Fed Holds Rates Steady
As expected, the Fed kept its target rate at 5.25% for the tenth-straight session, stressing once again that inflation is the economy's predominant risk. While acknowledging that core inflation has "improved modestly in recent months," it said for the first time that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." Core inflation dropped slightly between the May and June meetings, but a Thursday report revised Q1 personal consumption upward, making it unlikely inflation will drop below 2% into the Fed's 1-2% comfort zone. The Fed noted the housing market adjustment is "ongoing." San Francisco Fed president Robert Parry said a housing recovery "doesn't seem convincing" and that "the severity and the duration are a bit more serious than I thought it would be." Pimco's Bill Gross said on a CNBC interview that he continues to forecast a weaker economy over the next 12 months, accompanied by a .50-.75 basis-point drop in the federal funds rate to stimulate growth. Bond and equity markets bounced around after the announcement, but are largely unchanged from pre-release levels. Analysts stressed that the Fed's next moves will likely be influenced by growing subprime delinquencies and foreclosures. CGM Funds' Ken Heebner said Wall Street has not yet begun to grasp the severity of the problem, and that CDO losses will be in the $100s of billions.
Sources: FOMC June 28 release, May 9 release, CNBC.com, Wall Street Journal, Bloomberg
Commentary: Four Leading Analysts Map Out the Markets • Tops and Bottoms: Reflections and Predictions • Waiting and Wondering About What's Next For the U.S. Economy
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)
Micron Reports Q3 Loss on Memory Price Decline; Says 'Pursuing Initiatives'
Micron gained 2% to $12.66 in extended trading despite posting its second-consecutive quarterly loss, on news it is "pursuing a number of initiatives to drive greater cost efficiencies and revenue growth across its operations." Micron's fiscal Q3 net loss totaled $225 million, or -$0.29/share, on a 1.4% drop in sales to $1.3b. Analysts had expected a loss of $0.24/share on sales of $1.26b. Micron didn't provide an outlook for Q4, but analysts on average estimate a loss of $0.11/share on sales of $1.39b. Micron said it achieved significant per megabit cost decrease q/q for its NAND Flash (30%) and DRAM (15%). However, industry oversupply conditions caused prices to fall 30% and 35%, respectively. CEO Steve Appleton said the company "believes the market will improve, but it's hard to say how much." Shares of Micron were raised to "buy" from "neutral" by American Technology Research, with a target of $15.50. Robert W. Baird reiterated its "outperform" rating and has a target of $18.
Sources: Micron Technology F3Q07 Earnings Call Transcript, Press release, Bloomberg, MarketWatch
Commentary: Micron Shares On The Rise Ahead Of Earnings • Earnings Preview: Expecting Negative News From Micron Tech • Micron LBO Seems Imminent
Stocks/ETFs to watch: Micron Technology Inc. (NASDAQ:MU). Competitors: Qimonda AG (QI), SanDisk Corp. (SNDK), Toshiba Corp. (OTCPK:TOSBF), Samsung [see iShares MSCI S. Korea (NYSEARCA:EWY)], Sony Corp. (NYSE:SNE), STMicroelectronics NV (NYSE:STM), OmniVision Technologies Inc. (NASDAQ:OVTI). ETFs: SPDR Semiconductor (NYSEARCA:XSD), iShares Goldman Sachs Semiconductor (IGW), Semiconductor HOLDRs (NYSEARCA:SMH)
Western Digital to Buy Komag for $1 Billion
Hard disk manufacturer Western Digital announced Thursday it will purchase media disk maker Komag for about $1 billion, sending Komag's shares up 7.6% to $31.83 in AH trading. Komag shareholders will receive $32.25 per share, a 9% premium to their Thursday close. Komag makes rotating disks that record media inside hard drives, and Western Digital was one of its biggest clients. "This acquisition puts us in position to be in greater control of our own destiny," said Western Digital President and CEO John Coyne. The transaction, which has been approved by the boards of both companies, is expected to close in Q3. The purchase is expected by some analysts to enhance Western Digital's competitive position against Seagate, the largest hard disk maker in the world. In 2003, Western Digital bought Read-Rite Corp., which gave it an in-house recording head capability. In related news, Komag said it is forecasting a "substantial" operating loss in Q2 on lower revenue. Analysts had been expecting Q2 sales of $220.1 million.
