One Page Annotated WSJ Summary, Friday Sept. 1

by: SA Editors
SA Editors
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Lockheed Wins Major Spacecraft Job

  • Summary: Lockheed Martin Corp. (NYSE:LMT) won the NASA Orion Space Shuttle replacement contract valued at more than $8.1b, surprising a team led by Northrop Grumman Corp. (NYSE:NOC) and including Boeing Co. (NYSE:BA), who had been considered the front-runners due to their extensive experience with manned space programs. With NASA dictating many design and performance specifications, the choice hinged on which contractor had the strongest implementation plans; NASA apparently had greater confidence in LMT's procedural controls and capacity to meet budget as well as schedule requirements. This vaults Lockheed into the lead for civilian space efforts following the anticipated retirement of the Space Shuttle fleet. Northrop and Boeing each said they intend to continue to compete for future contracts. Lockheed said the project will generate as many as 2,300 jobs, which could prompt a secondary loss for Boeing; some of its engineers could be lured away to work on the endeavor.
  • Comment on related stocks/ETFs: Lockheed stock's recent strength, in contrast to the relative weakness of its competitors, seems to indicate that the market shares NASA's penchant for LMT over the Boeing/Northrop group. The PowerShares Aerospace & Defense ETF (NYSE:PPA) offers a balanced exposure to the industry, although LMT has substantially outperformed it. Jeffery Saul declares aerospace one of his "bull industries." Lockheed's previous effort to build a Shuttle replacement, the X-33, was canned in 2001 due to technological and cost problems. Not mentioned in the WSJ article, Orbital Sciences Corp. (ORB) will be designing the Orion's escape system. ORB was up sharply in late-afternoon trading Thursday. LMT shares jumped initially, but then dropped hard. Is this a case of "buy the rumor sell the news," or was this priced in?

Sanofi, Bristol Win Ruling on Plavix and Drug Firms Use Financial Clout To Push Industry Agenda at FDA

  • Summary: Avoiding a worst-case scenario, a federal judge granted a request by Bristol-Myers Squibb Co. (NYSE:BMY) and its French counterpart Sanofi-Aventis SA (NYSE:SNY) for a temporary injunction halting sales of a generic version of their best-selling drug, Plavix. The drug sold $3.8 billion in the U.S. alone last year; however, since the generic market opened up, Bristol-Myers and Sanofi have lost nearly 75% of their market share. The ruling was far short of a complete victory as it allows pharmacies to continue to sell the generic supplies already on their shelves - estimated to be enough for several months' distribution. In addition, Bristol-Myers and Sanofi were required to post a large bond. U.S. sales of branded Plavix plunged 77% to $14.4 million for the week ended Aug. 25 from $62.7 million for the week ended Aug. 4, according to market-research firm Verispan. Shares of Bristol-Myers have dropped 20% in value since a possible deal with Apotex, the Canadian company responsible for knocking branded Plavix off of shelves, which would have preserved some of Bristol-Myers market share fell through in July. In after-market trading, Bristol-Myers' shares rose $1.97 following news of the ruling. In other Pharma news, The FDA is bargaining with the pharmaceutical industry for an increase in fees, giving the industry an even greater role in shaping the way FDA regulates them. Such negotiations between the industry and the FDA date to the introduction of "user fees" in the early 1990s. But steadily rising payments by drug makers -- $232 million in fiscal 2004 -- now fund more than half the agency's critical drug-review process. It is considered highly irregular for a regulatory agency to be required to negotiate their budget with the industry they oversee. Other agencies such as the FCC and the SEC rely on user fees for at least some funding, but don't generally haggle over the fees. Instead, they typically impose changes through formal rule-making or by implementing formulas set by Congress. Until 1990, the FDA was entirely funded by Congress and any deal struck between them and the drug manufacturers will be subject to Congressional approval before it can be implemented.
  • Comment on related stocks/ETFs: For background on Bristol-Myers Squibb's and Sanofi-Aventis' recent problems with generic Plavix and the legal problems that have ensued, including an ongoing federal anti-trust investigation, see George Gutowski's Bristol-Myers Squibb the Subject of a Criminal Antitrust Probe. Then, for in-depth analysis, read David Phillips' excellent Bristol-Myers Squibb: Excedrin Headache No. 99.

