Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published at 6:30 AM ET every market day and delivered to 800,000 email subscribers

MACRO AND HOUSING

Vacant Homes on the Market Hit Record 2.1 Million

The Census Bureau reported yesterday that the number of vacant homes on the market swelled 34% to 2.1 million at the end of 2006 versus the end of 2005, the fastest increase ever. The vacancy rate for owned units set a record at 2.7%, up from 2.0% a year earlier. That rate has not been above 2% for forty years. The report implies significant excess supply in the housing market and thus no end in sight to the housing slump. "This argues that housing starts need to go down more," said James O'Sullivan, a UBS economist. Housing starts have declined 18% to a seasonally adjusted annual rate of 1.64 million over the past year. In 2006, the number of housing units rose by 2.14 million, but the number of units occupied rose by only 1.04 million. The homeownership rate -- the percentage of homes occupied by their owners -- was flat at 68.9%. Excess supply is likely to lead to an increase in homes available for rent, which should drive rental prices down and reduce core inflation. Northern Trust economist Asha Bangalore predicts a corresponding "quicker change" in the federal funds overnight interest rate.
• Sources: MarketWatch
• Related commentary: Economic Report Summary: Mixed Housing Stats, Existing Home Sales are Fantastic, According to the National Association of Realtors Anyway, Existing-Home Sales Dismal, But Expected To Pick Up
• Potentially impacted ETFs: iShares Dow Jones US Real Estate (NYSEARCA:IYR), iShares Cohen & Steers Realty Majors (NYSEARCA:ICF), streetTRACKS DJ Wilshire REIT ETF (NYSEARCA:RWR), Vanguard REIT Index VIPERs (NYSEARCA:VNQ)

TECHNOLOGY

Sony Reports Lower Q3 Profit on Game Segment Loss; Boosts FY Guidance

Sony reported Q3 (ended Dec. 31) net income and operating profit that fell 5.3% and 14.9% respectively, despite a 9.8% increase in revenues, hurt by a ¥54.2 billion ($446m) operating loss in its Game segment related to the PS3 launch and price cut. Sony raised its full fiscal year profit guidance based on strong electronics sales, yen weakness and record earnings at Sony Ericsson; but polls by media and financial research firms are reporting differing consensus estimates. Sony-SNE-1yr-chart-01-29-07 Sony's Q3 net income totaled ¥159.9b ($1.32b) on sales of ¥2.607t ($21.5b), led by "favorable performance" in its Electronics segment (Bravia LCD TVs and Cyber-shot digital cameras) and a sharp rise in revenues/profit in its Pictures segment. For the current fiscal year ending in March, Sony maintained its sales guidance at ¥8.23t ($67.75b), but raised expected operating income by 20% to ¥60b ($494m) and net income by 38% to ¥110b ($905m). A Thomson poll shows analysts expect net income of ¥108b and Reuters reports a consensus of ¥104b, whereas Bloomberg reports analysts' median estimate of ¥122.1b; compared to the ¥123.6b it earned last fiscal year. Sony's ordinary shares lost 1.75% to ¥5,630 ($46.15 ADR equiv. at ¥122/$1) ahead of its earnings release.
• Sources: Sony earnings release, presentation and supplemental material [pdf], Bloomberg, MarketWatch, Reuters, WSJ
• Related commentary: PlayStation 3 Losses Might Hit Sony Q3 Profit by 50%, Game Points: Game Console and Software Stock Update, Sony Financial IPO Talks Heat Up; PS3 Launch Date Set for Europe. Conference call transcript: Sony F2Q06
• Potentially impacted stocks and ETFs: Sony (NYSE:SNE). Competitors: Nintendo (OTCPK:NTDOY), Microsoft (NASDAQ:MSFT), Canon (NYSE:CAJ), Matsushita (NYSE:MC), Toshiba (OTCPK:TOSBF), Philips Electronics (NYSE:PHG), Apple (NASDAQ:AAPL)