Sources: Press release, Wall Street Journal, TheStreet.com, Bloomberg
Commentary: Komag Advised To Sell Itself To Western Digital • Western Digital: Second to None in the Data Storage Industry • Western Digital: Seasonal Upturn Seen Ahead
Stocks/ETFs to watch: Western Digital Corp. (NYSE:WDC), Komag Inc (KOMG). Competitors: Seagate Technology (NASDAQ:STX), Fujitsu Ltd. [ADR] (OTCPK:FJTSY), Hitachi (HIT)
Conference call transcripts: Western Digital F3Q07, Komag Q1 2007
RIM Surges 17% on Earnings Beat; Will Split Shares 3:1
Research in Motion shares surged 17.1% to $193.90 in after-hours trading, following its report of a 73% jump in Q1 net income to $223.2 million, or $1.17/share, on nearly 77% higher sales to $1.08b -- beating average forecasts of $1.06/share on sales of $1.05b. Q2 guidance was also well ahead of Street estimates. RIM said it will split its shares 3-for-1 in August. RIM expects to earn $1.37-$1.49/share in Q2, on revenue of $1.3b-$1.365b, compared to analysts' average forecasts of $1.12/share on sales of $1.11b. The 3-for-1 stock split is effective Aug. 20, for shareholders as of Aug. 17. Rival Palm Inc. reported quarterly declines in profit and sales, sending its shares 3% lower. Apple's iPhone is scheduled for release Friday. During RIM's conference call, co-CEO Jim Balsillie commented, "I think they [Apple] did us a great favor because they drove attention to the converged appliance base."
Sources: Research In Motion F1Q08 Earnings Call Transcript, Press release I, II, Bloomberg, MarketWatch
Commentary: No More Predictions on Research in Motion Share Price • RIM CEO Hints At New Multimedia BlackBerrys • Sky-High Expectations Ahead Of RIM's Earnings
Stocks/ETFs to watch: Research In Motion Ltd. (RIMM). Competitors: Motorola Inc. (MOT), Nokia Corp. (NYSE:NOK), Palm, Inc. (PALM), Microsoft Corp. (NASDAQ:MSFT), Apple Inc. (BATS:INC). ETFs: iShares S&P GSTI Networking (NYSEARCA:IGN), Wireless HOLDRs (NYSEARCA:WMH), iShares MSCI Canada Index (NYSEARCA:EWC)
Conference call transcripts: Palm F4Q07
Palm Beats on Q4 Profit, But Q1 Guidance Sends Shares Down
Smartphone manufacturer Palm Inc. reported after the close Thursday that Q4 profit slid 43% from the year-ago period on the back of promotion costs for the Treo cellphone. The drop was not as steep as the Street was expecting, but the shares tumbled on Q1 guidance well below analyst forecasts. Fiscal Q4 net earnings came in at $15.4 million ($0.15/share) versus $27.2 million ($0.25) last year. Excluding items, EPS were $0.17. Revenue dropped to $401.3 million from $403.1 million a year ago. Analysts were expecting EPS of $0.15 on revenue of $407 million. The company announced it is projecting fiscal Q1 EPS excluding items of $0.07-0.09 on revenue of $355-365 million. Analysts had been expecting EPS of $0.14 on revenue of $393 million. Palm has had to step up its marketing of the Treo to enable it to compete with Research in Motion's Blackberry and Apple's iPhone, which will be released Friday. Earlier in June, Palm sold a 25% stake to private equity firm Elevation Partners and put two former Apple executives on its board. Palm shares dipped 6% in AH trading before closing down 2.7% at $16.12.
