One Page Annotated WSJ Summary, Wednesday Sept. 6

by: SA Editors
SA Editors
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Ford Taps Boeing Executive as CEO

  • Summary: Maybe Bill Ford Jr.'s comment at the last Ford (NYSE:F) board meeting should have been a clue: "I'm really struggling with trying to keep all the balls in the air. It's a lot--perhaps too much." Ford announced yesterday that effective immediately, Boeing (NYSE:BA) senior executive Alan Mulally is joining as its new president and CEO, a bold move by Ford considering his lack of experience in the auto industry. Bill Ford, will retain the role of Chairman. In January, Mr. Ford announced a turnaround company for the company, however this has not sufficed in making the radical change the company needs in the face of pension and health-care obligations, high gas prices, and foreign competition. According to Mr. Ford, Mr. Mulally's name "kept coming up" when began to look for a replacement. His experience in leading a major turnaround at a large industrial company is what made him a fit for the job: at Boeing, he reduced the workforce from 120,000 to 50,000 employees while slashing the time required to build airliners by 50%.
  • Comment on related stocks/ETFs: See Seeking Alpha's full coverage on Ford, with a range of opinions from bulls and bears. The Stock Masters asked yesterday, in advance of the announcement, if Ford can survive. Investopedia Advisor is a contrarian bull on Ford. John Bethel explains why Ford's main problem is product, not costs.

H-P Board Clash Over Leaks Triggers Angry Resignation

  • Summary: Fireworks in the Hewlett Packard (NYSE:HPQ) boardroom: In May, director George Keyworth was singled out by an internal investigation as the source of leaks about board deliberations; Mr. Keyworth's friend, Tom Perkins, quit on the spot, and has forwarded materials to the SEC prompting a probe of the investigation. HP fired back, announcing a filing with the SEC today. One of the practices under question is pretexting, where private investigators falsely represent themselves to telcos to receive someone's personal records. The Hollywood style drama runs much deeper than this, though. One small nugget: Tom Perkins was brought to the board despite Ms. Fiorina's resistance, and was party to calls and emails prior to joining the board surrounding her capabilities. You may want to wait for the book: Ms. Fiorina's version will be published next month.
  • Comment on related stocks/ETFs: HP's Q3 conference call. Andy Neff comments on Hewlett Packard's strong quarter and Q2 PC shipments. On February 15th, Carl Howe anticipated HP's Post-Valentine's Day Lover's Quarrel.

Ouster of Viacom Chief Reflects Redstone's Impatience for Results

  • Summary: In a move reminiscent of his 1996 shakeup at Viacom (NYSE:VIA), Chairman Sumner Redstone ousted CEO and President Tom Freston, a veteran of 26 years with the company. In January, Redstone and the Board authorized the corporate split that separated Viacom's cable networks and film studio from the broadcasting businesses that were carved off into CBS (NYSE:CBS). In the wake of the split, Viacom's stock price fell, while CBS's rose. Redstone's move yesterday came as a shock to investors since he had previously indicated that he was willing to give Viacom "a year" to show that the split was a success. As a result, shares of Viacom sold off to the tune of 6% yesterday. The firing came amid concerns that Viacom's flagship cable channels, MTV and Nickelodeon, were losing popularity to Web start-ups such as and Falling ratings at the MTV Video Music Awards have only exacerbated such concerns and MTV's inability to jump start its own YouTube-like site ultimately led to Freston's dismissal.
  • Comment on related stocks/ETFs: While Viacom has faced a range of troubles since the corporate split with CBS, evidenced again recently by Sumner Redstone's recent refusal to resign Tom Cruise with Viacom's Paramount Pictures, CBS has seen much success of late in raising shareholder value under CEO Les Moonves.

