One Page Annotated WSJ Summary, Friday Sept. 8

by: SA Editors
SA Editors
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H-P Scandal Puts Chairman, Lawyer In Awkward Light and Nine Journalists' Phone Records Targeted in H-P Probe of Leaks

  • Summary: When Hewlett-Packard's (NYSE:HPQ) non-executive Chairman, Patricia Dunn (pictured), authorized investigators to look into press leaks in January 2005 that Hewlett-Packard directors were unhappy with the company's performance under then Chairman and CEO Carly Fiorina, she never would have imagined the result would be a full-fledged state investigation into the methods H-P's investigators used.dunn H-P's outside counsel, prominent Silicon Valley lawyer Larry Sonsini, assured Tom Perkins, an H-P director who angrily resigned in May over a search of directors' phone records, that the probe -- including its use of a practice called "pretexting" to obtain the phone records -- was "well done and within legal limits." Yet, yesterday, a spokesman for California Attorney General Bill Lockyer said that state investigators now believe there was criminal activity involved in the methods used to search those records. Besides H-P directors, the company disclosed that nine reporters, including Pui-Wing Tam of The Wall Street Journal, had their phone records accessed by investigators working for H-P. The company maintains that it was unaware that pretexting was being used. Pretexting is illegal in the state of California. Furthermore, H-P claims to be "dismayed that the phone records of reporters were accessed without their knowledge," adding that they "are completely and fully cooperating with the state attorney general's investigation." In the case of Mr. Perkins, whose phone records were also obtained, an unidentified person set up a fraudulent online account in January for his residential phone service, using the executive's telephone number and the last four digits of his Social Security number. It is not known how his Social Security number was obtained.
  • Comment on related stocks/ETFs: For more on H-P's unfolding scandal, see yesterday's WSJ excerpt on the company. The chorus of voices calling for current Chairman, Patricia Dunn, to step down is growing each day. Barron's Tech Trader Daily has more.

Lukewarm Investors, Nervous Workers Await the New CEO at Lucent-Alcatel

  • Summary: Taking the helm at failing Lucent Technologies Inc. (LU) in 2002, Patricia Russo returned the company to profitability in less than two years. Her strategy was to cut the workforce from 62,000 to 30,000, and to jettison many of Lucent's secondary businesses. Lucent's recent merger with French Telecom giant Alcatel (ALA) presents a new challenge: To meld the two into a trans-Atlantic telecom giant and lead the companies in the face of new rivals and a consolidating customer base. Russo plans to cut 9,000 jobs from the combined work force of 88,000. Critics on both sides of the Atlantic expressed discomfort: Americans charge it's almost impossible to lay off workers in France; Russo says this is "absolutely flat-out not correct." French workers, alarmed by the speed with which U.S. executives slash jobs, are concerned Russo will be too quick to cut positions and will favor employees at Lucent over those at Alcatel. Alcatel will make up 60% of the company's post-merger shareholder base, and will dominate management. But Russo has made it clear she will be running the show despite weak French management, saying she feels things will turn sour unless the CEO is in clear control. "In the end, the buck stops with me."
  • Comment on related stocks/ETFs: In its Fiscal Q3 conference call, Ciena Corp. (NASDAQ:CIEN) CFO Joseph Chinnici commented on the merger. He was positive 1) because he felt resultant short-term confusion would benefit Ciena, and 2) because in the big picture he felt consolidation was good for the industry. Tim Luke notes that the merger creates the world's second largest wireless equipment vendor with 20% market share—surpassing Nokia Corp. (NYSE:NOK), but trailing Ericsson who leads with 35%—and that product overlap between the two is minimal. Alcatel and Lucent execs held a conference call on Apr. 2 to announce and discuss the merger; chairman Serge Tchuruk said the merger was about taking the lead in innovation (two heads are better than one) and cost-cutting (economy of scale). The recent mergers, LU with ALA and NOK with Siemens AG (SI) has left some pundits worrying that once-mighty Nortel Networks Corp. (NT) might be left without a partner. For broader exposure to the sector, consider iShares S&P Global Telecom ETF (NYSEARCA:IXP), iShares Dow Jones U.S. Telecom Sector Index ETF (BATS:IYZ), Telecom HOLDRS ETF (NYSEARCA:TTH), and Vanguard Telecom Services ETF (NYSEARCA:VOX).