Verizon Happily Rejected Chance To Be Sole iPhone Service Provider

According to Verizon President and COO, Denny Strigl, his company rejected the chance to be where Cingular Wireless is today: sole service provider for Apple's soon-to-be-released iPhone. He's glad they did. On yesterday's earnings conference call, Strigl revealed Apple had approached Verizon Wireless, jointly owned by Verizon Communications and Vodafone, two years ago seeking a partner for its then top-secret iPhone. "The iPhone product is something we are happy we aren't the first to market with," Strigl noted, citing Apple's steep and one-sided terms including a cut of monthly subscription fees and total control over distribution and customer relations. Another Verizon spokesman added, "We have great distribution partners nationally, regionally and locally... And the deal [Apple] wanted would have frozen out those partners."
• Sources: Verizon Q4 2006 Earnings Call Transcript, USA Today, CNet, Macworld
• Related commentary: Verizon Hung Up on iPhone Deal, iPhone: Who Stands To Gain and Lose?, The iPhone Will Probably Be Released In 2007: Who Is Apple Up Against?
• Potentially impacted stocks and ETFs: Verizon (NYSE:VZ), Apple (AAPL), Vodafone (NASDAQ:VOD). Competitors: AT&T (Cingular) (NYSE:T). ETFs: PowerShares Dynamic Telecom & Wireless ETF (PTE), Wireless HOLDRS (NYSEARCA:WMH)

Intel, IBM Take Moore's Law to the Next Level

Over the weekend, Intel and IBM announced separately their solutions to heat-related challenges involving Moore's Law -- the ability to double the number of transistors on a chip about every two years -- by replacing the use of silicon dioxide as an insulator with various metals and a new material collectively called "high-k and metal gate", resulting in improved performance and better energy retaining. Intel said it believes it has more than a year lead over competitors in 45nm processors and expects production to begin in the second-half of this year on its "Penryn" codenamed 45nm family of products. Intel co-founder Gordon Moore said this is the "... biggest change in transistor technology since ... the late 1960s." IBM announced it plans to apply its technology to products with chip circuits as small as 45nm from 2008. The research director at Envisioneering Group commented, "Intel will be the first to have this in production, but IBM could potentially have a density advantage compared with Intel's scheme." Shares of Intel gained 1.75% to close at $20.89 yesterday; IBM +1.12%, $98.54; AMD -1.66%, $15.95; ASM Int'l, reportedly a supplier to Intel of a product in "high-k gate", -0.23%, $22.00.
• Sources: Intel press release, IBM press release, BusinessWeek-AP
• Related commentary: Color On Intel's Transistor News: ASM Supplying Tools?, Intel's Shrinking Chips: Goodbye Silicon Dioxide, Intel Back In Server Driver's Seat After Sun Deal. Conference call transcripts: Intel Q4'06, IBM Q4'06, AMD Q4'06
• Potentially impacted stocks and ETFs: Intel (NASDAQ:INTC), [Reported Intel supplier] ASM International (NASDAQ:ASMI), IBM (NYSE:IBM). Competitor: Advanced Micro Devices (NASDAQ:AMD), [IBM's transistor dev. partners inc. AMD] Sony (SNE), Toshiba (OTCPK:TOSBF). ETFs: Semiconductor HOLDRs (NYSEARCA:SMH), iShares Goldman Sachs Semiconductor (IGW), PowerShares Dynamic Semiconductors (NYSEARCA:PSI), SPDR Semiconductor (NYSEARCA:XSD), Technology Select Sector SPDR (NYSEARCA:XLK)

INTERNET

Microsoft's Next Challenge: Internet Search

In a bid to tackle the problem of its shrinking share of the Internet search market, Microsoft is taking on Google's ad-supported business model head-on, said CEO Steve Ballmer yesterday at the launch of Vista, the company's new operating system. Now that Microsoft 30 01 2007 ChartMicrosoft's foot is squarely on the chest of the open-source software market, it is in a position to confront its dwinding share of the U.S. search market, which is now 8% to Google's 51%, according to Nielsen/NetRatings. Microsoft also enjoys nowhere near as substantial a network of advertisers to support the traffic generated by its search engine as does Google. Microsoft will need to invest more heavily in its search technology and advertising system and does not rule out appropriate acquisitions. Ballmer also indicated that Microsoft might try to devise a different kind of search from a Google search, which produces many "false positive" results.
• Sources: Financial Times, Brand Republic, MSNBC
• Related commentary: Microsoft's Profit Drops 28%; Raises Forecasts; Shares Gain 2% After Hours, A Close Look At Microsoft's Earnings, The 20 Most Popular Websites. Conference call transcript: F2Q07 (Qtr End 12/31/06)
• Potentially impacted stocks and ETFs: Microsoft Corp. (MSFT). Competitors: Google, Inc. (NASDAQ:GOOG). ETFs: streetTRACKS DJ Wilshire Large Cap (ELR), First Trust Dow Jones Internet Index (NYSEARCA:FDN)