Intel to Slash 10% Of Work Force In Restructuring

  • Summary: Reacting to increased competition from AMD (NASDAQ:AMD), Intel (NASDAQ:INTC) yesterday announced cutbacks both in headcount and capital spending. Aside from reducing capital expenditures by $1 billion, Intel expects that the elimination of 10,500 jobs (about 10% of its work force) will result in annual savings of $3 billion. This will help with Intel's current price war with AMD, which is compressing margins on its flagship microprocessors. Analysts expect more non-core business to go on the auction block - most notably, its flash memory business, which lost $149 million in the second quarter.
  • Comment on related stocks/ETFs: While Intel and AMD might be good investments in the long run, the short term could get nasty. AMD is making inroads in PCs, and Intel scored a coup by snagging Apple. All this competition will mainly benefit the consumer. As chip speed becomes less relevant (software has not kept up with hardware advances), look for reduced power consumption to become a key selling point. This is important for both portable device battery life and the increasing power requirements of server farms (which can consist of over 100,000 computers).

Vivendi Agrees to Buy BMG For $2.1 Billion, Besting Rivals

  • Summary: Vivendi outbid six competitors to buy Bertelsmann AG's BMG Music Publishing business for $2.1 billion, making it the world's biggest music publisher, pulling ahead of rivals EMI Group PLC and Warner Music Group (NYSE:WMG). It also puts the conglomerate in a position to dictate terms when it comes to licensing music for TV shows, commercials and movies. Music publishers control the rights to melodies and lyrics, and earn steady, low-cost revenues by licensing them to record companies, film and TV producers, as well as ringtone and videogame makers. The deal is subject to U.S. and European Union regulatory review; music publishing is generally held to a less-stringent standard than recorded music, because it doesn't do business directly with consumers.
  • Comment on related stocks/ETFs: In a recent earnings conference call, WMG executives discussed future acquisitions.

Phelps Dodge, Giving Up on Inco, Could Become a Takeover Prospect

  • Summary: Arizona-based U.S. copper miner Phelps Dodge (PD) has ended its takeover bid for Canadian mining company Inco (NYSE:N). The move sent shares of Phelps Dodge up more than 3% as many shareholders had opposed the takeover because they felt it would saddle the company with too much debt and increase shareholder dilution. The move clears the way for Brazilian mining company Companhia Vale do Rio Doce (NYSE:RIO) to takeover Inco as soon as an agreement can be reached. With rising industrial metal prices resulting from increased Chinese demand and consolidation taking place across the mining industry, speculation has begun that Phelps Dodge may become a takeover target itself in the near future. "The deal process is going to continue, because it's extremely hard to develop mines," said Frank Holmes of natural resource-focused U.S. Global Investors. With its increasing copper production, Mr. Holmes said, Phelps Dodge "could become a target." In the meantime, Phelps Dodge is content to continue expanding its own copper mining operations in the U.S. as well as Africa and South America.
  • Comment on related stocks/ETFs: William Trent believes that all the M&A activity in the mining sector is bullish for a continued commodity boom. Yaser Anwar believes copper to be a particularly strong prospect to continue the commodity bull run.

LONG & SHORT: Steve Jobs Should Address Options Scandals

  • Summary: steve jobs Steve Jobs has had an illustrious career at the helm of Apple (NASDAQ:AAPL) and Pixar Animation Studios, which he ran until the company was sold to Disney (NYSE:DIS) earlier this year. But now both companies have come under fire as part of the options backdating scandal sweeping Wall Street. And while it is currently unclear whether Jobs was involved directly or even indirectly in backdating at either of the companies he ran, his lack of frank discussion on his possible role in the scandal is disconcerting. While it would be preliminary for Apple's board to fire Jobs or for the companies Commander-in-Chief to resign - "that would be overly punitive, a cure worse than the original wrongdoing - Jobs should frankly and openly discuss the scandal if for no other reason than to assuage the legitimate fears of investors.
  • Comment on related stocks/ETFs: For more perspective on Apple's ongoing options backdating issues, read Carl Howe's piece from August as well as Jack Ciesielski's from July 4. For more on the options backdating scandal, check out the WSJ's Options Scandal Scorecard.

