Bernanke: Impending "Fiscal Crisis" on SS and Medicare Costs?
Fed chair Ben Bernanke issued a sharp warning yesterday that unless Social Security and Medicare are revamped, the economy could be severely weakened. The U.S. contains 78 million baby boomers, the oldest of whom will begin retiring in 2008. "The longer we wait, the more...Draconian...the adjustments are going to be," Bernanke told the Senate Budget Committee. Unless the government acts, the deficit will push federal debt to unprecedented levels, sending interest rates shooting upward. The ballooning national debt could set off a "fiscal crisis" that could be solved only by "sharp spending cuts or tax increases or both." Last year, the deficit reached a four-year low of $248 billion, but Bernanke calls that the "calm before the storm." Spending on Social Security, Medicare and Medicaid is forecast to reach 15% of GDP by 2030 versus 8.5% in 2006. Bernanke warned that economic growth alone will not be enough to stem the crisis, but refrained -- in keeping with his pledge to stay out of fiscal politics -- from offering specific solutions. President Bush will unveil the federal budget on February 5 as well as a plan to balance the budget by 2012. Treasury Secretary Henry Paulson has been assigned the task of overhauling Social Security.
• Sources: Bloomberg, MarketWatch, Business Week, Wall Street Journal (I, II [text])
• Related commentary: 'Era of Low Inflation'? Grandma Begs to Differ, Democrats Push for Medicare Part D Reform, Orthopedics: A (Baby) Booming Industry, 'Unmeasured Savings' and Other Marcoeconomic Myths, Dealing with Baby-Boom-Backlash -- For Boomers and Non-Boomers, Some Friendly Advice From the Tooth Fairy: Don't "Wait" To Buy Stocks, Use Common Sense To Decipher Fed Comments, Paulson's Optimism is Bewildering to Say the Least
• 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)
Pulte Homes Cuts Q4 Guidance, Stock Drops in Extended Trading
Pulte Homes announced preliminary Q4 results late yesterday that were sharply lower than its previous guidance. Q4 EPS is now seen between -$0.05 to $0.05, from $0.30 to $0.70 previously. A poll by Thomson shows analysts had expected $0.37. Impairments and land-related charges are now estimated between $330 million to $350m, or $0.83 to $0.88/share, more than double prior guidance of $150m. Q4 home closings totaled 12,566, or a 20% decline year-over-year and new orders of 6,466 represent a 34% decline. Pulte's CEO commented, "... [we] continue(s) to navigate through a challenging operating environment, with demand for new homes during the fourth quarter still far below pre-2006 levels." In a positive note, average sales price per home was up 6% to approx. $341k. Backlog totaled 10,255 homes at the end of Q4, valued at $3.6b. Pulte reports Jan. 31 after the market's close and its conference call will be held the following morning at 8:30 ET. Its shares were up 0.3% in normal trading yesterday at $32.90, but lost 3.5% to $31.75 in extended trading on volume of 85.5k.
• Sources: Press release, MSN Money-AP
• Related commentary: Weak Housing Forecasts Foretell Further Downside, More Evidence of the Housing Bottom from the Builders, Housing Bubble and Real Estate Market Tracker, Assessing the Homebuilder Stocks
• Potentially impacted stocks and ETFs: Pulte Homes (PHM). Competitors: DR Horton (DHI), Centex (CTX), Lennar (LEN), Toll Brothers (TOL), KB Home (KBH), Beazer Homes (BZH). ETFs: iShares Dow Jones US Home Construction (ITB), streetTRACKS SPDR Homebuilders ETF (XHB)
IBM Profit Up 11%, but Shares Drop on Hardware Sales
In an apparent vindication of its strategy to move away from low-margin offerings like PCs into higher-margin areas like software and services, IBM has reported an 11% net income gain, exceeding analyst expectations, thanks to higher global services sales and burgeoning software demand. IBM shares fell 5%, however, on weak hardware sales. The company earned net income of $3.54 billion this quarter, or $2.31/share, up from $3.19 billion, or $1.99/share, a year ago. Revenue grew 7.5% to $26.4 billion, up from $24.4 billion and ahead of Street forecasts of $25.7 billion. Earnings from continuing operations were $3.5 billion, or $2.26/share, also ahead of the Street's $2.19 expectation. The global services division was a strong revenue driver, rising over 6% to $12.8 billion on new contracts with the German military, the states of Indiana and Texas, and mobile-phone company Vodafone. Software, the company's most profitable business unit, saw a 15% rise in sales to $5.7 billion. The total gross profit margin rose to 44.6% in Q4 from 44.1% a year ago. Revenue from hardware sales, the only blot on the report, ticked up to a disappointing $7.2 billion from $6.9 billion last year.