ENERGY AND MATERIALS

Saudis to Cut Oil Output, Again

In an aggressive attempt to shore up oil prices, WSJ reports that Saudi Arabia -- which has already dropped its oil output -- will cut production a further 158,000 barrels/day effective Feb. 1, bringing its total cuts since last summer to 1 million b/d. This is nearly double the total cuts it Oil 30 01 2007 Chartagreed to during OPEC summits, and brings its output to "around 8.5 million b/d." Saudi oil officials say more cuts are on the way, but have been careful not to pinpoint a price target. Roger Diwan, an analyst at PFC Energy, a Washington industry consultancy, says this: "They are defending prices from falling below $55 quite aggressively... The Saudis, they don't talk a lot, so look at what they do, and that will give you the whole story." Yesterday crude traded down $1.41 to $54.01/barrel when the outgoing Saudi ambassador to the U.S. said current price levels are "adequate to meet the requirements of producing and consuming countries," and dismissed speculation that Saudi Arabia was trying to drive prices down in order to hurt Iran's export revenues.
• Sources: Wall Street Journal
• Related commentary: Crude Oil Price Rebounds on U.S. Reserve Plan, What's Happening With Crude Oil ?, How Crude Oil Inventories Impact The Market
• Potentially impacted stocks and ETFs: Oil Service HOLDRs ETF (NYSEARCA:OIH), United States Oil Fund ETF (NYSEARCA:USO), PowerShares DB Oil Fund (NYSEARCA:DBO), Claymore MacroShares Oil Up (UCR), Claymore Macroshares Oil Down (DCR), iPath Goldman Sachs Crude Oil ETN (NYSEARCA:OIL), iShares Dow Jones U.S. Oil & Gas Exploration/Production (NYSEARCA:IEO)

Exxon Drilling for Gas Near Its Own HQ

Exxon Mobil is stepping up production at the Barnett Shale gas field, which surrounds Fort Worth, Texas and lies very close to the company's global HQ in Irving. Barnett Shale is the fastest-growing gas field in the country. In 2005, Exxon became a part of Metroplex Exxon 30 01 2007 ChartBarnett Shale LLC, a JV with Dallas-based Harding Co. and Houston-based Petrosearch Energy Corp. Exxon owns 80% of the venture. The company has spent the past half-year reconfiguring a gas pipeline and opening seven wells. It is now prepared to open five rigs by year-end and drill more than 50 wells next year across eight counties encircling Fort Worth. Up to now, Barnett Shale has been developed by smaller energy companies like Devon Energy, XTO Energy, EOG Resources and Chesapeake Energy. Metroplex Barnett Shale currently has 15,000 acres under lease and is acquiring more area. Exxon will operate the JV.
• Sources: Wall Street Journal
• Related commentary: ExxonMobil Subsidized Misleading of Public on Global Warming, Says Watchdog, Dow Components Comparative Performance: GM Leads, Exxon Lags, Exxon Shares Sinking to Levels They Richly Deserve
• Potentially impacted stocks and ETFs: ExxonMobil Corp. (NYSE:XOM). Competitors: BP plc (NYSE:BP), Chevron Corp. (NYSE:CVX), Royal Dutch Shell plc (NYSE:RDS.A), Devon Energy Corp. (NYSE:DVN), XTO Energy Inc. (XTO), EOG Resources Inc. (NYSE:EOG), Chesapeake Energy Corp. (NYSE:CHK). ETFs: WisdomTree LargeCap Dividend (NYSEARCA:DLN), WisdomTree Total Dividend (NYSEARCA:DTD), streetTRACKS DJ Wilshire Large Cap (ELR)

TRANSPORT AND AEROSPACE

British Airways Strike That Never Was Will Still Cost It

British Airways Plc may have avoided a strike by cabin crew members hours before it was set to go into effect but it will still likely lose millions of pounds as a result of flight cancellations.bab The airline canceled 1,300 flights and will not be able to reninstate many of them on such short notice. The strike was set into motion when CEO Willie Walsh, in an attempt to trim $100 million in costs a year, attempted to reduce sick leave allowances as well as the number of crew members on flights. The strike was averted only after Walsh agreed to leave current sick leave allowances intact and to raise pay 4.6% in the coming year.
• Sources: Bloomberg, Wall Street Journal, MarketWatch, USA Today
• Related commentary: Cramer's Take on BAB, Seeking Alpha Airlines Theme Page
• Potentially impacted stocks and ETFs: British Airways plc (NYSEARCA:BAB)

