Market Hiccups As Fed's December Minutes Are Released
Treasuries inched up and stocks backtracked slightly on the release of minutes from the Fed's December meeting. They indicate that in addition to the Fed's concern about inflation, it is also worried about an overall slowdown in economic growth. At the December meeting, Chairman Bernanke left the benchmark interest rate at 5.25% for the fourth straight time while leaving open the possibility of a later rate increase to contain inflation. However, the minutes reveal that one official believed the Fed should express its willingness to adjust rates in either direction, suggesting that growth may be at greater risk than previously thought. The market, which had already priced in growth, reacted with a momentary tumble to the revelation that the Fed sees further downside risk. Fed policymakers attributed the slowdown in part to the "substantial cooling" of the housing market, a stronger phrase than was used at the October meeting. Consumer spending is holding up well, but that could change, "especially if house prices were to decline significantly."
• Sources: Newsday, CNN Money, Bloomberg
• Related commentary: Split Decision at The Fed On Next Rate Move?, Correlating Income, Consumption and the Economy, Inflation Update: Do Not Believe Everything You Hear, The Fed Model For Market Timing, U.S. Economy Just Beginning to Sizzle, Inflation Unleashed?, Fed Leaves Short-Term Rates at 5.25%, PPI Jumps Fully 2% - A Closer Look
• Potentially impacted ETFs: S&P 500 Index (SPY), NASDAQ 100 Trust Shares ETF (QQQQ), Diamonds Trust Series 1 ETF (DIA), iShares Russell 2000 Index ETF (IWM), iShares Lehman 1-3 Year Treasury Bond ETF (SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (IEF), iShares Lehman 20+ Year Treasury Bond ETF (TLT), iShares Lehman TIPS Bond Fund (TIP)
Strong Manufacturing/Construction Numbers Suggest Market Strength to Continue
U.S. manufacturing expanded unexpectedly and construction spending fell less than forecast, according to data released Wednesday by the Institute for Supply Management and the Commerce Department. The ISM's manufacturing index rose to 51.4 from 49.5 in November, beating analyst forecasts of 50; anything over 50 signals expansion. Construction spending dropped 0.2% percent in November following a 0.3% drop in October that itself was smaller than originally reported;. The figures suggest the economy will extend its five-year streak into 2007 despite housing and automotive slumps. Growth in exports and healthy consumer spending have helped businesses trim inventory gluts; uncertainties for manufacturers include declining commodity prices (many stocked up on raw materials at higher prices) and dollar volatility. Also Wednesday, an ADP Employer Services report said U.S. companies unexpectedly shed 40,000 jobs in December -- the first drop since April 2003. Following the report economists were quick to pare their estimates of the Labor Department's Friday job creation report -- the median forecast fell from 115,000 to 100,000.
• Sources: ISM Press Release, Construction Spending from Census Bureau (.pdf), ADP Employer Services, Wall Street Journal, Bloomberg
• Related commentary: Economy's Ready To Shake Off Housing, CPI Numbers Don't Square With Reality - Market To Climb Anyway
• Potentially impacted stocks and ETFs: PowerShares Dynamic Building & Construction (PKB), iShares Dow Jones US Consumer Goods ETF (IYK), Consumer Discretionary SPDR ETF (XLY), Vanguard Consumer Discretionary VIPERs (VCR)
TECHNOLOGY AND INTERNET
Cisco to Buy IronPort Systems for $830 Million
In a bid to tap burgeoning demand for security software, network equipment giant Cisco Systems will buy Web messaging and e-mail security firm IronPort Systems Inc. for $830 million. Cisco, which is predominantly a manufacturer of routers and switches, is on a hunt for niche technologies to add to its product line; the purchase follows nine smaller acquisitions by Cisco over 2006. IronPort's claim to fame is its "reputation filters," which block spam by sifting through senders' records. IronPort had considered an IPO but ultimately decided that Cisco could give it access to a wider array of potential clients. IronPort's current client list is primarily large technology, media and financial services firms, but it wants to expand into the business market. The purchase puts Cisco into direct competition with Symantec, the world's security software leader. The Web messaging security market is growing at about 25% a year, with global spam volumes roughly doubling year-on-year. The security software industry continues to consolidate: two years ago, Symantec bought Brightmail, while last year, Microsoft bought FrontBridge.
