April Housing Data Surprises; Stocks Reverse Early Gains on Fear of Fed Hike
New home sales data for April from the Commerce Dept. showed a seasonally adjusted monthly increase of 16.2% to 981,000 units, the highest in 14 years, far exceeding expectations of a slight up-tick. However, the median price for new homes fell a record 11.1% to $229,100. The drop suggests builders may be cutting prices to move inventory. Unit sales gains were led by the Northeast, which jumped 43.1%, but sales fell elsewhere: Midwest -28.1%, West -25.4% and South -3.4%. The SPDR S&P Homebuilders ETF rallied as much as 3.4%, but ended unchanged at $35.75. Among homebuilders, Toll Brothers gained 1% to $30.07 and both Hovnanian and KB Home rose 0.7% to $25.81 and $46.54, respectively. In other economic data news, April durable goods orders rose a more-than-expected 0.6%. Economists had forecast no change. The March figure was revised to 5.0%, from 4.3%. The Dow Jones rallied nearly 100 points in early trading, but went on to lose 84 points (0.6%) to 13,441. The S&P 500 reversed a 0.5% gain into a 1% loss to 1,507.51.
Sources: Associated Press, MarketWatch
Commentary: New Home Sales Up (But Beware Double Digit Monthly Gains) • The National Association of Realtors Predicts the First Drop in Home Prices Since 1968 • Buying Homebuilders On The Good News
Stocks/ETFs to watch: Toll Brothers (TOL), Hovnanian Enterprises (HOV), KB Home (KBH). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones US Home Construction (ITB), S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), NASDAQ 100 Trust Shares ETF (QQQQ)
SEC Opens Probe Into Dow Chemical -- NYT
The SEC has opened an investigation into whether or not a senior executive and a board member at Dow Chemical, both of whom have been removed by the company, secretly attempted to put the company in play, according to the New York Times. The regulator is also examining unusual trading that might have resulted from their actions. In addition, the investigation might probe Dow's attempt last autumn to buy DuPont in a deal worth over $40 billion. At the time, neither company disclosed that Dow had approached DuPont. DuPont turned Dow down, but its stock rose 15% between September and December. Regarding the takeover speculation about Dow, CEO Andrew N. Liveris has denied the company sought a buyer. Dow says such speculation, and the accompanying stock price spikes, were fueled by the actions of Romeo Kreinberg and J. Pedro Reinhard, who held "multiple meetings" about a takeover. JPMorgan Chase, which had been working on an unauthorized takeover proposal of Dow, says it met with both men. Kreinberg and Reinhard deny plotting a takeover and have countersued Dow for defamation. The SEC probe and the lawsuits will hinge on testimony from JPMorgan CEO James Dimon, who allegedly told Liveris that Kreinberg and Reinhard had held talks with the bank about a takeover of Dow.
Sources: MarketWatch, New York Times
Commentary: Dow Chemical: The Transformation Proceeds • Tracking Money Flow in Materials Stocks • Dow Chemical: Liveras Continues to Deliver
Stocks/ETFs to watch: The Dow Chemical Company (DOW). Competitors: BASF AG (BF), EI DuPont de Nemours & Co. (DD). ETFs: PowerShares FTSE RAFI Basic Materials (PRFM), Vanguard Materials ETF (VAW), PowerShares Dynamic Basic Materials (PYZ)
Dell to Sell PCs at Wal-Mart
PC maker Dell announced Thursday it will break with its 23-year direct sales strategy and sell its merchandise at Wal-Mart. Starting June 10, Dell will sell two versions of its Dimension multimedia desktop computer for under $700 at about 3,500 Wal-Mart and Sam's Club stores. Dell's shares closed down 1.4% at $25.89, and those of computer component manufacturers declined as well, on worries that the low-cost PCs will shrink profit margins. Dell's entry into retail stores will have an impact on rival Hewlett-Packard, which took the #1 PC company spot from Dell in part on the success of its strategy of selling through major retailers; and on Taiwanese PC manufacturer Acer, which sells its merchandise at Best Buy, Circuit City and Wal-Mart. Last month, CEO Michael Dell tipped off the market that the company was pursuing a retail outlet by telling employees in a memo that the direct-sales model was "not a religion." "Today's announcement with Wal-Mart represents our first step [in global retail]," said company spokesman Bob Pearson. "Stay tuned."
Sources: Reuters, MarketWatch, San Jose Mercury News, ZDNet, Bloomberg
Commentary: Dell's New Model [Forbes] • Dell Tries Its Hand At Mass Distribution • Which Partner Will Help Ease Dell Into Retail?
