Market Wrap for Wednesday, July 5, 2006

Stock Tickers: HANS GM CHTR DQE AAPL IPAS DQE HD BA GERN SIRI MRVL OPSW UVN TRMP WYNN HET IGT

DJIA 11,151.82 (Down 76.20, 0.68%)
NASDAQ 2,153.34 (Down 37.10, 1.69%)
S&P500 1,270.91 (Down 9.28, 0.72%)
10YR Bond 5.227%

The market fell on a stronger ADP jobs report and after North Korea test fired seven missiles, and late-day attempts to recover were stopped in their tracks.

Despite a weak market, there were many winners today.

Shares of Hansen Natural (HANS) ran another 3.6% to close at $205.35 ahead of its 4-1 stock split next Monday.

General Motors (GM) should actually be considered a win with its shares closing up 0.1% at $29.44 considering they had disclosed June sales down 25% or so. The company is going to discuss a proposed alliance with Renault and Nissan.

Charter Communications (CHTR) won the ANALYST CALL OF THE DAY with its shares up 6.3% at $1.18. Citigroup's analyst Jason Bazinet raised the ailing cable and broadband provider from a Sell up to a Buy rating.

Duquesne Light (DQE) shares jumped 19% to close at $19.36 after the electric-utility company agreed to be acquired by a private equity consortium for $20 a share, a 21% premium to Monday's close.

iPass (IPAS) had been down 5% all day but recovered to only -2% at a $5.49 close after Jim Cramer gave it positive mention on CNBC at 3:35 PM EST on his "Stop Trading" segment.

Positive brokerage research notes from several analysts pushed shares of Genentech (DNA) up 0.95% to close at $83.61.

We also had many losers today, but those with negative news saw their losses multiplied:

Home Depot (HD) fell another 0.7% to close at $35.51 in a manner that is almost becoming automatic. Boeing (BA) fell 1.3% to close at $80.17, despite the fact that they are getting daily reports of outperforming Airbus.

Geron (GERN) fell 2.3% to close at $6.68 despite posting some positive discovery data and ahead of next week's congressional bills that would expand stem cell research funding.

Sirius (SIRI) closed down 2.8% at $4.48.

Wet Seal (WTSLA) had opened in positive territory after disclosing that its SEC inquiry had ended with a recommendation of NO ACTION, but ended up closing lower by 4.5% to close at $4.63.

Stock options probes continue to take their systematic toll on any company disclosing this. Marvell Tech (MRVL) fell another 7.8% to close at $41.31 and Opsware (OPSW) fell 7% to close at $7.60 on this news.

Univision (UVN) fell another 1% to close at $33.58 after Televisa (TV) disclosed it has an 11+% stake and wants to sell it to the private equity-led buyout group.

Trump Entertainment (TRMP) closed down significantly by 3.85% to close down at $19.50 after New Jersey failed budget passage closed casinos and gambling facilities in the state until the budget issue is resolved. Other leveraged casinos and those with New Jersey exposure closed lower as well: Wynn Resorts (WYNN) closed down 1.85% at $72.34, Harrah's (HET) closed down 1.08% to close at $69.74, and even mega-supplier International Game Tech (IGT) closed down 0.6% to close at $37.02.

A late morning news alert notified the market that Enron's former CEO, Ken Lay, had died of a heart attack. But, did anyone care?

Today and tomorrow we should get most of the Same-Store-Sales (s-s-s) for June, and that always creates many extreme moves in the underlying stocks. Since that basically wraps up the second quarter, this will give companies a last shot to come clean about their quarter and disclose whether they beat or missed sales and approximate earnings estimates.

We should also get some usual weekly energy numbers and the weekly jobless data tomorrow, but those numbers may be dwarfed by Friday's employment data out of the Labor Department.

Jon C. Ogg
July 5, 2006

What's Driving Hansen?

Stock Ticker: HANS

If you have been watching shares of Hansen Natural Corp. (HANS) over the last few days you may wonder what has been driving them up, up, and away. Its shares have now gotten back over that $200 mark reached back in May. Shares of HANS have not had much of their own natural news, but the driver sure seems to be this upcoming stock split. Shares of HANS will go ex-split on Monday, July 10, 2006 and will reflect their previously announced 4 for 1 stock split on that date. This move puts it easily up over $30 from the highs just 5 trading sessions ago and up over $40 from the lows of the last 10 trading sessions.

This is a name that Jim Cramer on MAD MONEY said to wait for 3 days after the stock split before buying (back when it was under $170), so we'll have to see what happens between now and then. This has been an impressive mover no matter how you cut it. Herb Greenberg has also been anti-HANS on a longer-term basis since the stock was around $80 or so, and this is up 300% from just 1 year ago.

Sophisticated accounts have tried making money front-running what they believe will be a herd-mentality trade, and that appears to be what has been happening here. Stock splits are jokingly referred to as "If I give you 4 quarters for your dollar bill, then you have more money," so we'll have to see if there is any selling into the event. Hansen will likely not report their quarterly earnings for another month or so.

Jon C. Ogg
July 5, 2006

New Jersey Affecting All Casinos and Suppliers.

Stock Tickers: TRMP, BYD, MGM, PENN, WYNN, ISLE, STN, ASCA, KXL, PNK, IGT, SHFL, WMS, BYI

Everyone knows that when the industry benchmark companies get hit, the rest follow suit. That is what has happened over the New Jersey budget stalemate that has led to the temporary closure of Atlantic City and New Jersey Casino operators.

Trump (TRMP) is perhaps the one considered at the highest leverage to New Jersey, and TRMP shares are down about 5% on the news. This has almost all casino holdings stocks lower today. A poor performance from the overall market with the DJIA off 0.75% and the NASDAQ off 1.65% is probably exagerating some of the losses.

Boyd Gaming (BYD) and MGM Mirage (MGM) operate the Borgata, and those shares are off 2% and 1.6% respectively. About the only good news is that this is at the beginning of a quarter instead of at the end of the quarter.

Penn Gaming (PENN) used to be an ex-NJ operating name, but that is no longer the case as it owns the Freehold Raceway track in New Jersey (whose website says CLOSED DUE TO RESOLUTION). PENN is down 0.75% to $38.77.

Wynn Resorts (WYNN) is down more than others because it is a leveraged name to the sector, and the street still has confusion over Steve Wynn's prior management that did have operations in New Jersey, even though Wynn Resorts is solely in Las Vegas and Macau. WYNN shares are down 2.75%, or $2.03, at $71.67.

Many other casino operators that have no preceived New Jersey gambling exposure are trading off more than usual. Isle of Capri (ISLE) has no exposure to New Jersey and its shares are down 1.5% to $25.04. Station Casinos (STN) is also not perceived to having any New Jersy exposure but its shares are down 1.6% at $66.98. Ameristar Casinos (ASCA) is one of the names that has mostly escaped the carnage today with its shares only down $0.05, or 0.25%, at $19.03. Kerzner (KZL) is also only down 0.04%, or -$0.03, at $79.13. Kerzner is mostly a higher-end international operator. Pinnacle Entertainment (PNK) has no perceived exposure to New Jersey and its shares are down $0.68, or -2.21%, at $30.14.

So far most research reports have hinted that this should not go on without a resolution, and therefore most haven't started trimming estimates. If this goes on and on without resolution, then you can imagine what will happen to those names leveraged to New Jersey. Until then this looks like just another bad day at the office for casino operators.

This has also affected those who supply and service casinos with gaming machines and other products and services. International Game Technology (IGT), the king of all game machine suppliers, is down 1.4% to $36.71. Even shares of Shuffle Master (SHFL) are trading down $0.74, or -2.28%, at $31.69. W M S Industries (WMS), a video screen gaming maker is down 1.81% to $26.63. Bally Technologies (BYI) is also trading down 2.7% to $15.98.

