Fed Official Mishkin: PCE Inflation Should "Drift" Down to 2.0%
Some commentators are interpreting a speech by Federal Reserve governor Frederic Mishkin as challenging conventional wisdom that the Fed always seeks a "comfort zone" of 1-2% inflation as measured by the personal consumption expenditure [PCE] indicator. The PCE annual inflation rate is currently 2.25%. Mishkin did not explicitly say in his Friday speech that he considers 2% PCE inflation acceptable; what he did say is that it should be easier to achieve 2% than to push below it. Some analysts nevertheless expect the markets to infer that the Fed is less single-mindedly concerned with inflation than it has been of late, and is thus more open to cutting interest rates. Mishkin's views are expected to add to uncertainty over the Fed's target inflation rate; and Mishkin, an advocate of a clearly expressed target, may have intended his comments to force a debate on that subject. “...I think that we can be reasonably optimistic that core PCE inflation will gradually drift down from its 12-month reading of 2.25%,” he said. Pushing it below 2.0% "may take a while in light of the recent rebound in prices for gasoline and other petroleum products...A substantial further decline in inflation would require a shift in expectations, and such a shift could be difficult and time-consuming to bring about.”
Sources: MSNBC, India Times, Wall Street Journal
Commentary: FOMC Statement Changes Scream Stagflation • Not All Fed Rate Cuts Are Created Equal • Stocks To See You Through Current Inflation Levels
ETFs to watch: 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)
Intel Shows Committment to China, Announces $2.5B Chip Factory
Intel announced earlier today in China it will invest $2.5 billion to build a 300mm wafer fabrication plant in the northeastern coastal city of Dalian -- its first new fab plant construction in 15 years, with profound implications for its future business activity in China. An Intel spokesman commented, "This is the fastest-growing major market anywhere. We want to invest to participate in it." Construction will start later this year and production is expected to begin in the first-half of 2010. The selection of Dalian is significant because of Chinese politicians' urgency to redevelop the region known as the rust belt. Intel reportedly has spent years negotiating with Chinese officials and says intellectual property protection was a consideration, but it is confident it can protect it. The plant will be dedicated, at least initially, to producing chipsets used to support its core microprocessors. The Wall Street Journal notes Intel could save a considerable amount of money by transferring used production tools to the new site.
Sources: Press release, Bloomberg, The Wall Street Journal
Commentary: Will Intel, Advanced Micro Devices Suffer From Processor Price Cut? • Trading Idea: My Four-Way Intel Play • Chip Industry: 2007 Forecast Guided Down
Stocks/ETFs to watch: Intel (INTC). Competitors: Advanced Micro Devices (AMD). Chipmakers building factories in China: STMicroelectronics NV (STM), Taiwan Semiconductor Manuf. (TSM), Hynix Semiconductor (S. Korea: 000660). ETFs: Semiconductor HOLDRs (SMH), iShares Goldman Sachs Semiconductor (IGW), SPDR Semiconductor (XSD)
Zell's Offer for Tribune Gaining Favor
As Sam Zell's roughly $8 billion offer for the Tribune Company gains traction over the company's proposed "self-help" plan, former bidders Ron Burkle and Eli Broad are claiming the company did not give their $27 per share dividend offer a fair shot. Burkle and Broad are rumored to be preparing a counteroffer. Zell's plan involves the creation of an employee stock ownership plan [ESOP] with which he will partner to bring the bid to $33 per share, an 8% premium over the Tribune's Friday close of $30.53. That price is considered by some analysts to be a reasonable enticement to the company to enter into an ESOP, which, while providing several tax benefits, will also create a problematic debt burden. Hints of improvement in the negotiations between the Tribune and Zell contributed to a 3.5% runup in the company's shares on Friday.