Goldcorp to Buy Miner Glamis For $7.8 Billion

  • Summary: Goldcorp Inc. (NYSE:GG) entered a deal to acquire rival gold-miner Glamis Gold Ltd. (NASDAQ:GLG) for stock valued at $7.8 billion. Some investors were disappointed by the deal, reflected in Goldcorp's sharp 9.2% loss in share price yesterday. Glamis was up intraday over 18%. Glamis shareholders would receive 1.69 Goldcorp shares for each Glamis common share, a 33% premium based on Wednesday's closing prices. The deal requires the support of two-thirds of Glamis shareholders, but doesn't require approval from Goldcorp's shareholders. In reaching the deal, the companies assumed a long-range price of $550 an ounce, lower than current levels, but higher than historical averages. Goldcorp is counting on continued high gold prices and promising development projects to make up for deal terms.
  • Comment on related stocks/ETFs: Phil Davis speculates that the deal represents Goldcorp's desire to control a greater share of gold output, thereby keeping the commodity's price artificially inflated: "You need monopolies, or at least cartels, in order to maintain high pricing, and this administration has never met a merger it didn't like." In a recent conference call, GG CEO Ian Teffer expressed his continued bullishness on gold prices, speculating gold still has another $200 to the upside. His reasons: Declining mine supply, flat central bank sales, and India and China continuing to take much of the output. Yesterday's volatile action is why some traders look towards the streetTRACKS Gold Trust ETF (NYSEARCA:GLD) as a safer play on the underlying metal.

Bernanke Defends 'Core' Focus

  • Summary: Fed Chairman Bernanke said controlling core inflation in the near term is the most productive way to contain overall inflation in the longer term. The Fed has been criticized for being overly optimistic on this matter in the face of rising energy costs. Critics say that focusing on core inflation, which doesn't account for food and energy prices, fails to address some of most important forces facing consumers. Bernanke said the Fed, in the short run, tolerates the pressure rising of energy prices. "Our objective is to make sure it doesn't pass though into other wages and prices — in other words, that there are not second-round effects."
  • Comment on related stocks/ETFs: Fund manager John Hussman has been unimpressed with the moderate CPI numbers of late, noting a disturbing expansion of the spread between intermediate and finished goods pricing. Bernanke has been accused by some of "pursuing a monetary policy of 'shooting from the hip,'" reacting to each market blip and economic number as it's released, instead of focusing on the bigger picture. David Fry has been an outspoken critic of the Fed's focus on the 'core rate' over the nominal rate, calling it 'the greatest fraud being promulgated by the government and Wall Street.'

Mixed Retail Results Breed Unease

  • Summary: Overall, same-store sales (for stores open at least one year) for retailers in August rose 2.8%, below the 3.7% the industry was logging during the first half of this year. Continuing the trend, higher end stores are seeing stronger increases than the low/middle end. However, aside from blaming gasoline prices for lower-than-expected store traffic, the weakening housing market is starting to have a psychological effect on higher income consumers. Discounters: Wal-Mart (NYSE:WMT) same-store sales rose 2.7%, hitting the high end of its 1%-3% forecast – overall customer traffic declined. Target (NYSE:TGT) saw same-store sales rise by 2.8% - customer traffic was flat. JC Penney (NYSE:JCP) blamed “softer sales of big-ticket items, particularly furniture," for its flat same-store sales in August. Bucking the trend, Kohl's (NYSE:KSS) same-store sales jumped 5.2%. Department Stores: Neiman Marcus and Nordstrom (NYSE:JWN) saw 4.4% and 7.1%, respectively. While Federated's (FD) 3.8% increase was at the high end of their forecast, sales figures from the 400 stores added via the May acquisition were not included. Teen Apparel: Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (AEOS) and Bebe Stores (NASDAQ:BEBE) saw same-store sales rise 6%, 11% and 13%, respectively. The Gap (NYSE:GPS) continues to struggle, posting a 2% increase at Banana Republic, but seeing same-store sales decrease 8% at Old Navy and fall a whopping 11% at its Gap division.
  • Comment on related stocks/ETFs: While analysts initially thought that the impact of high gasoline prices would be focused on low-end retailers, as gasoline prices stabilize (or even decline), concern may shift to higher-end retailers, primarily due to concerns about the housing market (Check out SeekingAlpha's Housing Bubble and House Prices Tracker).