Jon C. Ogg
July 5, 2006

Stamps.com's Disappearing Growth (STMP)

Needham & Co., which initiated coverage on Stamps.com in January 10 with a "buy" rating, dropped its rating to a "hold" today. Investors should wonder what took them so long.

Stamps.com, which allows businesses and consumers to buy US Postal services stamps online, was a fast-growing business for several years. Revenue moved from $21.2 million in 2003 to $61.9 million last year. The company's operating loss in 2003 was $12.6 million. Stamps.com had an operating profit of $8. 4 million in 2005.

After posting rapid revenue increases on a quarter-over-previous-quarter basis in the September and December 2005 quarters, the topline flattened out. December 05 revenue was $20.6 million and March 06 was flat at $20.5 million. Operating income dropped from $3.6 million in the December quarter to $2.3 million in March.

Guidance for the year was for revenue to be as low as $82 million. That would mean no pick-up in revenue at all in the last three quarters of 2006. Not particularly good news for a company that tripled revenue from 2003 to 2005.

The company was recently added to the S&P SmallCap 600, but that has not helped the stock on Wall Street.

After a run from $15.64 in October 2005 to $39.24 in April, the stock has come back to $24.56.

If Stamps.com does not show some growth in the next quarter or two, the stock could move back toward its 12-month bottom.

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

How Did Coal Become an Alternative Energy Source

Stocks: (SSL)(HW)

By William Trent, CFA of Stock Market Beat

The New York Times has a story on new techniques for converting coal into energy. Although we wonder how coal, which has been used for centuries, became an alternative energy source all of a sudden the search for new uses for coal benefits two of our Watch List companies - Sasol (SSL) is mentioned in the article as having been converting coal into fuel oil for decades and Headwaters (HW) develops catalyst technologies to convert coal and heavy oil into liquid fuels.

The article points out that coal reserves in the US are far greater (in terms of potential energy) than the oil reserves in Saudi Arabia. Given the enormous global demand for energy as China and India rapidly move into the developed world, in the short term any available energy sources are likely to be sought just to keep the lights on. However, the article notes coal’s dark side:
Producing fuels from coal generates far more carbon dioxide, which contributes to global warming, than producing vehicle fuel from oil or using ordinary natural gas. And the projects now moving forward have no incentive to capture carbon dioxide beyond the limited amount that they can sell for industrial use….

Unless the factory captures the carbon dioxide created during the process of turning coal into diesel fuel, the global warming impact of driving a mile would double.

We have written a number of times on emerging solar technologies that will hopefully be cost-competitive within a few years. If they do, carbon dioxide worries would likely quickly become a thing of the past. It is quite possible that the companies hoping to exploit coal and oil will need to make their hay while (or before, in this case) the sun shines. Meanwhile, the process of converting coal allows companies to use high-sulfur coal rather than the low-sulfur variety, which vastly broadens the potential energy stockpile.

The coal will come from southern Illinois, by barge or rail. The diesel can go straight to terminals or truckstops in the area, said Mr. Diesch, the plant manager, and the fertilizer to local farms. An odd advantage is that today, most coal-burning power plants in the area use coal hauled from Wyoming, because its sulfur content is lower; burning high-sulfur coal encourages acid rain. But if the coal is gasified, rather than burned, filtering out the sulfur is relatively easy, and the sulfur changes from a pollutant to a salable product.

So the environmental impact is a mixed bag - more carbon dioxide, less sulfur. And, as befits a market economy there are those who would turn the pollutant into cash.

GreatPoint has a different plan: move the plant where it can sell the carbon.

Andrew Perlman, the company’s chief executive, thinks it has value. “Not only is it capturable, one of biggest advantages of the system is, we can locate our plant near a natural gas pipeline, in places where we can sell that carbon dioxide for a profit, using existing technology,” he said. Oil producers inject carbon dioxide into old oil fields, to force oil to the surface.

http://stockmarketbeat.com/blog1/

Pierced Perc Purveyors Unite! (SBUX)

By William Trent, CFA of Stock Market Beat

Apparently a group of New York City (of course) baristas has chosen to join a union, and will not rest until Watch List member Starbucks (SBUX) pays above-average wages and offers health benefits to any employees working more than 20 hours per week.
Oh, wait! Starbucks already offers those things (awkward pause.) Ok - here’s the new list of demands.

Group of SBUX NYC baristas proud to be Union - Blogging Stocks
Friday mid-afternoon at their store location, a group Starbucks espresso-pullers made known their membership in the IWW Workers Union according to a New York Press report. The public declaration was accompanied by a list of demands. The article quotes Daniel Gross, barista and union organizer, saying the group’s main three concers are “a living wage, secure hours of 30 or more per week and an end to the anti-union campaign.” Customers were not served while the demands were being presented.

If you ask us, it sounds dangerous to suddenly stop serving coffee to caffeine-dependent New Yorkers. Of course, it won’t be the first time these brave baristas have stood firm in the face of danger. Apparently Starbucks’ anti-union effortsincluded publishing a .pdf document on their web site.

http://stockmarketbeat.com/blog1/

Semiconductor Data Shows Continuing Oversupply

By William Trent of Stock Market Beat

Over the holiday weekend the Semiconductor Industry Association (SIA) released data showing that year/year sales growth improved from 8.2 percent in April to 9.4 percent in May.
“Worldwide sales of semiconductors in May continued to reflect generally favorable worldwide economic conditions,” said SIA President George Scalise. “As consumer products drive an increasing proportion of microchip sales, the growth of the semiconductor industry more closely reflects overall economic growth.

Sales of cell phones and other consumer electronics products once again were the principal contributors to growth in semiconductor sales. Sales of analog chips grew by 21.5 percent from May of 2005, while digital signal processor (DSP) sales grew by 13.7 percent.” Analog devices and DSP chips are important components of cell phones.

“Strong growth in sales of NOR flash memory products and optoelectronic devices are indicators of continued growth in sales of digital cameras and cell phones. Unit sales of personal computers have continued to run ahead of expectations, contributing to 13.7 percent year-on-year growth in sales of DRAMs. Sales of PC microprocessors declined by 2 percent from May of 2005, reflecting both robust competition and some inventory corrections in this major market segment.

Consumers continue to benefit from this competition, as the average selling price for a notebook computer has fallen below $1,000 for the first time ever,” Scalise said.
In June the SIA raised its forecast for 2006 worldwide sales growth from 7.9 percent to 9.8 percent. “We expect to see global semiconductor sales running 9 to 10 percent ahead of last year’s pace for the next several months. End market demand, inventory levels, and capacity utilization all indicate generally favorable conditions for the industry,” Scalise concluded.
Nine- to 10-percent growth is quite acceptable.

However, as we have pointed out repeatedly orders for semiconductor manufacturing equipment are growing at a far faster pace (62 percent in May.) Since this equipment will eventually be used to make more semiconductors the favorable inventory and capacity utilization levels are likely to be lost. This, in turn, will lead to additional price cuts that will make a $1,000 notebook look expensive. With signs that wireless, the recent growth driver, is slowing there could be even more trouble ahead.

We remain concerned that the approximately 20 percent drop in the Philadelphia Semiconductor Index (SOX) from recent highs is not sufficient to correct for coming market imbalances.

http://stockmarketbeat.com/blog1/

Norsk Hydro: Really Unlucky?

