: Tuesday Morning Ideas
• Potentially impacted stocks and ETFs: China Telecom (CHA), Verizon (VZ), AT&T (T). ETFs: iShares Dow Jones US Telecom (IYZ), iShares Goldman Sachs Networking (IGN), Vanguard Telecommunication Services (VOX), PowerShares Dynamic Networking (PXQ), PowerShares Dynamic Telecom & Wireless (PTE)
Apple Stock See-Saws On Reports Of Faked Options Docs
Apple stock was down about 5% in early trading Wednesday following a report from Law.com that federal investigators are examining stock-option documents allegedly falsified by company officials to maximize potential executive gains. The report, citing anonymous "people with knowledge of Apple's situation," claims that criminal charges are being considered by prosecutors and that CEO Steve Jobs has decided to hire an attorney to defend against forthcoming Justice Dept. and SEC actions. Jobs previously relied upon the company's outside counsel. This Friday's delayed 10-k filing by Apple may contain further information on the options investigation, including the possibility of further earnings restatements. The stock completely recovered from Wednesday early drop, however, ending the day up a penny. But an unsourced report late Wednesday from the Financial Times has the stock trading down 3-4% again -- the FT indicates Jobs was handed 7.5 million in stock options in 2001 without required authorization from the company's board of directors, and documents were falsified afterwards to cover this up. Jobs later surrendered these options before they were exercised.
• Sources: Law.com: Faked Documents May Be at Core of Apple Case, Financial Times: Apple ‘falsified’ files on Jobs’ options, CNN Money, MarketWatch
• Related commentary: UBS: Apple Options Fears Overdone, Apple's Options Problems Deepen - Likely To Restate Results, Apple Stores Now More Profitable Than Tiffany's Per Square Foot, High School Math 101: iTunes Sales Not Collapsing . Conference call transcripts: Apple F4Q06 (Qtr End 9/30/06)
• Potentially impacted stocks and ETFs: Apple Computer (AAPL)
Cenveo Inc. To Purchase Cadmus Communications for $430 million
Digital printing company Cenveo announced on Wednesday that it will buy Cadmus Communications, another digital printing services provider, for $430 million. The merger will create the third largest graphic services company in the U.S. with revenue of over $2 billion. The purchase is valued at $24.75 a share in cash, an 18% premium over Cadmus' Tuesday closing price of $20.98. Analysts are pleased with the acquisition as it will provide Cenveo with entry into more specialized areas of the industry, including packaging and niche journal and magazine production. Cadmus' FY05 revenue was about $450 million, while Cenveo generated $1.75 billion for 2005. Layoffs are expected at the corporate level where more jobs will become redundant, but less downsizing is anticipated in operations. Cadmus stock climbed over 17% to $24.55 on Wednesday, after touching a year high of $24.66. Cenveo shares increased over 9% to $21.67.
• Sources: Reuters, MarketWatch.com, InformationWeek
• Related commentary: Other articles on Mergers & Acquisitions
• Potentially impacted stocks and ETFs: Cenveo (CVO, Cadmus (CDMS) Competitors: Ennis Inc. (EBF), CSS Industries (CSS), The Standard Register Company (SR)
ENERGY AND MATERIALS
Falling Natural Gas Prices Haven't Affected Stocks (Yet)
The stock prices of natural gas producers have remained stable despite a 30% drop in the price of natural gas since the beginning of December. A combination of warm seasonal weather and record high inventories have sent gas prices to several-month lows but stock prices haven't followed suit. The reason, according to Canaccord Adams analyst Irene Hass is that even at a 30% discount to its previous prices, natural gas continues to remain quite profitable, especially with the news that Canadian natural gas exports to the U.S. are expected to drop heavily. As a result, none of the gas drillers have really slowed down their operations. But if some of the current inventory buildup isn't drained this winter - something which would require colder weather - there are concerns 2007 revenues could be badly impacted for top gas producers like Devon Energy, Apache Corp., Anadarko Petroleum and Chesapeake Energy Corp. as well as energy service companies such as Halliburton Co. and BJ Services.
• Sources: Reuters, Washington Post
• Related commentary: Natural Gas Inventories Not Pressuring Supply in Meaningful Way, International Securities Exchange Launches Natural Gas Index, Natural Gas is Running Out of Steam, Chesapeake Energy: Hedging Its Way to the Top, The Short Case for Apache Corp.