• Sources: Bloomberg, Red Herring, MarketWatch, Wall Street Journal. Conference call transcripts: Q4 2006
• Related commentary: Color On Big Blue's Report, The Decline of the PC: Computers No Longer a Growth Industry, Microsoft, Apple and IBM: Gorillas in the Living Room, Goldman On IT Trends: What Tech Companies Stand To Gain?, IBM: You Don't Need a Computer to See Its Growth Potential
• Potentially impacted stocks and ETFs: International Business Machines (IBM). Competitors: Accenture Ltd. (ACN), Electronic Data Systems Corp. (EDS), Hewlett-Packard Co. (HPQ), Microsoft Corp. (MSFT). ETFs: Internet Architecture HOLDRs (IAH), iShares Goldman Sachs Technology Indx (IGM), DIAMONDS Trust, Series 1 (DIA), iShares S&P Global Technology (IXN)
JDS Uniphase Raises Guidance on Q2 Sales
Shares of optical switching and transmission component manufacturer JDS Uniphase surged 12.8% to $17.81 on news that Q2 sales rose 17%, ahead of expectations. Full results will be reported on January 31. Sales increased to $360-365 million from $312.9 million a year earlier, exceeding the company's previous guidance of $332-352 million. The Street expectation were $341.8 million. The company attributes the strong showing to increased demand for testing equipment, which compensated for weakness in optical communications. CEO Kevin Kennedy is trying to reverse the fortunes of JDS, which hasn't had an annual profit since 1996, by making acquisitions in the testing division and catering to fresh demand from telephone service providers that are offering video over the Internet. In October, JDS declared a reverse 1-for-8 stock split in an attempt to shore up the stock price, which dropped 12% in 2006.
• Sources: Bloomberg, MoneyCentral
• Related commentary: JDSU: Second Quarter Revenue Ahead of Previous Guidance, Death of the All Optical Network, Reverse Splits at JDSU and Ciena: The Effects, Winners and Losers in the Optical Communications Market
• Potentially impacted stocks and ETFs: JDS Uniphase Corp. (JDSU). Competitors: Finisar Corp. (FNSR), Ciena Corp. (CIEN)
Hewlett-Packard Extends Lead Over Dell in PC Market
Hewlett-Packard has topped Dell in PC sales for the second quarter in a row, securing its position as the world's biggest PC manufacturer. HP took 17.4% of the market, up from 15% last year, while Dell was down to 13.9% from 16.4%. Dell and HP both shipped 38 million units, but HP's shipments were up 19.2% in 2006 while Dell's were up a scant 3.5%. HP upped unit sales by 23.9% in Q4, in part due to its vast retailer network, which includes Wal-Mart. Dell's quarterly sales, on the other hand, skidded an alarming 8.7%. Overall, PC sales are declining: total shipments rose 7.4% in Q4 to 67.4 million versus 16% in Q4 2005. PC sales in the U.S. were constrained by new electronic offerings like widescreen TVs and gaming consoles, as well as by the delayed release of Microsoft's Vista OS. Dell in particular was hurt by contracting demand for business PCs, an SEC probe, a battery recall, and persistent customer complaints. The U.S. market -- in which Dell managed to retain top position -- slid 3.2% to 16 million units in Q4.