By William Trent, CFA of Stock Market Beat


Watch List company Norsk Hydro cuts output target
Norsk Hydro (NHY) cut its 2006 oil and gas output target on Friday by about 5 percent due to production shortfalls.Norsk Hydro shares dropped sharply on the news, but recovered from their steepest losses and traded down 2.7 percent at NOK 164.50 by 1140 GMT on the Oslo bourse, up from a session low of 161.”(It) is mainly due to unforeseen events in Norway, Canada and US Gulf of Mexico, and somewhat lower gas export from Norway than planned,” Norsk Hydro said.

Was there anyplace that Norsk Hydro foresaw events? It almost sounds like a commercial for peak oil pundits.

http://www.stockmarketbeat.com/

Journal Register's Missing President (JRC)

Stock Ticker: JRC

Newspapers usually expect the people they talk to for stories to be forthcoming and honest with their answers and information, so investors should anticipate that newspaper companies would be models of disclosure.

So, why is it so difficult to figure out what happened to the Journal Register's president?

Jean Clifton, who was also the Chief Operating Officer of the company, resigned effective June 30. She received severance of $2.81 million according to the Associated Press and documents filed with the SEC.

But, Clifton "resigned", and based on her contract, unless she resigned for "good reason" she is paid nothing. But, the SEC filings did not stipulate that she resigned for good reason or that she was fired.

It makes for quite a puzzle. But, one thing is for certain. Jean Clifton left with a large severance package, a consulting agreement and stock options. Shareholders of Journal Register stock ought to wonder what happened. Most investors are already frustrated with the company. Its stock dropped over 40% during the first half of 2006.

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

Trident Gets Trimmed (TRID)

Trident Microsystems, which is one of the leaders in making integrated circuits for LCD and flat-panel displays, has fallen sharply on a downgrade from Thomas Weisel and negative comments from Piper Jaffray. Competition and the potential of falling unit sales in the second half of 2006 were the primary reasons behind the concerns. Trident has also been caught up in the options back-dating scandal.

But, perhaps Trident has take too much of a beating in a falling stock market that takes any bad news badly.

Trident has been a grrowth engine. For its fiscal year ending June 30, 2005, Trident's revenue rose 31% to $69 million. Revenue for the June 30, 2005 quarter was $20.9 million and the company had an operating loss of $6.6 million. By the December 31, 2005 quarter revenue had nearly doubled from June to $40.6 million and operating profit hit $7.7 million. In the March 2006 quarter, revenue rose to $44.7 million and operating profit jumped to $8.6 million.

Trident has lost half of its market cap since April, although there is no evidence that the company is in trouble. Is there a chance that its business is slowing? Yes, but the final word will not be in on details of the company's growth until it announces the June 2006 quarter. What is obvious is that a stock that traded at over $31 less than three months ago is now at $16.20.

Trident's market cap is now $925 million for a company that will probably have revenue of over $210 million for the next fiscal year meaning that it trades at a little more than 4 times sales. The company also has $135 million of cash and short-term investments and no debt.

Trident's stock is down too far.

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

Watching Stem Cell Stocks

Stock Tickers: ASTM, GERN, STEM, VIAC, ACTC, IVGN

While this week is an off week for Congress, there is an ongoing controversial situation to watch that can impact several stocks. There is a "possibility" that there will be three different stem cell research bills as soon as next week, that includes a measure already passed in the House of Representatives that would allow federal funds to be granted for embryonic stem cell research (with limitations of course).

This is not representing a wholesale granting of monies over all sorts of embryonic stem cell research, although you can bet it will stir controversy either way. These grants would be regarding "Donated" frozen embryos from in-vitro fertilization procedures and those materials that are slated to be destroyed at fertility clinics. One other measure would BAN fetus farming and one measure would allocate potential federal funding for stem cell research for stem cells taken from other human material outside of embryos.

Keep in mind that delays can and do often occur in congressional hearings and initiatives, and we have a lot of calendar between now and then. The stocks that have historically had the most exposure to stem cell research backing are the following: Aastrom Bio (ASTM), Geron (GERN), StemCells (STEM), ViaCell (VIAC), Thermogenesis (KOOL) and Advanced Cell Technology Inc. (ACTC-OTC); Invitrogen (IVGN) has also been recently lumped in after a deal with Geron.

Some of these names appear to be up pre-market today after Geron (GERN) presented new data documenting progress in therapeutical development of products from human embryonic stem cells, so the names are likely not up solely because of congressional hopes.

Pre-market: Geron (GERN) is up 1.45% to $6.94; StemCells (STEM) is up 1% at $1.98.

Leaders from both parties agreed last week to schedule a vote on a package of bills that would loosen President Bush's 5-year-old restrictions on human embryonic stem-cell research. Head counts in reports suggest that there may be enough votes to pass the legislation, and Bush has reportedly promised a Veto. This sets the stage for what could be the first real showdown between Congress and the president. This development, if passed, would also allow the US companies and institutions involved in stem cell research to potentially regain some lost ground to European and Asian countries and organizations that do not have embryonic stem cell bans in place.

Jon C. Ogg
July 5, 2006

Pre-Market Notes (July 5, 2006)

S&P FAIR VALUE +$1.19.

(AAPL) Apple down 0.5% pre-market as it is still facing monopoly charges for iTunes in France according to Washington post.
(ACTG) Acacia Research licenses resource scheduling technology to GE.
(ATNI) Atlantic Tele-Network Inc. filed to sell 3.6M shares of common stock; 2.4M are from the company itself and 1.2M are from Chairman (who is former CEO); stock down 0.5% pre-market.
(CBH) Commerce Bank noted somewhat cautiously in WSJ.
(CCMP) Cabot Micro acquired certain slurry patents from IBM.
(CDV) CD&L gets $3.00 buyout from Velocity Express; stock up 75% pre-market.
(CHTR) Charter Communications up 10% pre-market on Citigroup upgrade.
(CME) Chicago Mercantile to acquire Swapstream for total of $15 million.
(DOVP) DOV Pharma CEO resigned.
(DQE) Duquesne Light Holdings gets a 21% premium buyout offer from a Macquarie-Led Consortium equalling $20.00 per share.
(EGHT) 8X8 sends letter to ease shareholders over recent officer resignation.
(GM) GM's sales were down 25+% in June.
(LF) LeapFrog names Jeffrey Katz as CEO effective immediately.
(MCX) MC Shipping acquired 2 additional tankers for tansporting LPG.
(MERQ) Mercury Interactive directors get SEC WELLS NOTICE over stock options inquiry (Monday).
(MRVL) Marvell gets inquiry over stock options.
(NABI) NABI Bio is working on smoking vaccine according to NYTimes.
(NGRU) NetGuru received a Going Concern note from auditors disclosed over 4th of July time period.
(ORCH) Orchid Cellmark CFO has resigned.
(QSFT) Quest Software will restate earnings aspart of its internal options investigation from 1999 to 2002.
(RTN) Raytheon stock up 1.75% pre-market on North Korean Missile tests as they are the primary beneficiary of US missile defense program.
(TMIC) Trend Micro's CEO may be wrapped up in an SEC action that involved her husband who was a co-head of SINA.
(UVN) Univision up 0.25% pre-market on disclosure of Televisa's 11+% stake and preparation for sale of shares.
(WAG) Walgreens June s-s-s +9%.
(WTSLA) Wet Seal announced an SEC inquiry has ended with a recommendation of No Action; stock up 4% pre-market.
(YHOO) Yahoo! faces its own lawsuit from music labels according to reports.
(ZRAN) Zoran gets grand jury subpoena over stock options.