Sources: Chicago Tribune, MarketWatch, Wall Street Journal
Commentary: A Sam Zell Takeover May Be Tribune's Best Bet - Barron's • Sam Zell In Midst of Revising Bid for Tribune Co. • Tribune Reviewing "Self-Help" Plan
Stocks/ETFs to watch: The Tribune Company (TRB). Competitors: Gannett Co. (GCI), The New York Times Co. (NYT), The Washington Post Co. (WPO), The McClatchy Company (MNI)
Conference call transcripts: Q4 2006
TRANSPORT AND AEROSPACE
Big 3 Sit Down With President to Discuss Flex-Fuel Production
For the second time in less than six months, Detroit's Big 3 automakers will have a sit-down with President Bush, though this time with a slightly different agenda. Executives of the Big 3 are expected to express their support for the President's plans to lower U.S. energy usage by 20% over the next 10 years, largely through the use of alternative energy sources. Not expected to be on the agenda this time are issues affecting the profitability of the auto industry such as foreign exchange rate disadvantages and mushrooming unionized healthcare costs. High on the agenda will be the industries attempts to build flex-fuel vehicles that can run on both conventional and alternative fuels, which President Bush has repeatedly endorsed, including during a visit to two gas-electric hybrid plants in the Midwest a week ago. The Big 3 stress they can not make flex-fuel automobiles profitable unless energy production companies greatly increase the availability of biofuels and fueling stations multiply greatly.
Sources: Wall Street Journal, Business Week, Reuters
Commentary: The Race for Fuel Efficiency is On • 2007 State of the Union Address: Should Alt. Energy Stocks Expect a Boost? • The Rise of Toyota and the Demise of the American Auto Industry
Stocks/ETFs to watch: DaimlerChrysler (DCX), Ford Motor Co. (F), General Motors Co. (GM). Competitors: Toyota Motor Corp. (TM), Honda Motor Co. (HMC), Nissan (OTCPK:NSANY)
Citigroup May Report Restructuring Plans ahead of Q1 Earnings -- WSJ
The Wall Street Journal reports people familiar with a restructuring plan at Citigroup say cost cutting plans could include 15,000 jobs, or about 5% of its global work force and a $1 billion charge. Citi is expected to make an announcement ahead of its Q1 earnings release scheduled April 16, which is followed by its annual meeting on the 17th. The Journal points out the plan isn't final, and notes a source says one option for reducing headcount is to not replace some of the 30,000 - 50,000 employees that leave Citi annually. One of CEO Charles Prince's biggest problems is spending is exceeding revenue growth. Last year operating expenses increased 15% to $52b, while revenues rose only 7%. Citi's COO Robert Druskin, a close friend and longtime colleague of Prince's, is leading the restructuring planning and is said to have 150-200 areas under review. The Journal mentions Citi is considering whether to make a bid for ABN Amro in the ballpark of $80b, but suggests Prince will place a higher priority on the forthcoming restructuring plan.
Sources: The Wall Street Journal
Commentary: Citigroup Said to be Considering Rival Bid for ABN Amro • Nikko Cordial: 6.6% Shareholder Southeastern Says Citi Bid Too Low • HSBC, Citigroup, Get Key Approval for Chinese Banking
Stocks/ETFs to watch: Citigroup (C). Competitors: Bank of America (BAC), Deutsche Bank (DB), JP Morgan Chase (JPM). ETFs: iShares Dow Jones US Financial Services (IYG), Financial Select Sector SPDR (XLF), KBW Bank ETF (KBE)
Reuters, CME Team Up To Open Spot Currency Exchange
This morning Reuters and the Chicago Mercantile Exchange announced the official opening of FXMarketSpace, allowing for anonymous trading in spot foreign exchange against the dollar on the euro, yen, sterling, Australian dollar, Swiss franc, Canadian dollar as well as four cross-currency pairs. The companies are claiming that although the exchange just opened, customer numbers are already "significantly ahead of expectations." Reuters is using its know-how to provide trading access, trade notification and market data with the CME is bringing clearing and trade matching services to the mix. Each company has 50% ownership. The global market for ForEx trading currently stands at greater than $2 trillion a day and many analysts predict that number could cross $3 trillion by year's end. The companies expect the exchange will be profitable by 2008.