OPEC Likely to Keep Output Level and BP's Top U.S. Pipeline Inspector Refuses to Testify

  • Summary: OPEC's Monday meeting in Vienna comes at a crucial point, with oil prices remaining high despite a recent decline. While the organization, responsible for a third of the world's oil output, is expected to leave its formal crude-output limits unchanged during the meeting, oil consumers remain vulnerable to supply outages. One potential trouble spot is oil-rich Iran, locked in a tense standoff with the West over Tehran's nuclear-development program. Another is the hurricane-prone American oil hub in the Gulf of Mexico, where storms ravaged output in 2005. The storm season has been mild, but has more than two months to go. Additionally, world oil use typically rises sharply during winter in the Northern hemisphere - by as much as 1.5 million barrels a day this winter according to IAE. And with OPEC's largest producer nations failing to meet quotas this year - countries like Venezuela and Indonesia - any sociopolitical shakeup or natural disaster could send oil prices through the roof. Then again, some forecasters predict crude could fall toward $50 a barrel by the end of next year, assuming there are no shakeups to the system currently in place. In other supply side news, the chief pipeline-inspection expert for the U.S. subsidiary of BP PLC (NYSE:BP), Richard Woollam, took the Fifth Amendment under oath before a House Energy and Commerce panel rather than explain what he knew about corrosion in the oil company's Prudhoe Bay pipelines in 2002. The committee alleges that he reduced inspection personnel responsible for monitoring 22 miles of pipelines leading from the giant oil field by 25%, after an outside contractor suggested that accumulating sediment in the lines might be corroding them. Mr. Woollam has been placed on leave by BP. Steve Marshall, president of BP Exploration Alaska Inc., which manages Prudhoe Bay, said neither he nor other BP officials knew about serious corrosion problems until March 2, when 250,000 gallons of crude oil spilled onto the tundra. Oil prices rose further after BP last month partially shut down Alaska's Prudhoe Bay oil field, which it runs on behalf of a consortium of oil companies, following the discovery of more corrosion and a second leak. Committee Chairman Joe Barton, Republican of Texas, said: "Maybe [BP] shouldn't operate the pipeline," suggesting that Congress might help arrange a private sale of the oil-field system. Democrats were in agreement, with several paraphrasing BP's environmentally friendly slogan, "Beyond Petroleum," calling it "Broken Pipelines."
  • Comment on related stocks/ETFs: There is much disagreement over the direction oil prices are headed. A quick perusal of Seeking Alpha's Oil Price page yields a wealth of oil price bulls, bears and everything in between. For more on the BP Prudhoe Bay fiasco, see Eli Hoffmann's WSJ summary and Phil Davis, who is suspicious of the timing of BP's summer oil spill.

Bank of Japan Leaves Monetary Policy Steady

  • Summary: As widely expected the Bank of Japan voted unanimously to leave monetary policy unchanged saying it will "encourage the uncollateralized overnight call rate to remain at around 0.25%" and continue to purchase government bonds monthly at ¥1.2 trillion ($10.3 billion). It's believed weaker-than-expected CPI data released in late August was a factor in the BoJ's decision. The CPI basket was updated with new components such as flat screen TVs which put downward pressure on the reading. Concern over the strength of the U.S. economy is also seen as a key topic discussed among the board. The BoJ's tankan corporate sentiment survey is due out Oct. 2nd ahead of its next board meeting on Oct. 12-13. Some BoJ watchers say strong readings in areas such as capital spending could influence the BoJ to raise rates.
  • Comment on related stocks/ETFs: Although the outlook is mixed whether the BoJ will raise rates again this year the popular stance is that another 0.25% hike is too insignificant to affect equities whereas most of the impact would be on on bonds and the yen. In its monthly report the BoJ maintained its position that the economy is expanding moderately and is expected to continue doing so. reports BoJ Governor Fukui saying the following at a press conference after the rate decision meeting: "Even looking at the CPI index after the revision, we see that prices are basically on a positive trend. The revision won't prompt us to change our basic stance (on prices)." See WSJ coverage of the latest CPI data and stronger-than-expected CAPEX data. A long-time Japan watcher says he doesn't believe the "fool's gold" yen rally of late and recommends going back to the carry trade. Also see a currency trader's take on inflation in Japan.