Stocks/ETFs to watch: Dell Inc. (DELL), Wal-Mart Stores Inc. (WMT). Competitors: Hewlett-Packard Co. (HPQ), International Business Machines Corp. (IBM), Sun Microsystems Inc. (SUNW). ETFs: Internet Architecture HOLDRs (IAH), PowerShares FTSE RAFI Telecom & Tech (PRFQ), Vanguard Information Technology ETF (VGT)
Conference call transcripts: Dell Q2 2007
Gap Q1 Profit Down 26%
Casual clothing retailer Gap Inc. reported Thursday that its Q1 profit shrank 26% on markdowns at its namesake stores and losses at the now-shuttered Forth & Towne chain. Q1 net income came in at $178 million ($0.22/share) versus $242 million ($0.28) in the year-ago quarter. Sales were up 3.5% to $3.56 billion. Excluding Forth & Towne losses, the company posted EPS of $0.25, in line with internal forecasts and analyst expectations of $0.24. Same-store sales fell 4% in Q1 against a 9% drop a year ago, the company's eleventh straight quarter of sales declines. The company reiterated its full-year EPS forecast, excluding Forth & Towne losses, of $0.80-0.90. Analysts are expecting $0.93. CFO Byron Pollitt said markdowns at Gap stores pushed gross margins down 2.1 points from the year before. Interim CEO Robert Fisher has been trying to disassemble the company's administrative bureaucracy and is increasing the level of autonomy at each of the company's three chains (Gap, Banana Republic and Old Navy). He has also hired fashion designer Patrick Robinson to overhaul men's and women's clothing at the Gap. Even with the changes, Fisher forecasts the company's profit may fall 8-18% this year.
Sources: The Gap Q1 2007 Earnings Call Transcript, Business Week, Reuters
Commentary: Attention Gap Management: Spin Off Something, Already! • Gap's New CEO: A Lampert University Graduate, Please! • Time to Go to The Gap - As A Value Stock?
Stocks/ETFs to watch: Gap Inc. (GPS). Competitors: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc. (AEO), J. Crew Group, Inc. (JCG). ETFs: Retail HOLDRS ETF (RTH), SPDR S&P Retail (XRT), PowerShares Dynamic Retail (PMR)
Barnes & Noble Swings to Loss, But Beats Forecast
Bookseller Barnes & Noble posted a net loss for Q1 on member discounts, but beat forecasts on a 3% rise in revenue. B&N shares gained 2% to close at $42.89 after the report. The company reported a Q1 net loss of $1.7 million (-$0.03/share) versus earnings of $10 million ($0.14) for the year-ago period. B&N had forecast a loss of -$0.08-0.12. Excluding charges related to the closing of the company's Internet distribution center and a review of its stock-option practices, B&N would have posted EPS of $0.10. Revenue was up 3% to $1.15 billion from $1.11 billion last year. Analysts were expecting EPS, excluding one-time items, of $0.01 on revenue of $1.14 billion. Q1 same-store sales were up 1.7%. Q2 same-store sales are projected to rise in the low- to mid-single digits, primarily because of the release on July 21 of "Harry Potter and the Deathly Hallows." Full-year same-store sales are forecast to be flat to slightly positive. B&N is forecasting Q2 EPS of $0.08-0.12 and full fiscal year EPS excluding items of $1.67-1.81; analysts are expecting $0.13 and $1.72, respectively. Q1's sales were boosted by "one of the better hardcover new release schedules in some time," according to CEO Steve Riggio, but member discounts cut into gross margin.
Sources: Barnes & Noble F1Q07 Earnings Call Transcript, AP, MarketWatch
Commentary: Amazon Should Buy Barnes & Noble • Will Borders and Barnes and Noble Become Book Buddies? • Pershing Square Capital's William Ackman: Buys, Sells, Portfolio
Stocks/ETFs to watch: Barnes & Noble Inc. (BKS). Competitors: Amazon.com Inc. (AMZN), Borders Group, Inc. (BGP), Books-A-Million Inc. (BAMM). ETFs: Retail HOLDRS ETF (RTH), SPDR S&P Retail (XRT), PowerShares Dynamic Retail (PMR)
Upper Deck Offers $416 Million for Topps
Shares of baseball card manufacturer and confectioner Topps Co. rose 4.9% to close at $10.26 Thursday after the company said it had received an unsolicited indication of interest from sports and entertainment publishing company Upper Deck Co., which wants to buy it for $10.75 a share. The offer, which amounts to approximately $416 million, is higher than an earlier bid for Topps submitted by Tornante Co., an investor group led by former Walt Disney CEO Michael Eisner. Tornante and private-equity firm Madison Dearborn Partners offered $9.75 a share, or about $385 million. The bid was opposed by three of the 10 members of Topps's board and activist hedge fund Crescendo Partners II, which says the offer undervalues the company. Topps says Upper Deck's offer has several complicating factors, including unclear financing and Upper Deck's demand that its liability be limited in the event that antitrust regulators block the acquisition. In addition, a deal with Upper Deck would require the approval of Major League Baseball. Tornante has granted Topps permission to talk with Upper Deck. Topps shareholders are scheduled to vote on the Tornante proposal on June 28.