Sources: Reuters, Finextra.com
Commentary: A Look At Stock Exchange Stocks • Exchange Stocks: Beware The Bear • U.S. Exchanges Continue To Trim Expenses Through Consolidation, M&A Activity
Stocks/ETFs to watch: Reuters Group PLC (RTRSY), Chicago Mercantile Exchange (CME). Competitors: CBOT Holdings (BOT), International Securities Exchange (ISE). ETFs: iShares Dow Jones US Broker-Dealer Index (IAI)
Johnson & Johnson's Natrecor Found to Be Safe - and Ineffective
Johnson & Johnson's heart drug Natrecor has been proven safe - so safe, in fact, that a study has concluded it is ineffective in treating acute and chronic heart disease. Alleviating fears that the drug caused kidney damage and produced an increased death rate, the American College of Cardiology, currently meeting in New Orleans, revealed yesterday the results of the latest study on the drug which showed it neither caused death, nor prolonged it in patients with severe heart disease. According to Dr. Clyde W. Yancy, Director of Baylor University Medical Center's Heart and Vascular Institute, "It is very clear [Natrecor's administration] did not result in any clinical benefit." said in Dallas. Johnson & Johnson hasn't announced a change to plans to begin a $100 million trial of the drug that will involve 7,000 patients in Europe, Canada and the U.S., to examine its safety and effectiveness, despite the latest clinical setback.
Sources: New York Times, Bloomberg, Reuters, Forbes
Commentary: Johnson & Johnson Subpoenaed on Marketing of Three Drugs • Goldman Remains Positive on Johnson & Johnson Despite FDA Ruling • Cramer's Take on JNJ
Stocks/ETFs to watch: Johnson & Johnson (JNJ). Competitors: Merck & Co. (MRK), Pfizer Inc. (PFE), Wyeth (WYE), Schering-Plough Corp. (SGP), Novartis AG (NVS), Teva (TEVA), AstraZeneca plc (AZN), GlaxoSmithKline plc (GSK), Sanofi-Aventis (SNY), Eli Lilly & Co. (LLY), Abbott Laboratories (ABT), Amgen (AMGN). ETFs: iShares Dow Jones US Pharmaceuticals (IHE), Pharmaceutical HOLDRs (PPH)
Abbott's "Xience" Stent Achieves Goals in Clinical Trial
A clinical study has shown Abbott Laboratories' "Xience," a drug-coated stent, to be more effective than Boston Scientific's Taxus device. This result clears Abbott to seek FDA approval for the Xience. Drug-coated stents have come under scrutiny recently for possibly contributing to blood clots. The Xience is designed to dissolve inside the body after about three years, unlike the stents of Boston Scientific and Johnson & Johnson, which remain in the body permanently. Abbott is now planning to file for FDA approval in Q2 in the hope of marketing the device in the $3 billion U.S. stent market in H1 2008. The Xience performed better than the Taxus in the primary goal of the trial, which was the prevention of renarrowing of artieries. It also outperformed the Taxus in its secondary goal, the avoidance of heart attacks and death. The Xience's success will benefit Boston Scientific to a degree, since that company's purchase of Guidant Corp. last year gave it the right to market the Xience under a different name (Promus). In related news, the results of the seven-year "Courage" study of bare-metal (non-drug-coated) stents are to be released tomorrow. The study concludes that the stents do not avert heart attacks or death. Stent manufacturers contend that the study is inherently flawed, since stents are not intended to prevent either of those events; they are designed solely to alleviate the symptoms of heart disease.
Sources: MarketWatch, CNN.com, Bloomberg, Wall Street Journal (I, II)
Commentary: Biotechs Develop New Generation of Drug-Eluted Stents • Abbott Labs, Johnson & Johnson: Healthy, Wealthy and Wise • Wall Street Cautious Over Drug-Coated Stent Risks
Stocks/ETFs to watch: Abbott Laboratories Inc. (ABT) Boston Scientific (BSX). Competitors: Pfizer Inc. (PFE), Johnson & Johnson (JNJ), Medtronic, Inc. (MDT). ETFs: Pharmaceutical HOLDRs (PPH), iShares Dow Jones US Pharmaceuticals (IHE), PowerShares Dynamic Pharmaceuticals (PJP)
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
- If new Radio Shack (RSH) CEO Julian Day follows through with cost-cutting measures and continues to improve the stores' product mix, shares -- up 61% in his 8 months on the job -- could gain another 30% or more in the next 12 to 18 months.