Pax May Bless Some 'Sin' Stocks

  • Summary: Socially responsible investment funds generally avoid what are referred to as "sin stocks" -- companies that profit from gambling, tobacco, firearms and an array of other industries linked to social ills. Now Pax World Funds, one of the largest members of the "socially responsible mutual fund family" is rethinking that strategy after their Pax World Balanced Fund has returned only 4% in the 12 months through July, trailing more than half its peers. Making matters worse, funds like Vice Fund -- which actively seeks out sin stocks -- have handily beaten most SRI funds recently posting a 20% average annual return over the last three years. Pax is considering lifting its zero tolerance policy against alcohol and gambling, choosing instead to look at a company's entire "social responsibility profile". One example of why Pax is rethinking its 30-year old investment strategy: Pax was forced to sell a lucrative stake in Starbucks Corp. (NASDAQ:SBUX) last year when the company set up a deal to launch a coffee liqueur with whiskey maker Jim Beam. The funds' 375,000 shares were valued at $23.4 million at the time and had to be relinquished even though some SRI researchers estimate liquor-related sales contributed less than 1% to Starbucks's revenue. Shares of SBUX are up nearly 25% since Pax sold them.
  • Comment on related stocks/ETFs: Market Participant looks closer at why socially responsible ETFs have failed to yield significant returns. Here's a more positive look at the potential offered by the iShares KLD Select Social Index Fund (NYSEARCA:KLD).

Ford Weighs Sale of Aston Martin

  • Summary: Ford's Premier Automotive Group ("PAG") - its portfolio of European nameplates (Aston Martin, Jaguar, Land Rover and Volvo) has not lived up to expectations. Despite hopes that PAG would account for almost one third of its operating profit, PAG lost $1.6 billion in 2005 and is not expected to be profitable this year. Yesterday, Ford announced that it is considering selling PAG's crown jewel, Aston Martin. Analysts expect Aston Martin to fetch anywhere from $200 million to over $1 billion. Ford's next decision will be what to do with other PAG nameplates, most noticeably Jaguar and Land Rover. Ford needs the cash for a restructuring of its struggling North America operations.
  • Comment on related stocks/ETFs: Aside from Ford's problems being well documented, it remains to be seen if they can build cars that resonate with the American public. High gas prices have contributed to a 12.3% decline in its bread and butter pickup truck business, and their (once extremely profitable) SUVs are feeling the heat as well. One area to watch: Will the slump in new SUV sales trickle down to the used car market? If that happens, SUVs coming off leases will be worth significantly less than the residual amounts originally written into the leases. This will cause further losses for Ford's (and other automakers) financing arm.

Housing Chill Begins to Pinch Nation's Banks

  • Summary: Banks are worried about the cooling housing market. Real-estate downturns often trigger rising delinquency/default ratios, and lack of demand for new loans has begun cutting into otherwise strong earnings. Sales of new homes fell 4.3% in July; existing-home sales fell in July to the lowest level since January 2004. Some banks have begun warning investors through SEC filings of declines of close to 50% in mortgage originations. Real estate, including mortgages, home-equity loans and commercial loans, represents 33.5% of the U.S. banking industry's $9.3 trillion in assets. At bigger banks with multi-faceted operations the percentage is smaller (from 5-15%), but growing. Bank executives and Wall Street analysts have expressed little concern about increases in mortgage delinquencies or defaults, due to low unemployment and a relatively strong economy. Delinquencies are at 4.41% up from 4.31% last year. But the mortgage market is filled with new types of loans, such as interest-only loans and adjustable-rate mortgages, vehicles more interest-rate sensitive than their predecessors.
  • Comment on related stocks/ETFs: Barron's Lon Witter sees the current high-leverage mortgage situation as the trigger for a major housing market correction that will have broad repercussions in the stock market. Some related figures: 32.6% of new mortgages and home-equity loans in 2005 were interest-only, up from 0.6% in 2000. 43% of first-time home buyers in 2005 put no money down. 15.2% of 2005 buyers owe at least 10% more than their home is worth. 10% of all home-owners with mortgages have no equity in their homes. $2.7 trillion dollars in loans are slated to adjust to higher rates in 2006 and 2007. Since the end of 2003, the percentage of loans in negative amortization has gone from 1% to 47%. The various financial sector ETFs — (NYSEARCA:XLF), (NYSEARCA:IYF), (NYSEARCA:IYG), (NYSEARCA:VFH) and (NYSEARCA:RKH) — can be used to play the short-side of the banking industry.

