Summary of selected articles from this morning's Wall Street Journal with comments on related stocks. Links are to the original WSJ article, which requires a paid subscription. Use this summary as a starting point for research; check the summary against the original before trading:
Breaking News: Bank of Japan Leaves Interest Rates Unchanged.
Bet on Huge Plane Trips Up Airbus
- Summary: Airbus announced yesterday that its double-decker passenger plane, the A380, would be delayed another six months. The delays are causing Airbus to overshoot its $12 billion A380 budget by at least $2.5 billion. Then, Singapore airlines announced that it would purchase 20 Boeing 787 "Dreamliners" instead of the Airbus A350 mid-sized plane. Boeing now has 423 orders fom 30 customers for the 787 versus Airbus' 180 orders from 14 customers for the A350.
- Comment on related stocks/ETFs: European Aeronautic Defence & Space Co., which owns 80% of Airbus, saw its stock fall 26% yesterday. (It's not traded in the US.) Beoing's stock (BA) rose 7%. Two key points for investors: (1) the news over the last few days (and the commentary here) signalled a clear buying opportunity for Beoing, and (2) it's still not clear whether this news is being efficiently priced-in to these stocks if Boeing's stock if it was up 7% but Airbus was down 26% given that competition between the two companies is a zero-sum game. They key is to understand how much profit exposure the two companies have to the commercial business versus their defense businessess.
Chandlers Threaten Proxy Fight Over 'Disastrous' Tribune Strategy
- Summary: Tribune's second largest shareholders, the Chandler family, attacked the company's strategy and the $2 billion stock buy back announced two weeks ago. The Chandlers own 12% of Tribune's stock and control 3 of its 11 board seats. The Chandlers made three demands in a letter to Tribune filed with the SEC: separate the newspaper and broadcasting businesses via a tax-free spin-off; sell a significant stake in the broadcast business to a private equity firm; and conduct a review of the company's management and strategy. The Chandlers estimate that a leveraged buyout could be accomplished at $35 a share.
- Comment on related stocks/ETFs: Tribune's stock closed up almost 3% yesterday at $32, but is still almost 10% below the $35 buyout price the Chandlers specified. Note, however, that the Heard on the Street column in the June 9th WSJ (summary and discussion here) argued that break-ups have failed to raise the price of media stocks in the past.
Reports Intensify Pressure On Fed to Boost Rates and Reversal: Stocks Rule for a Day, Bonds Lose
- Summary: Data were released yesterday showing that consumer prices rose 0.4% between April and May, and were up 4.2% year over year in May. At the same time, "The beige book, a roundup of anecdotes on business conditions from the Fed's 12 districts, said consumer spending growth "had slowed" and "residential real-estate markets continued to cool across the country....Some districts mentioned that sales were slowing or weaker than anticipated at discount stores or to lower-income customers," perhaps because of higher gasoline prices." Dallas Federal Reserve Bank President Richard Fisher called current inflation expectations "unacceptable." As a result, bonds fell heavily. The DJIA rebounded by 1.03%, but more than a third of its gain came from Boeing. Stocks would normally sell off on poor inflation numbers; their bounce yesterday appears to be more a reaction to recent heavy selling than a fundamental improvement.
- Comment on related stocks/ETFs: Higher inflation plus a slowing economy should (in theory) be good for inflation-protected bonds, because eventually the Fed won't want to raise interest rates, and lower rates plus higher inflation is good for inflation-protected bonds. But like other bonds, the iShares Lehman TIPS Bond Fund ETF (TIP) fell yesterday. David Fry looks at the 7-10 Year Treasury chart here.
CREDIT MARKETS: Consumer Data Sinks Bond Prices
- Summary: After yesterday's consumer price data (see above), "Federal-funds futures markets indicate near certainty that the Fed will raise its benchmark interest rate for the 17th straight time to 5.25% when it meets later this month." Two year Treasuries are now yielding 5.116%, the highest level since December 2000, but rates on long term Treasuries have risen less, reacting to data suggesting a weakening of the economy. The result is an inverted yeild curve (short term rates higher than long term rates). ""The bond market is saying the Fed is already being restrictive, and I think the yield curve has got it right," adds [Pimco bond fund manager] Mr. Kiesel. Pimco has been accumulating short-term Treasurys because it expects the Fed to start lowering rates next year, which would cause prices on shorter-dated securities to rise and their yields to fall."
- Comment on related stocks/ETFs: The easiest way to buy short term Treasuries is with the iShares Lehman 1-3 Year Treasury Bond Fund (SHY).
China Warns Its Banks to Curb Lending as Money Supply Rises
- Summary: China's State Council (Premier Wen Jiabao's cabinet) was quoted yesterday saying that China's economy is at risk from excessive credit growth and overinvestment in property. Banks were told to curb lending after China's central bank reported that M2 money supply rose 19.2% year over year in May. Critically, the authorities let the yuan rise, crossing the important threshold of 8 yuan to the US dollar.