• Sources: Bloomberg, Reuters
• Related commentary: Cisco Shares Rise on Strong F1Q07 Profit Report, Analysts More Confident in Cisco, Cisco's Scorched Earth Policy Claims Another Victim, The Ten Best Tech Stocks Of All Time. Conference call transcripts: F1Q07 (Qtr End 10/28/06)
• Potentially impacted stocks and ETFs: Cisco Systems, Inc. (CSCO). Competitors: Check Point Software Technologies (CHKP), Symantec (SYMC), Avaya Inc. (AV), Juniper Networks, Inc (JNPR), Nortel Networks Corp. (NT). ETFs: Internet Architecture HOLDRs (IAH), iShares S&P Global Technology (IXN), iShares Russell 1000 Growth Index (IWF), iShares Russell 3000 Growth Index (IWZ)
Kodak and Sony Make Peace
A patent battle over digital camera and imaging technology that was approaching its third year exists no longer, as Kodak and Sony have announced a technology cross-license agreement and mutually concluded their patent litigation. In a statement, Kodak said the two will have "broad access" to each other's patent portfolios and the "license agreements are royalty bearing." Sony issued a brief statement saying, "This license and settlement will have no material impact ..." on its latest earnings forecast from Oct. 19, 2006. Neither firm disclosed specific terms of the agreement. However, the agreement also includes Sony Ericsson Mobile Communications. Sony and Kodak are competitors mostly in cameras, but also in printers, film technology, portable devices and televisions.
• Sources: Press release [I, II], Reuters
• Related commentary: Sony Discovers Flaw in Digital Cameras, Kodak Reports Eighth Straight Loss, but Shares Rise 5%, Sony's Q2 Earnings Tank on Battery Recall Costs, PS3 Development. Conference call transcripts: Eastman Kodak Q3'06, Sony F2Q06
• Potentially impacted stocks and ETFs: Kodak (EK), Sony (SNE)
Sirius, XMSR Shares Jump On Positive Sirius Subscriber, Cash Flow News
Shares of Sirius Satellite Radio rose 5.7% yesterday on positive news from the company - as did shares of rival XM Satellite Radio, which jumped nearly 5.3%. Yesterday Sirius reported that it had added 2.7 million net additions during 2006 for a total addition of 82%. The company broke the six million subscriber mark while turning free cash flow positive for the first time during 4Q'06. Analysts who cover Sirius at Stanford Group and Cowen & Co. saw the news as wholly positive. However, an article on Motley Fool argued that "it's not all roses in the Sirius camp", pointing out that subscriptions were actually down year-over-year from 1.1 million to 900,000 in the 4th quarter. Without another huge subscriber boost in 2007 (like signing on Howard Stern at the beginning of 2006), Sirius' numbers may continue to struggle. XM Satellite will likely report its 4Q'06 subscription numbers before Monday. Shares of both companies were down 47% in 2006.
• Sources: Bloomberg, Motley Fool, MarketWatch
• Related commentary: The NY Times Discusses the Prospects for a Sirius-XM Merger, Sirius and XMSR Merger Murmurs Continue, XM or Sirius? Why Not Both?, Satellite Radio News Watch: Sirius Lowers Subscriber Guidance, XMSR Inks Deal With GM. Conference call transcripts: Sirius Q3 2006 Earnings Call Transcript, XM Satellite Radio Q3 2006 Earnings Call Transcript
• Potentially impacted stocks and ETFs: Sirius Satellite Radio (SIRI), XM Satellite Radio Holdings (XMSR). Competitors: Clear Channel Communications (CCU), Cumulus Media Inc. (CMLS)
Blockbuster Surprises Investors With 2 Million Online Subscribers
Blockbuster surprised investors and analysts with a stunning 2 million subscribers to its online Total Access service, which allows customers to return movies rented on line to Blockbuster stores. Shares climbed 6.6% to $5.64 after the news was announced on Wednesday. Netflix has around 5.5 million subscribers. Both companies see a potential online rental market of 20 million customers. There has been concern that Blockbuster stores have become superfluous in the face of online rental's popularity. Blockbuster's new program, combined with a limited offer of a free in-store rental for every Netflix mailing label customers, brought in 500,000 subscribers in Q4. Blockbuster CEO also said they expect to offer movie downloads for purchase or rental starting this year.