Baby, You Can Drive My Car -- Via Television

  • Summary: At a time when marketers are questioning the value of traditional television commercials, a variety of virtual showrooms are playing an increasingly large role in marketing automobiles. driverTV is the most extensive of these pay cable channels, featuring an unlikely approach to showcasing new cars. Instead of glamour shots of vehicles bounding over desert terrain, driverTV showcases three-minute videos of new cars and light trucks taking the exact same turns, making the same stops and driving at similar speeds. The service makes money from car makers who pay to have their models displayed on driverTV and from consumers who pay for the channel. General Motors (NYSE:GM), DaimlerChrysler (DCX) and Ford Motor Co. (NYSE:F), were among the first companies to sign up, although Ford initially featured just a few models. Now Toyota Motor Corp. (NYSE:TM), Porsche, Jaguar, Hyundai Motor Corp. and Suzuki Motor Co. are joining the service. By the end of the year, driverTV will feature 75% of all U.S. models. In addition, many car companies are starting their own versions of driverTV. In April, GM launched a video-on-demand service which showcases more than 60 GM models. Ford has also looked into starting a similar service for potential customers.
  • Comment on related stocks/ETFs: Marketing guru Carl Howe has lots to say about the decline of traditional TV marketing and advertising methods. He recently addressed TV advertising's ongoing decline and the ways major U.S. companies like Coke (NYSE:KO) and Johnson & Johnson (NYSE:JNJ) are increasing their non-traditional advertising budgets to as much as 20% of their total marketing budgets - at the expense of traditional TV advertising.

For Subway, Every Nook And Cranny on the Planet Is Possible Site for a Franchise

  • Summary: To fuel their growth, fast food chains like Subway are staring to look beyond strip malls to less traditional locations. Aside from their 110 hospital locations, Subway recently opened their first kosher store in Cleveland's Jewish Community Center, a Goodwill store in South Carolina, a church in New York and inside a few California laundromats (solving the problem of what to do when you squirt ketchup on your shirt!). Subway now has over 20,000 locations in the U.S., easily surpassing McDonald's (NYSE:MCD) 13,700. Subway's use of “non-traditional” locations has jumped from 13% a decade ago to 22% today.
  • Comment on related stocks/ETFs: While some believe food stocks remain attractive investments, too much expansion in a given area can lead to sales cannibalization. Subway's approach is an interesting solution to this problem, especially since their kitchen requirements are much simpler than the chains that fry/grill their food. This might explain McDonald's focus on overseas expansion.

China Lures Foreign Retailers With Rule Changes

  • Summary: Last year China's retail sector was finally liberalized per its promise to do so when joining the WTO in 2001. Foreign retailers no longer have to form JVs or partner locally, resulting in a surge in applications and approvals -- some completely new to China such as prominent U.S. players like privately held Toys "R" Us and publicly traded Best Buy and Home Depot. Interestingly China has some of the world's largest shopping malls but only about 10% are profitable. New entrants seem to be eying only the major cities and as the CEO of Best Buy International said, "We're only going to open when it's right. This is not a race."
  • Comment on related stocks/ETFs: Estee Lauder (NYSE:EL) and Tiffany (NYSE:TIF) are among a handful of other companies in addition to Best Buy (NYSE:BBY) and Home Depot (NYSE:HD) that are listed in the article as having received approval for retail operations licenses over the past year. Wal-Mart (WMT) is regarded as an established player in China's retail sector. There is some concern about the government intervening and hampering chain-store expansions. However, there have been no real developments to-date except for some draft rules under consideration. With a national savings rate estimated between 40-50% and sustained robust economic growth there's no questioning why foreign retailers are knocking on China's door. The key will be to take it slow as Best Buy intends to do and to focus on major economic centers lining the coast.