ANALYST CALLS:
AAP maintained Buy at Goldman Sachs.
ABY raised to Buy at UBS.
ADO raised to Buy at UBS.
AMD and INTC estimates cut at UBS.
ATHR cut to Hold at Jefferies.
BRC started as Outperform at Wachovia.
BSX cut to Mkt Perform at JMP Securities.
CCRT cut to Mkt Perform at Wachovia.
CENT reitr Outperform at JPMorgan.
CHKP cut to Hold at Deutsche Bank.
CHTR raised to Buy at Citigroup; stock up 10% pre-market.
DNDN raised to Buy at JMP Securities.
ECLP raised to Buy at First Albany.
EGY cut to Underperform at Jefferies.
ELE cut to Neutral at CSFB.
FIA cut to Sell at Merrill Lynch.
HOFF started as Buy at Jefferies.
LLY tgt raised to $67 at Goldman Sachs.
MA started as Overweight at Cowen; started as Buy at Citigroup; started as Overweight at Prudential.
MGA raised to Buy at UBS.
MHP raised to Buy atr Citigroup.
MWA started as Overweight at MSDW; started as Equal Weight at Lehman.
ORCL reitr Outperform at Cowen (Monday call).
T raised to Buy at B of A.
TEVA reitr Overweight at Lehman.
TRLG started as Outperform at CIBC.
VG started as Mkt Perform at Piper Jaffray; started as Neutral at UBS; started as Hold at Citigroup.
VOD raised to Buy at Deutsche Bank.
YHOO lowered estimates at Soleil.

10:00 AM EST MAY Factory Orders.
Casinos in New Jersey are reportedly closing down over a statewide tax negotiation that failed to be resolved.

Cramer Revisited Defense Stocks (Re-Cap of 7/3/06)

Cramer revisited Defense stocks Monday.

Summary: Negative on GD; Positive on ALOG, NICE, OSIS, VISG, AXYS, EDO.

"There's a lot of money to be made in security stocks and military stocks." But he also noted, "I can't honestly tell you that the security game is in bull mode, but I can tell you that when the bull comes back, you'll want a shopping list of great security and defense companies."

Even though he likes the stock, he wouldn't buy General Dynamics (GD) with the stock down about 7% since he recommended it in April.

He discussed Analogic (ALOG) as a cheap stock that is down about 25% since he recommended it in March; and then said Nice Systems (NICE) is a way to be aggressive in the sector.

Cramer noted that Osi Systems (OSIS) is worth looking into as well.

Cramer looked at Viisage (VISG) as a name he still believes in, even though it is off big since his first recommendation.

Cramer finished the show discussing Axsys (AXYS) and EDO Corp (EDO) as long-term positives that will run when the sector comes back in favor.

The Exporting Of GM

Fans of GM's independence and the current plan to turn the company around received two blows in as many days, at least on the surface. The boards of Renault and Nissan said they would be open to forming a three way alliance with world's largest automaker, a move that could concentrate enough shares with the foreign automakers and Kirk Kerkorian to give the group effective control of GM.

Renault and Nissan may buy as much as 30% of GM as a part of the global triumvirate, which would put as much as $7 billion in cash into GM's coffers. The press has pointed out that alliances between US car company's and their overseas counterparts have faltered before, but the temptation of the large cash influx is likely to at least turn the head of GM's board.

The other news that threatens the turnaround of the car giant is its drop in June U.S. sales. Units sold dropped 26% to 407,722 and market share was only 27.2%. Making new news worse, sale of Toyota's for the same period rose 14.9% to 223,019.

The press was also filled with stories about how much the Renault and Nissan share prices have risen over the last few years, compared with the drop in GM's market capitalization.

GM's huge problems could be the largest stumbling block a for both the Renault and Nissan board, who, as fiduciaries for their public investors are faced with answering the question about how they would run GM differently. GM's negotiations with the UAW in 2007 may well decide the fate of the company. If the automaker has billions more in cash on its balance sheet, management loses much of its leverage for concessions.

The largest problem, however, may be GM's dropping units sales. The company argues, with some good reason, the sales figures for the summer of 2005 were high due to incentives that cut into the profits on most of the vehicles that they sold during the period. Even with this explanation, it is hard to rationalize a drop of 143,000 unit sales in June while Toyota added 29,000 units during the same period.

Another critical issue is where the sales are being lost. The evidence is now fairly clear that gas prices are cutting into the sales of pick-up and SUVs which were once large profit producers, especially for GM and Ford. In June, sales of the GM Chevy Silverado dropped over 46%. The company's GMC Sierra sales were off 47% and the company sold 34% fewer Chevy Trailblazers than it did a year ago.

The investment by Renault and Nissan is still a long shot, very long. The GM board is unlikely to abandon the turnaround plan that it has publicly endorsed and hand effective control to Kerkorian, Nissan and Renault. And, the two overseas car companies are not likely to walk into the hornet's nest of GM's falling sales and labor problems. It makes good headdlines, but it is a hard a sell for the shareholders of Renault and Nissan because it has too much chance of undermining all of the progress both companies have made by dragging them into GM's problems.

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

CNET's Value Proposition

There are very few companies with business models as close together as those of
CNET and TheStreet.com. Both are essentially networks of online publications with
revenues from advertising, subscriptions, and license fees. Both have had solid
revenue growth over the last couple of years. The market has not liked the fact
the CNET has guided that its 2006 revenue will be slower than anticipated. But,
it first quarter numbers were still up 17% to $84.3 million from the same period
a year ago. The company expects revenue of $88.5 million to $92 million in Q2
2006 last year the topline was $80.4 million.

CNET has an operating loss of $1.5 million in Q1. It forecasts a modest operating
profit of as much as $4.4 million in Q2.

CNET's business, then, appears relatively healthy and growing at a rate of about
15% year-over-year. It is also profitable in most quarters.

TheStreet.com has much lower revenue that CNET, but is growing faster, at least
for the time being. Revenue in the first quarter rose 43% to $11.1 million. Operating
profit hit $2.3 million.

TheStreet.com has a great deal of competition. MarketWatch. WSJ.com. Reuters.
The Motley Fool. The New York Times business section.

CNET would appear to have many fewer direct competitors. There are some well-
read online blogs on technology. The New York Times and BBC have tech sections,
but they are hardly as well-read as CNET, and the depth of the product reviews
the company provides is so broad that it does not really have competition.

The valuations of TheStreet.com is radically different, which opens the question of
whether one is overvalued or the other undervalued.

CNET trades at 3.2 times revenues according to YahooFinance! The company has a forward
PE of 26. The Street.com trades at 9.4 times revenue and has a forward PE of 21. CNET,
at $8.17 trades near its 52-week low and TheStreet.com, at $12.78 trades very near its
52-week high.

The market is likely to reconcile this kind of disparity over time, but its is likely that CNET's
shares will be viewed as undervalued over the course of the coming months, especially
if the company has a respectable Q2.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not
own securities in companies he writes about. He is a former board member of
TheStreet.com.

Microsoft's Augean Stables

Foreign antitrust regulators may due more to damage Microsoft's business that the
delayed release of its products or the migration of some of its most talented people
to competitors like Google.

The highest court in South Korea upheld a ruling that Microsoft must offer new
versions of its operating system and server software because the Korean Fair
Trade Commission said that Microsoft was abusing its dominant position
in the market to bundle its own software products like the Windows Media
Player to the exclusion of competing products.

On the other side of the world, all 25 members of the European Union have voted
that Microsoft is not in compliance with the 2004 sanctions based on the company's
anticompetitive behavior. The next step may be that Microsoft will be fined $2.5 million a day until it is in compliance.

Microsoft's stock, trading below $24, is priced about where it was in mid-2002.
The litany of problems at the company have been complicated by the late release
of key products and lack of profit growth at units outside the core operating system
and server software units. These are problems that can at least be addressed
internally by the company. The troubles in Europe and Korea, which could spread,
are one that Microsoft has been ill-equiped to handle. Perhaps this is because
the model for adding new software features to Microsoft's products is based on
the principle of bundling new products with the company's widely distributed OS.
Without this base, many new Microsoft products might be still-born. They would
at least have to face the expensive and painstaking competition that most other
software companies deal with every day.