Housing Slowdown Takes Its Toll

  • Summary: Since 1975, when the Office of Federal Housing began indexing home prices, housing has never posted an annual decline. In a recent survey of 52 economists, most believe cooling in the housing market will extend into next year. Housing forecasts: Many predict no change, or even a decline, in home prices next year. The average prediction for next year was a 0.43% increase in housing prices, well below the 2.7% forecasted CPI inflation measure. The last time housing trailed inflation was in 1996. Economic forecasts: Expect modest economic growth through the middle of next year; the average GDP forecast was for an annual rate of 2.8%. Twenty-two economists said recession is the greatest threat over the next 12 months, 14 said inflation is the biggest threat, and nine chose stagflation (rising inflation and stagnant economic growth). The economists raised their forecasts for the likelihood of recession for a third straight time; the average probability was 26%. The most significant lasting implication of the Sept. 11 attacks: The rise in oil prices (26), increased vulnerability of consumer confidence (3), a reduction in talented foreign workers (3), none (5). Other survey tidbits: • Fourteen said Democratic control of both houses of Congress would have the best chance of reducing the national deficit, 14 said Republican control of both chambers, and 10 said a split Congress. • They predicted 115,000 new jobs a month will be added to nonfarm payrolls over the next year, the lowest forecast since the question was first asked in June 2005. • The unemployment rate will rise to 4.8% by November, up from the 4.7%, and to 4.9% by May 2007. • Economists forecast crude-oil prices at $66.95 a barrel by December, and $63.91 by June 2007. Some key quotes: • "The housing correction is just in its early stages now... prices will have to go lower to give demand a lift in short term." • "The most volatility will come in areas like Florida, where there are a large number of second homes and investment properties." • "Companies are taking a more conservative approach to corporate finances now... suppliers of capital [are] less willing to lend money" to unproven borrowers. • "Although the human costs of the 9/11 are incalculable, the macroeconomic costs have been remarkably small."
  • Comment on related stocks/ETFs: In a recent interview, Toll Brothers (NYSE:TOL) CEO attributed housing market weakness not to macroeconomic factors, but to the impact of global issues such as terrorism on the psyche of the American consumer. But looking at the Housing Affordability Index, which measures families' ability to meet mortgage requirements, Marc Gerstein suggests houses have simply become too expensive, such that even a decline in interest rates won't bolster the market. Oliver Schwindler notes that the current bubble in housing prices can not be attributed to a corresponding rise in income, nor population growth; combine this with the fact that rents have not gone up together with housing prices, and it's difficult not to conclude, as Lon Witter does, that, "housing prices [are] 30 to 50 percent too high."

In Some Deals, Executives Get a Double Payday

  • Summary: HCA (NYSE:HCA), Kinder Morgan (NYSE:KMI) and Aramark (RMK) are all being taken private this year, to the tune of $40 billion total. In each case, executives from the companies joined forces with private equity funds to buy the companies. What's in it for the executives? They get to keep running the companies and they get an equity stake as much as 10%. What's in it for the private equity funds? By working with the executives, they essentially guarantee that there will not be any competition to win the deal. For example, after HCA received its bid (from its executives), HCA's special committee placed restrictions on the other bidders and set a 50 day deadline for the competing bid. This can obviously lead to conflicts of interest - by stacking the deck in its executives' favor, shareholders are not necessarily getting top dollar for their shares.
  • Comment on related stocks/ETFs: The stakes are huge here. HCA, Kinder Morgan and Aramark are number 2, 3 and 9 on the list of largest buyouts in history. Heading up the list - RJR Nabisco, of "Barbarians at the Gate" fame. The Kinder Morgan buyout is a stunning $13.5 billion reversal of fortune for Richard Kinder, who left Enron 10 years ago to start the company that bears his name