HEARD IN ASIA: In Japan, the Buyback Defense

  • Summary: Japanese publicly listed companies are showing more interest in being shareholder friendly these days. An unprecedented amount has been spent on share repurchases in the first half of the year and 2005 was a record year for dividends paid. Share buybacks totaled $9.1 billion in H1-06 versus $2.9 in the same period last year and $585 million for all of 2001. Dividends paid in 2005 totaled $45.27 billion, which is a 26% increase over 2004 and 56% higher than in 2003. Although management may be more interested in protecting it and the firm from unsolicited takeovers, shareholders are benefiting nonetheless as share prices are on the rise from companies taking measures such as buybacks and raising dividends. Companies across Japan hope a higher share price will prevent shareholders from selling out to a hostile bidder. At the same time, the use of cash in buybacks and dividends reduces cash on the balance sheet making a particular firm less attractive as a takeover target. Some firms are still resorting to adopting poison-pill defenses but even in these cases share prices are seen rising in hostile takeover bids.
  • Comment on related stocks/ETFs: For non-Japanese individual investors it can be difficult to screen for likely M&A targets and the transaction costs as well as a lack of research material pose another challenge. One's best bet may be to consider Wisdom Tree's (WSDT) new dividend-weighted ETFs covering Japan: Small Cap Dividend Fund (NYSEARCA:DFJ), High-Yielding Equity Fund (NYSEARCA:DNL), and the Total Dividend Fund (NYSEARCA:DXJ). If interested in trying to play individual stocks the frequently published investment newsletters at Japan Investments are recommended reading.


  • Summary: The old conventional wisdom among economists was that 180,000 jobs were needed to be created each month just to keep up with the new people entering the workforce; but as the labor force growth has slowed, the new conventional wisdom reduces that figure to between 100,000-120,000 new jobs per month. Economists project that today's jobs reports will show that 130,000 new jobs were created in August, up from 113,000 in July. The concern here is that stronger job growth will heat up the economy and fuel inflation.
  • Comment on related stocks/ETFs: If job creation is too strong for Wall Street's taste, look for the catalyst to shift to oil. Will declining oil prices be enough to offset job growth concerns? Focus will shift to the Fed to see if they feel the need to raise rates.

SMALL STOCKS: Jos. A. Bank Falls 16%; Bon-Ton Stores Rises 9%

  • Summary: Small stocks were little changed amid light trading volume and as investors gave a mixed response to monthly retail-sales reports. Smaller retailers saw the most volatile action of the day: Jos. A. Bank Clothiers (NASDAQ:JOSB) slid 16%, to $23.93 after the retailer reported a drop of 6.1% in August same-store sales. Hot Topic (NASDAQ:HOTT) tumbled 11%, to 9.88 after the apparel and accessories retailer said its August same-store sales fell 6%. Bon-Ton Stores (NASDAQ:BONT) rose 9%, to 27.41 after the department-store operator reported total sales for the four weeks ended Aug. 26 more than doubled from the year-earlier period. Gymboree (NASDAQ:GYMB) added 6.4%, to 33.55 after the children's clothing retailer said August comparable-store sales rose 17%. Small stocks marked gains for the month of August, with the Russell 2000 rising 2.9%. The S&P 600 advanced 1.7% in August, breaking a string of four straight monthly declines. Other individual performers of note included PSB Bancorp (PSBI) which gained 44%, to 15.93 after agreeing to be acquired for $17 a share by Conestoga Bancorp; Advo (AD) fell 22%, to 28.59 after Valassis Communications (NYSE:VCI) sued to back off its proposed acquisition of the marketing company; World Wrestling Entertainment (NYSE:WWE) bodyslammed its way to a gain of 11%, to 17.28. after the company posted first-quarter earnings that surpassed analysts' estimates; Blyth (NYSE:BTH) climbed 26%, to 21.48 after the designer and marketer of home-decor products posted better-than-expected second-quarter earnings; NMT Medical (OTC:NMTI) jumped 16%, to 14.14 after receiving conditional FDA approval for modifications to a study of its implant designed to treat migraine headaches in patients with heart defects; NCI Building Systems (NYSE:NCS) gained 10%, to 54.34 reporting quarterly net income rose to $21.7 million, or $1 a share, from $14.7 million, 70 cents a share, a year earlier; NetManage (NETM), a software company, advanced 13%, to 5.05 after Riley Investment Management and Zeff Capital Partners unveiled a proposal to buy the shares of NetManage they don't already own for $5.25 a share.

Notable articles on Seeking Alpha today: Our new Housing Bubble and House Prices Tracker; Hilary Kramer names a construction contractor that should fall given the housing slowdown; Starbucks has no room for indulgent self-discovery; TiVo's ballooning subscriber acquisition costs; a largecap financial sector bargain; Conference call transcripts from Tiffany, Zale, JDS Uniphase, Ciena, and OmniVision. Jim Cramer's latest stock picks.

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