New York Times DealBook Summary 6/30/2006

Stocks: (BA)(EMC)(RSAS)(PD)(FAL)(N)(CD)(VE)(SYMC)

NY Times DealBook reports that Boeing spin-off aircraft parts company Spirit AeroSystems has filed for an IPO. The company plans to raise about $500 million.

DealBook reports that shares in storage company EMC fell to a 52-week low on news it was buying RSA Security for $2.1 billion. There may have been a rival suitor. According to BusinessWeek, it was online security company Symantec.

According to DealBook, several institutional investors have said they do not support Phelps Dodge's purchase of Falconbridge and Inco. Atticus, a hedge fund that owns 6% of the company has voiced its doubts as has Neuberger Berman.

DealBook reports that Cendant has sold its travel services business, TravelPort, to the Blackstone Group for $4.3 billion.

Bidz.com, the online jewelry business, has cut back its IPO, dropping the number of shares for sale by half to 3 million.

DealBook say that French company, Veolia, the world's largest water company, has bought Brambles Industries, a trash collection firm, for $1.1 billion.

Douglas A. McIntyre

Why The GM Deal With Nissan/Renault Is Dead On Arrival

GM's largest shareholder, Kirk Kerkorian has been in touch with the heads of Nissan and Renault about buying a minority stake in the U.S. auto company and creating a three-way international alliance to build and market cars. GM's stock opened the day up sharply, but began to fall off almost immediately.

It won't happen.

Although Nissan's stock is off its April/May highs, it is still well above its two year bottom of early 2005. Sales of Nissan's vehicles in Japan have caused the company's shares to move down. However, the company still says it will sell 4.2 million vehicles in fiscal 2008. Carlos Ghosn's turnaround if Nissan is legendary in the car business, notwithstanding its current issue.

Ghosn is also now chairman of Renault and the European car company has cross ownership with Nissan with each owning shares in the other. The company's stock is doing unusually well, and Ghosn's presence at the company has helped it be viewed as a substantial force in the European auto industry. The company is now the 10th largest auto maker in the world with 2005 sales of 2.553 million cars.

GM, with its massive labor problems and junk-grade debt is hardly an attractive partner for tow smaller but more stable can companies. GM's situation may have improved, but a 2007 strike by the UAW is still a possibility if the union makes a last stand to protect jobs.

Additionally, and perhaps more important, GM's financial condition and falling market share are the most important hammers the company has in dealing with the UAW. An alliance that improves GM's short-term financial situation exacerbates the ability of the company to rebuild its North American operations by giving the union a bargaining chip.

Although they may be tempted, a partnership with GM is not in the cards for Nissan or Renault. Carlos Ghosn is too smart for that.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

Growing with Accenture

Stocks: CTSH - IBM - ACN

By William Trent of Stock Market Beat

Consulting firm Accenture (ACN), which is on our Watch List, reported strong earnings Thursday after the market close. The outsourcing market appears to remain strong, which has positive implications for other Watch List names including IBM and Cognizant (CTSH).

Fiscal third-quarter net income advanced 2.5 percent to $496.1 million, or $0.56 per share, from $484 million, or $0.51 per share, in the year-ago period. Analysts were expecting $0.46. The year-ago results included a benefit of $66 million, or 8 cents per share, related to the company’s 2001 reorganization into a corporation from groups of partnerships. Revenue rose 6.8 percent to $4.81 billion from $4.5 billion last year and compared favorably to analyst estimates of $4.43 billion. Consulting revenue rose 6 percent to $2.66 billion, and outsourcing revenue gained 11 percent to $1.75 billion.

Accenture shares have tumbled about 11 percent in the three months since its last earnings report on March 28, when the company surprised investors with a $450 million charge for losses expected on a computer system project for the British health care system. The Standard & Poor’s 500 Index fell 4 percent during the same period.

New bookings, a key indicator of future revenue, were $5.57 billion in the third quarter, the highest in nine quarters, Accenture said.

Accenture said it now expects full-year 2006 revenue growth at the upper end of its earlier forecast of 9 percent to 12 percent. It expects full-year net income per share of $1.55 to $1.57, including a $140 million tax benefit recorded in June.

For the fourth quarter, Accenture forecast revenue of $4.2 billion to $4.35 billion and net income of 52 to 54 cents per share. Analysts are forecasting profit of 38 cents per share, before items, and revenue of $4.27 billion.

http://stockmarketbeat.com/blog1/

Sell Side Comes to Investing Epiphany

By William Trent of Stock Market Beat

Comments from Merrill Lynch semiconductor analyst Joe Osha, found via Tech Trader Daily.
The worse the data points get, the more bullish we become, and we think that the key lesson of the last six months is that the value of data point investing in semiconductor stocks has now been eliminated.

Markets are amazingly efficient at arbitraging excess profit opportunities away, and we’ve seen it in semiconductor stocks before. Ten years ago all one had to do was correctly call the inflection point in industry revenue growth, and the stocks would follow. By 2001 investors had started to figure that out, and over the next several years the relationship broke down. Few semiconductor analysts bother with the sweeping sector calls that used to be so popular, as the market has figured out that adding value that way become almost impossible.

Data point investing in semiconductor stocks is now headed for a similar fate, in our view. Consider the fact that no amount of channel checking would have turned up weakness in January despite the fact that January was the selling opportunity. Meanwhile, publicly available SIA data showed the industry hitting dangerously high unit shipment levels, and valuations were too high as well.

There are too many investors taking too many airplanes to Taiwan and China, and the exercise is now undifferentiated and valueless. Oddly enough, some of the tools that used to work better – watching industry data closely, and paying attention to valuation – seem to be working better. No doubt that we’ll see another shift in semiconductor stock behavior that will render those measures useless as well. For now, though, the formula for success seems to favor watching earnings multiples and SIA data, and staying off those flights to Taipei.

We will set aside our confusion over why published industry sales data does not constitute a “data point” in Osha’s parlance. Or, for that matter, why the P/E multiple for a stock does not count as a “data point.” It seems amazing that an equity analyst would suddenly realize that valuations (earnings multiples) and macroeconomic data such as that delivered by the SIA are more important to an investment thesis than some random tidbit gleaned in a channel check. (For the uninitiated, a channel check is basically asking someone who buys semiconductors “how’s business?”) If there was ever an anomaly in the stock market, it was a time when valuations didn’t have an enormous impact on investing returns. On the other hand, perhaps we’re being too harsh on Osha. His pay - no, his very job - is driven by what tiny edge he can glean for hedge fund managers that none of the other sell side analysts were able to glean.
For the most part, hedge fund managers are not investors - they are traders. For traders, a moment’s swing in sentiment due to a slow sales day at one customer is enough to jump in for a quick profit. All the better that they get the data from the sell side - that leaves more of the 20 percent incentive pay for their own profits.

If you are an investor rather than a trader, you are less likely to be concerned by the weekly fluctuations in this or that. If you are a dedicated investor, you paid very close attention to the valuation when you bought, and were probably aware of the potential short-term downside to that valuation. You are less concerned about whether customer X ordered fewer semiconductors today than you are whether customer X is consistently ordering fewer semiconductors. You’ll suffer the first couple of points of downside waiting for the trend to become apparent, but you won’t waste buy and sell commissions trading on each wiggle in a volatile chart.

To some extent the whole concept of trading tech stocks is an ongoing bubble-era hangover. We used to be able to make so much money in tech stocks we believe that if we only try harder we will be able to do so once again. So we jump on the plane to Taiwan and interview factory workers to see whether they assembled more iPods today than they did yesterday. Thing is, it ain’t the bubble anymore. In fact, the tech bubble was only the tech bubble because the growth days in semiconductors were already gone and nobody believed it.

When Osha wonders what changed when “Ten years ago all one had to do…” he need look no further than the same old SIA data. It would have given the right data then - although acting on that data would have (and did) make some investors look stupid. For a while. But Osha still hasn’t learned.

He goes on to say:
Now, of course, the negative data points are myriad, although we’re mystified as to how much value-add there can be with the SOX down 22% from its January peak and valuations now reasonable. With a seasonal uptick in PC build activity beginning to show up, the predictable appearance of negative wireless data points justifying a trade into PC stocks has been especially amusing to watch.

Only to someone who still thinks in terms of the bubble can believe that valuations are now reasonable. The chart shows how much growth trends have slowed. In fact, if you take the April 1996 number and the April 2006 number you will find an average annual growth rate of just over five percent. Nominal. GDP has grown faster on a nominal basis, with less volatility. Just about any industrial segment - chemicals, steel, homebuilders - has had more growth in the last 10 years than semiconductors. So don’t tell us semiconductor valuations are reasonable until their P/E ratios are similar to those of Dow Chemicals (8.7), US Steel (12.7) or Toll Brothers (5.1). ‘Til then, you’re living in dreamland.

Note: That is not to say we think semiconductor valuations will head straight to zero. The vast majority of investors were at the same kegger Osha went to, and are still as hung over. The industry remains cyclical and thus will have ups and downs within that longer-term valuation compression. So we’ll keep on watching that SIA data, and we’ll try to call those turning points. Just don’t expect us to hang on for more than a few months. We’d rather miss a little upside within a wiggle than participate in more of the longer-term downtrend.

http://stockmarketbeat.com/blog1/

PC Market Still Slowing

By William Trent of Stock Market Beat

Thus spake Lenovo.

While the news is likely no surprise to DELL’s investors, it may be one for those who own Hewlett-Packard. Furthermore, the delays to Microsoft’s Windows Vista continue to cause many to wonder whether businesses will alter their PC replacement plans in order to do a more comprehensive upgrade at a later time.

Passive component maker Walsin Technology Corporation (WTC) said that lower-than-expected demand from the PC sector has affected the company’s performance in the second quarter and it regarded July to August as the key indicator for this year’s business outlook, according to DigiTimes.