• Sources: Reuters, USA Today, Red Herring
• Related commentary: Blockbuster Hits 2 Million Online Subs - At Netflix's Expense?, ABI Research: 48% Of Consumers Will Not Pay For Movie Downloads, Taiwan: Another Sad Story In Blockbuster's International Saga, Blockbuster: Sinking Stock, High-Flying CEO, Blockbuster's Year of the Dog Conference call transcripts: Blockbuster Q3 2006 Earnings
• Potentially impacted stocks and ETFs: Blockbuster (BBI), Netflix (NFLX) Competitors: Hastings Entertainment (HAST), Movie Gallery (MOVI), Comcast (CMCSA), Time Warner (TWX)
Time Warner Cable Agrees To Carry Future Fox Business Channel
Reports surfaced yesterday that Time Warner Cable has agreed to carry the future Fox Business Channel. While no details were disclosed, a spokesperson for Fox owner News Corp. did confirm that an agreement had been reached between the two companies. News Corp. Chairman and CEO Rupert Murdoch had initially wanted a Fox Business Channel launched as early as 2005 but deals with cable companies were not forthcoming. At this point, News Corp. has deals in place with the U.S.'s largest cable company, Comcast (24 million subscribers) as well as with DIRECTV, which is now controlled by Liberty Media. Time Warner Cable has 13 million subscribers and represents a crucial signing according to UBS analyst Aryeh Bourkoff because of its "presence in New York, which is obviously a critical market for a financial news service." According to Business Week, the website of the Financial Times is reporting the deal will bring News Corp. 10-15 cents in revenue per Time Warner subscriber. Such details were not disclosed by the involved parties. The new channel would challenge CNBC, which currently has the day time business news slot all to itself.
• Sources: Bloomberg, Business Week, Red Herring
• Related commentary: Fox Business Channel Ready For Action in 2007, Views On Liberty's DTV Swap, Murdoch Sells DirecTV : Does He Know Something Liberty Media Doesn't?. Conference call transcripts: News Corp F1Q07 (Qtr End 9/30/06)
• Potentially impacted stocks and ETFs: News Corp. (NWS), Time Warner (TWX), Comcast (CMCSA), Liberty Media (LINTA), DIRECTV Group (DTV). Competitors: General Electric (GE), EchoStar Communications (DISH), Cablevision Systems Corporation (CVC). ETFs: PowerShares Dynamic Media Portfolio (PBS)
R.R. Donnelley Completes Its 'Trilogy' With Von Hoffman Acquisition
Specialty printer R.R. Donnelley & Sons Company just announced its third acquisition in a short period -- it will buy educational textbook printer Von Hoffmann. The deal will be for a reported $412.5 million in cash, to be paid to Von Hoffman owner, Visant Corp. R.R. Donnelley's most recent acquisition comes on top of the purchase of magazine and catalog printer Perry Judd's Holdings for $176 million in December and competitor Banta Corp., for $1.3 billion in October. All three deals are expected to close during 1Q'07. R.R. Donnelley CEO Mark A. Angelson said: "This completes our 'trilogy' of transactions designed to offer our print customers greater capacity and flexibility, and further secures our position as the leader in our industry."
• Sources: Press Release, Reuters, TheStreet.com, multichannelmerchant.com
• Related commentary: S&P Maintains R.R. Donnelley Ratings, Why Are Financial Printing Expenses So High?
