One Page Annotated WSJ Summary: Tuesday Sept. 26

by: SA Editors
SA Editors
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In a Turnaround, Slowing Economy Spurs Bond Rally

Summary: The yield on the 10-year Treasury note hit 4.55% yesterday, its lowest level since February and significantly below its late June level of 5.25%. The yield curve is now inverted, as the 10 year rate is below the rate on 2-year Treasury notes (4.65%), on 3-month Treasury bills (4.89%) and the overnight interbank rate (5.25%). Long term rates have been pushed down by concerns the economy is slowing and the housing market is in for a hard landing, though some think the bond market rally is merely technical. Low long term rates could support stock prices, buoy home sales and prices, and prolong the leveraged buy-out boom.
Related links:

Full WSJ article • Bill Gross: Bond Prices Have BottomedRecession Around the Corner?Yield Curve Forecast: Cloudy With a Chance of RainThe Economy's Wake-Up Call: Are Investors Listening?Recession 2007? Philadelphia Fed Index Turns Negative • More on the government bond ETFs: iShares Lehman 1-3 Year Treasury Bond ETFiShares Lehman 7-10 Year Treasury ETFiShares Lehman 20+ Year Treasury Bond ETFiShares Lehman TIPS Bond ETF.

Existing Homes' Median Price Falls

Summary: Home sales are down and, in the second sharpest decline in almost forty years, U.S. median home prices dropped 1.7% since last year. Some of the statistics issued by the National Association of Realtors: sales of existing homes were down 0.5% from July and 12.6% from last year; condo sales were down 3.5% from July and 14.5% from last year; single family home sales were down 12.3% from last year; condo prices fell 2.4% from last year; and inventory of unsold homes rose 1.5% last month to the biggest supply since April 1993. Thomas Lawler, former Fannie Mae economist notes "You've got a ways to go. You still have affordability issues in a lot of markets."
Related links: Full WSJ article • National Association of Realtors Press ReleaseHome Prices Fall For First Time in DecadeContrarians Moving Into Housing StocksHousing Weakness Poses Significant Risk to GDP and Stocks


Summary: When times are tough companies become tempted to report pro forma earnings rather than conforming to generally accepted accounting principles (“GAAP”). Thus doing, they can separate out one-time charges (plant closings, severance packages etc.) as “non-recurring”, i.e., one-time charges that don't really count. As the economy improves, the difference narrows between pro forma and GAAP earnings. According to Merrill Lynch’s Rich Bernstein, the second quarter’s “GAAP gap” (the difference between GAAP and pro forma earnings for the 1,600 companies covered by Merrill Lynch) was the widest observed in the past two years. The ratio of GAAP earnings over pro forma earnings fell from 95% in the first quarter to 90% in the second quarter. With the recent increase in layoffs, employee buyouts and restructurings, the focus will be on how these are accounted for in the third quarter earnings reports.
Related links: Full WSJ article • Wikipedia: Pro Forma • Knowledge@Wharton: Pro Forma Earnings Reports: A Deceptive View of PerformanceAnnals of Accounting: A Look at AT&T and Verizon's MethodsSEC Investigates XM Satellite's Soft Stats • Barron's: Maybe Pro-Forma Earnings Aren't So Evil After All • BusinessWeek (2002): Commentary: Amazon Is All Grown Up, Except for Its Accounting


Tobacco Firms Exposed To New $200 Billion Claim

Summary: Contrary to what tobacco companies had hoped for, U.S. District Judge Jack B. Weinstein in Brooklyn, N.Y. made a pre-trial ruling yesterday allowing as many as 50 million light cigarette smokers to claim class-action status in a lawsuit against the country's major tobacco companies. Also included in this ruling in a 2004 lawsuit was an allegation that Philip Morris USA [now Altria] (NYSE:MO), Reynolds American Inc.'s (NYSE:RAI) R.J. Reynolds Tobacco Co., and Loews Corp.'s (LTR) Lorillard Tobacco unit lied to consumers by advertising "light" cigarettes as being healthier than the regular high-tar version. The plaintiffs are seeking between $120 billion and $200 billion in damages, the approximate amount that the tobacco companies gained through their alleged deception. As a result, Altria announced it would delay its planned breakup and spinoff of its 88%-owned Kraft division. Altria's stock went down $5.26, or 6.4%, to $77.06. Reynolds shares fell $2.27, or 3.7%, to $59.75. Tobacco companies are appealing the ruing in the Second U.S. Circuit Court of Appeals in New York.
Related links: Full WSJ articleAltria's Opportunity to Unlock Shareholder Value • Yahoo News: R.J. Reynolds Tobacco Company to Appeal, Ask for Stay in "Lights" Case • Background: Altria Stock Jumps on Judge's Ruling Against Smokers