Meanwhile, industry analysts at IDC expect notebook computer shipments to grow in Asia, though not enough to offset a decline in the US and Europe.

http://www.stockmarketbeat.com/

Microsoft, Just Shoot Me

Microsoft was hit with back-to-back bad news recently.

First, Office 2007 will be released late this year and not in the Fall. Maybe. Microsoft is now releasing products late on an ever-increasing basis. The company's new operating system, Vista, has also been hit with delays. Aside from the embarrassment of having major software releases constantly delayed, there is another, more important, impact.

A look at Microsoft's public filing shows the extent to which the OS and Office products drive the huge majority of the company's operating income. Continued late releases are bound to catch up to the company's financials as customers wait to upgrade to new versions. Sales could certainly be hurt in the fourth quarter of this year.

In addition, Microsoft lost another key employee to Google. This adds to the public perception that Google has the hot hand in software development and consumer sentiment and that Microsoft has seen its best days.

If the delayed release in software hits the topline and earnings this year, Microsoft's stock could drop below $20 for the first time since 1998. The stock has already been as low as $21.46 over the last 52-week period.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

Looking Ahead- Reflections on the 3Q

By Yaser Anwar of Equity Investment Ideas


The markets are entering a period of seasonal vulnerability.

The third quarter is generally a weak one for stocks. In the period after World War II, the S&P 500 has posted an average loss of 0.1% between July and September.

Since 1928, the average third-quarter gain for the “500” has been only 1.1%. Market upturns generally resume in earnest in the fourth quarter, which has, historically, been the strongest.

The Standard & Poor’s Investment Policy Committee target for the “500” by year-end remains 1385.

http://www.equityinvestmentideas.blogspot.com/

Tweaking The Foreign Allocation

By Yaser Anwar, CSC of Equity Investment Ideas

S&P Equity Strategy believes recent global stock market volatility is fueled by concerns that major central banks, fearing increased cost pressures, will overshoot and raise interest rates too much, stifling global economic growth in the second half of 2006.

Investors are worried that this will lead to a dramatic slowdown in global earnings growth. Thus, the current P/E contraction.

Global equities are experiencing their first major correction since the beginning of the current bull market in October 2002, with the S&P/Citigroup World Index down 11% from May 9 through June 21. S&P believes this volatility is shifting global risk-reward ratios and warrants several allocation changes.

The S&P Investment Policy Committee has decided to increase the allocation to developed international markets to 12% from 9%.

In the Model ETF Portfolio, this group is tracked by iShares MSCI EAFE (EFA). Since developed markets represent the largest international equity asset class, we believe greater exposure is warranted.

Also, Europe and the United Kingdom make up about two-thirds of developed international markets. Europe and the U.K. also have among the most attractively valued markets and offer a dividend yield higher than those of other developed markets.

http://www.equityinvestmentideas.blogspot.com/

European Stock Market Report 6/30/2006

Stocks: (BCS)(BP)(BAB)(BT)(PUK)(RTRSY)(UN)(UL)(VOD)(AZ)(BAY)(DCX)
(DB)(DT)(SI)(SAP)(ALA)(AXA)(FTE)(TMS)(V)

Stocks in Europe were higher at 5.30 AM New York time.

The FTSE was up .8% to 5,837. Barclays was up .4% to 613.5. BP was up 1.1% to 634. British Air was up .5% to 340.75. BT was down .1% to 562.5. Diageo was down .8% to 908.5. Prudential was up .5% to 594.5. Reuters was up 1.9% to 383.25. Unilever was up .4% to 1200. Vodafone was up .9% to 116.

The DAXX was up 1.2% to 5,646. Allianz was up .5% to 123.07. BASF was up 1.1% to 62.34. Bayer was up 4.6% to 35.85. DaimlerChrysler was up 1.1% to 38.41. Deutsche Bank was up 1.6% to 87.49. Deutsche Telekom was up .7% to 12.48. Siemens was up .5% to 67.83. SAP was up 1.1% to 164.78.

The CAC 40 was up 1% to 4,929. Alcatel was up 1.9% to 10.02. AXA was up 1.1% to 25.58. France Telecom was down .1% to 16.55. ST Micro was up .7% to 12.57. Thomson was up .8% to 12.75. Vivendi was down .5% to 27.08.

Douglas A. McIntyre

Media Digest 6/30/2006

Stocks: (MA)(AAPL)(DMX)(RIMM(EMC)(RSAS)(F)(BA)

According to Reuters, MasterCard may have violated European antitrust rules by restricting competition among banks.

Reuters writes that Apple has announced that it found irregularities in its stock option grants, including on to Steve Jobs that was later cancelled.

The Wall Street Journal writes the Chrysler will introduce a new version of the Dodge Challenger based on the 1970s icon.

Reuters also writes that Arcelor shareholders will vote on a business combination with fellow steelmaker Severstal.

Reuters also reports that Reseach In Motion, maker of the Blackberry, posted better than expected earnings. Sales rose 35% to $613 million.

The Wall Street Journal reports that Chrysler plans to introduce an employee discount pricing plan for all customers.

WSJ also reports that EMC has agreed to but RSA Security for $2.3 billion.

The New York Times writes that Ford Motor plans to shift its focus away from hybrids and develop cars that us a range of fuels like ethanol to consume less gasoline.

The NY Times also reports that Boeing will take a second quarter charge of as much as $1.15 billion, part of which is to settle ethics charges with the U.S. government.

Douglas A. McIntyre

Asia Markets 6/30/2006

Stocks: (CAJ)(FUJIY)(HIT)(HMC)(NIPNY)(NTT)(DCM)(SNE)(TM)(PCW)(HBC)
(CHL)
Asian markets were sharply higher.

The Nikkei was up 2.5% to 15,505. Canon was up 2.4% to 5610. Daiwa Securities was up 4.3% to 1830. Fuji Photo was up 1.3% to 3840. Japan Air was down .3% to 285. Hitachi was up 1.9% to 756. Honda was up 2.4% to 3630. NEC was up 3% to 610. NTT was up 3.5% to 561000. Docomo was up 2.4% to 168000. Sharp was up .9% to 1808. Softbank was up 2.6% to 2565. Sony was up 2.2% to 5050. Toyota was up 4.2% to 5990. Toshiba was up .8% to 747.

The Hang Seng was up 2.3% to 16,225. China Mobile was up 3.9% to 44.25. China Netcom was up .7% to 13.55. China Unicom was up .7% to 6.85. HSBC was up 1.7% to 135.9. Lenovo was up 1% to 2.575. PCCW was flat at 5.5.

The KOPSI was up 2.5% to 1,285.

The Straits Times Index was up 1.8% to 2,430.

The Shanghai Composite was flat at 1,672.

Douglas A.. McIntyre

Microsoft pushes back Office 2007 release (MSFT)

By William Trent of Stock Market Beat


Microsoft (MSFT) pushes back Office 2007 release: Financial News - Yahoo! Finance
The world’s biggest software maker said it will now aim for a launch of Office 2007 to business customers by the end of 2006 rather than an earlier autumn target. Microsoft also said it would delay the general availability of the Office upgrade to early 2007 from its previous January target.
It should come as no surprise, really, as Microsoft is known for serially delaying new products. Furthermore, with the Vista operating system delayed what was Office 2007 supposed to run on anyway?
For the record, we feel about Office as we feel about Vista: Microsoft needs to get them right so delays are better than half-baked products. However, longer-term it will be crucial for Microsoft to get more effecient use of its R&D budget. It needs to release reasonably significant upgrades on an ongoing basis rather than having huge overhauls every 4-5 years. In short, it needs to get smaller because that is the most likely way to get more nimble.

http://stockmarketbeat.com/blog1/

Red Hat Woes a Modest Positive for Oracle

Stocks: (ORCL)(RHAT)(IBM)(SAP)(BEAS)

By William Trent, CFA of Stock Market Beat

We knew Oracle was doing much better in applications after having had trouble digesting acquisitions. We know their main target is SAP. But open source models are something of a threat to all of the existing software vendors, so today’s disappointing Red Hat performance, attributable in part to their acquisition od JBoss.

As Marketwatch noted:
Early this month, Red Hat bought JBoss for around $350 million in cash and stock. The deal aimed to help accelerate a shift towards service-oriented architecture.

JBoss was a maker of open-source middleware products, which are designed to help different software applications work together. The products, including application servers, compete against offerings from the likes of Oracle Corp. (ORCL), BEA Systems (BEAS), and International Business Machines Corp. (IBM).

Plus, having some of the smaller players help clean up the excess capital (translation: buy up some of the extra companies) out there saves Oracle the trouble and gets the industry to a sustainable structure faster.

http://stockmarketbeat.com/blog1/

Stocks That Missed The Rally

Among the most widely held stocks there are a few that missed the rally today. This is usually a sign that they are viewed poorly by Wall Street or may be trading at such high multiples that further gains are not likely near-term. Either way, stocks that did not have on rally caps are probably not candidates for appreciation any time soon.

The Nasdaq was up slightly less than 3% today. Some stocks that trade a lot of shares were up much less:

Microsoft (MSFT) +1.34%
Oracle (ORCL) +1.1%
Sirius (SIRI) +1.5%
Ebay (EBAY) +1.77%


The Dow was up slightly less than 2%. A few widely traded stocks missed the boat:

Ford (F) +.63%
Tenet (THC) -1.8%
GE (GE) +1.03%
Boston Sci. (BSX) -.06%
Home Depot (HD) +.83%
AT&T (T) +1.06%
Time Warner (TWX) +.99%
Sprint/Next (S) +1.06%


Douglas A. McIntyre

New York Times DealBook Digest 6/29/2006

Stocks: (JCG)(EMC)(RSAS)(KIM)(NXL)(PNP)(ASN)

According to DealBook, Millard Drexler, the CEO of J. Crew, saw his $10 million investment in the company from three years ago grow to $84 million after the recent IPO.

DealBook writes that RSA Security said it was in talks about a strategic transaction, largely believed to be a sale of the company to EMC.