Sources: Palm F4Q07 Earnings Call Transcript, Press release, AP, TheStreet.com, Bloomberg, MarketWatch, RTTNews
Commentary: Palm Keeps Missing Obvious Opportunities: Can This Turnaround Succeed? • Palm to Announce PE Investor at 9% Premium, New Board and $9 Dividend • Palm Hopes To Capture Some iPod Magic
Stocks/ETFs to watch: Palm, Inc. (PALM). Competitors: Motorola Inc. (MOT), Nokia Corp. (NOK), Research In Motion Ltd. (RIMM), Apple Inc. (NASDAQ:AAPL). ETFs: Wireless HOLDRS (WMH)
TiVo/Comcast Seal DVR Software Pact
TiVo Inc. announced cable provider Comcast Corp. will license its DVR software -- only three days before a previously disclosed deadline -- paving the way for Comcast users to begin using TiVo software to capture Comcast's On Demand programming . In its effort to capture a greater share of the pay-TV market, TiVo has moved from making its own DVR boxes exclusively to licensing its software to cable and satellite providers. The agreement with Comcast allows subscribers to download TiVo's DVR software and interface to set-top boxes made for Comcast mainly by Motorola. TiVo's simple and intuitive DVR software is preferred by many users over that offered by cable companies like Comcast and Time Warner Cable. Separately, TiVo announced a surprising limited-time offer for subscribers to its Lifetime Service plan offered with its Series1 and Series2 boxes to transfer their plans to a new Series2 dual-tuner 80-hour unit for $299. TiVo has been moving away from Lifetime Service plans in favor of monthly and yearly plans. To qualify, the Lifetime Service plan has to have been activated before June 2003.
Sources: SEC filing, Reuters, Engadget, Technabob
Commentary: Bear Sterns: TiVo Unleashing Market 'Blitz' • TV Habits: So Much On, So Little Actually Watched • A Close Look At TiVo’s New Series 3 Remote
Stocks/ETFs to watch: TiVo Inc. (NASDAQ:TIVO), Comcast Corp. (NASDAQ:CMCSA), Motorola Inc. (MOT). Competitors: Time Warner Cable Inc. (TWC), DirecTV Group Inc. (DTV), EchoStar Communications Corp. (NASDAQ:DISH)
Conference call transcript: TiVo F1Q08, Comcast Q1 2007
Blockbuster Closing 282 Stores; Netflix Cuts Price of 2-DVD Plan
Movie-rental chain Blockbuster Inc. said Thursday it will shutter 282 stores, reflecting a worse-than-expected decline in rentals this year. The company, which closed about the same number of stores last year, has over 8,000 stores around the world. Revenue from in-store rentals dropped 13% across the industry from last year, well beyond the 7.5% the company had forecast. "[In-store] traffic is just not what it used to be when Blockbuster was the big rooster in the hen house," said the Motley Fool's Andy Cross. Online rentals, however, will amount to $1.9 billion this year, 46% more than in 2006. On Wednesday, Blockbuster settled a suit brought by Netflix that alleged Blockbuster had violated Netflix's online service patent. Terms were not disclosed, but Blockbuster said the settlement will have no material effect on the company. In related news, Netflix lowered the price of its two-at-a-time rental plan to $13.99 per month to match a similar Blockbuster plan. On Thursday, Blockbuster hinted it might raise prices on its Total Access program. Shares of Netflix declined 4.5% to $19.85; Blockbuster shares were off .95% to $4.16 before declining a further 1.4% to $4.10 after hours.
Sources: AP I, II, MarketWatch, Bloomberg I, II
Commentary: Blockbuster and Netflix Settle Patent Infringement Suit; Terms 'Not Material' • Blockbuster Hints At Price Rise For Total Access Program; Netflix Rises • Will 'Burn On Demand' Eventually Save Blockbuster?
Stocks/ETFs to watch: Blockbuster Inc. (BBI), Netflix, Inc. (NASDAQ:NFLX). Competitors: Amazon.com (NASDAQ:AMZN), Apple (AAPL), Movie Gallery Inc. (MOVI), Hastings Entertainment Inc. (NASDAQ:HAST). ETFs: PowerShares Dynamic Leisure & Entertainment ETF (NYSEARCA:PEJ)
Conference call transcripts: Blockbuster Q1 2007, Netflix Q1 2007
TRANSPORT AND AEROSPACE
Delta Seen Winning China Route -- WSJ
The Wall Street Journal reports Delta Air Lines is the leading contender to receive approval from the Dept. of Transportation for the first new nonstop U.S.-China flights awarded in a bilateral agreement signed in March. Delta has limited competition for the flights since only U.S. carriers without existing U.S.-China flights can apply. In fact, at present only Delta has filed an application -- the deadline is July 16. American Airlines, Northwest, Continental and United are unable to apply, leaving US Airways, which has stated it wants to wait until 2009 to apply, since China is a new market for them. Delta has failed in prior attempts to receive approval for a China route. However, Delta's VP of public affairs commented, "Regardless of what competition there is, we have the most compelling case." Shares of Delta gained 1.3% to $19.67 on Thursday.