• Potentially impacted stocks and ETFs: Apache Corp. (APA), Anadarko Petroleum (APC), Halliburton Co. (HAL), Devon Energy (DVN), BJ Services (BJS), Chesapeake Energy Corp. (CHK). ETFs: iShares Dow Jones U.S. Oil & Gas Exploration/Production (IOE), PowerShares Dynamic Oil & Gas (PXJ)
Hasbro's 'Wizards of the Coast' Renews Lucasfilm Agreement
Wizards of the Coast, a subsidiary of the toymaker Hasbro, has reached an agreement with Lucasfilm and will continue to produce Star Wars Miniatures and the Star Wars RolePlaying Game for an extended period of time. In addition, the Seattle-based company, which also produces Dungeons and Dragons and other popular games, will make new sets for existing products, as well as a Starship Battles vehicles game. Star Wars miniatures allow players to choose from hundreds of characters to create skirmish-style battles, and fans can create their own mini- plots in the Star Wars saga with the Roleplaying game. "Star Wars celebrates its 30th anniversary next year, which makes 2007 very special for us," said Derek Stothard, director of toys at Lucas Licensing... We're looking forward to working with Wizards of the Coast in this banner year."
• Sources: Press Release, Theforce.net, Motley Fool
• Related commentary: Hasbro's Fundamentals Seem Solid, Jim Cramer Discusses Hasbro on Mad Money, Nov. 21
• Potentially impacted stocks and ETFs: Hasbro (HAS). Competitors: Mattel (MAT), Marvel (MVL), JAKKS Pacific Inc. (JAKK)
Settle Down, People -- Toyota/Ford Talks Were About Sharing Green Technology
Shares of Ford and Toyota leaped on the news that their CEOs met in Tokyo last week, but the companies have hastened to downplay any suggestion that joint ventures were discussed. The conversation was about sharing green technology. Ford, which is having one of the worst years in its history, lags its competitors in terms of fuel-efficient offerings. Toyota, on the other hand, is a leader in the field of green auto technology, with its hybrid-electric Prius leading the U.S. government's annual top-10 fuel economy list for 2007 cars. The two companies already have a history of technological cooperation in environmental technology: in March 2004, Toyota licensed Ford several hybrid system and emissions purification patents.
• Sources: Boston.com, Houston Chronicle, International Herald Tribune
• Related commentary: Heads of Ford and Toyota Meet in Tokyo, Toyota Versus GM/Ford: Classic Hedged Pair Trade, Ford's Internal Projections: Toyota Will Be #2 Within Months, Toyota To Become World's Largest Automaker in '07
• Potentially impacted stocks and ETFs: Ford Motor Co. (F), Toyota Motor Corp. (TM). Competitors: General Motors (GM). ETFs: BLDRS Asia 50 ADR Index (ADRA), iShares NYSE Composite Index (NYC), Rydex S&P 500 Pure Value (RPV), Rydex S&P 500 Pure Value (RPV)
AEROSPACE AND DEFENSE
Air Force Might Hire Private Sector Contractors for Next-Generation GPS Satellite System
The U.S. Air Force, hoping to avoid the expensive trouble it has had managing multibillion-dollar space projects, is considering the unprecedented move of hiring private sector firms to act as consultants and contractors. In an implicit acknowledgement that Air Force Space Command and the Pentagon's enormous weapons-buying bureaucracy lack the expertise to oversee systems engineering and integration, the Air Force is contemplating bringing in an outside systems integrator for its next-generation navigational satellites. These global positioning system [GPS] satellites have both military and consumer applications, like in-car direction services. The next-generation system [GPS III] is expected to comprise two dozen or so $100 million satellites. Boeing and Lockheed Martin are competing for the contract to build the satellites and may ultimately compete for the integration work as well. Production is intended to begin in 2008 with the satellites entering orbit around 2013. In the meantime, the Air Force, together with federally funded think tank Aerospace Corp., is evaluating whether conflicts of interest will be created if contractors for GPS III or similar programs are permitted to compete for corresponding integration contracts.