- Comment on related stocks/ETFs: Rising yuan plus booming Chinese economy = buy Chinese stocks. There are two ETFs: the iShares FTSE/Xinhua China 25 Index Fund (FXI) and the PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Note, however, that Andrew Schmitt (who's sharp) is nervous about China.
China's Alternative-Energy Plan Faces Coal-Methane Hurdles
- Summary: China's aggressive targets to use 100 times more coal-bed methane [or CBM] for the county's energy needs than is currently produced look implausible without a technological breakthrough or until the government is willing to provide financial support.
- Comment on related stocks/ETFs: China's failure to increase coal and CBM use will continue to drive demand for oil, benefitting the US Oil ETF (USO).
AHEAD OF THE TAPE: A Different Kind of Meltdown
- Summary: Although emerging market stocks have taken a beating in this market decline, emerging market fundamentals are much better than they were in the '90s. Most emerging economies are growing fast, running trade surpluses, and have strong credit ratings on their debt.
- Comment on related stocks/ETFs: Concerns about a weakening dollar will also fuel long term inflows into emerging market stocks. The easiest way to play a rebound in emerging market stocks when the time is right is via the iShares MSCI Emerging Markets Index ETF (EEM), or via Vanguard's Emerging Markets VIPERs (VWO) which excludes Russia but has a far lower expense ratio. J.D. Steinhilber doees a good job of comparing these two ETFs.
VeraSun Shares Surge 30% in IPO
- Summary: Ethanol producer VeraSun which priced its IPO at $23 yesterday rose to $30 by close of trading. "Fuel additive MTBE, which has been banned or limited in many states due to environmental concerns, is being replaced with ethanol... VeraSun has joined with General Motors Corp. and Ford Motor Co. to promote awareness of a fuel blend made of as much as 85% ethanol. The campaigns include the addition of ethanol fuel pumps at service stations in the Midwest."
- Comment on related stocks/ETFs: See detailed analysis of VeraSun (VSE) by Cleantechblog and ClearFish Research. VeraSun is the second largest ethanol producer. The largest, already public, is Archer Daniels Midland Company (ADM). The third and fourth largest producers -- Hawkeye Holdings Inc. (HKI) and Aventine Renewable Energy Holdings Inc. (AVR) -- have both filed for IPOs. Detailed coverage of ethanol stocks here.
FOREIGN EXCHANGE: Dollar Declines Amid Reactions To Inflation Data
- Summary: Stronger-than-expected consumer price increases announced yesterday initially lead to the dollar strengthening on expectations of further increases in US interest rates, but then led to a decline in the dollar as traders concluded that higher interest rates could slow the US economy and dampen demand for US assets.
- Comment on related stocks/ETFs: Don't you just love the inscrutability of the foreign exchange market and journalists' attempts to make sense of it? "Higher inflation means the dollar strengthens... sorry, weakens." If you want to gamble on dollar movements with an ETF, try the Euro Currency Trust Euro Currency (FXE), and check the discussion of the new Deutsche Bank Currency ETF (DBV), basically a currency hedge fund.
HEARD ON THE STREET: Investors Weigh NutriSystem's Stock Run
- Summary: Diet products company NutriSystems ships low-calorie meals directly to dieters homes for less than $300 per month. Customers grew from 52,000 in 2004 to 347,000 in 2005. The stock now has a market cap of over $2 billion, over 31x 2006 estimated EPS versus 19x for Weight Watchers International. The company is testing products to be sold through retailers, and is a clear beneficiary of the fact that over 60% of Americans are overweight according to an FDA report. But rosy expectations are priced-in to the stock, and any disappointment could lead to a sharp pull back.
- Comment on related stocks/ETFs: Clearly negative conclusion on NutriSystems (NTRI); the valuation comparison is mildly positive for Weight Watchers (WTW).
SMALL STOCKS: LMI Aerospace Increases 13%, But Banking Sector Takes a Hit
- Summary: Aerospace components company LMI Aerospace (LMIA) rose 13% off the Singapore Airlines Boeing order and an upgrade of the commerical aerospace sector from Goldman Sachs. Earnings results: Positive results from Casey's General Stores (CASY), up 19%, medical devices company Somanetics (SMTS), up 21%, and Barrett Business Services (BBSI), up 16%. Power-One (PWER) rose 10% on announcing a deal to provide power conversion products to Ericsson.
- Comment on related stocks/ETFs: Small cap coverage from Seeking Alpha here.
Other updates: Japan embarked on a search engine project. Multiple insiders are buying NRG Energy stock.
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