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Tuesday, July 25, 2006

AT&T Up 1.6%; With Higher Short Interest

AT&T (T) reported better earnings than expected, and sahers are up just over 1.5% at $28.24 in pre-market trading. BellSouth (BLS), its merger partner, is not trading up. There may be some indication that a more sinister thought prevailing in the markets is getting trumped on its operating business and on its cost projections.

There has been talk of "some" merger approval problems in this AT&T acquisition of BellSouth for some time now. A judge has been granted more authority in the review of this, and even the FCC has been piping down into projected marketshare and implications of what would in reality be AT&T-SBC-BellSouth. While this merger is really not a good thing at all for shareholders the FCC, the DOJ, and the current administration have not blocked a single merger. They may place some limitations and may keep it under extended reviews, but the current projection would be for this merger to still go through.

We now have the July Short Interest on these stocks and it looks like the June short interest on AT&T of 84.7 million shares climbed to just over 106 million in July. The short interest for BellSouth in the same period went from 13.9 million shares to 13.35 million shares. So why are the shorts lining up more on AT&T when BellSouth is actually the target?

What may be at issue is AT&T earnings and its trimming of cost projections. It looks like there were some added bets that AT&T would have trouble meeting expectations because of the SBC merger integration, but AT&T said it would actually have HIGHER "synergies" and it is lowering its expenses going forward on pension/retiree costs, and even lowered its expense projections against earnings from Project lightspeed.

There may be some decent news for capital expenditure stocks (telecom equipment) after AT&T said it would be at the high-end or above its $8.0 billion to $8.5 billion in cap-ex it had made in prior projections. While this implies higher net costs in cap-ex, telecoms are actually getting rewarded if they are building infrastructure right now. All of this news is probably going to result in some added short coverings as investors look at the results more than the merger.

Jon C. Ogg
July 25, 2006
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