Walgreen Net Rises 25%, But Worries Damp Stock

Summary: Drugstore chain Walgreen Co (WAG) reported fiscal fourth quarter earnings up 25% y/y, but the stock dropped over 5% on investor concerns regarding eroding generic drug margins. Costs related to the new Medicare Part D program and an increased reliance on prescriptions among overall sales were also cited by the company as contributing to gross margin pressures. Competitor Wal-Mart's (NYSE:WMT) recently-announced program to sell a 30-day supply of some 300 generic drugs for just $4 is an indication that "the generic value chain is being challenged." Walgreen's EPS of 41 cents was up from 32 cents in the year-ago quarter.
Related links: Full WSJ article • Walgreen's earnings conference callWalgreen Stock Is Still Too ExpensiveWhy Wal-Mart's Drug Program Shouldn't Worry Walgreen and CVS InvestorsWal-Mart's Generic Prescription Plan: The Connection to Pharmacy Benefit Managers and The Big Drug Chains


Cisco Systems Enters Market For Business-Video Messaging

Summary: Cisco (NASDAQ:CSCO) credits YouTube for popularizing video as a communications tool among individuals; now they want to capitalize on the trend with a similar offering geared for businesses. Through its advanced technologies business Digital Media Systems, Cisco is launching today media manager software and video encoders. Cisco anticipates annual revenue from DMS of $1 billion over the next 5-7 years. Wainhouse Research analyst Ira Weinstein says the business video market could grow at an annual clip of 30%, and believes Cisco has an advantage with its name recognition.
Related links: Full WSJ article • Last week Cisco was one of Seeking Alpha's most popular stocks. • Also last week, Jim Cramer bullish on Cisco, commented that it's "bigger and better than ever." • Should Cisco and Motorola be Worried About Apple?Playing the Video Communications Sector with RadvisionCisco in Your Living Room • Conference call transcripts: Cisco Q406

T-Mobile Readies New Web Phones-- And Hangs Up on a Star Pitchwoman

Summary: Deutsche Telecom AG's (DT) T-Mobile is moving quickly to make use of its new $4 billion worth of radio frequencies purchased from the FCC's recent spectrum auction. It reportedly plans to roll out a dual-mode phone that offers smooth transition between traditional cellular and Wi-Fi networks, also effectively serving as a land-line substitute. And it might be considering offering the industry's first VoIP service. People familiar with the matter say T-Mobile will phase out the use of its celebrity pitchwoman Catherine Zeta Jones in advertising. T-Mobile is the 4th largest cellular carrier in the U.S. with 23 million subscribers, behind Cingular Wireless, a joint venture of AT&T (NYSE:T) and BellSouth (BLS); Verizon Wireless, a JV of Verizon Comm. (NYSE:VZ) and Vodafone (NASDAQ:VOD); and Sprint Nextel (NYSE:S). Its biggest competitor could be Sprint, which has a partnership with leading cable providers Comcast (NASDAQ:CMCSA) and Time Warner's (NYSE:TWX) cable company, and also plans a WiMax network by 2008.
Related links: Full WSJ articleT-Mobile Comes Out On Top In FCC Spectrum License AuctionBidding Up the Spectrum Auction - Is Comcast Looking to Go Wireless?Outside of Wireless, Everything is a CommodityWiFi Phones Don't Threaten The Big CarriersSprint and Time Warner's Quadruple Play • Conference call transcripts: Deutsche Telekom HY06AT&T Q206BellSouth Q206Comcast Q206Sprint Nextel Q206Verizon Comm Q206

H-P Is Urged To Overhaul Board In Wake of Probe

Summary: Four public pension funds have filed a proposal with Hewlett-Packard (NYSE:HPQ) that would allow them (and any other shareholder group owning 3% of HP’s stock) to nominate candidates for the board of directors. This increases pressure on CEO & Chairman Mark Hurd, who earlier this month promised that he would focus on improving the board. According to Boardroom Insider publisher Ralph D. Ward, “You have a board here right now that is crippled in every way imaginable.” In another development, H-P Senior Counsel Kevin Hunsaker and H-P Global Security Manager Anthony Gentilucci were issued subpoenas by a House committee examining the HP leak-investigation scandal.
Related links: Full WSJ articlePrevious WSJ summaries on the scandal (dating back to September 6th.) • The Wall Street Journal: Tracking the H-P ControversyCramer's Take on HPQAnalysts Rallying Around H-P, Hurd • Conference call transcripts: Hewlett-Packard Q3 2006

Arriving Late, Can BlackBerry Hook Japan's Mobile Market?

Summary: NTT DoCoMo (DCM), Japan's largest mobile-phone operator, has begun marketing Research in Motion's (RIMM) advanced BlackBerry 8707h. There appears to be strong interest among expats and particularly in investment banking. Since most Japanese have never heard of the BlackBerry and are unlikely to take to its "clunky" and "large" design compared to Japanese handsets, DoCoMo is accordingly only selling it to corporate customers and even then, particularly to foreign employees of MNCs. Furthermore, there are some differences in business culture that make the BlackBerry less meaningful to the Japanese, such as working longer hours as opposed to making oneself available via wireless/email, and doing more business face-to-face instead of relying on email; few Japanese companies even have a system in place that syncs office email networks with devices such as BlackBerries.
Related links: Full WSJ article • DoCoMo Press Release: Marketing the BlackBerryBlackBerry Going to Japan via NTT DoCoMo -- Don't Get ExcitedTwo Reasons Why Research in Motion Should OutperformResearch In Motion Still Priced For Perfection • RIMM Press Release: 2Q Results to be Announced Sept. 28 • Conference call transcripts: Research in Motion F1Q07