• Potentially impacted stocks and ETFs: R.R. Donnelley & Sons Company (RRD), Banta Corporation (BN)
ENERGY AND MATERIALS
Oil Prices Plummet as Temperatures Rise
Crude oil prices plummeted yesterday as traders speculated fuel supplies would increase due to mild U.S. weather. Forecaster Weather Derivatives said Northeast home-heating demand, responsible for 80% of all U.S. heating-oil use, will be 43% below normal through Jan. 10, and analyst surveys said fuel stockpiles likely rose last week. The $2.73 (4.5%) drop to $58.32/barrel was crude's biggest one-day plunge since April 27, 2005. Eugene Hodge, who manages a $4.3 billion oil and gas company portfolio: "With the East Coast looking warm for the foreseeable future, the focus will shift to how good a job OPEC does in cutting production." OPEC agreed last month to reduce output by 500,000 barrels/day as of Feb. 1; the group already cut 1.2 million barrels a day starting Nov. 1. Dennis Gartman, editor of the Gartman Letter: "It's inordinately warm here in the United States... plus you have the concerns that OPEC may not be able to monitor itself very well and adhere to its own quotas." The selling is also being driven by a general weakness commodities market. Analysts noted that oil prices are nearing 2006 lows of $55.81, which, if breached, could fall a long way. But last year oil prices surged amid worries about violence in Nigeria and Iran's nuclear capabilities; both factors are more relevant today than they were then. The Energy Department will release its weekly inventories report today.
• Sources: Bloomberg (I, II), BusinessWeek
• Related commentary: EIA website -- look for this week's This Week in Petroleum at 1:00 EST, Options Trader Phil Davis covers the oil market twice daily, Falling Natural Gas Prices Haven't Affected Stocks (Yet), Study: Washington's Oil Incentives Offer Little in Return, OPEC Cuts Production: Crude Prices May Still Fall
• Potentially impacted stocks and ETFs: United States Oil Fund ETF (USO), Oil Service HOLDRs ETF (OIH), PowerShares Dynamic Oil & Gas (PXJ), iShares Dow Jones U.S. Oil & Gas Exploration/Production (IOE), iShares Dow Jones U.S. Oil Equipment & Services (IEZ), SPDR Oil & Gas Equipment & Services (XES), SPDR Oil & Gas Exploration & Production ETF (XOP)
ExxonMobil Subsidized Misleading of Public on Global Warming, Says Watchdog
In a nod to tobacco industry tactics, ExxonMobil has allegedly subsidized a $16 million campaign of misinformation about global warming between 1998 and 2005 in an attempt to create uncertainty in the public's mind about climate change. A report by non-profit group Union of Concerned Scientists indicates that the oil giant gave the money to 43 groups that question the relationship between greenhouse gas emissions and global warming. Over the past 30 years, the earth has experienced a steep warming trend that is believed by most of the scientific community to be due to the emission of these gases through the burning of fossil fuels. The watchdog group asserts that ExxonMobil used the advocacy groups to misrepresent scientific studies, emphasize selected facts, and create the false impression of a debate among scientists on a subject that is not, in fact, in dispute. It accuses ExxonMobil of falsely asserting a desire to uncover "sound science" and exploiting its access to the Bush administration to manipulate federal policy to its advantage. Tobacco companies that used similar tactics were ultimately found liable for racketeering. Exxon calls the scientists' report "yet another attempt to smear our name and confuse the discussion of the serious issue of CO2 emissions and global climate change." In related news, the New York State attorney general is threatening legal action against ExxonMobil to force it to address a massive, decades-old oil leak under a Brooklyn neighborhood. Environmentalists and residents of Greenpoint, the affected neighborhood, are also preparing substantial class action suits.
• Sources: Newsday, Reuters, Bloomberg
• Related commentary: Ceiling Not Yet in View for Big Oil Stocks, Exxon Mobil Is Gearing Up For Continued Success, ExxonMobil: Black Magic, Oil Economics in a Nutshell. Conference call transcripts: Q3 2006.
• Potentially impacted stocks and ETFs: ExxonMobil Corp. (XOM). Competitors: BP plc (BP), Chevron Corp. (CVX), Royal Dutch Shell plc (RDS.A). ETFs: WisdomTree LargeCap Dividend (DLN), WisdomTree Total Dividend (DTD), streetTRACKS DJ Wilshire Large Cap (ELR)
Nardelli Severance Deal: Yet Another Home Depot Gaffe?