Sources: Press release, Forbes (I, II), Reuters, Business Week, TheStreet.com, Wall Street Journal
Commentary: Topps Going Private for $385 Million • Topps Shareholders Should Reject Eisner's Offer • Topps: This Buyout Is Robbery
Stocks/ETFs to watch: The Topps Company, Inc. (TOPP). Competitors: William Wrigley Jr. Co. (WWY)
TRANSPORT AND AEROSPACE
SEC Seeks Documents on GM's Derivatives Accounting; GM Sets Exposure to Delphi at $7 Billion
Shares of General Motors fell 3.1% to close at $30.47 Thursday after the company said SEC regulators have requested documentation on its commodity and foreign-exchange contracts. The company also said in an SEC filing that its exposure to bankrupt auto parts manufacturer Delphi Corp. is $7 billion. GM further said it might have to restate results after the SEC completes its review of General Motors Acceptance Corp., the company's former finance unit. Last year, GM restated results dating back to 2000, and in March 2007, the company delayed its 2006 annual report in order to restate figures between 2002 and 2005. The SEC probe relates to that report. Regarding Delphi, GM had set aside $6 billion to pay retirement costs for GM workers at that company; those costs are now estimated at $7 billion, and GM will likely take a pretax charge of $1 billion in Q2. GM also expects to pay United Auto Workers members at Delphi $300-400 million in annual labor-related charges. GM is adding to its cash position by raising $5.2 billion through a convertible-bond offering and setting up a new credit revolver. Separately, GM is now classifying a sale of subsidiary Allison Transmission as "probable." Analysts have speculated such a sale could bring in about $3 billion. Blackstone, Centerbridge and Carlyle are considered possible purchasers.
Sources: Reuters (I, II), Freep.com, Bloomberg, MSNBC
Commentary: GM to Offer $1.1 Billion in Convertible Debt • GM Unit Pursued by Private Equity • General Motors: A Work in Progress
Stocks/ETFs to watch: General Motors Corp. (GM), Delphi (DPHAQ.PK). Competitors: Ford Motor Co. (F), Toyota Motor Corp. (TM), Daimlerchrysler AG (DCX). ETFs: PowerShares FTSE RAFI Consumer Goods (PRFG), Rydex S&P Equal Weight Consumer Discr (RCD), Rydex S&P 500 Pure Value (RPV)
Conference call transcripts: Q1 2007
ENERGY AND MATERIALS
Gas Prices Up, Crude Down, Refinery Problems Cited
The prices of crude and gasoline futures moved in opposite directions Thursday, as the former slumped to a one-week low on weaker forecast demand stemming from refinery problems, which in turn helped push gasoline higher due to declining inventories. NYMEX July crude futures lost 2.4% to $64.18, while June gasoline rose 2.0% to $2.36 a gallon. "A series of unplanned operational problems and prolonged scheduled maintenance on refineries amid strong demand have depleted gasoline inventories and caused pump prices to rise to record highs around the country," explains The Wall Street Journal in its Commodities section. The average price for unleaded gasoline in the U.S. rose to $3.227 a gallon Thursday, an all-time high and less then seven cents from an inflation-adjusted record high. Thursday's sector decliners include: Frontier Oil -2.2% to $37.13, Sunoco -2.1% to $76.70, ConocoPhillips -2.0% to $75.19, Chevron -1.8% to $79.97, Valero -1.8% to $73.15 and Exxon Mobil -0.9% to $82.28.