Sources: Associated Press, Wall Street Journal
Commentary: 21 Airline Stocks to Keep You Flying High This Summer • Airbus Flies High at Paris Air Show; Delta, Boeing Negotiate $20B Order • Delta: Q1 Loss Narrows, Plans to Exit Ch. 11 This Week
Stocks/ETFs to watch: Delta Air Lines Inc. (NYSE:DAL). Competitors: US Airways Group, Inc. (LCC), AMR Corporation (AMR), Southwest Airlines Co. (NYSE:LUV), UAL Corp. (UAUA), JetBlue Airways Corp. (NASDAQ:JBLU)
GM to Sell Allison Transmission Unit for $5.6 Billion
GM shares rose 2% to close at $38.15, their highest level in seventeen months, on news the company has agreed to sell its Allison Transmission unit to The Carlyle Group and Onex Corp. for $5.6 billion. The proceeds of the sale will be added to the $16 billion the company has set aside over the past two years from asset sales, layoffs, plant closings and employee buyouts. "The $5.6 billion was definitely a positive surprise for GM investors," said money manager Dan Poole. Lehman Brothers analyst Brian Johnson had forecast a sale price on the order of $3 billion. Some proceeds are expected to be devoted to the development of electric vehicle systems, a technology the company needs to compete with Toyota. Other funds might go toward establishing a health care fund for union retirees, which could be an issue during July's contract negotiations. The transaction is the latest in a series of auto industry purchases by private equity firms and hedge funds, including last year's acquisition of half of GM's finance unit by Cerberus Capital Management and this year's $1.5 billion purchase by Carlyle of Goodyear's Engineered Products division. Shares of Onex closed up 5.4% at $37.60, their biggest one-day gain in three years.
Sources: Press release, Bloomberg, Financial Times, Wall Street Journal, TheStreet.com
Commentary: GM And Onex Up On Transmission Deal • GM Unit Pursued by Private Equity • GM's Balance Sheet: A Sign of Impending Doom
Stocks/ETFs to watch: General Motors Corp. (NYSE:GM), Onex Corp. (NYSEMKT:OCX). Competitors: Daimlerchrysler AG (DCX), Ford Motor Co. (NYSE:F), Toyota Motor Corp. (NYSE:TM). ETFs: PowerShares FTSE RAFI Consumer Goods (PRFG), Rydex S&P 500 Pure Value (NYSEARCA:RPV)
Conference call transcripts: Q1 2007
Related: Allison Transmission
Bank Regulators to Unveil New Subprime Loan Standards -- Reuters
Bank regulators are expected Friday to release new standards for the issuance of subprime mortgage loans, Reuters reported Thursday. The guidelines, a draft of which was released in March, will instruct depository lenders on how to make loans to clients with impaired credit. The final version is expected to be very similar to the draft, which obliges lenders to work harder to determine the likelihood of long-term payments being made and warn clients of potential costs. It also advises lenders to evaluate the "borrower's ability to repay the debt by its final maturity at the fully indexed rate," a provision that concerns many lenders who are hoping for a standard closer to that which prevailed during the housing boom. John Dugan, Comptroller of the Currency, told Reuters earlier in the week that he expected the new standards to be emphatic about the need to stop issuing loans with little or no documentation of the borrower's capacity to repay. The five bodies issuing the standards are the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC, the Office of Thrift Supervision and the National Credit Union Administration.
Commentary: Indymac’s Response to TheStreet.com’s 'Two Ways to Play a Mortgage Lender' • The Housing Crisis: Symptom or Cause of Market Volatility? • Fed Beige Book's Benign Economic Picture Contradicts Real Estate Reality
Stocks/ETFs to watch: IndyMac Bancorp, Inc. (IMB), IMPAC Mortgage Holdings, Inc. (NYSEMKT:IMH), American Home Mortgage Investment Corp. (AHM). ETFs: PowerShares Dynamic Banking (NYSEARCA:PJB), streetTRACKS KBW Bank (NYSEARCA:KBE)
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