One Page Annotated WSJ Summary, Monday July 10th

by: David Jackson
David Jackson
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

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Saudi Arabia Tests Its Potential For Unlocking Heavy-Oil Reserves

  • Summary: Chevron Corp. is testing a new steam extraction technique to extract heavy oil from Saudi oil fields. Heavy oil has more impurities than light oil and requires more expensive refining. Chevron has used steam extraction in the US and Indonesia, and it is also used in the Canadian tar-sand deposits. The Saudis now want to see if it will work in the more porous rock in the Middle East. If successful, it would significantly increase Saudi Arabia's stated oil reserves of 260 billion barrels of recoverable reserves. Chevron's project will cost an estimated $300 million; Occidental Petroleum is preparing to spend $2 billion on a similar project in Oman. "Three years ago, the U.S. Geological Survey estimated the world has more than one trillion barrels of heavy oil, mostly in Canada, Venezuela and elsewhere in the Western Hemisphere... But some experts believe the amount of heavy oil in the Middle East has been underestimated because of the focus on the giant deposits of light oil in the region."
  • Comment on related stocks/ETFs: Positive for Chevron (NYSE:CVX), Occidental (NYSE:OXY) and other companies with expertise in stream extraction.

'Pirates' Plunders Box Office On Way to a Record

  • Summary: Disney's movie Pirates of the Caribbean: Dead Man's Chest broke the record for opening weekend box office performance, raking in $132.03 million. Disney had made a big bet on this film -- investing over $450 million in two Pirates sequels to the 2003 smash The Curse of the Black Pearl. It couldn't have come at a better time for Disney Studios, which posted a major loss for fiscal 2005 and disappointing revenue for the past two quarters. PG-13 rated "Pirates" is the latest effort of Disney to reach a broader audience than its traditional child-focused films.
  • Comment on related stocks/ETFs: Disney CEO Bob Iger noted the importance of this film on the company's most recent conference call. Disney stock may get a boost this morning in response.

Freescale Brings Chip to Market Based on Magnetic Technology

  • Summary: Freescale Semiconductor (NYSE:FSL), spun off from Motorola (MOT) two years ago, today plans to begin shipping a new type of memory chip that promises significant advantages over the two current types of memory chips. Freescale's MRAM memory is 'non-volatile' (ie. doesn't require constant electric charge) like NAND flash memory, which has recently experienced high growth alongside the cellphone and digital camera explosion, but MRAM can process information far faster than flash chips can. The other major type of memory chip - DRAM or SRAM - is cheap to produce but requires that constant charge to maintain information. Freescale hopes MRAM will eventually find markets addressed by both current technologies, but will begin by focusing on the server/network component, home-security and computer printer sectors, which currently combine a battery and an SRAM chip.
  • Comment on related stocks/ETFs: An important development in the field, but (1) due to the cost issue, it doesn't look like an immediate threat to the major flash memory producers -- SanDisk (SNDK), M-Systems (FLSH), Saifun (NYSE:SFUN) and Spansion (SPSN), and (2) the market for DRAMs is looking up on the eve of Microsoft's Vista rollout and the concomitant PC upgrade wave -- Freescale's innovation shouldn't affect that process significantly. Yet it's an incremental negative for DRAM producers Micron (NASDAQ:MU) and Infineon (IFX).