Microsoft's slowing growth and lack of new products are successful is compounded
by government activism that is increasingly aimed at some of the software company's
core marketing strategies.


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

European Stock Market Report 7/5/2006

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

Markets in Europe are off in early trading at 5.45 New York time.

The FTSE is off .6% to 5,646. Barclays is up .1% to 622.5. BP is off .6% to 629.5. British Air is off .4% to 345.5. BT is .9% to 238.5. GlaxoSmithKline is off .4% to 1500. Prudential is off .9% to 607.5. Reuters is off .9% to 379. Unilever is off .9% to 1213. Vodafone is flat at 119.

The DAXX is off .7% to 5,687. Allianz is off .9% to 123.56. Bayer is off 1% to 36.13. DaimlerChrysler is off .5% to 38.31. DeutscheBank is off 1.3% to 87.66. Deutsche Telekom is up .2% to 12.68. SAP is off .8% to 165.3. Siemens is off .9% to 165.3.

The CAC 40 is off .7% to 4,950. Alcatel is off 1% to 9.95. AXA is off .5% to 26. France Telecom is off .1% to 17.02. ST Micro is off .5% to 12.75. Renault is off 1.6% to 81.35. Thomson is off .5% to 12.93. Vivendi is off .2% to 27.22.

Douglas A. McIntyre

Stock Upgrades to consider- CTXS, C, BA, DNA, GOOG, RIMM & SBUX

By Yaser Anwar, CSC of Equity Investment Ideas

Citrix Systems "outperform" target price raisedAnalysts at RBC Capital Markets reiterate their "outperform" rating on Citrix Systems Inc (CTXS), while raising their estimates for the company. The target price has been raised from $44 to $46.In a research note published this morning, the analysts mention that the company is likely to outperform its 2Q revenue and EPS guidance. Recent checks indicate that several large deals are being signed in the healthcare, government and financial sectors, the analysts say. Citrix Systems' performance in Europe has been healthy so far in the quarter, RBC Capital Markets adds. The EPS estimates for 2006 and 2007 have been raised from $1.36 to $1.38 and from $1.52 to $1.60, respectively.

Citigroup "overweight"- Analyst Michael L Mayo of Prudential Financial maintains his "overweight" rating on Citigroup Inc (C). The target price is set to $60.In a research note published yesterday, the analyst mentions that the company’s stock has outperformed Prudential's Citigroup Proxy Index through June 28. Proxy categories have delivered another weak month in June, with results adversely impacted by poor results from Asia, Latin America, and Western Europe and in investment banking, US consumer banking and credit cards, the analyst says. The company appears on track to outperform the Proxy for the fourth month, Prudential Financial adds.

Boeing "overweight"- Analyst Byron Callan of Prudential Financial reiterates his "overweight" rating on Boeing Co (BA). The target price is set to $92.In a research note published yesterday, the analyst mentions that the company would be taking a charge of about $615 million related to its tentative legal settlement with the US government. Boeing would also record a charge of $300-$500 million related to an increase in costs for an airborne surveillance programme, the analyst says. Prudential Financial expects the margins and market share of the company’s Commercial Airplane division to expand going forward.

Genentech "buy"- Analysts at Lazard Capital maintain their "buy" rating on Genentech Inc (DNA). The target price is set to $113.In a research note published yesterday, the analysts mention that Avastin and Herceptin sales are progressing ahead of the 2Q estimates. IMS has reported Herceptin sales of $103.2 million in May itself, ahead of the $294.9 million US sales estimate for 2Q. IMS has posted sales of $129.3 million for Avastin, ahead of the $475.2 million US sales estimate for 2Q.

Google "overweight"- Analyst Mark J Rowen of Prudential Financial maintains his "overweight" rating on Google Inc (GOOG). The target price is set to $500.In a research note published yesterday, the analyst mentions that the company has launched Checkout, a payment processing service that is easy to use and is well integrated with the merchant checkout process. Google is offering as much as a 20% discount on search advertising in order to boost market acceptance of the Checkout service, Prudential Financial adds. Checkout is unlikely to significantly affect eBay's Paypal service in the near term, the analyst says.

Research in Motion "buy"- Analysts at UBS reiterate their "buy" rating on Research in Motion Limited (RIMM). The target price is set to $110.In a research note published this morning, the analysts mention that the company has reported robust F1Q revenues and EPS, ahead of the estimates and the consensus. The upside was driven by better-than-anticipated hardware revenues from higher-than-expected hardware ASPs due to healthy hardware upgrade demand and a favourable product mix, the analysts say.

Starbucks "buy"- Analyst Dan Geiman of McAdams Wright Ragen maintains his "buy" rating on Starbucks Corp (SBUX). The 12-month target price is set to $44.In a research note published yesterday, the analyst mentions that the company is likely to report its June comparable store sales growth at 7%-8%. The main drivers of this growth are likely to have been robust sales in the seasonal and core espresso beverage division and the continued expansion of Starbucks’ food programme, the analyst says.

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

Freddie Mac- Continuing Progress

Stocks: (FRE)(FNM)

From Value Discipline

Freddie Mac released its annual report a couple of days ago with the title "Continuing Progress."

Though Washington seems to be abuzz with anti-Fannie (FNM) and Freddie rhetoric as Washington prepares for the summer, it occurs to me that these franchises, and especially Freddie's are discounting the worst that regulators can throw at them.

Freddie (FRE) addresses its challenges rather forthrightly in its annual. Remember, the accounting sins of FRE were related to under-reporting of earnings not over-statement of earnings. This was a case of holding reported earnings back for a rainy day rather than trumpeting success that was not there. An accounting sin, but more venial than mortal as accounting misrepresentation goes.

The company continues to address some Sarbanes-Oxley shortcomings....internal controls still need some work in financial reporting. The weaknesses are not credit or derivatives related. The internal controls weaknesses are being addressed.

Portfolio limits which have been imposed and accepted by Fannie have been asked for by OFHEO of Freddie, as the annual puts it, "Limitations on our portfolio activities for some period of time."

Derivatives exposure is down considerably at only $225 million in net exposure versus a gross notional exposure of $683 billion. The market value of derivatives which was $15 billion at the end of 2004 is down to $6.5 billion.

The 30% of capital requirement for surplus is comfortably exceeded. Freddie has core capital of about $36 billion or about $3.5 billion more than the 30% requirement entails.

The credit risk in the mortgage portfolio is low. For 2005, 87% of its business had loan to value ratios below 80% and 21% were below 60%. The credit scores for the borrowers were also more than satisfactory...only 4% had FICO's below 620 and 64% had FICO's over 700.

What happens if Fannie and Freddie are constrained in their portfolio purchases? From an investor viewpoint, at least this one's, I suspect nothing. I believe that the current valuation for FRE already suggests a zero growth assumption for mortgage growth. Even with zero growth, my guess is a valuation of $70-75.

If Congress blesses some growth in the portfolio, this provides upside to my valuation estimate.

A vindictive Congress had better be careful with an unwinding and a downsizing of the two biggest players in this marketplace. Banks are counterparties on many derivative exposures for both FNM and FRE. Significant amounts of the banking system's core capital is exposed to Fannie and Freddie paper. So pulling the plug has adverse consequences for the banking system in total.

Even though the political climate could well become more adverse as November approaches, the low valuation of FRE and its "innocence" at least relative to the mis-deeds of FNM, seems under-appreciated. In the interim, the large banks have been buying mortgages at a much faster pace than the GSE's. The constraints on FNM and FRE have been a benefit to BAC, WB, and WFC.