DealBook also writes that Winn-Dixie Stores has submitted a plan to its bankruptcy judge to emerge from Chapter 11. The program would wipe out the value of all shares held by existing shareholders.

DealBook reports that Kimco Realty is considering buying New Plan Excel Realty Trust which is primarily in the shopping center business. Kimco may also be looking at Pan Pacific Retail Properties.

DealBook also reports that Archstone-Smith, an apartment company, is buying Deutsche WohnAnlage which sells residential properties for $649 million.

DealBook writes that online photo sharing site Shutterfly has filed for an IPO. The company plans to raise $92 million.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com.

Boeing's Hard Landing (BA)

Things have been going extraordinarily well at Boeing recently. Since the ethics scandal that lead to the departure of its CEO, the company has been posting good numbers and take share from its arch-rival Airbus. Recent news that Airbus is having trouble with its super-jumbo ject could be further positive news for Boeing, which is building a super-jumbo of its own.

Boeing's achievement is highlighted by its 2005 results and the first quarter of this year's numbers. Last year, revenue rose 5% to $54.854 billion. Operating income was up 36% to $3.083 billion. The March quarter showed operating profit stronger than any of the three that predated it. With revenue of $14.204 billion, operating profit came in at $815 million.

But, the things that can trip up one company in an industry can trip up another.

Boeing said it would take charges totaling over $1 billion in the second quarter of this year. Of this $615 million will go to settle charges with the U.S. government over criminal charges for hiring a former Air Force official and taking documents on Lockheed Martin's rocket program.
The balance, however, is probably more troubling. The company may take a charge of as much as $500 million for the late delivery of surveillance planes to Australia and Turkey.

So, product delays are not just a problem at Airbus.

Bank of America now estimates that Boeing will have a loss of $.41 a share instead of an anticipated profit of $.81. That's a big swing.

Boeing's shares trade at $81.78, up from less than $50 less than two years ago, and near the 52-week high of $89.58.

In all probability, that means the stock has more room to fall than rise, and any piece of bad news could take a chunk out of Boeing's market cap.

Douglas A. McIntre can be reached at douglasamcintyre@gmail.com. He does not won shares in companies he writes about.

The Great Independent Research Debate

By Chad Brand of The Peridot Capitalist

There is a very simple reason why Peridot Capital does its own research; there are very few people I trust more than myself to implement my investment philosophy. As much as so-called "independent" research claims to be such, experienced investment professionals know that research is often far from independent. All you have to do is ask yourself, is there reason to believe that this research is independent?

In the case of a buy-side firm like Peridot, there is every reason to believe that our research is independent because it is solely used internally to make investments on the behalf of clients. If clients do well, the company will prosper, and if they do poorly, clients will leave.But what if a company doesn't manage money? What if they are solely in the business of selling research? Do they have to be independent? What is keeping them from doing whatever it takes to sell the product? After all, selling research is their only line of business. It's the same reasoning that some journalists print things that might not be completely accurate. They are in the business of selling papers, or magazines, or whatever their product is. How do tabloids stay in business? Is it because their stories are always accurate? No, it's because people buy them.

I decided to write this piece after reading a transcript of testimony given by Kim Blickenstaff, CEO of Biosite (BSTE), a small medical diagnostics company based in San Diego. Her testimony was part of a Senate Hearing this week entitled "Hedge Funds and Analysts: How Independent is their Relationship?" Below is an excerpt:
"In the ten months from February to December 2002, the number of shares [of Biosite] controlled by short sellers increased from 690,000 to 7.1 million shares, which represented nearly 50% of our outstanding stock.During this same period, Sterling Financial Investment Group, a Florida-based research firm, issued at least seven negative research reports on Biosite, each carrying a Sell/Sell Short recommendation, and an $11 target price. We believe that these reports contained numerous inaccuracies or false and misleading statements, which ultimately lent volatility to the stock's performance, thereby harming many of our long-term, fundamentally-based investors."

There are many issues I have with this testimony from Biosite's CEO.First, short sellers do not "control" shares of stock. They borrow shares from other investors and immediately sell them in order to raise cash proceeds. The investors who have sold the stock short no longer control the stock, they simply owe it to someone, and will have to buy it back at some point in the future to repay the loan.

Second, Blickenstaff claims that negative research reports issued by Sterling between February 2002 and December 2002 were successful in "harming many of our long-term, fundamentally-based investors." This is interesting given that Biosite stock was $18.37 on February 1, 2002 and closed December 31, 2002 at $34.02 per share. So, even as the number of shares sold short increased more than 10-fold, the stock price soared by 85 percent. How exactly long-term investors in Biosite were hurt by this I'm not exactly sure. Sounds like these types of investors should beg short sellers to target their stocks!What can we take away from all of this?

One, short sellers do not cause stock prices to go down. If a stock can rise 85% as half the outstanding shares are being borrowed and immediately sold, such as argument is easily discounted as silly.Two, independent research is not always independent. Merely listening to Sterling's negative view on Biosite stock (which did prove to be inaccurate) would have lost you a lot of money if you were in fact a long term investor who wanted to "invest" (versus "trade") in BSTE shares.

Three, if you are an "investor" then you should, by definition, have a long-term view. Traders focusing on the short term probably were hurt by these negative research reports because they likely caused a quick drop in the stock price upon being published. In the short term, any kind of report can influence stock prices, accurate or not.Over the long term, however, company fundamentals will matter above all else. Since the research Sterling published turned out to be incorrect, the stock price went up, not down. That is why someone who bought the stock in February before all the short sellers and negative reports came out of the woodwork, and held it throughout all of this sketchy behavior, would have made 85% on their investment in less than a year.

Hopefully you can see why people should do their own research and invest for the long term. If your analysis proves accurate, you will make money, no matter whatever anyone else out there is doing. That is the philosophy I use when managing my clients' money, but it is valuable for anyone who doesn't want to be adversely affected by the inherent conflicts of interest on Wall Street, whether you are a Peridot client or not.

http://peridotcapital.blogspot.com/

Mixed Signals for Consumer

By William Trent of Stock Market Beat

With the end of the second quarter a day away, this morning’s announced revisions to first-quarter GDP are old news. Yet they are interesting in light of the differences between the story they tell and today’s other news. As has been the case for some time, the strength in GDP was driven by the consumer. In fact, 3.53 of the 5.6 percentage points of GDP growth were due to increased personal consumption expenditures.

Against this backdrop, Advanced Auto Parts saw its shares plunge as much as 20% early Thursday as the No. 2 U.S. parts retailer slashed its second-quarter profit forecast, citing the impact of soaring gas prices and rising interest rates on customer spending.
“We believe that macroeconomic factors, including higher energy prices, ever-higher interest rates, and higher required credit-card payments are further reducing discretionary income for our lower- and middle-income customers and has unfavorably impacted customer traffic,” said Chairman and CEO Mike Coppola.

The weakness also affected other companies in the industry, including our Watch List component Autozone.

Consumers most likely to be buying their own auto parts tend to be those at the lower end of the income spectrum, where higher interest rates and gas prices hurt the most. Yet buyers of new cars are also stepping back, as the New York Times reports.

The pattern was set last summer when General Motors introduced employee-discount pricing for everyone. Ford and Chrysler followed suit, buyers flocked to dealerships and sales soared.
That cleared a lot of inventory off dealer lots. But sales slumped once the deals were gone, taking Detroit’s market share to the lowest level in history.

With inventories bulging again and Asian companies making record sales, Detroit automakers are now seeing that they must offer another eye-popping round of promotions to clear out all the cars and trucks that have been sitting too long on dealer lots.

It’s a habit the Detroit auto companies, which lost billions of dollars last year in North America, would like desperately to break so they could earn a profit in their primary business.
Despite all of Detroit’s claims to have abandoned the fire-sale mentality of the past, the companies’ actions suggest otherwise.

While the article does note that Asian brands continue to do well, and many of those vehicles are produced in the US, some of those models are imports and higher sales of them acts as a drag on GDP. In the first quarter of 2006, auto and auto parts production accounted for 0.60 percentage points of growth.

The death of the consumer has been predicted for some time, and has repeatedly been wrong. For all we know, it may never happen. But today’s indications from the automotive group, which is one of the larger consumer spending areas, are worth noting. And it is easy to measure the impact. If the consumer merely continues to spend the same amount - not even cutting back but just not spending more - GDP growth would be cut by more than half. So if you are making the bet that consumer spending will continue to be strong, be sure to keep in mind what that means.

http://stockmarketbeat.com/blog1/

Good For Consumers, But for Garmin?

By William Trent of Stock Market Beat

We have written several times about how the digital navigation market appears finally to be taking off, which has certainly helped shares of Garmin (GRMN) over the last couple of years (see chart below). We have also noted the increasing competition from major consumer electronics companies such as Pioneer and Sony. An article caught our eye today that shows how far the competition is going.IBM Embedded Speech Technology to Drive Pioneer In-Car Navigation System: Financial News - Yahoo! Finance

“Speech recognition is at the beginning of a tidal wave in cars,” said Karen Rubin, director of product planning and marketing for navigation, Pioneer Electronics (USA) Inc. “Drivers can now enter destinations, search for points of interest, and access their music on the built-in hard drive using their voices.”

All of this is clearly good for consumers, who will have more choices than ever when considering a new digital navigation system. Whether Garmin will be able to maintain its stock performance
against competition is open to question.

http://stockmarketbeat.com/blog1/

Dell's Baby Steps (DELL)

Dell (DELL) announced two initiative recently that show how desparate the company is to create any positive news. The company launched a new IT service plan called Platinum Plus. With this program, companies can use Dell to support their computers, whether they bought them from the PC giant of not.

The other news is that Dell will begin to ship computers with Advanced Micro Devices (AMD) chips.