Sources: MarketWatch, The Wall Street Journal
Commentary: Energy Stock Trader: Thursday Outlook • Gasoline Price Reaches All-Time High, Above $3.20 Per Gallon • XTO Energy: Best Track Record In Energy Stocks • US Oil Fund ETF Fails Investors Consistently
Stocks/ETFs to watch: Alon USA Energy (ALJ), Chevron (CVX), ConocoPhillips (COP), Exxon Mobile (XOM), Frontier Oil (FTO), Sunoco (SUN), Tesoro Petroleum (TSO) and Valero (VLO). ETFs: United States Oil Fund ETF (USO), Barclays Bank Zero Cpn ETN (OIL), Energy Select Sector SPDR (XLE)
Related: AAA Daily Fuel Gauge Report
Nasdaq to Purchase Nordic Bourse Operator OMX for $3.67 Billion
Nasdaq Stock Market Inc. announced Friday it will acquire Nordic exchange operator OMX AB. Nasdaq's shares rose 2.3% Thursday on speculation that a deal was imminent. The deal is valued at 25.1 billion Swedish kronor ($3.67 billion), representing a 19% premium to OMX's Wednesday close. Nasdaq will pay 208.1 kronor ($29.28) per OMX share in cash and stock. Together, the exchanges will operate stock and derivative markets in eight countries. OMX will provide Nasdaq with "not only a regional exchange but business relationships with a lot of the other global exchanges," according to Sandler O'Neill analyst Richard Repetto. The acquisition "provides us with an excellent platform for further expansion into derivatives and other asset classes," said Nasdaq CEO Robert Greifeld. The combined entity will be called Nasdaq OMX and will list about 4,000 companies with a total market cap of $5.5 trillion. Those companies include Nokia, Volvo and Microsoft. The purchase follows last month's acquisition by NYSE Group of European markets operator Euronext NV for $14 billion. Earlier this year, Nasdaq tried for the second time to buy the London Stock Exchange Group [LSE]. Nasdaq has since established a 30% stake in LSE, and there is speculation that together with OMX, Nasdaq might try for the LSE yet again next year. Nasdaq is also in talks to acquire the Philadelphia Stock Exchange, the third-largest options exchange in the U.S.
Sources: Reuters, Business Week, TheStreet.com, The Independent, Bloomberg, Wall Street Journal
Commentary: Nasdaq in Talks To Acquire European Exchange Operator OMX AB • Nasdaq in Talks With Options Heavy Philly Exchange - WSJ • Treading Carefully In Exchange Stocks
Stocks/ETFs to watch: Nasdaq Stock Market Inc. (NDAQ). Competitors: NYSE Euronext (NYX), Chicago Mercantile Exchange Holdings Inc. (CME). ETFs: Financial Select Sector SPDR ETF (XLF), PowerShares Financial Preferred Portfolio (PGF), iShares Dow Jones US Financial ETF (IYF)
Advanced Medical Optics Considering Offer for Bausch & Lomb
Shares of Bausch & Lomb gained 5.7% to close at $70.21 Thursday after Advanced Medical Optics said it is interested in bidding for the company. Advanced Medical's shares fell 3.2% to $41.10. Last week, Bausch agreed to be acquired by private-equity firm Warburg Pincus for about $3.67 billion, or $65 a share. Eye-care product manufacturer Advanced Medical, which has half the sales of Bausch, claims its offer is superior to Warburg's because the combination would provide cost synergies. Last spring, Bausch was forced to recall its ReNu with MoistureLoc contact-lens cleaner after it was connected to a series of eye infections. Advanced Medical, too, had to withdraw 2.9 million units of its Complete MoisturePlus solution on fears of bacterial contamination. Advanced Medical bought laser eye surgery device firm VisX Inc. for about $1.25 billion last year, and last month, it purchased vision-correction laser manufacturer Intralase Corp. After those acquisitions, Advanced Medical is "far and away the leader in the refractive surgery market," according to Robert W. Baird analyst Jeff Johnson. Some believe Warburg will not be content with the $40 million break-up fee if Bausch accepts Advanced Medical's as-yet unquantified bid. FTN Midwest Securities analyst Chris Cooley: "As Advanced Medical moves forward...there's a good likelihood you could see Warburg revisit their $65 offer."
Sources: Wall Street Journal, Chron.com, Bloomberg, Reuters, MarketWatch
Commentary: Bausch & Lomb To Be Taken Private for $4.5B; Traders Anticipate Higher Bids • Biotech Buyout Frenzy Continues • Bausch & Lomb Could Be Heading Toward a Buyout, But Based On What? • Advanced Medical Optics: ValueAct Capital Discloses 7.3% Stake
Stocks/ETFs to watch: Advanced Medical Optics, Inc. (EYE), Bausch & Lomb Inc. (BOL). Competitors: Alcon Inc. (ACL), Cooper Companies Inc. (COO)
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