But in my opinion, the valuation of the portfolio even without growth favors FRE as an investment.

Disclaimer: I, my family, and most clients currently have a position in FRE. Neith I, my family, or clients have a current position in FNM, or WB. Neither I, nor my family have a position in WFC though certain clients do own a current position.

www.valuediscipline.blogspot.com

Turnarounds and Value Investing

Stocks: (WMT)(WON)(BRK-A)

It's been great to take a few days off of work, a few days off of blogging! No doubt, fatigue sets in, ideas tend to get outworn or musty, and the bedraggled routine of everyday thinking needs to be revamped. Readers need a break from my mental meanderings as well!I am very fortunate...I truly love my work largely because it is my own work. As Mark Twain observed, "Cursed is the man who has found some other man's work and cannot lose it." That's one of the best aspects of the investment management business, whether you are pursuing it professionally or for your personal gains...everyone can have their own style of investing. If it represents a discipline that you can formulate and follow, then it has a chance of success.

Otherwise, investment management becomes random shots at stocks, a scattergun approach to the market.One of my mentors used to counsel me, "If you don't know where you are going, any road will do."Find a discipline that will work for you and that you can be comfortable with. It might not be value investing, the discipline that I follow...and that is perfectly okay! One of my former partners, though he described himself as a value investor, was really more of a technician. He would seek opportunities in cyclical stocks based on charts. His fundamental judgments in non-cyclical stocks were peculiar and rarely rationally based. At least, I couldn't find the rationale. Yet, time and time again, with his particular knowledge of the paper and forest products sector, he could find bargains largely based on charting. Bill of Absolutely No DooDahs has impressed me greatly with the uniqueness of his thinking that combines fundamentals with statistical probabilities and technical analysis...a very broadly based point of view.

This weekend, I've been asking myself. "Can a Buffetteer be involved in a turnaround stock?" If we take a pure Joel Greenblatt approach (of 'Little Book" fame), it seems the answer is no. Such companies will not meet the return on invested capital hurdle that Greenblatt requires, at least not for the most recent TTM period. Yet, when we examine some of the companies that Buffett has purchased, there are turnaround characteristics present...most recently Russell Corp. which has a return on capital of barely 2% for the TTM. An excellent research piece by Jaison Blair of Rochdale Research which was recently published, clarifies what is needed to "Find Good Businesses When They Go on Sale."

Reversion Toward the Mean- Is current profitability below historical levels? Does the company have a sustainable competitive advantage that is distorted by temporary factors? For example, in WalMart (WMT) have high energy prices permanently affected its target audience?

Depressed Valuation Relative to Normalized Profitability- Plugging in numbers that assume some restoration of profitability, whether based on margins, or return on capital, should result in a bargain price. Evaluating what we know relating to historical performance, industry structure and margins, as well as management's plans should help us assess where profitability ought to be...and what the resultant valuation becomes. For example, many value investors (myself included) have positions in media stocks that look very cheap relative to historical norms. Westwood One (WON) sells at 10.7 times trailing earnings, an all-time low relative to its ten year history; it sells at book value, again unprecedently cheap; it sells at less than 9 times cash flow, agin, not seen in its prior history. But return on capital in the most recent year is down about 2% from its peak of four years ago...what is normalized profitability for this business?

Conviction that the Situation is Temporary- Clearly, if we believe that an industry's fundamentals have undergone a permanent shift downward, historical numbers have no place in our analysis. Accept the reality and model this in your work. For example, I do not believe that terrestrial radio is finished as a business, nor do I believe that returns on invested capital will be permanently stuck at these levels.

Does Management's Plan to Restore the Business Make Sense?- Is the plan sensible, and do we believe that management can execute based on historical performance and industry conditions?

Financial Strength to Weather the Storm- Respect the downside. Is there sufficient balance sheet strength to survive a war, let alone a battle, or is there potential for resource conversion such as sales of assets or subsidiary businesses that could bolster the balance sheet if the turnaround falters? Is there evidence of debt being paid down or improvement in working capital management?

The absolute ideal investment is buying something that is great at a fair price. "Iscar" was such an investment for Berkshire. But, leave room in your thinking for the Russell's of this world...for the currently downtrodden, but only temporarily flawed business. Being involved in something that has a little hair on it can be highly profitable. Importantly though, I do not believe that assessing a turnaround allows much flexibility in the above criteria. I think having just four of the five criteria met is not good enough! You really need all five. A depressed price relative to "Normal" profitability is great but if there is no plan to restore profitability from a credible management team, what have you got? The answer...a permanently depressed stock. As I like to say, "Presents excellent value, and likely to stay there." If there is no balance sheet to count on, tomorrow may never come.

Turnarounds can be tricky. They invariably take longer than you expect. Having too much exposure to a turnaround strategy will subject you to perhaps more risk than you anticipate despite having what at least superficially appears to be a diversified portfolio. Given the vagaries of markets and the short term sensitivity of many players, an ill-timed turnaround can play havoc with your results.

But don't exclude turnarounds from your investment strategy. Excellence is rarely priced cheaply. When it is, jump on it. Great companies which are fairly priced, provided they can maintain their competitive advantage and consequently, their "greatness" are where most of your portfolio should reside.

Finally, a few turnaround candidates can provide outstanding returns when they work, and annoyance and disappointment as they "just sit there." Or worse. But the rewards more than compensate for the risk when the above criteria are followed.

Disclaimer: I, my family, and most clients have a current position in Berkshire Hathaway. I, my family, and most clients have a current position in Westwood One and are patiently awaiting the turnaround!

http://valuediscipline.blogspot.com/

On Google’s Non-Search Products

Stocks: (MSFT)(GOOG)

By Geoff Gannon of GannonOnInvesting

Business Week has a good article about Google’s non-search products. Entitled “So Much Fanfare, So Few Hits”, the article makes a few obvious points that are often omitted in a discussion of Google’s innovation. The most obvious point is, of course, that these products have not exactly been great successes.

The press (both online and offline) is obsessed with Google (GOOG). An interesting exercise would be to clip the press coverage (or speculation) surrounding the launch of a new Google product and compare it to that product’s performance some months later. I’m afraid this exercise would prove the reality did not live up to the hype. Of course, most of this is not Google’s fault. It isn’t that these products fail miserably. In many cases, they are simply competent products that offer little advantage over the existing alternatives. So, Google moves on.

As one person interviewed for the article put it: “Google has product ADD”. I’m not sure if that’s true or not. The fact that Google develops these non-search products does not in and of itself suggest anything dangerous about Google’s future spending and the efficiency with which its capital is deployed outside of the core search business.

After all, these products are really little more than ideas. Has the company really put much behind any of them? That’s a more interesting question. It also happens to be one of the most important questions for investors to answer.

This Google article reminded me of a blog post on Microsoft I had found via Seeking Alpha. This blog post had one very memorable line: Name six innovations from Microsoft over the past 12 months.

That line jumped out at me, because I’m not eager to invest in a company where you can name six innovations over the past 12 months. No company develops six truly meaningful innovations in a year. The issue is not the number of innovations. It’s finding one that really works.

Both Microsoft (MSFT) and Google had the bad luck to develop a unique cash cow in their early years. As a result, both companies will inevitably have to face accusations of mediocrity in their future endeavors.

Microsoft’s Windows (and by extension Office) and Google’s search are once in a lifetime finds in an otherwise unforgiving competitive environment. These oases of extraordinary profitability can not be duplicated. So, if your reason for buying into either stock is an expectation that future products will rival past products in terms of profitability, you are on a fool’s errand. There will be growth within each franchise and there will be other (lesser) franchises. But, neither company will duplicate their initial success.