Bob Nardelli's severance package is giving Home Depot critics more ammunition. Nardelli resigned from his job as chairman and CEO on Wednesday, leaving with about $210 million -- the equivalent of about $96,000 for every day of his 6-year tenure -- on top of at least $119.2 million in salary and bonus, not including options, that he collected through the end of fiscal 2006, while HD shares shed 8%. Activist investors say the board should have cut a much less generous exit deal with Nardelli. Neil Minow of The Corporate Library, a corporate governance research group: "He should be giving money back, not taking more money out... performance has been poor and he has been hugely overpaid every step of the way." The AFL-CIO called on Home Depot to freeze all payments to Nardelli until the company determines whether the compensation pact was properly entered into, and whether Nardelli "complied with his obligations under those agreements." The union group also called for the resignation of Kenneth Langone, lead director. Others countered that Nardelli's severance terms were clearly outlined in his employment contract, and while the company paid a steep price to get rid of him, it may have been it's only choice to begin moving forward. Nardelli's successor, Frank Blake, praised Mr. Nardelli's "significant achievements" and said the company would stay on the "current strategic path." Many analysts speculated that Blake may be just a temporary CEO as the company charts a new course and fends off a possible leveraged buyout.
• Sources: Reuters, Globe and Mail
• Related commentary: Home Depot Investors Bought High: Unfortunately, The "Fool" Didn't Buy Higher, After Home Depot's Nardelli, Who's Next To Go?, Home Depot: Did Nardelli Just Take the Money and Run?, Home Depot CEO Bob Nardelli Resigns, Shares Up Strongly
• Potentially impacted stocks and ETFs: The Home Depot Inc. (HD). Competitors: Lowe's Companies Inc. (LOW), Fastenal Co. (FAST). ETFs: Retail HOLDRS ETF (RTH), Consumer Discretionary SPDR ETF (XLY), Vanguard Consumer Discretionary VIPERs (VCR)
Costco: International Sales Boost Revenue 14%
Costco reported that same store sales for the five week period ended Dec. 31st climbed 9% y/y, beating analyst estimates of 5.7%. International sales rose 10% y/y. Worldwide net sales increased 14% to $7.24 billion from $6.37 billion y/y. Costco operates 504 warehouses, including 371 U.S. locations. The company plans to open 16-18 more locations in FY2007.
• Sources: Bloomberg, Reuters, Marketwatch.com
• Related commentary: Costco is No Walmart, The Stealth E-Commerce Stocks?, When Goliath Stumbles: Wal-Mart, Target and Costco Conference call transcripts: Costco Wholesale F1Q07 (Qtr End 11/26/06) Earnings
• Potentially impacted stocks and ETFs: Costco (COST) Competitors: Wal-Mart (WMT), Target (TGT), BJ's Wholesale Club (BJ), Amazon (AMZN), Walgreen (WAG), Best Buy (BBY), Circuit City (CC) ETFs: Retail HOLDRs (RTH), Consumer Discretionary SPDR (XLY).
Amazon Launches Standalone Shoes and Accessories Site
Amazon.com announced its first standalone U.S retail site, Endless.com, which will sell footwear and accessories. The new site will feature 250 brands and 15,000 styles for men, women and children. Amazon will be competing against a growing number of online shoe retailers such as Zappos.com, Onlineshoes.com, Shoes.com, and Piperlime.com. Endless.com will provide its customers with free return shipping up to 365 days after purchases, and a 110% price guarantee. What sets Amazon's site apart from its competitors is its offer of free overnight shipping; rival sites charge a fee for the service. Amazon's management did not comment on how the company would absorb the costs for this unique perk. The growing popularity of luxury boots and handbags is driving the proliferation of such sites.
• Sources: Press Release, New York Times, Reuters, The Seattle Times
• Related commentary: Amazon's Endless.com website, Amazon.com Heads in Yet Another Direction, Online Marketplace Turns Away from E-Tailers like Amazon, Amazon May Sell Non-DRM MP3's, Pacific Crest: Amazon Priced Beyond Perfection. Conference call transcript: Amazon Q306
• Potentially impacted stocks and ETFs: Amazon (AMZN). Competitors: Gap (GPS), Nordstrom (JWN). ETFs: First Trust DJ Internet Index ETF (FDN), Internet HOLDRS (HHH)
More Bankruptcies, Slower Sales Predicted for U.S Car Manufacturers
Auto Executives around the world expect sluggish North American sales growth and more bankruptcies for auto parts suppliers in the next five years according to auditing and consulting firm KPMG LLP. Of the executives surveyed, 56% stated that bankruptcies would increase while 31% predicted that they would remain steady. A solid majority believe that Asian cars will surpass American brands, with 71% predicting a decline in sales for U.S. car manufacturers. 83% believe there will be an increased market share for hybrids, and 75% envision a higher demand for fuel-efficient cars. Many expressed a belief that the perception of high fuel costs would keep consumers away from SUVs and trucks. A number of executives were optimistic over cheaper ways to produce parts.