Both of these initiatives are aimed at Dell's corporate customers. The IT service plan is only useful to big companies, and most consumers cannot tell the difference in performance between an AMD or Intel (INTC) powered product. It might be important to some corporate IT managers.

But, Dell's most significant problem recently is the sales of its computers to consumers, not corporations. The company has also fallen short on customer service which has encouraged the company to hire a new head of customer service.

Dell is betting big on the corporate market, but it may be the wrong gamble.

In the quarter ending May 5, 2006, operating income actually fell to $949 million from $1.174 billion in the same period a year ago. Operating income in the Americas and Europe was hit hardest, but the increase in Asia, up only $3 million from last year to $136 million, was embarrassing given the company's push in China.

In the quarter, enhanced services like training and enterprise support were 10% of Dell's revenue, and this business is growing. Servers and networking were 9%. But, these lines of business which are primarily for businesses are still too small to have a marked impact on the company's topline and operating income.

The problem at Dell is simple. Desktop PC sales are dropping. They were 36% of revenue in the May 5 quarter down from 40% a year ago. Laptop computers, which are now 26% of revenue, picked up some of the desktop drop, but the business needs to turn itself around.

Dell can open all the new enterprise initiatives it wants to, and move from one chipset to another. Until customer service improves, and the cost of PCs stops dropping like a stone, Dell's stock is likely to stay near its 52-week low.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

A Business Model That Ought to Take Off

By William Trent, CFA of Stock Market Beat

Tom Evslin writes about a new business model for sharing WiFi access.

FON is a commercial/cooperative worldwide WiFi access network. Huh? Actually it’s an interesting idea and a great laboratory for pricing models.

Foneros are members who’ve agreed to share their Internet access through their WiFi routers. If you’re a Fonero, you can be a Linus and allow other Linuses to use your access free in return for free use of all FON hotspots. Or you can be a Bill and charge nonLinuses for use of your access. Currently the rate is 3 Euro/day. The Bill keeps half and FON keeps the rest.
(For my readers who are not up on blogosphere ingroup jokes: “Linus” refers to Linus Torvalds who started development of Linux, the open source operating system; “Bill” is Bill Gates who charges for his operating system – and puts the resulting profits to good use.)

You become a Linus or a Bill by installing special sharing software on your existing Linksys (subsidiary of Cisco) WiFi router. To encourage growth of the network, FON is offering special Linksys routers – they call them “social routers” - with sharing software preinstalled for $5 in the US and 5 Euro in Europe (not available elsewhere). Shipping and VAT are extra ($8 to US). There is a penalty if you don’t add your new router to the network to discourage freeloaders from taking advantage of the subsidized router offer.

Aliens are members like me who are not sharing a router. We aliens always have to pay the 3 Euro/day fee for access to hotspots. If we sign on to a Linus hotspot, FON gets all of our fee. If we sign on to a Bill hotspot, the Bill gets half.

So FON itself has a real business model although one that has yet to be proven. I am going to become a Linus as soon as my social router arrives. Then other Linuses can share my Internet access free and I can log on free at any FON hotspot, even those that belong to Bills.

Here’s where the pricing gets interesting. Remember, I can choose to be either a Bill or a Linus. In my case the choice is easy. My location is isolated and few people will use my connection. But I travel so free access to other connections is valuable to me. If I lived in a more urban setting, I might have decided to be a Bill and see if my revenue offset the roaming charges which I would have to pay as a non-sharer. If you don’t ever travel with a WiFi equipped PC or other device, you clearly want to be a Bill.

This business model could cause open source/crowdsourcing to take off even faster. Consider movie downloads. If the studio sets up a hosted site it can control who downloads the movie and how much they pay, but have to be able to supply enough storage and bandwidth to accommodate the users.

The illegal model, such as bit torrent, spreads the storage and bandwidth to multiple users who “share” their files, along with their storage space and connection.

An interesting business model would be to allow users to buy a version of a movie that was authorized for resale. Then they could be compensated for their storage and bandwidth and relieve the studios of this burden. Everyone could be a winner, and distribution costs would likely plummet.

http://stockmarketbeat.com/blog1/

Can Cable Trump The Telco Video Card?

Stocks: (T)(TWX)(VZ)(CMCSA)

Comcast has announced that it will buy thePlatform, a digital media video company with customer including Comcast itself, the Wall Street Journal, ABC News and Starz.

It is a safe bet that the purchase was as much to form relationships with thePlatform's customers as to get the technology.

Cable firms like Comcast now seem to take seriously the threat posed by AT&T, Verizon and others as they prepare to offer television over their fiber networks. Try as they might, the cable firms have not been able to get the federal government to stop the march of the telcos into services that compete with cable TV.

If you can't beat them, join them.

Systems like the one offered by thePlatform allow video to be sent over the internet to televisions. So, the web-based content that most people watch on their PCs can now be routed to the television set as well. Most video on the internet makes it to the PC and no further, and this eliminates potential customers who do not want to watch TV or movies on a PC screen.

As the Wall Street Journal pointed out, Comcast has one large advantage over the telcos. It already pays them a huge sum for programming on its cable TV system, so it has access to the content providers to get offerings for the new IPTV intiative.

For the last year or so, it seemed that the large regional telephone companies had caught the cable guys flat-footed in the internet video delivery business.

Well, look again.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does now own stock in the companies he writes about.

EMC's Slow Expansion

Stocks: (EMC)(RSAS)(CHKP)

EMC announced within the last few days that it was buying Isreali content management outfit ProActive Software Solutions and that it would also spend $500 million in China. The investment will be made between now and 2010. The company said it was making the move because the pool of tech workers in China is one that EMC wants to tap, but the cost factor of using workers outside the U.S. is certainly a the heart of the move. EMC is making similar moves in India.

As a digital storage company, EMC's products are at the heart of the growth, or lack thereof, of technology products at big company's. EMC's CFO recently said that the company's quarter that ends in June may not be as good as previous forecasts. This took a stock that was already in bad shape and made matters worse. After trading between $10 and $14 most of the last two years, the stock is now at the low end of that range at $11.25.

The stock may be too low.

From 2003 to 2004, revenue grew 32%. From 2004 to 2005, revenue grew 17% to $9.664 billion. Operating profits also grew impressively each year, and hit $1.48 billion for the entire year 2005.

Wall Street was disturbed that the March 2006 quarter had a topline of $2.551 billion and operating income of $303 million.

Now word comes that EMC is buying RSA Security for $1.8 billion. The company has valuable assets in the secure digital software market and would add significantly to the products EMC could market to large enterprises. The company also had revenue of $310 million last year and operating income of over $35 million. So, EMC would be paying a 4.5 time prices to sales ratio according to YahooFinance!. RSA competitor Check Point tades at nearly eight times sales.

EMC's appetite for reasonably priced acquisitions to build its business may turn out to be the catalyst that drives the company's revenues back to double digit growth. And, if labor costs for the company's software and IT employees drop due to EMC's moves into India and China, the stock may look cheap at $11.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

The Wheels Come Off, Again, In Detroit

Stocks: (GM)(F)(DCX)

At the beginning of the year, GM was a poster child for the bankruptcy of a big American auto maker and Ford was considered in decent shape with the Ford family repeatedly saying the Chapter 11 was not an option.

The landscape has shifted. Ford's debt was recently downgraded by S&P, and even the company CEO admits that the turnaround he has championed is not on track.

What happened between the beginning of the year and now is that incentives have returned. The Big Three have repeated renounced incentives as an option to stimulate sales, but with inventories up and sales down, all three car makers are moving to zero percent financing or employee pricing for all customers.

One would think that with Ford cutting over 10,000 employees through buyouts and GM dropping over 30,000 hourly workers that the hundreds of millions of dollars in annual saving would be enough to get the car markers' North American operations back into the black.

But, the drop in SUV sales and pick-up truck purchases is pounding the American manufacturers and the hurt to Ford is particularly acute due to the high percentage of these big gas inefficient vehicles in its mix.

GM has the slight advantage of having its price-per-vehicle up about 5% in the first five months of this year. That at least gives the largest car company a small buffer.

Chrysler, due to its parent Daimler Benz, has the advantage of a company that owns the Mercedes line of cars and other businesses.

Ford's stock has been beaten like a red-headed mule. The shares have dropped from a 52-week high of $11.19 to the current low of $6.34. The company's market cap is an appallingly low $12 billion. This for a company with annual revenue of over $177 billion.

If the next few months show that Ford's big SUV and truck sales continue to drop, the stock has not seen its bottom.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not won shares in companies he writes about.

Google Gets Creative (GOOG)

:By Yaser Anwar of Equity Investment Ideas


The concept of interactive TV in a two-screen environment. Meaning with the TV and either a computer or web-enabled portable device.

The Pew Internet & American Life Project reports that 17% of Americans were online when they last watched TV.

The service goes something like this: Jane watches TV with her laptop nearby. When she clicks over to a particular program her laptop "hears" a snippet of the audio, matches it to its database of audio samples, and identifies it as a particular episode.

From there, it creates an ad-hoc social community of other viewers watching the same thing, so Jane can discuss the broadcast on message boards and view complementary content -- a gossip column about the characters' real-life antics or photos of the cast at the Emmys. When a commercial for Steve Carrell's latest film interrupts the show, the computer picks up the audio and serves an ad listing the nearest theater and showtimes.

Their system doesn't rely on connecting the PC to the TV through a cord or wireless connection, but instead uses an ambient audio "listening" technology using the microphone commonly installed on new computers.


Source: Advertising Age

http://equityinvestmentideas.blogspot.com/

Semiconductor Oversupply Continues

By William Trent, CFA of Stock Market Beat

Although we have frequently noted what we view as alarmingly fast growth in semiconductor equipment purchases relative to the end demand for semiconductors, it looks as though the supply will continue to grow unabated for a while. DigiTimes reports:
Semiconductor Manufacturing International Corporation (SMIC) will sign a fab construction contract with the Wuhan city government (Hubei province, China) and the pure-play foundry will increase its monthly 12-inch wafer capacity by 25,000 wafers after the completion of construction in 2007, according to company officials. SMIC reportedly gained US$3 billion in investment aid from the Wuhan government for the new fab construction.