New Fed Chairman Hopes to Downplay Impact of His Words

  • Summary: Federal Reserve Chairman Ben Bernanke, who took over from Alan Greenspan last February, has brought democracy to the Fed's decision-making -- an approach the markets are still learning to interpret. Where Greenspan and predecessor Paul Volcker were noted for their ex cathedra pronouncements -- an approach that gave their every word the power to affect the market -- Bernanke encourages the contribution of other Fed officials in matters of policy. Some argue that the Fed does not need much alteration, since Greenspan left it with "strong growth, low inflation, and a near-sterling reputation". But Bernanke's approach -- which entails providing the public with clear, frequent reports of the Fed's goals and forecasts -- could be beneficial. A clear indication of the Fed's goals for the inflation rate, for example, should contain public pressure for higher wages, which would in turn curtail the Fed's need to use "wrenching" interest rate changes to maintain stability. Forecasts on growth, unemployment and inflation would also enable the markets to anticipate whatever interest-rate action the Fed might take, thus rendering them less vulnerable to the specific language used in Fed statements. The danger is that the Fed might be wrong once too often, undermining its credibility, or that the public might find more information confusing rather than illuminating. While some argue that a decentralized, democratic Fed "isn't compatible with the strong leadership the world expects from the U.S. central bank", others hold that the benevolent-dictator approach of Volcker and Greenspan placed too much power in the hands of one person. In the early days of Bernanke's tenure, the markets were oversensitive to his language and misinterpreted him on occasion, but market confidence in him appears to be gaining.
  • Comment: In June, fund manager John Hussman stated that Bernanke's words do not -- and should not -- directly affect the markets.

New MasterCard Aims for Rich

  • Summary: MasterCard, Inc. (NYSE:MA) is introducing a line of credit cards aimed at households with annual incomes of more than $250,000. The first such card, which is designed for customers of upscale retailer Saks Fifth Avenue (NYSE:SKS), will carry no annual fee -- but will charge its holders a 22.65% interest rate. The card is one of many "co-branded" cards that are linked to the reward programs of specific retailers or airlines. MasterCard, like Visa USA Inc., has spent several years attempting to increase its share of the affluent market, which is dominated by American Express (NYSE:AXP). MasterCard offers a high-end card called "World" that offers "premium perks" and has been aimed at households with an annual income of at least $125,000. The new, co-branded card creates a further subset of the upscale market. "This platform will help us with this very high-end segment," said Walt Macnee, president of the Americas for MasterCard, based in Purchase, N.Y.
  • Comment on related stocks/ETFs: Shortly after MasterCard's successful IPO in May, Catablast Media recommended it as a reasonable short-term play but advised caution over the longer term. Bill Simpson, along with Catablast, recommended that investors bear in mind the company's serious litigation problem, but he considers MasterCard a "solid money-making operator".

PERSONAL TECHNOLOGY: Pearl BlackBerry Offers Video, Camera, Music, As Well as Great Email