At 3M, Profit Warning Takes 9% Off Stock, Hits Dow Industrials

  • Summary: 3M's stock fell Friday by 9%, its largest one day percentage in over 8 years, after the company reported that it would miss its prior projection for Q2 earnings due to weak demand for optical films used in flat-screen TVs and monitors. Optical films accounted for about 8% of 3M's revenue in 2005. 3M now expects revenue of $5.7 billion, up about 8% year over year and close to the consensus estimate of $5.71 billion, but EPS below prior guidance of $1.14 to $1.17. 3M said manufacturers overestimated demand for LCD TVs ahead of the World Cup, and that manufacturers and retailers are now left with excess inventory, leading them to cut back on new orders.
  • Comment on related stocks/ETFs: Despite the fact that 3M's (NYSE:MMM) miss may have been exacerbated by loss of market share, as Kodak (EK), GE (NYSE:GE) and some Asian manufacturers have entered 3M's market, the company's comments confirm earlier data points suggesting weakness in the flat panel market. Specifically, flat panel manufacturers AU Optronics (NYSE:AUO) and LG Philips LCD (NYSE:LPL) earlier cut their estimates for Q2 sales and profits. The key question for investors now is what to do with the stocks in the flat panel supply chain that haven't yet pre-announced worse than projected earnings. Smart investors were steering clear of all the stocks in the flat panel "food chain" since the AUO and LPL pre-announcements, but the hit to 3M's stock suggests that the bad news isn't fully priced-in until it's explicitly announced. The stocks with potential exposure include glass manufacter Corning (NYSE:GLW), and chip vendors Genesis Microchip (GNSS), Pixelworks (NASDAQ:PXLW), Silicon Image (NASDAQ:SIMG) and Trident Microsystems (TRID). Perhaps weak flat panel TV sales could also hurt retailers Best Buy (NYSE:BBY) and Circuit City (NYSE:CC); they certainly won't get relief from sales of movie projectors. In the longer run, weakness in the flat panel stocks may be a buying opportunity, since this is a market with strong long-term growth prospects. Note Apple's recent decision to switch to flat panels only for its PCs and further market share gains by flat panel TVs at the expense of plasma and rear-projection TVs.

South Korean Cash Flows Into U.S. Real Estate

  • Summary: Korean direct investment in the US is rising sharply, partly driven by purchases of residential real estate. The Korean won his risen over 20% against the dollar over the last two years, and many Koreans now believe the dollar will rebound against the won due to higher US interest rates, Korean government concern that a high won is reducing Korea's competitiveness, and new Korean regulations that facilitate capital outflows by allowing individuals to invest up to $1 million in foreign real estate. As a result, many Koreans believe that US residential real estate is a good investment, and US real estate agents are reporting record purchases by Koreans. "Although there are no data for residential real estate specifically, Korean direct investment in North America in the first three months of this year was more than $570 million, nearly half the $1.27 billion total for all of last year, according to the Bank of Korea. It includes corporate investment in stocks and bonds, commercial real estate and infrastructure."
  • Comment on related stocks/ETFs: Predicting currency movements is risky, and this could end badly. The downside scenario: the dollar resumes its fall against the Korean won as the Fed finishes tightening and the US economy slows, and the US housing market tips into a sharper decline. Korean owners of US real estate would then lose doubly. This is significant for the US housing market because, while capital inflows from Korea are probably tiny relative tot the broader housing market, at the margin this is "hot money", parked for investment purposes. And we've seen that markets most exposed to hot money -- such as the market for second homes in the US -- decline faster than other, less volatile markets.

Venture to Buy Heritage Property

  • Summary: Strip-mall owner Heritage Property (HTG), which has been strongly criticized of late for its generous executive compensation packages amid poor stock performance, will be purchased for about $1.83 billion by an Australian and American joint venture, Centro Watt. Centro Properties is a publicly-traded Australian concern, and Watt Commercial Properties is a Los Angeles-based private company. The buyout price is $36.15/share, just a 3.3% premium over Heritage's closing price on Friday. Centro was able to offer more than many American suitors of Heritage due to the low current cost of capital in Australia.
  • Comment on related stocks/ETFs: That lower cost of Australian capital is one of the reasons the Australian ETF (NYSEARCA:EWA) is attractive to many investors these days. Roger Nusbaum notes that Australia hasn't had a recession since 1991, and has healthy GDP growth and natural resources to draw upon. Heritage has underperformed its peers since it went public more than four years ago, with a total return to investors of 87.7% since it went public in April 2002, compared with 154.5% for strip-mall companies, the Journal reported.