Furthermore, although some manufacturers including pure-play foundry Taiwan Semiconductor Manufacturing Company (TSM) are slowing their expansion plans by postponing equipment delivery, DRAM makers are still looking to continue with their expansion plans, according to sources at equipment makers.

Meanwhile, wafer maker Wafer Works will expand its 6-inch silicon wafer monthly capacity in Taiwan by 20% to 300,000 wafers in the third quarter. The company will mainly focus on 4- and 5-inch silicon wafer production at its China subsidiaries but will also supply 6-inch wafers for China-based customers.

This expansion has mild implications for semiconductors for two reasons: Wafer Works is a small company and it also manufactures wafers for solar cells. It is currently running at full capacity, and we doubt their capacity increases will be broadly felt.

http://www.stockmarketbeat.com/

European Stock Market Report 6/29/2006

Stocks: (BCS)(BP)(BAB)(BT)(GSK)(UN)(UL)(VOD)(AZ)(BF)(BAY)(DCX)
(DB)(DT)(SI)(ALA)(AXA)(FTE)(V)

European markets were sharply higher at 5.15 New York time.

The FTSE was up 1% to 5,737. Barclays was up 1.6% to 604. BP was up 1.2% to 626. British Air was up .8% to 337.5. BT was up 1.6% to 233.75. GlaxoSmithKline was up 1% to 1482. Prudential was up 1.7% to 584. Reuters was up 1.6% to 372.75. Unilever was up .7% to 1182. Vodafone was down .2% to 112.75.

The DAXX was up .8% to 5,502. Allianz was up 1.5% to 120.59. BASF was up 1.3% to 60.58. Bayer was up 1.6% to 33.86. DaimlerChrysler was up 1.2% to 37.44. DeutscheBank was up 1% to 84.71. Deutsche Telekom was up .2% to 12.27. Siemens was up .9% to 89.03.

The CAC 40 was up 1.1% to 4,827. Alcatel was up .5% to 9.71. AXA was up 2.1% to 25.17. France Telecom was up 1% to 16.45. ST Micro was up 1.3% to 12.46. Vivendi was up .7% to 26.89.

Douglas A. McIntyre

News Digest 6/29/2006

Stocks: (GOOG)(YHOO)(BP)(F)(GM)(DCX)(SYMC)(PFE)(WMG)(RSAS)(EMC)

According to Reuters, the Federal Reserve is set to raise rates for the 17th consecutive time.

Reuters also reports that Google will release its new online payment service today. It will be called Google CheckOut.

The Wall Street Journal writes that a federal judge has approved a Yahoo! click fraud settlement in which the internet company was accused of not providing adequate protection for fruadulent clicking on ads on its service.

The Wall Street Journal reports that traders from BP illegally cornered a portion of the U.S. propane market in 2004 causing prices to rise in seven million homes.

The WSJ also writes that Ford is hitting stronger resistance that it thought several months ago. The company is trying to restructure its North American operations to get them profitable again. The company's SUV sales have been hurt by rising gas prices.

The WSJ reports that Tenet will pay $725 million to settle charges that it manipulated Medicare to get higher payments.

The WSJ writes that Symantec is fighting a U.S. tax bill of $1 billion involving Veritas Software, a company it acquired.

The WSJ reports that Pfizer will introduce a generic version of Zoloft now that its patent has run out.

The New York Times reports that Detroit car makers are introducing incentives as inventories rise. Chysler is introducing employee pricing. Some incentives from the Big Three could be worth over $5,000 for certain cars. Chrysler may also offer no interest financing to match Ford and GM.

The NYT reports that music companies EMI and Warner Music have each launched bids to take the other over.

RSA Security, which put itself on the market a few months ago, may be sold to EMC in the near future. The deal could be worth $1.8 billion.

Douglas A. McIntyre

Gold set for seasonal boom

By Yaser Anwar of Equity Investment Ideas


The Canadian National Post reports that between the end of July and the end of September, the price of the precious metal typically rises due, in part, to purchases of gold by jewellery-makers who are gearing up for the busy Christmas and Diwali seasons.

Both of these holidays coincide with the strongest periods of gold jewellery purchases in the calendar.

Gold prices have gone up in eight of the past ten periods, according to stock statistics of the Philadelphia gold and precious metal index quoted in The National Post. The average gain per period over the past ten has been 16.6 per cent.

Gold mining companies have also seen significant rises in their stock, despite the recent decline in the metal's price. Newmont Mining (NEM) has gained in seven of the last ten periods, at an average of 13.5%

Analysts hope this traditional period of growth in the metals sector will spark a recovery in gold prices after recent declines in the past few weeks as the market eased back from quarter-century highs registered in April and May.

The Fed EuroDollar futures signalling atleast two more rate hikes, this seasonal gold boom could further be aided by investors putting money in gold to protect against inflation.

http://www.equityinvestmentideas.blogspot.com/

Technical Analysis of Northrup Grumman (NOC)

By Yaser Anwar of Equity Investment Advisors

Today i'd like to talk about an idea by Casey Murphy, an excellent technician at ChartAdvisor.

Take a look at NOC because it is currently testing the support of the 200 DMA. This moving average is generally regarded as one of the most influential averages and it is closely followed by many traders.

Expect to see the bulls step in here and push the price back up toward the resistance of the 50 DMA near $65.50.

The MACD indicator has recently crossed above its signal line. This bullish crossover will likely be used by many traders as confirmation of the expected move off of the support.

http://www.equityinvestmentideas.blogspot.com/

Asia Markets 6/29/2006

Stocks: (CAJ)(FUJIY)(HIT)(HMC)(NIPNY)(NTT)(SNE)(TM)(CHL)
(CN)(HBC)(PCW

The major indices in Asia were sharply higher.

The Nikkei was up 1.6% to 15,121. Canon was up 2.6% to 5480. Fuji Photo was up 1.6% to 3790.
Hitachi was up .8% to 742. Honda was up .3% to 3540. NEC was up 2.8% to 592. NTT was up 1.3% to 542000. Nippon Steel was up 1.9% to 425. Softbank was up .6% to 2500. Sony was up 2.7% to 4940. Toyota was up .8% to 5750.

The Hang Seng was up .8% to 15,865. China Mobile was up .8% to 42.7. China Netcom was up 1.5% to 13.4. HSBC was up .6% to 133.8. Lenovo was down 2.8% to 2.55. PCCW was flat at 5.45.

The KOPSI was up 1.4% to 1,263.

The Straits Times Index was up 1.1% to 2,377.

The Shanghai Composite was up 2% to 1,672.

Douglas A. McIntyre

New York Times DealBook Summary 6/28/2006

Stocks: (JCG)(GS)(BCS)(WMG)(MT)(MFE)(RMIX)

According to DealBook, shares of J. Crew rose 28% on their first day of trading. Goldman Sachs and Bear Stearns lead the underwriting.

DealBook say that the takeover fight between music companies EMI and Warner Music has resulted in each making and rejecting takeover offers from the other. EMI said that Warner had offered $4.6 billion.

DealBook says that Russian steel company Severstal is planning to make another bid for stell company Arcelor, which is already planning to merge with Mittal. Mittal's $33.5 billion bid for Arcelor has already been accepted.

Hedge fund Third Point has won two board seats at Massey Energy. It lead a proxy fight to get them.

DealBook says that U.S. Concrete has agreed to acquire Alberta Investments and an affiliate Alliance Haulers to expand its business in west Texas. The price was $165 million.

Douglas A. McIntyre

Upbeat cable outlook good for Comcast (CMCA), CBS (CBS), Verizon (VZ) & JDSU

By Yaser Anwar of Equity Investment Ideas


According to a study released on the cable network executives expect a rebound this year for the industry. Kagan Research, which surveyed more than 100 cable networks, predicts revenue for the industry will reach $33.8 billion, a 13.1% increase over last year.

The growth will be driven by ad revenue holding steady in the double-digit growth range, the study says. Kagan sees such challenges looming ahead as license fee increases between 2%-5% annually for networks owned and operated by conglomerates and the shuffling of channel lineups by satellite and land-based cable operators if license fees are deemed excessive in light of a networks' ratings.

Kagan Research senior vp Derek Baine reflected on the networks' recent performance in a statement Monday: "Most major cable networks (revenue) has been growing at a rapid clip. ... ESPN took in $3.7 billion in 2005, $2.1 billion more than its nearest competitor. Nickelodeon, TNT, FSN, MTV and USA all topped $1 billion in revenue, while 10 other networks had revenue greater than $500 million."

This upbeat outlook for cable industry bodes well for stocks like Comcast & CBS, both of which have been beefing up their cable & fiber-optic networks to meet increasing demand not only from consmers but telephone companies such as Verizon (Verizon itself has been expanding its fiber optic networks to offer broadband phone services). A derivative play of the fiber optic networks would be JDSU & Brocade.

Sources of first three points: Hollywood Reporter & Kagan Research

http://equityinvestmentideas.blogspot.com/

Pension Crisis: Looming Taxpayer Bailout?

By Yaser Anwar of Equity Investment Ideas


Is the bankrupt Pension Benefit Guaranty Corporation going to hoist its obligations onto taxpayers?

The quasi-government agency has been taking on failed companies’ pension payments since it’s creation in 1974. But could there come a day when the PBGC requires a bailout from taxpayers?A Wall Street Journal editorial says so.

The PBGC reported a $23 billion deficit for 2005. That’s a long fall from the $10 billion surplus the agency had in 2000. The reason? Companies aren’t paying into the coffers of the PBGC like they once were, and more are calling on its assistance.

According to a study by Watson Wyatt Worldwide, 113 of the Fortune 1,000 companies have ended their pensions. That’s compared to 71 in 2004, says the consulting firm.