• Sources: 2006 KPMG Global Auto Executive Survey, Newsday/AP
• Related commentary: Toyota leads December Sales but Ford Holds on to #2, GM Stable While Other Auto Industry Heads Roll, Will GM Be Killed by the Electric Car?
• Potentially impacted stocks and ETFs: General Motors (GM), Ford (F), Daimlerchrysler AG (DCX), Toyota Motor Corp. (TM), Honda Motor Co. (HMC)
Toyota Leads December Sales Growth, But Ford Holds On To #2
Toyota again posted a double-digit monthly U.S. sales increase in December, crushing the competition as U.S. automakers' struggles continued. It recorded a y-o-y sales increase of 12% to 228,322 cars and trucks sold, versus a decline of 13% each for GM and Ford, which sold 341,327 and 233,621 autos respectively. DaimlerChrysler's sales fell 1% to 218,530. Honda's sales were off by 0.8% at 131,778 and Nissan posted a 0.6% gain to 91,776. GM sold its lowest number of autos annually since 1970 and had its seventh consecutive year of lower sales. Ford posted its sixth straight year of declining sales and lowest total since '91. Toyota meanwhile, achieved its 11th straight year of sales growth, boosting its U.S. market share to 15.4% in '06 against 13.3% in '05. Bloomberg reports Asian auto companies added 3% market share overall to 39.4%, while the U.S. big-3 dropped by 3.2% to 53.7% combined. According to Autodata Corp., U.S. December sales were 3.6% lower y-o-y at 1.43m units and '06 sales of 16.56m units was a 2.6% y-o-y decline and the lowest since '98. On an annualized basis GM's sales declined 8.7% to 4.07m autos, Ford's fell 7.9% to 2.92m, Toyota's grew 13% to 2.54m, DaimlerChrysler's fell 5.5% to 2.39m, Honda's gained 3.2% to 1.51m (its 13th consecutive annual rise) and Nissan's dropped 5.3% to 1.02m. Separately, the WSJ reports Ford and Chrysler are increasing incentives to drive sales at the start of '07.
• Sources: Bloomberg, WSJ
• Related commentary: GM Management Remains Stable While Other Auto Industry Heads Roll, Tata Motors Sales Recover in November, December, Ford's Internal Projections: Toyota Will Be #2 Within Months, Toyota: A Lesser Known Stock?
• Potentially impacted stocks and ETFs: Toyota (TM), DaimlerChrysler (DCX), General Motors (GM), Ford (F), Honda (HMC), Nissan (OTCPK:NSANY)
U.S. Markets: Split Decision at The Fed On Next Rate Move?
Long Idea: Hansen Natural Hits The Spot
Internet: Google To Hit $630, Fueled By Non-Search Assets - Jaffray
Hardware: BofA: Intel Q4 Looking Better Than Expected
Consumer Electronics: Analyst: Apple iTV Upgrade and/or Phone Likely at Macworld
Media: DG Fast Channel Raises Its Point.360 Stake -- Takeover Looming?
Healthcare: Why I'm Staying Away From LeMaitre Vascular
Biotech: 2007: The Year Of Biotech IPOs?
Retail: Home Depot Investors Bought High: Unfortunately, The "Fool" Didn't Buy Higher
Gold: Gold-Related Equities Took A Hit During Wednesday's Volatile Session
Energy: Beacon Power: No Need to Panic - Yet
Financial: Brookfield Leading the Way to Brazil
Asia: Japan: 2006 Market Cap Ranking
ETFs: Correlation Diversification Reduces Portfolio Risk
Small-Caps: What's Behind Highway Holdings' High Volume Surge?
IPO Analysis: The Case For IPOs In A Shrinking US Market
Sound Money Tips: Lowering Car Insurance
Jim Cramer: Latest stock picks
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