New AIDS Pill Simplifies Treatment

  • Summary: Gilead Sciences and Bristol-Myers Squibb have partnered to combine their AIDS drugs into a "triple-cocktail" that requires patients to take only one pill per day, and the FDA says it may approve the pill soon, possibly within the next few weeks. Doctors expect the availability of a singe-pill treatment to simplify patients' lives and even slow the spread of AIDS, with significant ramifications for Africa and other developing countries where the AIDS epidemic is acute. The new pill will contain three drugs: Viread and Emtriva from Gilead and Sustiva from Bristol-Myers Squibb. Gilead currently offers Viread and Emtriva together in a single pill called Truvada. Pricing for the triple pill has not been disclosed, but the two companies have suggested it would cost about the same as its components, ie. about $14,00 per year in the US. It would sell at cost in developing countries, namely about $600. But that's 4x the price of an older, more toxic triple-combination pill currently available.
  • Comment on related stocks/ETFs: It's not yet clear what the financial impact will be on Gilead (NASDAQ:GILD), Bristol-Myers Squibb (NYSE:BMY) and distributor Merck (NYSE:MRK), as the financial arrangements for who manufactures the new pill and how the profits will be split haven't been disclosed. But sometimes focusing on the stock impact is distasteful: this is simply great news for a lot of people.

FDA Signals It's Open To Drug Trials That Shift Midcourse

  • Summary: The large drugmakers have begun using 'adaptive trials' that allow them to route larger groups of patients to more promising treatments in the middle of trials, and to drop treatments that seem ineffective in early testing. The FDA has begun to show some openness to accepting these new types of trials in its assessment and approval process -- the agency will today announce plans to develop official regulatory guidelines for the adaptive trials. Among the concerns: sponsors, doctors or patients may (consciously or not) become biased in their orientation to the drugs being tested, skewing the results, and preliminary results may leak through to investors.
  • Comment on related stocks/ETFs: Clearly a positive for the major pharm companies, among them Eli Lilly (NYSE:LLY), Wyeth (WYE), Bristol-Myers Squibb Co. (BMY), Novartis AG ADS (NYSE:NVS), Merck (MRK) and Pfizer (NYSE:PFE). As always, it's an interesting debate where consumer safety, effective treatment and big corporate payoffs meet.

Starbucks Aims to Perk Up Sales Of Noncoffee Items for Holidays

  • Summary: Starbucks promoted Janet Parks to be its new VP in charge of merchandise sales, which accounted for about 4% of sales in recent years, down from a high of 8% in 1998. Ms. Parks previously worked in a global creative role for 12 years at Walt Disney Co. "The holiday lineup will feature a glittery snow globe on a gold-colored base, at least three kinds of Christmas ornaments, a reusable Advent calendar that turns into a miniature chest of drawers at the end of the season, and a dessert plate reading "Cookies for Santa.""
  • Comment on related stocks/ETFs: Starbucks (NASDAQ:SBUX) could clearly increase its profitability with a more successful merchandising strategy. But will glittery globes really do it? Meanwhile, William Trent says Starbux is trading down on noise.

Kraft to Bolster European Lineup In Deal for Part of United Biscuits

  • Summary: According to a WSJ source, Kraft will acquire a part of the UK's United Biscuits, giving Kraft control over brands such as Ritz crackers and other popular food products in Europe. The move would be an extension of new CEO Irene Rosenfeld's strategy of compensating for its lack of internal new brand production.
  • Comment on related stocks/ETFs: About 88% of Kraft (KFT) stock is owned by Altria Group (NYSE:MO) -- following the recent good news from the courtroom for Altria, a spinoff of Kraft seems more likely.