• Sources: Wall Street Journal
• Related commentary: Defense Stocks Should Continue to Outperform in 2007, Boeing Is Flying High, Lockheed Flying High After Winning Lucrative Shuttle Replacement Contract
• Potentially impacted stocks and ETFs: Boeing Co. (BA), Lockheed Martin Corp. (LMT). Competitors: General Dynamics Corp. (GD), Northrop Grumman Corp. (NOC), Raytheon Co. (RTN). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA), Vanguard Industrials ETF (VIS), PowerShares Dynamic Large Cap Growth (PWB)
Nabors and HCC Insurance Holdings Grapple with Options Reviews
Nabors Industries is reinvestigating its option-granting after a Wall Street Journal article questioned the company's practices. Although an internal review revealed nothing questionable, the article mentioned that CEO Eugene Isenberg received $450 million over the last 19 years through stock-option grants whose value was increased by "controversial moves." Nabors allowed Isenberg to trade worthless options for those with lower exercise prices and "reloaded" him with new options once he cashed in others, according to the article. On Wednesday, Nabors's shares rose 30 cents to $30.53. In other corporate options news HCC Insurance Holdings reported a gross, noncash compensation expense of $26.6 million following an independent review of options-granting errors between 1997 and 2005. Although the expense has no effect on the company's revenue, cash or cash flow for the time period, it does mean a net after-tax decrease in shareholders' equity of $3.3 million. HCC's shares rose 38 cents to $32.04.
• Sources: Wall Street Journal, Businessweek
• Related commentary: Nabors Should Capitalize on Strong Natural Gas Demand, The Long Case for HCC Insurance Holdings
• Potentially impacted stocks and ETFs: Nabors (NBR), HCC Insurance Holdings (HCC)
Goldman Raises $6.5 Billion For Dedicated Infrastructure Fund
Goldman Sachs raised a reported $6.5 billion for its first dedicated infrastructure fund, which was supposedly closed to new investments as of yesterday. The fund will focus on infrastructure projects such as air, seaports and utilities in developed countries. In recent years, infrastructure investing has grown in popularity among investment banks, insurers and pension funds in search assets that offer long-term, relatively inflation-proof returns. In addition to money from outsiders, Goldman added $750 of its own to the fund. The Financial Times reports that Goldman's new fund highlights concerns that the rush into infrastructure investing is creating an unsustainable bubble. Last month, Standard & Poor's cautioned that the infrastructure sector was in danger of a "dual curse" of overvaluation and excessive leverage.
• Sources: Financial Times, Financial News, Reuters
• Related commentary: Risk Versus Reward In Financial Institution Stock Valuations, Goldman Posts Its Best Quarter (and Year) Ever, Macquarie Sees Opportunity in Japanese Infrastructure, GE Discusses Its Infrastructure Business. Conference call transcripts: Goldman Sachs F4Q06 (Qtr End 11/24/06)
• Potentially impacted stocks and ETFs: Goldman Sachs (GS)
Proctor & Gamble Signs Joint Venture with Inverness Medical
Proctor & Gamble will pay $325 million for a 50% stake in a joint venture with Inverness Medical Innovations Inc. which will focus on medical diagnostic products aimed at consumers. P&G will be responsible for marketing and distribution of existing and future Inverness products. The joint venture excludes cardiology and diabetes care products that Inverness is currently developing. The deal will close in late 1Q07.
• Sources: Reuters, AP, Press Release
• Related commentary: Procter & Gamble: A Classic Investment With Great Potential, Procter & Gamble's China Problem: The Return of SK II Conference call transcripts: Procter & Gamble F1Q07 (Qtr End 9/30/06)
• Potentially impacted stocks and ETFs: Proctor & Gamble (PG), Inverness Medical Innovations (IMA) Competitors: Quidel Corporation (QDEL), Genzyme Corporation (GENZ), Nastech Pharmaceutical (NSTK) ETFs: iShares Russell 1000 Index (IWB), iShares Russell 1000 Value Index (IWD), iShares S&P 500 Index (IVV)
China's Central Bank: Fed Rate Cut to Lift Yuan; Inflation Concerns
The Vice Governor of the People's Bank of China said in a written statement today that "[c]hanges in economic growth and interest rate differentials will enhance the trend of a weaker dollar and stronger euro and yuan." She also said a weaker dollar would help to balance the global economy. The Vice Governor commented that further monetary tightening is expected in China, Japan and the E.U in '07, compared to the possibility of rate cuts in the U.S. Separately, the Bank's Governor Zhou Xiaochuan, expressed concern about inflation and the need to reign in liquidity from a growing money supply and credit. He also said the yuan will gradually be allowed to trade more flexibly, according to market supply and demand. The WSJ notes in its coverage that Xinhua, China's official news agency reported the nation's Vice Premier said China will take advantage of its more than $1 trillion in foreign reserves to add to its strategic resources.
• Sources: Reuters, WSJ
• Related commentary: People's Bank Says China Should Improve Its Forex System -- But How?, Bernanke Ratchets Up Pressure On China Over Exchange Rate, Paulson & Co. in China: Much of the Same Rhetoric, But Dialogue Still Meaningful, China: What to Do with Foreign Reserves At $1 Trillion and Counting?