Delta Airlines just became the latest in a string of companies looking to the PBGC to handle its pension payouts. The airline wants to end its pension plan for pilots. United Airlines and US Airways have already stuck PBGC with its pensions, PBGC assumed $6.6 billion of United’s pension liabilities and $3 billion of US Airways’, says The Seattle Times.

The growing number of companies looking to the PBGC for assistance is worsened by the fact that companies are underfunding their pension programs. The Labor Department estimates that pensions are underfunded by more than $450 billion last year.

That means companies are making promises that they can’t deliver, and the PBGC is left to pick up the pieces. As the insurer of last resort for these pensions, the PBGC is obligated to take on the liabilities of failed companies.

But what if, asks the Journal, the PBGC doesn’t have the cash to pay its obligations? Taxpayers beware.

Source: Money News

http://equityinvestmentideas.blogspot.com/

Wireless Slowdown Could Knock Your SOX Off

Stocks: TXN - MOT - NOK

By William Trent, CFA of Stock Market Beat

We recently wrote how the Chinese market for handsets may be oversupplied. With wireless being the main growth driver for semiconductors these days, a slowdown there could have a magnified effect on the whole industry, further bringing down the SOX. A JP Morgan report now suggests that this is indeed the case.Tech Trader Daily » Report Nokia (NOK) Pushing Out Some Parts Orders; Bad News for RFMD, TXN

J.P. Morgan chip analyst Christopher Danely this morning reports that “checks in the channel” indicate Nokia (NOK) is pushing out orders for handset components “across the Asian handset supply chain.” Danely says the Nokia pushouts, as well as “weakness from Motorola (MOT), LG and Samsung,” raises concerns about downside risk to estimates for both Texas Instruments (TXN) and RF Micro Devices (RFMD). He notes that Nokia represented about 10% of calendar 2005 sales at TI, and about 38% of fiscal 2006 sales and RF Micro.

“Our checks now indicate the top four global handset OEMs - Nokia, Motorola, Samsung and LG - (roughly 75% of [first quarter 2006] global handset sales) are eighter pushing out component orders (MOT and NOK) or missing [second quarter] sales estimates (Samsung and LG). We believe the rash of negative wireless data points in indicative of either an inventory over-build or weaker-than-expected demand.”

http://stockmarketbeat.com/blog1/

Semiconductor Margins Getting Squeezed at Both Ends

By William Trent, CFA of Stock Market Beat

Our regular readers know that we believe semiconductor pricing conditions are only going to get worse in coming months due to continued investment in new supply, which is growing at a faster rate than end demand. We also recently noted that solar power’s resurgence is creating competition for raw materials.

As this article elaborates:
Scrap wafer recycle supplier Phoenix Silicon International (PSI) said the company turned profitable in May, thanks to large demand from solar cell makers, according to the company. The company also sees encouraging capacity growth on growing demand.

PSI observed that the tight silicon supply boosted the price of scrap wafers significantly. The price of a 8-inch scrap wafer from semiconductor makers had jumped to US$6.50-7.00 from last year’s US$1.20-1.40. Despite the price increase, the company’s recycled scrap wafer output continues to grow with 8-inch wafer shipments staying at 3,000 per month while 12-inch shipments are hitting 50,000 wafers, according to the company.

Semiconductor manufacturers rely on other commodities such as copper and aluminum, which have also seen substantial price increases, in their production as well. This has seldom been an issue in the past, as commodity prices were tame and/or declining and because the raw materials made up such a small percentage of the total price of semiconductors (gross margins as high as 70 percent in some cases.)

However, with prices set to decline even more rapidly than normal and costs having gone up significantly in the last year, margins could be set to compress dramatically. The combination has not lined up this way in many years, and thus may catch many market observers by surprise.

http://stockmarketbeat.com/blog1/

Now This is a Quadruple Play

Stocks: VZ - T - S - TWX - SI

By William Trent, CFA of Stock Market Beat

It has been said that cable’s major advantage over telcos and satellite tv is its ability to offer the “triple play” of video, voice and data over a single line. The ability to leverage its existing service to capture additional revenue streams gives it a unique edge that has been behind the telco’s own fiber roll-out.

At the same time, the telcos have enjoyed the advantage of wireless spectrum and services, which are largely replacing land-lines for voice service anyway. This gave the telcos a different triple-play: voice, data and wireless.

Thus the race was on to be the first to offer a quadruple play that included all four services. The telcos partnered with satellite companies, the cable companies partnered with independent wireless player Sprint-Nextel, and the telcos started their fiber expansion. But these interim partnerships appeared to us to be of limited value. There is no cost savings to the bells company from reselling satellite video - unlike video and data over the same pipe satellite was a different pipe, and one they didn’t own. Likewise for the cable companies offering wireless service. Until now.

Barron’s Tech Trader Daily reports:
In one of the first concrete steps to emerge from a partnership agreement signed last November between Sprint Nextel (S) and four major cable companies, Time Warner Cable (TWX) is reportedly making plans to roll out a dual-band wireless phone service with handsets that can alternate between VOIP over WiFi and cellular networks. According to the web site Light Reading, other participants in the project will include Siemens (SI) and BridgePort Networks, which together will provide the necessary network hardware.

This means that while in the customer’s home the phone will connect via WiFi to the cable modem and use the cable pipe. When the customer is mobile it will revert to the Sprint wireless network.

Granted, this has been tried before. Each of the Bells has toyed with a mobile/landline combo phone, and the plans have gone nowhere. Yet the idea remains attractive enough that companies keep trying. One day it might work. And if it does, it will be something that provides true differentiation.

Until, that is, it is copied.

http://stockmarketbeat.com/blog1/

How To Protect Yourself From Mutual Fund Issues

By Yaser Anwar, CSC of Equity Investment Ideas

Here are three ways you can protect yourself from these negatives about mutual funds:

1. Be your own money manager and invest in several mutual funds and individual stocks. Be prepared to take profits and use stop orders to protect you on the downside, in case there is a crash or bear market. I personally took profits and exited several of my favorite mutual funds during the most recent downturn.

2. If you want to be a long-term investor and not try to trade mutual funds, invest in a well-diversified "permanent" portfolio of index funds in a variety of categories: Consider a "permanent" portfolio of funds or Exchange-Traded Funds (ETFs) in growth stocks, bonds, commodities and cash. For example, the Permanent Portfolio Fund (PRPFX) attempts to do this all in one fund.

3. Consider going with a money manager who selects individual stocks and funds. Minimums are usually quite high for this approach: $50,000 or higher. Use a money manager who will post the value and composition of each position on the Internet, so you can constantly monitor performance. And stick with money managers who have a proven track record over five years.

Unlike a mutual fund, a money manager can go 100% in cash to protect you, if necessary.Fortunately, some relief for mutual fund investors may be on the way with publicly traded hedge funds that have the capability of going short or heavily into cash during a bear market.Until then, it's best to be your own money manager as much as possible. Studies have shown that individual investors often outperform professional money managers.

After all, who is more interested in your own money than yourself?

Source: Investment U

http://www.equityinvestmentideas.blogspot.com/

Investor Sentiment

By Yaser Anwar, CSC of Equity Investment Ideas

30 day outlook:

35% bullish, 33% previous week
38% bearish, 46% previous week
27% neutral, 22% previous week

Source: Low Risk

http://www.equityinvestmentideas.blogspot.com/

GM's Silver Lining

GM's news recently has been mixed, but the negative comments about June and July sales trumped the positives of the employee buy-outs and the stock skidded down sharply.

GM expects poor comparisons to last summers sales, but there are some good reasons and buried in these may be the key to the company's recovery. In June of last year, GM offered employee pricing for all customers which drove up sales sharply. However, it also drove down the company's yield and profit per vehicle.

GM's strategy has shifted markedly. With cost dropping, yield-per-vehicle is becoming just as important as absolute unit sales. GM also has several "hot" cars like the Pontiac Solstice that are selling very, very well.

The key to the GM recovery may be its rising price per car. For the first five months of the year, the company was able to fetch an average of $26,431 per vehicle, up $1,200 over the same period a year ago.

If GM can keep its yield-per-vehicle high, the critical comparisons will not be with last year's summer employee discount sales periods, but with the fall months when new models hit the dealers.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

Has Intuit Run Too Far?

Stocks: (INTU)(MSFT)(ADP)(HRB)

Shares in financial software company Intuit are up from under $40 early last year to $58, a twelve month high. The shares should have moved given the company's financial performance. In the quarter ending April 30, revenue hit $953 million and operating income was $480 million.
Revenue rose 14% from the same period a year ago.

The company does have some problems that could keep it from moving much higher. One is that it has been part of the options pricing scandal, which is yet to be resolved. Another is that guidance for the July quarter was for revenue to grow as little as 3% and for the fiscal year ending in July growth may be as low as 13% over the last fiscal year.

Another issue is that some of Intuit's brands are not growing quickly at all, bringing the overall rate of growth for the company down. Quicken Books grew at a rate of only 8% in the April quarter.

The most important issue is that Intuit, like many software companies, faces competition from Microsoft. Some of the new versions of Office offer accounting software for small businesses. Microsoft and ADP have developed a payroll solution for customers. H&R Block also has a horse in the race with its TaxCut product. All of these products could put pressure on margins at Intuit.

It is hard to make a case that Intuit's recent growth is anything other than impressive, but future increases may come more dearly, and the stock does trade at the top of its range.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in any of the companies he writes about.

European Stock Market Report 6/28/2006

Stocks: (BEAS)(BCS)(BP)(BAB)(BT)(RTRSY)(UN)(UL)(VOD)(AZ)(BF)
(BAY)(DCX)(DB)(DT)(SI)(AZ)(AXA)(FTE)(TMS)(V)

European Markets were fairly flat at 5.45 AM New York time.