ADVERTISING: Dell Skips Tech Talk For a More-Personal Link

  • Summary: Dell launches a new ad campaign today on network and cable TV (to be followed by print and online ads) with a radically different message. Instead of stressing price and performance, Dell's new ads will focus on its ability to customize computers for individuals, and will emphasise the company's brand. Dell hasn't disclosed the cost of the new campaign, but did report ad spending of $776 million in 2005. Dell's new ad campaign follows a similar "personal" campaign launched by HP in May, dubbed "The Computer is Personal Again".
  • Comment on related stocks/ETFs: Dell's new campaign plays to its competitive strength -- its ability to customize PCs for individuals due to its build-to-order manufacturing process. If successful, this could change investor perception that Dell's direct distribution strategy no longer offers the competitive advantage it once did. The key question for Dell (DELL) and HP (NYSE:HPQ) is the extent to which users really need to customize their PCs, or whether, say, 5 configurations adequately address the needs of most types of users. Dell's ability to convince PC buyers of the advantates of individual customization, together with its price advantage, will determine whether Dell can recapture US retail market share from HP. Meanwhile, both the Dell and HP campaigns are negative for Apple's stock (NASDAQ:AAPL) since they attack Apple in its core market -- consumers interested in photos, music and video.

FOREIGN EXCHANGE: Dollar Is Likely to Resume Retreat Ahead of Bank of Japan Meeting and China's Trade Surplus Rises To New Monthly Record High

  • Summary: The Bank of Japan's monetary policy meeting is scheduled for the end of this week. It's widely expected that it will raise interest rates due to evidence of a strong Japanese economy and positive inflation. But large movements in the dollar are not anticipated as there are no other major currency-related announcements expected. Separately, the Chinese Commerce Ministry reported that China's trade surplus hit a new monthly high of $14.5 billion in June, versus the previous record surplus of $13 billion in May. Exports rose 23% year over year.
  • Comment on related stocks/ETFs: See also Enzio von Pfeil's suggestion of how to play the European interest rate tightening cycle.

HEARD ON THE STREET: Regional Banks in a Rate Whirl

  • Summary: A number of regional US banks have warned investors that their profits are being hit by rising interest rates as consumers and businesses move funds from low-interest-bearing accounts to online savings accounts and CDs paying over 5%. Although rates have been rising for a while, consumers tend to act with a lag and often wait until the higher rates they can earn by moving their accounts exceed the cost and hassle of the move. City National Bank (NYSE:CYN) cut its 2006 EPS growth projection last month from 8-10% to 1-4%, and other regional banks that have issued profit warnings include National City (NCC), Fifth Third Bancorp (NASDAQ:FITB) and Commerce Bancorp (NYSE:CBH). Citigroup's (NYSE:C) online savings account now pays 5% versus its traditional savings account that pays 0.7%. Increased margin pressure is expected to accelerate M&A in the sector as regional banks try to eliminate costs to boost profitability. Citizens Banking Corp. (CBCF) recently agreed to acquire Republic Bancorp (NASDAQ:RBNC).
  • Comment on related stocks/ETFs: This is as much an Internet story as a regional banking story. The Internet improves information efficiency and reduces the cost of banking; both factors lead to competitive pressure to raise deposit interest rates. Look at the comments on this article about how to earn higher yeilds, for example. Investors can play this trend in two ways: you can short the Regional Bank HOLDRs ETF (NYSEARCA:RKH), or go long stocks with positive exposure to online banking, such as online brokerages E*Trade (NYSE:ET), Ameritrade (NASDAQ:AMTD) and Schwab (NYSE:SCHW), which are moving aggressively into online banking and customer asset accumulation.

MARKET MOVERS: Investors Await Profit Reports With Wary Eye

  • Summary: Profits for the S&P 500, based on a bottoms-up aggregation of sell-side analyst estimates, are now projected to grow by 12.3% year over year for Q2, 15.3% in Q3, 14.8% in Q4 and 10.8% in 2007. Profits grew by 7% on average since the 1970s, and the longest run of double-digit profit gains was 13 quarters in the early 1990s. This quarter will mark the 12th consecutive quarter of double-digit gains. That raises the possibility that profit expections are too high and actual results may disappoint. Wells Capital Management chief investment strategist James Paulsen believes that strong profit margins, continuing pricing power and rapid sales growth will drive stocks until Fed interest rate increases dampen the economy and stock market.
  • Comment on related stocks/ETFs: The bearish view on this is that profit margins reliably revert to the mean, and at the moment they are way above average. See, in particular, the views of Jeremy Grantham and John Hussman.