• Sources: Bloomberg, Channel Register
• Related commentary: The Decline of the PC: Computers No Longer a Growth Industry, Dell Losing Market Share, Hewlett-Packard Maintaining, How Hewlett-Packard Got Its Groove Back, Hewlett-Packard Has Big Plans, Understanding HP's Changing Profit Margins
• Potentially impacted stocks and ETFs: Hewlett-Packard Co. (HPQ). Competitors: Dell Inc. (DELL), International Business Machines Corp. (IBM), Gateway Inc. (GTW), Apple Inc. (AAPL), Lenovo Group Ltd. (OTCPK:LNVGY), Toshiba Corp. (OTCPK:TOSBF). ETFs: Internet Architecture HOLDRs (IAH), iShares Dow Jones US Technology (IYW), PowerShares Dyn Hardware&Con Electronics (PHW), iShares Goldman Sachs Technology Indx (IGM)
MySpace Sued For 'Millions' Over Failure To Protect Abused Minors
After announcing the availability of software (called 'Zephyr') earlier this week that will grant parents greater ability to monitor their children's online activity, social networking site MySpace was slapped with four separate lawsuits by parents who hold News Corp.-owned MySpace responsible for their underage children's sexual abuse. In the view of one of the suing law firms, "MySpace waited entirely too long to attempt to institute meaningful security measures that effectively increase the safety of their underage users." The site's MySpace's chief security officer Hemanshu Nigam responded that while "we take proactive measures to protect our members, [users must] apply common sense offline safety lessons in their online experiences and engage in open family dialogue." According to a lawyer representing the plaintiffs, the suits are "in the millions of dollars."
• Sources: Myspace.com, Wall Street Journal, MSN/AP, Reuters
• Related commentary: MySpace To Allow Parents To Partially Monitor Children's Online Behavior, Fox Interactive/MySpace Beats Yahoo in November Page Views. Conference call transcripts: News Corp F1Q07 (Qtr End 9/30/06) Earnings Call Transcript
• Potentially impacted stocks and ETFs: News Corp. (NWS). Competitors: Yahoo (YHOO), Microsoft (MSFT), Google (GOOG). ETFs: PowerShares Dynamic Media Portfolio (PBS), Internet HOLDRs (HHH)
ENERGY AND MATERIALS
GE Earnings Double on Strong NBC Numbers, Meeting Forecasts
GE Corp., the world's second largest company, said Q4 earnings were up 12% y/y to $6.58 billion ($0.64/share), matching analyst consensus estimates. GE sold its reinsurance unit, and thus treated it as a discontinued operation; inclusive, net income more than doubled from $3.16 billion a year earlier. Gross revenues were up 11% to $44.6b, also on target. GE confirmed it is reviewing a much-rumored disposal of its plastic business. It also said it still plans to execute a $5-7 billion stock buyback plan in 2007. NBC posted its first profit in a year; advertisers were impressed by its football lineup and "Heroes" show. GE gave Q1 2007 guidance of $0.43-0.45/share, and $2.18-2.23 on the year. GE shares were up 5.5% in December, giving it a market value of $392 billion, second only to Exxon.
• Sources: GE Press Release, Bloomberg, Wall Street Journal
• Related commentary: Microsoft, GE, Intel Garner Most 2007 'Buy' Recommendations, GE and Citigroup Rallies: How Wall St. Missed It. Conference call transcripts: General Electric Q3 2006, GE Q4 2006 (later today)
• Potentially impacted stocks and ETFs: General Electric Co. (GE). streetTRACKS Dow Jones Global Titans Index Fund (DGT), Wisdom Tree High-Yielding Equity Trust (DHS), iShares S&P 500 (IVV)
Crude Price Punctures $50 Support on High U.S. Inventories
Crude ticked below $50 a barrel yesterday, a 20-month low, on a DOE report that U.S. inventories rose beyond expectations. It recovered to $50.48 by the end of the session, a 3.4% drop. Crude inventories increased by 6.8 million barrels last week, dramatically beyond consensus estimates of 325,000 and the largest weekly gain since October 2002. Saudi Arabia just nixed a proposed third production cut to stem the 17% drop in the oil price since the beginning of the year. In a striking juxtaposition, the Saudis -- who dismissed the oil price freefall as a "short-term aberration" -- announced plans to increase production capacity nearly 40% by 2009 and double refining size over the next five years concurrently with the International Energy Agency's report lowering its world oil demand growth forecast for 2007. Global demand did rise 0.9% in 2006 on growth in the Chinese and Middle Eastern markets, but that was down from 3.9% in 2004 and 1.5% in 2005. The IEA's report also noted that oil consumption in the 30 OECD countries fell 0.6% last year, the first such drop in over 20 years. The drop suggests that businesses and consumers in the developed world finally began to curb consumption in response to precipitous oil prices; the tipping point appears to have been last July, when crude hit $78. Commodities guru Jim Rogers sees crude recovering and eventually reaching $100 on surging Asian demand and the lack of any significant oil finds in the past 30 years.