Crude Rallies After Fall Below $60 Fails to Stick

Summary: November crude contracts closed at $61.45/barrel yesterday, after dropping below $60 during intraday trading (Intraday prices fell after BP (NYSE:BP) announced that it will increase production at its Prudhoe Bay’s oil field.). OPEC recently agreed to leave its maximum output at 28mm barrels/day, but said that they would "respond rapidly to any developments which might jeopardize their interests." Analysts interpret that statement as a threat from OPEC to cut production if oil falls below the $55-$60 range. In other commodity markets, sugar futures hit a 13 month low, natural gas fell to their lowest price in almost three years and coffee bucked the trend, closing at its highest level in the past two and a half weeks.
Related links: Full WSJ articleThe Significance of Oil's Drop Under $60Oil vs. Dow: 1987 Deja Vu All Over Again?OPEC: Lemonade CartelCommodities' Downward Trend: Beginning of the End, or Merely a Speed Bump?


E-Loan to Announce Savings Account Paying 5.5%

Summary: E-Loan, owned by Popular Inc. (NASDAQ:BPOP), will today announce an online savings account paying 5.5%. That compares to savings rates of 5.25% for Amboy Direct, 5.26% for AmTrust Direct, and 5.25% for Countrywide Bank -- owned by Countrywide Financial Corp (CFC). EverBank Financial will offer a 3-month promotional rate of 6.01% starting next week, and E*Trade Financial (NYSE:ET) is offering a $50 bonus to select customers. Traditional banks Washington Mutual (NYSE:WM) and Citigroup (NYSE:C) also offer high rates for online savings accounts but require linkage to checking accounts. Research firm Celent LLC predicts that 19% of total core deposits will be in online savings accounts by 2010, versus 2% this year.
Related links: Full WSJ article • E-Loan's websiteOnline Brokerages Taking Share from Banks, Despite Price CutsInternet Competition Hits the Regional Banks • Conference call transcripts: E*Trade's July 19th Earnings CallE-LOAN Discusses Marketing and Home Equity Loans (E-Loan 2Q05 conf. call quotes, before E-Loan's acquisition by Popular).

Merger Trend Sweeping Big Exchanges Cascades Toward 'Interdealer Brokers'

Summary: As the NYSE (NYSE:NYX) and Euronext NV are looking to tie the knot, and the Nasdaq is looking to buy the rest of the London Stock Exchange, watch for the mergers and acquisitions trend to trickle down to the boutique "interdealer brokers." These are small exchange-like brokers that trade mainly in bonds, currencies and derivatives that are very attractive to hedge funds. The main players among these include Icap PLC [IAPLY.PK] and eSpeed Inc. (ESPD) and Tullett Prebon, a division of Collins Stewart Tullett, the British financial-services company. Icap has held talks with the London Stock Exchange, while eSpeed has met with CBOT Holdings Inc. (BOT), owner of the Chicago Board of Trade. None of these meetings have yet to bear any tangible fruits, but Michael Spencer, Icap's CEO said that, "This dialogue ... is a real harbinger of the sort of changes we may see in the landscape in the next few years. It is an inevitability you will see global exchange groups emerge.
Related links: Full WSJ articleWhy I'm Long-term Bullish on the ExchangesTokyo Stock Exchange Favors Euronext-NYSE DealTime for an ICE Hedge?Combined ICE-NYBOT Looks Attractive


Renault Executive Doubts GM's Drive in Deal Talks

Summary: According to Renault EVP Patrick Pelata, General Motors (NYSE:GM) has been dragging its feet in negotiations with Nissan (OTCPK:NSANY) and Renault to build an answer to Toyota (NYSE:TM). Kirk Kerkorian, 9.9% shareholder in GM, initiated an alliance between Nissan, Renault and GM in June and the companies have agreed to keep the negotiations quiet. Mr. Pelata commented to journalists that, with Toyota's plans to sell 9.8 vehicles globally by 2010, "What do we do? Say 'One day there will be a miracle, an earthquake,' [to stop Toyota's advance]?" While Mr. Pelata stopped short of making a statement about the negotiations with GM, he did indicate to reporters that he is frustrated with GM's inaction in pursuing a three way alliance. Stay tuned: GM Chairman and CEO Rick Wagoner and Renault-Nissan CEO Carlos Ghosn are set to meet in Paris tomorrow.
Related links: Full WSJ articleGM/Nissan-Renault Talks Bog DownGM-Renault-Nissan Alliance Talks Make Little ProgressToyota Ups Guidance GM Investors Ahead of ThemselvesJerry Flint: Detroit's Luck has Run Out

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Notable articles on Seeking Alpha today: Biotech is Volatile!OPEC: Lemonade Cartel • Today's earnings schedule • Why low oil prices help 'must-have' retailers the most • Andrew Schmitt's "The End of Telecom As We Know It"Four Questions to Ask Yourself in this Market Climate • Jim Cramer's latest stock picks.

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