  • Summary: WSJ tech guru Walter Mossberg reviews Research in Motion's (maker of the popular BlackBerry) new Pearl smart phone, an attempt by RIM to expand its consumer base outside of the corporate world. Mossberg gave high marks to the Pearl's design calling it more of a "fashion" phone despite having a keyboard. He compared it to Motorola's Q, both of which are $199 with a two-year contract. The Pearl is "shorter, narrower, and lighter ... though a bit thicker." Its email capabilities prove it's a true BlackBerry and it's also the first of the line to come equipped with a camera, memory card slot, and to play audio (quite well) and video (has compatibility issues). High marks were also given to its excellent voice quality and ease of setting up email accounts. Mossberg concludes however, that he won't trade in his Palm Treo 700p because of much slower web browsing compared to other carriers and the click-intensive user interface is too much.
  • Comment on related stocks/ETFs: Given the influence and broad following of Mossberg it seems his overall favorable review of the Pearl will at least not hurt Research in Motion's (RIMM) stock. However, his conclusion that he'd stick with his Palm (PALM) Treo 700p over the Pearl is obviously negative and could help Palm's stock, which has been sluggish, tanking yesterday on news of downward revised guidance amid intensifying competition resulting in an analyst downgrade and separately an analyst revised its target share price. Palm got the nod from Merrill Lynch analyst Vivek Arya as well, who said Palm's shares look "relatively more interesting" than RIM's. Don't forget about Motorola (MOT) which is experiencing solid sales of its Q smart phone riding on the coattails of the RAZR. See RIM's latest conference call transcript. Also see additional coverage of the Pearl by and


  • Summary: Investors appetite for newly minted bonds is feeding the leveraged-buyout [LBO] boom. In August companies issued $58.4 billion in bonds, compared to $51.5 billion in August 2005. Over $200b in deals to take companies private have been announced this year. The buyouts, which are financed largely by debt, account for nearly a quarter of U.S. mergers & acquisitions this year; in 1988, a peak-year in the '80s LBO boom, buyouts were only 14% of M&A action. Bonds of firms acquired in LBOs are considered risky. Typically, bond investors might demand higher yields, but they haven't. If this trend continues, private-equity firms may be encouraged to begin bidding-up the values of bigger companies, confident the bond market will help finance their offers. WSJ bottom line: "Stock-market valuations for small and midsize companies are historically pricey compared with big companies, in part because investors see little chance of the big guys getting taken private. By the end of the year, they may be proven wrong."
  • Comment on related stocks/ETFs: Some companies that have been suggested on Seeking Alpha as potential targets for LBOs: Aetna Inc. (NYSE:AET), Lexmark International Inc. (NYSE:LXK), Blockbuster Inc. (BBI), Thomson (NYSE:TMS), Kirkland's Inc. (NASDAQ:KIRK), and Centex Corp. (CTX). In a recent conference call, Cendant (CD) CEO Henry Silverman was asked about the possibilty of a LBO. His response, "Our advisors don’t think at current levels, even with a normal premium, that there’s enough capital in the world to affect an LBO. The funding hole is too big, and therefore the ability of doing an LBO at prices that our board would accept and at which we would get a fairness opinion is really not an available option." If you buy-in to the WSJ's conjecture, the landscape may be changing soon.

HEARD ON THE STREET: Stock-Exchanges Grudge Match

  • Summary: Both the NYSE Group Inc. (NYSE:NYX), owner of the New York Stock Exchange, and Nasdaq Stock Market Inc. (NASDAQ:NDAQ) have been trying to acquire an increased share in their European counterparts. NYSE Group announced in June a proposed merger with pan-European exchange operator Euronext NV. nas-nyse Not to be outdone, Nasdaq Stock Market Inc. has bought 25% of London Stock Exchange PLC and could try to buy the rest as early as next month. Both of these possible deals need shareholder approval that would come easier if the U.S. exchanges' stock prices rallied from recent slumps. NYSE shares are down about 31% from their high in March and about 6% since the Big Board launched its merger bid for Euronext while Nasdaq shares, have slid about 35% since mid-March, just after it made its first bid for LSE. The global mergers intensify a long struggle between the two exchanges for market share in the U.S. On Wednesday, Nasdaq said its market share of trading in NYSE-listed stocks increased to 12.5% in August, up from 10.8% in July and 4.8% in August 2005. Each percentage-point gain in market share that Nasdaq manages to grab from NYSE adds about a penny a share to Nasdaq's earnings, estimates Roger Freeman, a Lehman Brothers analyst. The same shift of one percentage point takes away about two cents a share from NYSE's projected earnings of $2.22 next year, he adds. The implications of the competition may be wider. Continued share losses at NYSE could force the Big Board to "sweeten its offer" for Euronext. In that scenario, Euronext could push for a bigger stake in a combined company to compensate for the risk of accepting NYSE shares that have declined in value.
  • Comment on related stocks/ETFs: In yet another attempt to diversify, Nasdaq Stock Market Inc. recently announced plans to open an options market. For more on the companies that run the U.S. exchanges, read Mark Mahorney's piece.