FINANCIAL

Merrill Lynch to Buy First Republic for $1.8 Billion

Merrill Lynch has agreed to purchase San Francisco's First Republic, a bank that specializes in mortgages on luxury homes, for $1.8 billion. The acquisition will be Merrill's biggest in almost 10 years. The offer, which values First Republic at $55 per share, amounts Merrill Lynch 30 01 2007 Chartto a 44% premium to First Republic's Friday closing price of $38.30. Merrill will pay half in cash and half in stock. The acquisition is designed to give Merrill Lynch's brokerage business access to wealthy private investors and coincides with CEO Stanley O'Neal's desire to bolster Merrill's ability to supply the banking needs of small business owners. Analysts view the purchase price, which is 24x Street estimates for First Republic's 2007 earnings, as high in view of the bank's relatively slow projected growth over the next two years. The acquisition is also perceived to be risky on the heels of Merrill's acquisition earlier in January of a subprime mortgage business, First Franklin, which the brokerage purchased from National City Corp. First Republic shares leaped 40% to $53.63 on the news while Merrill shares fell 2.3% to $92.39.
• Sources: Wall Street Journal, Bloomberg
• Related commentary: Merrill Lynch Boosts Q4 Profits by 68%, CEOs Speak: Merrill Lynch, Citigroup and E*Trade, Barron's Stocks for a Wealthy America. Conference call transcripts: Merrill Lynch Q4 2006
• Potentially impacted stocks and ETFs: Merrill Lynch & Co., Inc. (MER), First Republic Bank (NYSE:FRC). Competitors: Greater Bay Bancorp (GBBK), JP Morgan Chase & Co. (NYSE:JPM), UnionBanCal Corp. (UB), Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS). ETFs: iShares Dow Jones US Broker-Dealers (NYSEARCA:IAI), Financial Select Sector SPDR (NYSEARCA:XLF), Vanguard Financials ETF (NYSEARCA:VFH)

MUST-READS ON SEEKING ALPHA TODAY

U.S. Markets: So You Want To Invest Like Buffet? Here's An Easy Trick
Housing: Housing: That Was Then, This Is Now
Long Idea: Zarlink: An Undervalued Comm-Semi
Short Idea: Nortel Networks: Why Valuation Matters
Internet: Google Heads to $600
Telecom: Vodafone Already Has 3.5m Net Adds Bagged
Networking: Color on Atheros Earnings: Impressive Transition To of 802.11n Products
Hardware: Sun: 8-K Filing Fails to Address Most Basic Question
Chips: AMD, Intel Price War Revisited
Software: CEOs on Outsourcing: Infosys, IBM, Satyam, Convergys and AsiaInfo
Consumer Electronics: Apple TV Already Sold Out
Media: Getty Images: Quite a Day, All Around
Healthcare: AtheroGenics: The Clock Is Ticking
Biotech: Amgen: Unwarranted Dip Provides Opportunity
Retail: Still Confident in Sally Beauty's Intrinsic Value
Transport: UAG and Chrysler Team Up To Bring Smart Car To U.S.: Will Americans Buy It?
Energy: Alt. Energy Picks For a Windy Day
Financial: Nasdaq's Bid For LSE: Get Ready For A Dominant World Exchange
Asia: Google: Chinese Censorship Was 'Net Negative'
ETFs: Why Are Emerging Market Prices So Volatile?
Hedge Funds: Why Hedge Fund Regulation is All About Alpha
Small-Caps: Perennial Net/Net Blair Corp. To Go Private
Sound Money Tips: Tips on Bagging a Bank Loan
Jim Cramer: Latest stock picks
Conference Call Transcripts: CNET Networks Q4 2006, Getty Images Q4 2006, Genesis Microchip F3Q07, Atheros Communications Q4 2006, Spansion Q4 2006, Phelps Dodge Q4 2006, Verizon Q4 2006, Infineon Technologies F1Q07
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