The FTSE was up .2% to 5,662. BEA was off .4% to 357.75. Barclays was up .7% t0 594.5. BP was up .2% to 614.5. British Air was off 1.1% to 336. BT was up .4% to 228.74. Prudential was up .7% to 570.5. Reuters was up .1% to 367. Unilever was up .1% to 1160 . Vodafone was up .4% to 113.5.

The DAXX was off .2% to 5,449. Allianz was up .5% to 119.2. BASF was up .2% to 60.24. Bayer was up .9% to 33.06. DaimlerChrysler was down .7% to 37.07. Deutsche Bank was down .3% to 83.37. Deutsche Telekom was down .2% to 12.35. Siemens was up .2% to 66.41.

The CAC 40 was down .2% to 4,764. Alcatel was down .3% to 9.71. AXA was up 1.9% to 24.73. France Telecom was down .7% to 16.35. ST Micro was down .5% to 12.17. Thomson was .6% to 12.58. Vivendi was down .4% to 26.57.

Douglas A. McIntyre

Difficult Markets-The Rubble of Neglect

By Richard Konrad of Value Discipline

Roy R. Neuberger, the eponym of Neuberger Berman, an investment management firm now owned by Lehman has (he is 102) a great love of painting which he financed through his successful investment career. He was especially adept at short-selling, which brough him great fortune through the Great Crash of 1929 and well into the Depression.

A famous quote about the stock market that comes to mind in difficult markets is attributed to Neuberger,"Analysts...in bull markets, who needs them...in bear markets, they'll kill you!"Hans Deuel of the blog Clearfish Research describes the phenomenon well in "No Matter What You Do, You're Wrong."

If:
You buy on the way down, and it keeps going down (should have waited), or
You sell on the way up and it keeps going up (should have waited), or
You buy on the way up and it keeps going up (you should have bought earlier), or
You sell on the way down to stop losses and it turns around, or
You don't buy at all (opportunity loss), or
You don't sell at all and hold those losses, or...

As he points out, you can't beat yourself up. This is not a game of perfect. You have to quit beating yourself up in these choppy markets, keep the right investment horizon in mind, and don't expect that you will pick bottoms or tops.

I can recall Buffett describing his purchase of a large position in General Dynamics. At the annual meeting, he was asked about how much time he had spent in the analysis of GD's large submarine division . He replied about half an hour.

Sometimes, the obvious should not be an impediment. Mr. Market may agree over the short term or otherwise. Focus on decisions that favor your long term horizon. If Mr. Market continues his despondency, you can buy more of a good thing.

The beauty of markets like we are experiencing, and this is a good thing, is that we get the opportunity to buy businesses at prices much better than we could have expected. The high flying commodities are not a place where you want to be in my view...periods following gold rushes are not a lot of fun. A friend of mine put it best, "In today's market, people are buying things they should have owned five years ago, but wouldn't touch."Isn't that almost always true? Twenty years ago, the investment firm DLJ sponsored their last coal conference after only 18 people attended, 16 representatives of presenting companies, a buddy and myself. Coal went nowhere for some years until some shrewd investors discovered the mineral was cheaper on Wall Street than in Appalachia. At energy or mining conferences today, it is SRO...little firms such as mine can't possibly get in.Not that we'd want to!

I think similar thinking should be applied to your investments. Unpopular, boring, seemingly out of step ideas might turn into real jewels with a bit of time. No one cares in the capital markets. But is there still a business underneath the rubble of investor neglect?

http://valuediscipline.blogspot.com/

On the Road Again....To Zagreb??? Barr Labs

By Richard Konrad of Value Discipline

Well, it's a big, wonderful world out there and a xenophobic focus on the domestic opportunity set just does not provide sufficient perspective for successful investors, whether individual or corporate. Ergo, Barr's brave international move.

Barr Labs (BRL) today announced a potentially transformational bid for Pliva d.d.for $2.2 billion.Pliva has over $600 million in sales in Europe. The combined company, according to management's conference call this morning, will have nearly $2.5 billion in sales with EBITDA in excess of $875 million and net income greater than $550 million. Barr, which has been essentially a U.S. company, suddenly will find itself selling in about 30 countries. Germany is the largest base, but there is sales force in Poland, in Russia and across all of Europe...a very diverse group of countries with a very diverse set of regulations that Pliva has experienced and thrived in.

Founded in 1921, Pliva is today the largest pharmaceutical company in Croatia and by sales, the largest in Central and Eastern Europe. Since April 1996, Pliva's shares have been listed on the London Stock Exchange, a first for a Central and Eastern European manufacturing company.Healthcare is central to Pliva and the company produces a wide range of quality pharmaceutical, animal health and agrochemical products. Pliva also produces a range of food and beverage items and a line of cosmetics and personal hygiene products.

Pliva's best selling product is its patented oral antibiotic, azithromycin, which Pliva markets in Central and Eastern Europe under the brand name Sumamed. Pliva's azithromycin has also been licensed to Pfizer, marketed as Zithromax in the United States and elsewhere. Pliva also produces and markets drugs under license from a number of multinational pharmaceutical companies.

Barr becomes a leader in bio-generics, a capability that is embryonic because of the lack of regulatory structure in the States, but a capability that can be highly useful in Europe. But with Barr's penchant and skill for the important regulatory side of generic drug development, and this is the primary skill for generics operating in the U.S., the company should develop some valuable legal and regulatory expertise in crossing the pond with this skillset. The company gains some valuable sterile injectable drug manufacturing facilities in Brno, Czechoslovakia and in Krakow, Poland. In India, there is a bioequivalence laboratory, another significant capability for the future. In addition, transfer of some manufacturing to other countries should result in a lower tax burden for Barr.

The significant manufacturing and research capabilities should greatly increase the amount of research and cthe number of submissions that the company will be able to make for approval. These are very low cost facilities relative to the U.S. based facilities that the company operates. The company currently offers about 150 different dosage forms of some 75 different generic pharmaceuticals. As well, Barr has had a proprietary pharma strategy largely concentrated in women's healthcare with SEASONALE extended cycle oral comprehensives, Plan B emergency contraceptive, and ParaGuard Intrauterine contraceptive device, A total of 19 proprietary products are manufactured and distributed.

The combined company will have over 150 projects under development and will be marketing a current portfolio of about 120 products.The combined company has 65 ANDA's (Abbreviated New Drug Applications...used for generic approval) in front of the FDA.

Some of the Pliva products seem quite plain vanilla relative to other generics, but given their low cost structure, have significant margins.

The financials are not very clear. Pliva is being acquired for twice sales, which seems remarkably low relative to other generic deals in the States. The company claims that the deal is neutral to slightly accretive to its internal (not Street estimates) for 2007. Additive for 2008. The company expects some $50 million in cost savings in 2008 followed by $100 million in 2009.

Though the actual acquisition will follow a timeline requiring several approvals, Hart Scott Rodino approvals July/August, August/Sept Croation Agency Supervision approval, then the tender offer. The transaction will not be complete prior to October.

Despite the uncertainty that surrounds this new twist in Barr's strategy, the valuation for BRL is quite reasonable. EV/EBIT on a TTM basis is about 10.5 times. Return on invested capital for TTM was 18.4%. Long term debt is miniscule at about 1% of capital. However, the acquisition will be financed largely with about $2 billion in incremental debt both short and long term. Management indicated that it is working through those details.

Until I have a chance to work through some financials, I don't have sufficient comfort with the numbers and the assumptions. But strategically, I suspect the deal makes a great deal of sense for Barr. There is a lot of integration risk in deals of this scale. Barr has been a poor performer this year with a YTD decline of about 22%. Returns on capital have been sinusoidal ranging between 11% and 30% in the last five years. Free cash flow generation has been strong, especially in recent years with last year totalling over $300 million. About $80 million in net share buybacks occured last year. There is a $300 million buyback authorized since 2004.

Disclaimer: Neither I, my family, or clients have a current position in Barr Labs or Pliva.

http://valuediscipline.blogspot.com/

Stock of the Week: Harman's Ready to Rock

By The Average Joe Investor

WHO ARE THEY
Harman International Industries Inc. (ticker: HAR) is one of the worldwide leaders in the design and manufacturing of hi-fi audio and electronic systems. While Harman may look familiar to audiophiles out there as half of the Harman/Kardon brand, Harman is also behind a host of other brand names such as JBL, Infinity, Mark Levinson and Becker. The company operates in three segments, Automotive, Consumer and Professional, which represent their three primary markets.

On the home audio side, Harman's smallest business by revenue, you can find everything from home theatre systems, to headphones, to premium loudspeakers and iPod speaker docks. What you shouldn't expect to find, though, is a cheap-o boombox to take down to the beach - Harman avoids the cutthroat competition that is a hallmark of the low-end audio market. They opt for the equiptment that you buy when you think of music as a religion.Harman's second largest division, professional audio, sells just about everything you need to have a concert - save the band. This includes amplifiers, headphones, microphones, speakers and mixers.And, of course, their most important division, automotive, sells the really slick equipment that's being built into a lot of high-end new cars such as in-vehicle video and GPS navigation systems as well as - you guessed it - premium speakers and audio systems. The primary customers of Harman's automotive division are the premium manufacturers like DaimlerChrysler, BMW, Audi, Porsche, Land Rover and Volvo.

THE STORY
There really is a lot to like about this company. From product mix to past performance to forward projections to price, it all seems to line up right now for Harman.Product mix is a pretty key area to focus on as they predominantly sell into the auto market. In fact, 70% of their sales came from this market for their last fiscal year (ended 6/30/05). While this may give pause to some, it's worth reiterating that they are not selling to the US car manufacturers that have been very publicly suffering.

They are selling, as mentioned above, to premium manufacturers, many of whom operate out of Europe. While General Motors Corp (NYSE:GM) and Ford Motor (NYSE:F) continue to struggle, guys like Porsche and BMW are not having nearly as tough of a time.Even better than that is the fact that it's Harman's automotive division that is the rock star as far as operating performance. It blows both the consumer and professional divisions out of the water with a nice 16% operating margin versus 6% for consumer and 9% for professional.