TRACKING THE NUMBERS: Circuit City Highlights Doubts About Analysts

  • Summary: Ratefinancials (a research firm which only uses securities filings for its research) is worried that Circuit City (NYSE:CC) relies too much on extended warranty revenue for profitability. Additionally, they are concerned about the the way the company handles certain accounting issues. For example, about $3 billion of operating leases are not listed on the balance sheet as long term obligations. They estimate Circuit City's "normalized" earnings at $0.36/share, significantly lower than the $0.79/share reported by the company. Ratefinancials stands alone - the other 28 firms that cover the stock expect it to outperform other stocks in the sector, and have a price target of $30.50 (it closed yesterday at $22.70).
  • Comment on related stocks/ETFs: On the one hand, Circuit City appears to have turned things around and its stock has outperformed rival Best Buy over the past year. However, having all its eggs in the extended warranty basket is of definite concern. Note that Circuit City is not the only warranty income using it to juice up their bottom line (click chart to enlarge):

    Chart sources: BusinessWeek, Warranty Week

    See also:
    Circuit City's F1Q07 (Qtr Ending May 31, 2006) Earnings Conference Call Transcript

HEARD IN ASIA: This 'Car Stock' Is Real Hybrid

  • Summary: Shanghai Automotive Industry Corp's JV with General Motors is China's largest passenger-car maker by volume and its JV with Volkswagen is the countries second largest. Investors may gain access as soon as next month to the JVs if shareholders and regulators approve of what melts down to a swap of Shanghai Automotive's best assets to its publicly traded arm Shanghai Automotive Co. and its least attractive assets staying with the parent. Shanghai Automotive owns 50% stakes in both JVs and is currently only listed on the Shanghai Exchange but is believed to be considering a Hong Kong listing. One analyst warns the swap is not perfect since assets will double but profitability will increase only 30%. The asset swap is seen as a part of a growing trend where state-controlled companies are bolstering listed units with better assets. An industry expert sums it up: "The restructuring can be simply boiled down to an approach to improve operational efficiency and to beef up the GM, VW and Rover operations in the face of possible capital crunch when production capacity is raised in the future."
  • Comment on related stocks/ETFs: Non-(mainland) Chinese investors have limited access to domestically listed China stocks. That said, Shanghai Automotive's strategic move is viewed favorably by analysts but won't mean much to foreign investors until it lists its shares in Hong Kong. An analyst in Beijing expects Shanghai Automotive to issue new shares over the next 6-12 months in order to help build its own car brand. This is an interesting development as a Seeking Alpha contributor suggests the next auto invasion is coming from China. Three auto-related China stocks listed in the U.S. include: China Automotive Systems (NASDAQ:CAAS), Brilliance China Automotive (NYSE:CBA), and China Yuchai Int'l (NYSE:CYD). Shanghai Automotive's JV with General Motors (NYSE:GM) is doing quite well with sales up 39% y-o-y through July. Its JV with Volkswagen (OTCPK:VLKAY) has experienced a 70% jump in sales. See XFN-Asia newswire and coverage for more details on Shanghai Automotive's plans and the market's reaction.

Notable articles on Seeking Alpha today: Is China's mega-growth just pumping up a big investment bubble?; the real cause of the housing market's softness is not what Robert Toll would have you believe; at current depressed prices, Dell stock deserves a look; the kosher food boom should give this smallcap stock a boost; Hanes will make a snappy spinoff; the new Clorox CEO gets unusual 'real estate loss protection'; sell-side analyst Andy Neff says Apple's new iMacs are competitively priced; detailing flaws in Jim Cramer's Sears analysis; Cramer's latest stock picks.

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