  • Summary: If the Fed raises rates to 5.5% in August or September, interest rates will be close to average US nominal GDP growth over the last four years, of 5.6%. Hong Kong based GaveKal Research points out US interest rates exceeding the 4-year-average GDP growth is a negative leading indicator. Since the key transition mechanism is higher borrowing costs reducing corporate profitability, small companies will fare worse than large companies as they have relatively less cash on their balance sheets and are less able to access new capital.
  • Comment on related stocks/ETFs: If you accept this argument (and there are many reasons not to), there's an obvious pair trade: long the S&P 500 ETF (NYSEARCA:SPY), short the iShares Russell 2000 ETF (NYSEARCA:IWM).

THE OUTLOOK: Commercial Real Estate Maintains Its Strength Despite a Cooling Housing Market

  • Summary: Commercial real estate has is performing well despite a slowing housing market because it is driven by different factors. The residential market is driven primarily by interest rates, due to individuals' dependence on mortgages. In contrast, while cheap debt increased the number of bidders on commercial buildings and therefore pushed down rental yeilds, commercial real estate buyers are more diverse and often less dependent on loans. Furthermore, other factors contribute to commercial real estate pricing. The office market, which cratered after the tech bust in 2000, is benefiting from a strong economy and restricted supply, as many offices were converted for residential use. The residential property boom raised the cost of building and thus the value of completed buildings. Vacancy rates in the top metro office markets have fallen from 17% in 2004 to under 14% now. As long as jobs growth doesn't falter, the office market should hold up. Similarly, the shopping-mall market has benefited from strong consumer spending, and hotels have benefited from strong business travel.
  • Comment on related stocks/ETFs: The divergence of the commercial and residential real estate markets can be seen from the chart below comparing the Homebuilders ETF (NYSEARCA:XHB) to the streetTRACKS REIT Index Fund ETF (NYSEARCA:RWR) over the last six months. However, it's unlikely that commercial real estate and housing are uncorrelated in the long run. First, a key attraction of commercial real estate such as a REIT index fund is its yeild, which makes it comparable to a bond. Rising interest rates reduce bond prices and should therefore do the same to REIT stocks. Second, housing affordability is impacted by job and salary growth as well as interest rates, and the jobs market also impacts the office real estate market. If jobs growth stalls, both the housing and office markets would be impacted. Third, the conversion of office buildings to condos over the last five years shows that in many cases real estate is real estate, with no difference what it's used for. As such, it will be interesting to see whether the decoupling of the commercial real estate market from the housing market continues. Meanwhile, George Gutowski thinks homebuilder Dominion Homes' sales will get worse.

    XHB RWR chart

SMALL STOCKS: Radiologix Soars 39% on Buyout, As WebMethods and Lesco Drop

  • Summary: Friday's employment report rattled smallcaps, as it raised concerns about their prospects in a slowing economy amidst higher inflation. webMethods (WEBM) fell 32% following its severe warning on F1Q earnings; Radiologix (RGX) rose 39% on its buyout from Primedex Heath Systems (OTC:PMDX). Primedex itself jumped 6.9% to $1.87. LaBranche (NYSE:LAB) fell 24% to $9.42 upon warning for the quarter; Lesco (LSCO) fell 36% on guiding to a loss for 2006; Fiber-optic networker Finisar (NASDAQ:FNSR) gained 5.6% upon announcement of additional damages it will receive from largecap DirecTV (NYSE:DTV) in its patent-infringment case in federal court; Horizon Health (HORC) dropped 32% on lowered guidance.
  • Comment on related stocks/ETFs: Andrew Schmitt wrote the best recent article we've seen on Finisar.

Notable articles on Seeking Alpha today: Today's earnings schedule. Our one page summary of this weekend's Barron's. Willaim Trent on flat panel pricing and Intel vs. AMD. Matsushita is bullish on LCD sales. John Bethel on Kirk Kerkorian's next move for GM. Bill Miller re-iterates the case for large caps. The long case for Uranium Resources, and the short case for uranium stock USEC. Roger Nusbaum on how to survive a market meltdown.

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