The reason they won’t has nothing to do with size or culture. It’s much simpler than that. Both companies were marketed to investors as a great franchise. There aren’t many such franchises and the odds that two such franchises would be developed by the same company are extremely low. Most of the best businesses (not the biggest, but the best) learn to do one thing very well – and then do that one thing over and over again, year after year.

Google should be able to move into other businesses beyond search – and should be able to do so profitably. That isn’t the problem. Right now, the problem is the expectation that Google will have many successes. It won’t. Usually, there’s no reason why Google will be any more successful than the established players in a particular niche. Obviously, Google’s ventures have the benefit of free publicity. Unfortunately, the benefits from such publicity multiply with the differentiation of the product – and so far, that is an area in which some of Google’s innovations have been lacking.

One Google product I really like is Google Finance. This is the kind of product that would seem to have a lot of revenue potential if developed with that end in mind. I wrote a review of Google Finance when it launched.

I hope Google Finance isn’t suffering from neglect. There are still many improvements needed and I wouldn’t mind seeing Google spend a little more time improving existing non-search products and a little less time developing new ones.

Finally, getting back to the question of what Microsoft has done lately, they did come out with the Xbox 360. Although I don’t like the economics of the console market, I do like the economics of the game market. Microsoft's console may provide a beachhead in that market (actually the original Xbox already provided such a beachhead).

We’ll have to wait to see how this round of consoles plays out. However, I already have to admit Microsoft’s progress in the console business has been a lot faster than I expected prior to the launch of the original Xbox.

It’s also worth noting that, despite the greater press coverage given to Microsoft’s Vista woes, Sony’s problems with the PS3 are a lot more meaningful. People have to wait for Vista. They don’t have to wait for the PS3 – and they certainly don’t have to pay up. After all, a game console is no more than a platform. Prohibitive pricing will exclude some younger gamers from buying the PS3, which obviously doesn’t bode well longer term.

My point is simply that I would value Microsoft’s single innovation over Google’s entire assortment. To be fair, the one hit is what matters. Many misses are not really a bad omen. But, they certainly don’t warrant all the hype.


www.gannononinvesting.com

Media Digest 7/5/2006

Stocks: (GM)(DCX)(MSFT)(SNE)(SBUX)(FAL)(N)(PD)(FNM)(FRE)

The Financial Times writes that the CEO of Renault and Nissan, Carlos Ghosn, will meet with the head of GM later this month to discuss a partnership among the three companies.

According to Reuters, the CEO of DaimlerChrysler said that savings in auto company partnerships are hard to come by warning against optimism about the potential partnership between GM and Renault and Nissan.

Reuters reports that Bertelsmann is considering selling part of its stake in music company Sony BMG.

Reuters reports that Starbucks Japan will open another 100 stores.

The Wall Street Journal reports that Nissan investors showed concerns about a possible partnership with GM and a French government official did the same. The French government owns a large stake in Renault.

WSJ said that GM sales in China were up. GM sales in that country rose 47% in the first half of the year and the auto makers share of the market rose to 12.5%.

WSJ writes that the head regulator of Fannie Mae and Freddie Mac expressed the opinion that the companies should keep the ability to prop up the mortgage markets in times of trouble.

The WSJ reports that Telstra, the Australian phone company wants that country's government to go ahead with a sale of its stake in the company, preferably to retail investors.

The New York Times reports that regulators in Canada and the EU may slow down the acquisition of Falconbridge by Inco. The combines company will be purchased by Phelps Dodge.

NYT reports that Microsoft is running out of space to house employees at its headquarters outside Seattle. The company plans to add 12,000 employess.

Douglas A. McIntyre

Asia Markets 7/5//2006

Stocks: (FUJ)(HIT))(HMC)(NIPNY)(NTT)(DCM)(SNE)(TM)(HBC)(PCW)(CHL)(CN)

Asian markets fell sharply as North Korea completed it first long range missile test.

The Nikkei was off .7% to 15,524. Casio was off 2.1% to 2155. Diawa Securities was off 1% to 1429. Fuji Photo was flat at 3830. Hitachi was up .4% to 766. Honda was down 2.2% to 3600. Mazda was off 2.1% to 752. NEC was off 1.8% to 617. NTT was up .9% to 556000. Docomo was up .6% to 171000. Nissan was off 1.9% to 1239. Sharp was off 1.5% to 1809. Softbank was off 1.3% to 2655. Sony was off .8% to 5060. Toshiba wsa up .8% to 761. Toyota was down 1.2% to 5940.

The Hang Seng was off .5% to 16,291. China Mobile was off .7% to 44.45. China Netcom was off 4.2% to 13.6. HSBC was flat at 136. Lenovo was down 1% to 2.5. PCCW was down .9% to 5.55.

The KOPSI was off .5% to 1,280.

The Straits Times Index was off .8% to 2,430.

The Shanghai Composite was up 2.2% to 1,719.

Douglas A. McIntyre

Barron's Digest July 3, 2006 Issue

Stocks: (NEW)(SI)(GE)(LPL)(BAY)(ACV)(C)(BAC)(HBC)(WFC)(WB)(EMC)(RSAS)

Barron's writes that Newmont Mining has been hurt by the gold's price, but the $23 billion market cap company is doing well. It has prime properties, good management, and a solid balance sheet. While gold itself is up 14% this year, Newmont's stock is down 2%. This may be an investing opportunity. In the past, one of the issues investors have had with the company is rising costs. But, the management insists that this has leveled off. The company also owns valuable stakes in companies like Canadian Oil Sands.

Barron's writes that Siemen's purchase of Bayer's medical unit may have been a smart deal. The company has the chance to combine this with its diagnostics products business to build revene and compete with GE and Philips. With moves into this kind of business Siemens may be viewed less as a conglomerate, which tends to carry a discount in the stock market.

Alberto-Culver is spinning off its 3,200 beauty supply stores. The stock now trades at an 11% discount to the personal-products industry. Many analysts think that the value of Alberto-Culver and the stock spin-off is greater than where the stock trades now.

Barron's also reports that Citigroup has not performed as well as its peers. Over the last five years, the stock is down 1%. Bank of America is up 62% for the same period. Wachovia is up 56%. Wells Fargo is up 46% and HSBC is up 47%. Citi is doing well in several areas. Its overseas consumer bank business grew 8% in the first quarter and profits from that operation were up 21%. International corporate and investment banking revenue rose 23% for the period and profits rose 80%. Citi's CEO has said that his goal is to have mid-to-high single digit "organic growth" and sees "organic revenue growth" rising faster. Citi also has a 4% yield now. If the market begins to catch on to Citi's success, the stock could from its current price around 49 to above $60.

Barron;'s writes that EMC's purchase of RSA Security could pay off because network security has become important for corporate clients. However, this move will put the company in direct competition with Network Appliance, Hewlett-Packard and IBM, which has been pushing the EMC stock lower.

Douglas A. McIntyre

As Second Quarter Ends, IPO Market Heats Up

By Chad Brand of The Peridot Capitalist

Investors had a tough second quarter as the S&P 500 closed June up a mere 1.8% for the year. Unlike prior periods, where the IPO calendar slows dramatically in dicey markets, we have actually seen a pickup in IPO activity in recent weeks. Why the sudden interest?

With the average stock not doing much of anything, investors seem to be looking anywhere for places to make money. New offerings, whether well-known consumer brands like J Crew or Mastercard, or much hyped enthanol plays like VeraSun and Aventine, offer the potential for a quick payoff, something that has been lacking for several months in the market.