Airlines Watch for Terror-Plot Effect

  • Summary: After last month's airplane terror plot was discovered in Britain, there was understandable concern on its effect on passenger bookings. Impact so far has been minimal, but some troubling signs are starting to appear. Despite almost 1,300 flights being canceled due to the terror threat, British Air's (NYSE:BAB) August traffic was up 5% compared to the same period last year (last year's traffic was impacted by labor problems). Since then, however, bookings are running lower compared with recent months. Virgin Atlantic said that they have not seen any "long-term impact" to their business (no furter elaboration was given). To "stimulate the market", discount carrier Ryanair (NASDAQ:RYAAY) recently announced the availability of 4 million seats for the price of (only) taxes and fees. Continental's (NYSE:CAL) August passenger traffic rose 9.3%, filling 82.4% of its seats. Blaming increased security costs, Continental revenue-per-available-seat-mile rose about 7% compare to last year. This follows a 9.6% increase in July. American's (NASDAQ:AMR) August load factor was 81.9%, with traffic down 1.4%, which can be partially explained by a 1.9% decline in the number of available seats.
  • Comment on related stocks/ETFs: Airlines just cannot seem to get a break. Just when things were looking up for the sector, another event threatens to disrupt their business. Aside from legacy carriers, it looks like budget carriers are feeling the heat as well.

HEARD ON THE STREET: GM, Ford Seen Regaining Drive To Race Toyota

  • Summary: In light of Ford appointing Alan Mulally as CEO yesterday, the article takes a look at the performance of three major players, Ford Motor Co. (F), General Motors Corp. (NYSE:GM), and Toyota Motor Corp. (NYSE:TM) in the auto industry. The current landscape: Light vehicle sales: GM 24.8%, Ford 17.7%, Toyota 15%. Gross revenues: GM $205b, Toyota $185b, Ford $170b. Cash/Short-term investments: Ford $23b, GM $20b, Toyota $18b. Share prices change over past year: Toyota +30%, GM -3%, Ford -13%. Market capitalization: Toyota: $197b, GM $17.4b, Ford $15.4b. [Note the discrepancy; GM and Ford both trade at prices below their cash/short term investments; Toyota trades at 10x theirs.] Past 4-quarter profits: Toyota $12.6b, Ford -$1.6b, GM -$11.3b. Forecasted EPS for 2007: Toyota $8.22, GM $4.91, Ford -$.23. Question: Will Ford and GM continue to be dominated by foreign competitors, or can they take steps to regain favor in Wall Street's eyes? Bullish arguments: Today's pain and investor dissatisfaction will lead to cost-slashing and improved profit margins. Bearish arguments: Massive employee-benefit costs will continue to give foreign competitors a clear path to dominating the market.
  • Comment on related stocks/ETFs: Ford's woes have been well documented. The article focuses on cost-cutting as the solution to the auto-makers' woes; others have argued with conviction that GM and Ford did not lose a million annual sales each just because of high costs—their products are not hitting enough hot spots. While GM has been aggressive in their cost-cutting, offering cash incentives of up to $140k to get union workers to retire, Ford has been looked at by Wall Street as playing a weak game of catch-up. Honda Motor Co. (NYSE:HMC) is another foreign auto manufacturer that has been taking advantage of its weaker domestic counterparts to pull ahead of the pack. Not everyone has jumped on the bandwagon, though; Stephen P. Brown takes a bullish stance on Ford, just "because so few do."

AHEAD OF THE TAPE: Labor Cost Conundrum

  • Summary: Analysts are trying to understand why corporate profits and labor costs, which usually move in opposite directions, are presently travelling in tandem. Pretax corporate profits are up 20.5% from Q2 2005, while labor costs are up 4.9% over the same period. The Fed keeps a close eye on rising labor costs, because companies are likely to pass these costs on to customers, leading to inflation. The current strength in corporate profits suggests perhaps other measures must be used to measure labor costs; one such measure, which factors profits into the equation, suggest labor costs may be up as little as 0.2%. WSJ's one-line conclusion: "If you still believe in Goldilocks, it might make sense to trust the more benign measures; otherwise, it might be time to worry that labor costs are rising and the profit boom has lost steam."
  • Comment on related stocks/ETFs: Perhaps what the latter labor cost figure, which takes soaring profits into account, suggests is that companies are sharing some of their increased profits with their employees. Inflated labor compensation is seen as one of the main reasons GM and Ford are having such a hard time keeping up with their overseas competitors.