The company's core is its R&D focus, and this keeps the company on the cutting edge in their markets. The newest thing in the pipe for Harman is called "infotainment" -- the combination of information delivery and entertainment. Harman's website describes infotainment as the following:Harman Infotainment™ is the seamless integration of sophisticated information and entertainment systems. The brands of Harman International... have come together to develop this technology to provide users with a high-end graphic interface that combines a number of complex functions. These functions can include DVD navigation, e-mail, hands-free telephone, music, Internet access, voice activation, movies and much, much more. This wealth of convenience and innovation has the potential to vastly improve the quality of life, both on the road and in the home.

Of course, this isn't keeping them from continuing to innovate in their core multimedia systems. The following is from their first quarter conference call:Within one year, we expect to unveil the most advanced multimedia system architecture for OEM and consumer applications this industry has seen. It will provide simultaneous and seamless transport of audio from hard disk, CD, and USB memory sticks from any computer to any other computer. It will accommodate several iPods, each playing music and displaying its playlist in less than one second. Similarly, the system will stream three DVDs across the network in real-time. We have conducted a series of exclusive presentations and focus groups to review and evaluate this new development. The unfailing reaction has been, “It knocked our socks off.”With audio, information and multimedia systems in cars getting nothing but more complex, I like the leadership, entrenchment and innovation from Harman going forward.

VALUATION
So for valuation, I basically used the company's top-line projections through '07 and assumed a 16% 5-year EPS growth rate (lower than analyst expectations) and did a quick and dirty analysis. What I came up with was that there is somewhere in the range of 40% upside to be had here. Right now, if you go with analysts' 21% growth estimate for Harman, they're trading at 21x their trailing twelve months EPS and have a 1.0x PEG ratio. At my estimate above, that would take it to a 30x multiple of trailing EPS and a 1.4x PEG.

CONCLUSION
I'm not going to try to pose here that Harman's poised to shoot up 40%. Heck, in the choppy market that we're in right now, it's probably going to be tough to figure out what in the world their stock price is going to do. What I like here is that this is a solid growth company that has been beaten up without having seen any big hit to their business. What I do think is that over the next five years this is a company that could see some really nice growth and this is a stock that you will probably not regret having in your portfolio.

http://theaveragejoeinvestor.blogspot.com/

Why Ethanol demand will fade with rising costs & its Implications on- PEIX, ADM, ANDE & VSE

Stocks: Pacific Ethanol, Archer Daniels, Andersons, VeraSun

By Yaser Anwar, CSC of Equity Investment Ideas

Ethanol prices are hitting record levels this week, adding to the cost of gasoline as the nation heads into the peak vacation driving season.

A gallon of ethanol was going for as much as $5.75 on East Coast spot markets, more than double the $2.54 that it fetched as recently as three months ago, says Tom Kloza, analyst for the Oil Price Information Service.

Ethanol has gradually replaced MTBE, a petroleum-based additive thought to cause cancer, as the lower-polluting alternative. And demand has outstripped supply.

With ethanol prices so high, the 10% of ethanol in reformulated gasoline, as the blend is called, could add about 30 cents a gallon to the cost of gas, Kloza says.

After summer, ethanol prices could fade. Demand will fall as the season for reformulated gas ends. And 33 new ethanol plants are to be completed by year's end, says Michelle Kautz, spokeswoman for the National Ethanol Vehicle Coalition, an industry group.

Implications for stocks: Ethanol stocks had been very hot since President Bush's speech on Jan. 10. Stocks like PEIX, ADM & ANDE had skyrocketed but have come down quite alot. With the new VSE IPO, the stock has almost gone down everyday after its debut & with more public offerings in the pipeline & increasing Ethanol costs, this will negatively affect the Ethanol sector.

Bullet points source USA Today

http://www.equityinvestmentideas.blogspot.com/

Media Digest 6/28/2006

Stocks: (WMG)(GS)(DCX)(F)(NWS)(PCW)(VG)(BCS)(MS)(RMBS)(TTWO)(NT)

Reuters reports that EMI Group PLC, the music company, turned down an offer from Warner Music of $4.6 billion, saying the offer was inadequate.

A group lead by Australia's Macquarie Bank said it may make a bid for Associated British Ports, which is being bought by a Goldman Sach's lead group, according to Reuters.

Reuters writes that Ford, GM, and Chrysler vehilces emit 230 million metric tons of the greenhouse gas carbon dioxide in the U.S. which is more than any electric utility.

Reuters writes that News Corp has joined Macquarie Bank's bid for PCCW phone and media assets with an offer price of $7.3 billion.

The Wall Street Journal reports that Vonage is about to release a product that will allow customers to plug a phone into a PC for VoIP use.

The WSJ also reports that GM will report poor sales in June and July. The auto company will also offer zero percent financing on some vehicles. The news caused GM's stock to drop sharply.

The WSJ says that two lawsuits have charged several large brokers such as Morgan Stanley, Bearn Stearns, and Goldman Sachs of doing "naked shorting" for hedge fund clients. The action involves selling shares short without borrowing them.

The WSJ also reports that Rambus says that a board review has found improper dating of options awards.

The New York Times reports that shares of Take-Two, the video game company, dropped as much as 15% amid a criminal probe of the company's business practices.

The NY Times also reports that Nortel will cut 1,100 employees in an effort to strenthen the company's financial position.

Douglas A. McIntyre

Asia Markets 6/28/2006

Stocks: (CAJ)(FUJIY)(NIPNY)(NTT)(SNE)(TM)(CHL)(CHU)(HBC)(PCW)

Asian markets were off and the Nikkei was down sharply.

The Nikkei Index was off 1.9% to 14,886. Canon was off .7% to 5340. Daiwa Securities was off 1.7% to 1289. Fuji Photo was off 2.1% to 3730. NEC was off .7% to 576. NTT was 1.1% to 535000. Sharp was off 1.6% to 1783. Softbank was off 1.8% to 1783. Sony was 1.8% to 4810. Toyota was off 1.9% to 5700.

The Hang Seng was off .6% to 15,685. China Mobile was off .7% to 42.2. China Unicom was off 1.5% to 6.75. HSBC was off .4% to 133. Lenovo was off 1% to 2.575. PCCW was flat at 5.5. Wharf Holdings was off 1% to 26.2.

The KOPSI was off .7% to 1,239.

The Straits Times Index was off .3% to 2,350.

The Shanghai Composite was flat at 1,369.

Douglas A. McIntyre

New York Times DealBook Digest 6/27/2006

According to the New York Times DealBook, a bankruptcy judge has approved the Time Warner and Comcast purchase of cable company Adelphia's assets. The price is about $17 billion.

DealBook says that TheStreet.com has published a survey that criticizes stock buy-back programs. Apparently, the are often just a move to offset the dilution caused by stock option exercises by management.

DealBook says that at least one large investor in steel company Arcelor favors a deal with Russian company Severstal over the Mittal merger which is valued at over $33 billion. The investor will vote against the merger.

DealBook says Televisa is weighing its options now that it has lost it bid for television network Univision.

DealBook says Canadian bankers are concerned over the number of their companies that have been bought by interests from outside the country. The most recent deal was Phelps Dodge's purchase of Falconbridge and Inco.

DealBook also reports that the Tribune company is moving ahead with its share buyback, even though members of one large shareholder group, the Chandler family, object.

Douglas A. McIntyre

PETsMART versus Petco-The Debate

By Richard Konrad of Value Discipline

Pet ownership in America grows at about twice the rate of the human demographic. This basic approximation has driven the growth of pet retailing. This growing marketplace is very compelling because of its growth and its relatively unconsolidated nature. The largest participant in the industry is PETsMART (PETM) holding about 11% market share followed closely by PETCO (PETC) with about 6% market share.

The industry has come under increased scrutiny lately as value pricing on some SKU’s by PETCO resulted in some Wall Street downgrades of PETsMart stock.
A recent Motley Fool post seems to have promulgated further concern.Since year-end, PETM is actually up about 4.3% (total return) versus a decline of about 9.6% for PETC, but the recent downgrades of PETM have diminished PETM’s lead.

In my view, PETM stands out from its superstore competition with the broadest offering of services that is available in the industry. PetsHotels, pet grooming, Doggie Day Care, dog training and access to full veterinary care provides a much broader experience than any other retailer can. Translate broader experience into greater selling opportunities. Its loyalty program, PetsPerks was modelled after the loyalty program of Harrah’s (HET) generally believed to be one of the most successful loyalty programs known in marketing. The program is designed to increase the average spend by each customer without sacrificing gross margins.
PetsMart is in the midst of a remodelling program which should bring greater focus on its service offerings. Remodelled stores have demonstrated much improved same store sales comparisons. The remodelling costs are minor at between $50K and $100K per store. So far, 170 of over 800 stores have been remodelled.

A recent Citigroup report highlights the strong impact that the service side of this business can provide.The service business has grown by over 25% CAGR in the last five years. The services side represents only about 8% of sales at this point but I believe this will grow substantially over the next five years to some 15%. There is a leveraged benefit to these services. According to Citigroup, PetHotels have provided a 25% lift to same store sales at maturity as well as significant improvement in store operating margins of some 430 basis points.

The impact to profitability at the margin can be substantial. Taking your dog in for a grooming, often results in additional sales of grooming accessories, toys, and shampoos. According to the Citigroup report, incremental revenues of 25% arise from a PetHotel, but of greater importance, pre-tax margins lift from 8.1% to 12.4%. Pre-tax income per square foot lifts a very impressive 94%. The rollout of hotels is accelerating. Starting with only 7 stores in 2004, to a year-end 2005 total of 32, PETM should have a count of over 60 hotels by year end 2006.

The economics of PETM don’t really require much improvement. The essential story is one of free cash flow generation, a better model, in my view, than that of PETC.

http://valuediscipline.blogspot.com/