- In January, start up Telanetix (TNXI.OB) beat out video-conferencing giants Cisco (CSCO) and Hewlett-Packard (HPQ) in winning a major contract from Mercedes Benz. Last week, it began offering its Telepresence system for $1,000 -- a price analysts say could net them more big contracts, and perhaps attract a buyout bid from Cisco or HP. Shares ($3.95) could hit $5+ in a hurry.
- Shares in 13 of the 20 companies who have received healthcare contracts from the Veteran's Department this year are up 46%. Secretary R. James Nicholson's push for streamlining stands to benefit firms like McKesson (MCK), Northrop Grumman (NOC), Becton Dickinson (BDX), Cepheid (CPHD) and Roche (OTCQX:RHHBY).
- Starbucks (SBUX) shares are down 25% since November. At 29x 2008e earnings, it's richer than rival McDonald's (MCD) 16x, but with 13,200 stores, 1,600 more coming in 2007, and another 2-3,000 planned for 2008, analysts say it's a buy. Starbucks is also turning more profits from food products heated in TurboChef's (OVEN) high-speed ovens. Shares ($31.42) could hit the mid-40s this year.
- Asset manager Sy Jacobs subprime picks: Longs -- (1) Annaly Mortgage Management (NLY) is not sensitive to credit woes. Shares should rise from $9 to $16. (2) Opteum (OPX) -- ALT-A fears have made this stock oversold. Book value is $7.85/share, while shares are at $4.50. (3) Origen Financial (OTCPK:ORGN) -- the only remaining player in manufactured-housing finance. Shorts -- (1) Subprime troubles should continue to hurt NovaStar Financial (NFI), New Century Financial (OTCQB:NEWC) and Fremont General (FMT). (2) Bankrate (RATE) -- its client base of mortgage brokers and backers are rapidly disappearing. (3) Credit-rating agencies like Moody's (MCO) and McGraw-Hill (MHP) have high collateralized debt obligations, residential mortgage-backed securities and subprime holdings that account for 30-40% of their operating profits.
- Nick Rodelli, forensic accountant, says litigation is poorly understood by equity analysts, and presents a unique opportunity for investors who can assess when the markets have under- or over-compensated for its impact: (1) World Wrestling Entertainment (WWE) lawsuits against software publisher THQ Inc. (THQI) and JAKKS Pacific (JAKK) could give it a 14-22% increase in earnings. (2) MasterCard (MA) faces anti-trust suits from American Express (AXP) and Discover. The market has failed to take any of the risks into account -- the damages could be in the "tens of billions." (3) Sherwin Williams (SHW) -- a recent ruling demands a state-wide (Rhode Island) cleanup. Ohio, New Jersey, Wisconsin and California also have pending lawsuits. Share prices imply the Street doesn't understand the risk that lead paint could become 'the next asbestos.' (4) Qualcomm (QCOM) shares are down in an overreaction to its lawsuit with Nokia (NOK) and Broadcom (BRCM). At 24x earnings, Qualcomm is near historic lows, leaving little downside risk and substantial upside should anything positive develop in the courts. (5) Intel (INTC) failed to preserve key documents; the investigation into Dell's (DELL) accounting practices may be more serious than they're letting on; Steve Jobs may yet be forced to leave Apple Computer (AAPL).
- Despite a 66% jump in its share price this year, CMGI (CMGI) may still be a bargain. The more electronics are built in Asia, the more its value-added repackaging becomes necessary for U.S. customers. CEO Joe Lawler tells Barron's he can achieve 12-14% margins consistently by eliminating waste, and unnamed sources say EMC Corp. (EMC) may be a potential big new client. CMGI could also be an attractive buyout target for FedEx (FDX) or United Parcel Service (UPS).
- A successful test of January's high of $97 could propel Apple Computer (AAPL) shares to the $115-125 range analysts think it's worth. Many analysts have not accounted for the $299 Apple TV, but a successful rollout could net it 20-30% of the $26 billion CD/DVD market. Barron's Mark Veverka sees a boost in Mac sales with the spring rollout of its new Leopard operating system which includes a free copy of Boot Camp. Despite its 24 P/E multiple, shares have been and can go higher -- especially in light of projected 20% annual growth.
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