HEARD IN ASIA: When Looking at Databases, Consider the Data's Source

  • Summary: With the spread of popularity in using hedge funds to play emerging markets the use of databases is also gaining popularity. However, potential investors need to understand that the data is typically provided directly by hedge funds with almost no verification. An independent investor consultant advising on hedge fund investing from Singapore suggests such databases are a 'starting point for due diligence' but not the 'gospel for how a hedge fund is doing.'
  • Comment on related stocks/ETFs: The article mentions three hedge fund database companies (HSBC AsiaHedge of the UK, of New York, and Eurekahedge of Singapore), two of which (AsiaHedge and Eurekahedge) pretty much admit their data is unverified and shouldn't be relied on exclusively to make investment decisions. The reports today that Moody's (NYSE:MCO), S&P, and Fitch are simultaneously but separately developing a system to rate hedge fund managers. The rating is specific to the fund manager and so-called operational risk but doesn't cover "... the creditworthiness of hedge funds or the effectiveness of an investment strategy" according to Moody's. Less than a month ago a WSJ Heard in Asia article discussed how hedge funds are struggling this year in Japan, largely due to volatility and especially in smaller-cap stocks. Lastly, the SEC on hedge funds and funds of hedges funds.

Expanding Into Consumer Electronics, Cisco Aims to Jazz Up Its Stodgy Image

  • Summary: Cisco Systems is best known for its Internet routers and switches which make up about 60% of its $28 billion in annual sales. Cisco now intends to expand its product offerings to include consumer electronics, embarking on an image change with a redesigned logo on October 2nd and with a new marketing chief, who says "... the sizzle is back at Cisco." The firm's recent $6.9 billion acquisition of set-top box maker Scientific-Atlanta fits into its new strategy as does bringing home-networking equipment, wirelessly networked DVD players, and services such as VoIP and VOD to your living room. The burden of spreading the word and making this a reality has been placed on new marketing chief Susan Bostrom who brings years of consulting experience and plans to publicize virtually everywhere possible including billboards and digital communities like Ms. Bostrom seems to have won over her colleagues, as Cisco's N. American operations head says, "She's now reached rock-star status at Cisco."
  • Comment on related stocks/ETFs: It won't be easy for Cisco Systems (NASDAQ:CSCO) to shed its image as a nuts-and-bolts equipment maker but the timing seems right for Cisco to make a play on consumers' desire to have a more wireless living room exploiting broadband Internet to make phone calls, play video games, stream audio/video, etc. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) have already made progress in creating a so-called wireless living room and entertainment via their respective Media Center/Extender and LocationFree technologies. Apple (AAPL) offers AirTunes in conjunction with its AirPort Express which brings more power and flexibility in streaming audio wirelessly. It will be interesting to see if Cisco goes it alone or pursues alliances with CE companies.

Outline for Global Economic Forecast Is Detailed and Business Climate Is Getting Better, World Bank Says

  • Summary: The Paris-based think tank the Organization for Economic Cooperation and Development [OECD] raised its projection for economic growth this year in the 12-nation euro zone to 2.7% from an earlier forecast of 2.2% while sticking to its view that the U.S. economy will expand by 3.6% this year. OECD cut its forecast for economic growth in Japan to 2.5% from 2.8% (full report). In terms of longer term forecasts, Europe's economic growth is expected to slow during FY2007 while OECD expects the U.S.'s and Japan's to accelerate. In terms of world economic activity, 112 governments made 213 rule changes that mostly improved the business environment, according to an annual World Bank survey. Key overhauls included simpler and speedier procedures for setting up companies, lighter taxation, stronger property rights, increased credit access and lower barriers to trade. Georgia was the top reformer in the survey, which included 175 economies and covered the period from January 2005 to April 2006. The country cut minimum capital for business start-ups, simplified cross-border trade and liberalized its labor rules. Also in the top-10 reformers were Romania, Mexico, China, Peru, France, Croatia, Guatemala, Ghana and Tanzania.
  • Comment on related stocks/ETFs: Kevin Chou sees a continued upside for emerging market stocks, a view seemingly supported by the recent World Bank survey. Meanwhile, Morgan Stanley analyst Stephen Roach continues to stress the risks involved in investing in emerging markets.