• Potentially impacted stocks and ETFs: Currency ETFs: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE). Bond ETFs: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). China ETFs: China Fund (CHN), Greater China Fund (GCH), iShares FTSE/Xinhua China 25 Index Fund (FXI), JF China Region Fund (JFC), PowerShares Golden Dragon Halter USX China (PGJ)
Citi's Next China Investment Could Be in a Budget Airliner
Spring Airlines' spokesman is reported to have said Citigroup is among potential investors considering taking an equity stake in the privately-owned budget mainland China carrier. Newswire coverage carried on Forbes.com says a Citigroup spokesman had no comment, but mentions Citi is 'one of the arrangers for Spring Airlines' initial public offer, expected in 2009.' A source familiar with the matter quoted by Reuters comments, "We want to sell no more than 20 percent to one or several investors. Talks with Citigroup have passed the initial stage." Spring Airlines needs outside capital to finance a fleet expansion. Spring is said to be looking to raise approx. 3b yuan ($384m) through share placements and an IPO. A Spring executive said the firm expects to earn 20m yuan in profit ($2.6m) on 485m yuan ($62m) in sales this year, its first full year of operations. Citigroup meanwhile, won a $3.1b bid last month to take a 20% stake in China's Guangdong Development Bank, which will expand its footprint to 500+ branches, from just six previously.
• Sources: Forbes XFN-ASIA, Reuters
• Related commentary: China's Airline Industry: Robust Growth, But Risky Investing, Foreign Banks Granted Authority to Incorporate Locally in China, Citi Ready to Expand in China, Winning Bid for Bank Confirmed, Citigroup: Does a Breakup Make Sense? Conference call transcripts: Citigroup Q3'06
• Potentially impacted stocks and ETFs: Citigroup (C). Competitor: Goldman Sachs (GS) is one of the most active investors among global financial companies in China. ETFs: First Trust Morningstar Div Leaders (FDL), WisdomTree High-Yielding Equity (DHS), streetTRACKS KBW Bank (KBE), Vanguard Financials (VFH)
Japan's November Industrial Production Sets Record, Electronics Inventories Down
Demand for Japanese made products, especially autos and electronics, sent November industrial production up 0.7%, but that was 0.3% short of the average estimate of economists surveyed by Bloomberg. Measured against a base year of 2000 (equals 100), it reached an all-time high of 108.6. A very positive development along with the production growth is the closely watched technology inventories level fell 3.4%, its first decline in seven months, coming off a record high in Oct. Market participants now seem to expect a greater chance of a Bank of Japan rate hike in Jan. (meeting concludes the 18th). The one damper came in a separate report, which showed wages fell 0.2% in Nov. Although unemployment (announced Tues.) dropped to its lowest level since 1998, many companies appear to be hiring mostly part-timers, which caps national average wage growth, and is seen continuing to limit consumer spending. The Nikkei 225 just managed to close in positive territory, gaining 1.66 (0.01%) to finish at 17,224.81.
• Sources: Bloomberg
• Related commentary: Mixed Economic Data May Force BoJ to Postpone Hike, BoJ Keeps Target at 0.25%, More Data Watching, Japan: No "Soft Patch" Despite Weaker Economic Data
• Potentially impacted stocks and ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF)
U.S. Markets: S&P 500: Should We Expect A Correction?
Long Idea: Buying At The 52-Week Low: James River Coal and RadiSys
Short Idea: Philadelphia Consolidated: Why Forbes Bulls Are Wrong
Internet: Yahoo: Progress On Social Media Products Flickr and Delicious
Telecom: Alvarion May Profit From German WiMax Spend
Hardware: UBS: Apple Options Fears Overdone
Software: To Promote Vista, Microsoft Giving Bloggers Slick 'Ferrari' Laptops
Consumer Electronics: iSuppli: More LCD Pain On The Way
Biotech: Eye on Geron: Stem Cells and Telomerase
Retail: Jones Soda's Recent Rally Was All Cramer
Transport: Settle Down, People -- Toyota/Ford Talks Were About Sharing Green Technology
Energy: EXCO Resources: Insiders Taking Profits
Financial: A Look At Stock Exchange Stocks
Asia: Forbes Int'l Investment Report: IIJ Is Top Speculative Japan Play in '07
ETFs: Are Emerging Markets Headed Up Or Down?
Small-Caps: Companies Trading Below Net Asset Value Becoming Something of a Rarity
Sound Money Tips: More Tips on How to Perform a (Nearly) Free People Search
Jim Cramer: Latest stock picks
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