• Sources: Bloomberg (I, II, III, IV), Wall Street Journal (I, II [blog], III)
• Related commentary: Why You Shouldn't Have Been Slicked by the Oil ETF Fiasco, Oil vs. Energy Stock Prices: Something's Gotta Give, MacroShares Crude Oil ETFs: Unintentional Comedy Show, Oil Hovers Around $52 on Prospect of Emergency OPEC Meeting, Oil: On Its Last Legs, The Big Picture on Oil Prices, Oil at $35 a Barrel? It Could Happen to You, Oil Plunge: There's a Downside Too, Crude Oil Price Is Falling: How Do You Like Them Apples?, Oil Approaches 19-Month Low; Dow Sets Record, Panic in the Crude Pits, Oil Price Long Term Outlook
• Potentially impacted stocks and ETFs: ConocoPhillips (COP), Chevron Corp. (CVX), ExxonMobil (XOM), BP plc (BP), Royal Dutch Shell (RDS.A), Marathon Oil (MRO). ETFs: Oil Service HOLDRs Trust (OIH), United States Oil Fund LP (USO), PowerShares DB Oil (DBO), Claymore MacroShares Oil Up Tradeable (UCR), Claymore MacroShares Oil Down Tradeable (DCR), iPath Goldman Sachs Crude Oil ETN (OIL), iShares Dow Jones U.S. Oil & Gas Exploration Index (IEO)
Nicotine Study Re-ignites Call for FDA Regulation of Cigarettes
Thursday, a Harvard study concluded cigarette companies have been deliberately increasing nicotine levels in cigarettes to make them 11% more addictive -- leading to calls for greater federal oversight of the tobacco industry. Massachusetts Senator Edward Kennedy promised he would reintroduce a 2004 bill that would allow the FDA to regulate cigarettes; last round the bill failed in the House after receiving Senate approval. Cigarette maker Philip Morris released a statement taking issue with the study, but said it supported Kennedy’s bill. Morris said internal studies showed that nicotine yields for its Marlboro brand were unchanged in 2006 since 1997; any changes were due to random variations. Harvard professor Dr. Gregory Connolly, a leader of the study, said there was nothing random about the growth in nicotine yields, which were consistent across all brands and makers: "We know from our data that there are intentional design changes that result in more nicotine in smoke that increases the capacity for the cigarette to cause and maintain addiction." In August a federal judge found that tobacco companies had for decades "manipulated the use of nicotine so as to increase and perpetuate addiction... [and] lied, misrepresented and deceived the American public."
• Sources: New York Times, Bloomberg
• Related commentary: Warning: Cigarettes May Be Good For Your Financial Health, Light Cigarette Suit Could Exact a Heavy Price on Tobacco Companies, The Tobacco Empire Strikes Back
• Potentially impacted stocks and ETFs: Altria Group Inc. (MO), Gallaher Group Plc (GLH), Carolina Group (CG), British American Tobacco (BTI), Reynolds American Inc. (RAI), Vector Group Ltd. (VGR)
TRANSPORT AND AEROSPACE
Harley-Davidson Beats Street On Strong Int'l Growth, But Stock Drops
Harley-Davidson announced Q4 net income grew 9.7% to $252.4 million, or $0.97/share, beating the Street by a penny. Revenue increased 11.9% to $1.5 billion, beating analysts' average estimate of $1.44b. Full year net income was up 8.7% to $1.04b, or $3.93/share on revenue of $5.34b (+8.6% y-o-y), beating analysts' average estimate of $3.92/share on revenue of $5.75b. Wholesale shipments increased 8.6% on the year to 349,196 units with 92,848 units shipped in Q4 (+6% y-o-y). Worldwide retail sales in Q4 increased 6.4% y-o-y and full year sales rose 8.5%. Double-digit increases were achieved in international markets. However, retail sales in the U.S. declined 0.3% in Q4, but were up 5.9% on the year. Harley said it expects to ship between 82k to 84k units in Q1 versus 79,506 units last Q1. It expects EPS growth between 11% to 17% each year through 2009. Its shares lost 2.6% yesterday to close at $70.95, perhaps due to analyst focus on quarterly sales weakness in the U.S.