Home-Price Rises Slow the Most In Over 30 Years and Snippy Things Folks Say About Your Home Are Now Also Online

  • Summary: Home prices rose 1.17% in Q2, compared to 3.65% in Q2 2005; the drop was the steepest since 1975. Analysts attribute the slowdown to higher interest rates, rising inventories, and a decline in real-estate speculation. Price increases will continue to be weak. A related story: Operators of real-estate Web sites ZipRealty Inc. (NASDAQ:ZIPR) and Reply Inc. have begun encouraging customers to write reviews of homes for sale. Early indications are that the reviews can be harsh but honest, threatening to detract from the gushing language used in agents' marketing materials, this in a time when a homes-glut is already allowing buyers to take their time, dwell on defects, and demand price cuts. Operators of the sites say the reviews provide valuable information for home shoppers. The phenomenon also affects rental properties: Apartment Ratings Inc. says it has about 425,000 apartment ratings and reviews. Yahoo! Inc. (YHOO) is encouraging users to rate apartment complexes, as well as real-estate agents. Reviews are screened for racial discrimination, inappropriate content, phone numbers or advertisements, but not for whether reviewers' descriptions are accurate.
  • Comment on related stocks/ETFs: The housing/real-estate markets have been the economy's weak leg over the past year; some analysts insist they will eventually drag the stock market down with them. The major brokerage firms seem to be displeased with this recent development. Another possible angle is that anything that stirs controversy and catches people's interest can only benefit an otherwise flat marketplace.

Kodak Revamps Wal-Mart Kiosks

  • Summary: kiosk In a move that highlights the growing popularity of self-serve instant photo processing kiosks, Eastman Kodak Co. (EK) is installing more than 2,000 new kiosks at Wal-Mart Stores Inc. (NYSE:WMT), in an upgrade expected to provide a significant boost to the instant-print sales starting this holiday season. The kiosks involve self-service devices where customers plug in their camera or memory cards, pay by credit card, and receive digital photos that take four seconds to print. Under the agreement, Kodak will install newly designed kiosks that can be used by two customers at a time, which both companies expect will expand usage significantly. Wal-Mart, the world's largest photo processor, has already started installing the kiosks and plans to have them fully online by Nov. 1, in time for the holiday shopping season. The companies declined to disclose financial terms. The new three-year contract with Wal-Mart is an important step for Kodak, which has undertaken a painful three-year transition to the digital world, reporting huge losses as it closes plants and lays off thousands of workers.
  • Comment on related stocks/ETFs: For more on Kodak's performance, read their most recent quarterly conference call.

FOREIGN EXCHANGE: Dollar Rises on Europe Rivals, But Yen Gains as Rally Goes On

  • Summary: The yen continued to rally most of yesterday on earlier news of stronger-than-expected CAPEX data in Japan for the quarter ending in June. The director of research at commented, "The major theme that we've had [yesterday] is the liquidation of the carry trade. We're looking at a lower dollar overall and the yen taking a turn into the limelight." The yen is trading at its highest levels in two weeks against both the euro and dollar. Currency traders are now waiting on data releases today for Q2 U.S. productivity and unit labor costs, which will help determine the direction of trading for the dollar.
  • Comment on related stocks/ETFs: Both the dollar and euro are gaining on the yen so far today, with exchange rates currently at $1/Y116.4 and €1/Y149.28. Despite the CAPEX data induced newfound strength of the yen the BoJ is still unlikely to raise rates at this week's decision meeting, if anything due to the change in leadership later this month as PM Koizumi finishes out his term. Of particular interest however, is news Japan's monetary base dropped 20% in August to 87.56 trillion yen ($752b), falling for the sixth consecutive month and its largest monthly decline ever. Over the past year the dollar and euro have gained about 6% and 9% respectively against the yen. Against other Asian currencies the yen is down around 13% against the South Korean won, off by about 8% against the Chinese yuan, and down about 12% against the Singapore dollar. South Korean exports have particularly suffered this year whereas Japanese exports have gained heavily from forex profits. For more on currencies visit Seeking Alpha's Dollar/Currencies section in Market Overview.

Notable articles on Seeking Alpha today: Our daily housing bubble and real estate market tracker; battle of the drugstore giants - CVS trumps Walgreen on valuation; Ciena's reverse stock split may attract the shorts; options trader Phil Davis' Tuesday wrapup; why Check Point won't be sold to H-P, despite analyst speculation to that effect; Hilary Kramer sees a bulls-eye from Target; Jim Cramer's latest stock picks.

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