• Sources: Earnings press release, Bloomberg, MarketWatch
• Related commentary: Harley Davidson Stalls: Problems Beyond Subprime Loans?, Post Retirement Benefits Threaten To Eat Harley Davidson's Profits, S&P Gives Harley Davidson Securitization Negative Bias, Harley Riding High in China
• Potentially impacted stocks and ETFs: Harley-Davidson (HOG)
E*Trade Meets Estimates On Q4 Earnings; Stock Down Slightly
Deep discount online broker E*Trade Financial Corp. announced after yesterday's close that profits for 4Q06 jumped 37% to an all-time high, mainly through organic growth. Net income was $176.7 million, good for EPS of $0.40, compared to earnings of $129.4 million, or EPS of $0.32, a year earlier. Revenue came in at $628.8 million, up 31% from the $478.9 million during the year ago period. According to a Thomson survey, consensus estimates were for EPS of $0.39 on revenue of $627 million. For the year 2006, E*Trade's profits rose 46% to $628.9 million, or $1.44 per share, from $430.4 million, or $1.12 per share, in the previous year. CEO and President Jarrett Lilien said "2007 is budgeted to be our fifth consecutive record year"; the company guided to EPS of $1.65 to $1.80 for 2007. Competitors Charles Schwab and TD Ameritrade each posted strong earnings earlier this week. E*Trade shares were down $0.23 to $24.48 in after hours trading.
• Sources: E*TRADE Q4 2006 Earnings Call Transcript, Press Release, MSN/AP, MarketWatch, TheStreet.com
• Related commentary: E*Trade: Three Key Investment Factors, Online Brokers' Blasè Response To BOA May Come Back To Haunt Them, Cramer's Take on ETFC
• Potentially impacted stocks and ETFs: E*Trade Financial Corp. Competitors: Charles Schwab (SCHW), TD Ameritrade (AMTD). ETFs: First Tr DJ Internet Index Fd (FDN), Internet HOLDRS (HHH)
GE To Acquire Part of Abbott Labs' Diagnostic Unit For $8.13 Billion
Abbott Laboratories agreed to sell part of its diagnostic equipment uunit to GE for $8.13 billion. In the deal, GE will get product lines that include machines that test blood proteins for conditions including HIV and heart disease, good for annual sales of $2.7 billion. GE's latest acquisition will help CEO Jeffrey Immelt's continue to grow GE's $17 billion healthcare unit while Abbott will retain its diabetes monitoring and genetics testing units, allowing it to focus on higher-profit pharmaceutical units that treat disease rather than diagnose it. After much discrepancy in the press Wednesday over the likely details of GE's pending acquisition of the diagnotic unit, the deal's details matched Bloomberg's initial reports and contradicted the New York Times' account. The Times reported a likely deal for "as much as five billion dollars" and made it appear as if the entire diagnostics unit was up for sale, neither of which turned out to be accurate. In today's paper, the New York Times chose to run a "Bloomberg News" piece reporting the deal after using its own reporters for yesterday's article speculating on the deal's details.
• Sources: Bloomberg, Retuers, MarketWatch, Wall Street Journal, New York Times
• Related commentary: Abbott's Makeover Attracts Investors, Differing Accounts On GE/Abbott Deal, Top Picks for 2007 from JPMorgan HealthCare Analysts
• Potentially impacted stocks and ETFs: Abbott Laboratories (ABT), General Electric (GE). ETFs: iShares Dow Jones US Pharmaceutical Indx (IHE), iShares Dow Jones US Healthcare (IYH), Pharmaceutical HOLDRS (PPH)
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