The retail investor seems to be jumping in with both feet to the IPO market, which I would use as an indication that it's time to tred carefully. Despite lackluster financials, small investors jumped all over the J Crew deal, causing a huge spike. On a valuation basis though, the stock does not appear cheap. The ethanol plays are also expensive, with the Aventine deal actually dropping more than 10% on its first day of trading last week.

History has shown that IPOs are some of the worst investments around. Just think about why this is likely the case. Companies don't sell shares to the public unless they think they can get a great price. Why are ethanol companies going public now, even though oil prices have been high for a fairly long time? Perhaps they are sensing that speculative interest in the industry is at elevated levels and they want to take advantage of that.

The fact that many deals, including J Crew, are being brought to market by private equity firms is another red flag. These buyout firms bought companies years ago when prices were depressed. Now the so-called "smart money" is selling their stakes to the retail investor via IPOs. Which side of that trade do you think is going to come out on top?

Of course there will be exceptions, but I would caution investors to be careful when venturing into the IPO market. There is a reason why someone has decided this is the right time to sell. With initial public offerings having been relatively poor investments over time, make sure you pay attention to the stock's valuation, not just what company you are dealing with.

http://peridotcapital.blogspot.com/

Consumer Staples breakout has staying power

By Yaser Anwar, CSC of Equity Investment Ideas

# It was highlighted that the growth in shipments of consumer staples goods were likely to outperform overall manufacturing shipments.

# Such a development would provide the earnings catalyst that has been lacking during each of the failed breakout attempts in consumer staples stocks over the past several years.

# The boom in global economic growth caused consumer staples shipments to underperform, leading to a sharp drop in relative earnings growth estimates for the sector.

# As a result, rally attempts never garnered broad-based investor support. Now, with the Fed moving into overshoot territory, the ingredients for a marked slowdown in U.S. output growth exist, which means that at least a partial reversal of the profit conditions of the past few years should develop.

# Thus, in relative terms, analyst earnings estimates are poised for a sharp re-rating which should attract sustained buying interest.

# Even the pricey consumer staples subcomponents are on track to outperform.

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

Has The Fed Finished?

By Yaser Anwar of Stock Market Beat


* Uncertainty about Fed policy will persist for several more months, but investors betting on the odds of a pause in August, in my opinion, will be disappointed .

* The Fed's post meeting statement acknowledged that the economy has softened, but the Fed remains concerned about inflation.

* Future actions will still depend on trends in the data. If it becomes apparent over the summer that housing weakness is spreading into overall consumer spending as some expect, then the odds will favor a pause at the August meeting.

* However, the Fed would continue to leave its options open, so market fears would not be totally calmed.

* Even if the tightening cycle has now ended, this may not become totally apparent before the fall, so markets will continue to trade nervously for a while.

Source: BCA Research

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

Taking profits in SAY & HITT

By Yaser Anwar, CSC of Equity Investment Ideas

I would like to recommend taking profits in SAY & HITT. I recommended buying Satyam Computer (SAY) on June 12th '06, ever since then the stock has rallied more than 13.5% & Hittite Corp (HITT), which i recommended on June 4th '06 has rallied more than 17%.

So it would be prudent to take some profits now. If you bought these stocks when i recommended them in June, i still believe they have a great potential for further gains but with my beliefs that Fed will raise rates in August to 5.50% (which i pointed out back on June 5th '06), it would be good to book some gains & let the rest run.

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

WSJ Europe Update

By Yaser Anwar, CSC of Equity Investment Ideas

Nissan, Renault Boards Approve GM Talks
The boards of Nissan and Renault cleared the way for their CEO, Carlos Ghosn, to pursue an alliance with GM. The moves mark a major step toward the creation of the three-way deal backed by GM investor Kerkorian.

GM's Sales Tumble 26%
GM's June sales fell 26% from year-earlier levels pumped up by heavy discounting. Ford and Chrysler also posted declines amid continued pressure from high gasoline prices and foreign rivals. Toyota's vehicle sales jumped 14%.


Millicom, China Mobile End Talks
Luxembourg's Millicom broke off talks to be acquired by China Mobile after the two couldn't agree on a price. The deal, expected to be valued at more than $5 billion, would have been the biggest foreign acquisition by a Chinese company.


Permira Raises a Buyout Fund of $14 Billion
Permira has raised $14 billion -- collected in just three months -- to create Europe's largest private-equity fund.


Pro-Business Calderon Holds Lead in Mexico
Pro-business conservative Calderon appeared headed to a surprise victory in Mexico's presidential election, but his leftist rival had not conceded. Election officials began a review of the polling results. Mexican stocks surged, with giants Telmex and Cemex up strongly.
• In Focus: Latin America's Leftward Tilt



Former U.S. Solider Charged With Murder
U.S. prosecutors charged an Iraq war veteran with murder and rape in connection with the March killing of an Iraqi woman and members of her family. (Complete coverage)
• Criminal complaint: U.S. v. Green



Maersk Makes a Friendly Offer for Adsteam
Maersk launched a bid to buy Australia's Adsteam Marine for $515 million plus the assumption of debt.


German Leaders Reach Health-Insurance Pact
Germany's Merkel described as a "real breakthrough" the governing coalition's tentative deal on overhauling the health-insurance system.


M-Systems, Redback Disclose Probes
M-Systems is restating results due to stock-option problems. Redback Networks received an informal SEC request for information on its stock-option grant practices, as well as a Justice Department subpoena. Meanwhile, Delta Petroleum said the SEC began an inquiry into its grants.


Nortel Rises on Upgrade
Nortel Networks rose on an analyst's upgrade, while Chinese telecom Qiao Xing climbed on optimistic financial guidance. The Nasdaq finished ahead 0.8% in Monday's abbreviated session.


U.S. Stocks Rally on Fed Hopes
The Dow industrials gained 77.80 points to 11228.02, starting the third quarter with a rally, as a soft manufacturing report raised hopes that the Federal Reserve will stop raising interest rates soon.


Source: WSJ

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

LCD Panel Market Update

Stocks: (SNE)

By William Trent, CFA of Stock Market Beat

LCD-TV panel shipments continued to increase in May despite inventory concerns in Europe, rising 2% on-month and 124% on-year to 3.5 million units, while LCD-panel suppliers switched from shipments by air in April, which targeted World Cup demand, to surface transportation in May, targeting third-quarter demand, according to DisplaySearch.

Sony expects to ship eight million LCD TVs in FY2007

Sony expects to increase its global LCD TV shipments to eight million units in Fiscal 2007, according to Makoto Kogure, president of Sony’s TV Group and company senior vice president.

Kogure indicated that global demand for flat panel TVs is expected to jump significantly in the next few years. By 2008, flat panel TVs will account for 42% of the overall TV market, up from a 32% share in 2007. LCD TV will account for 75% of the flat panel TV market, rising from 52% in 2005, added Kogure.

By fiscal 2007 (April 2007- March 2008), demand for global LCD TVs will reach 80-100 million units, up from 50 million units in fiscal 2006 (April 2006-March 2007), he noted.

In response to recent inventory issues in the LCD TV market, Kogure pointed out that the company has no plans to slow down its schedule for next-generation LCD plant expansion amid strong demand for its own-brand LCD TV business. Sony’s joint venture with Samsung Electronics, S-LCD, expects to enter volume production at its eighth-generation (8G) plant in August 2007, Kogure said.

There is no doubt that demand for flat-panel TVs is growing rapidly. The concern is that supply is growing faster. For example, during the first quarter LCD TV shipments from HANNspree totaled 150,000 units. The Taiwan-based LCD TV maker aims to ship one million units in the fourth quarter.

The excess supply is resulting in faster than normal price reductions, which are being pushed back on suppliers. With large-size panel prices continuing to fall, panel makers have been pressuring key component makers to lower their quotes, causing the component makers to remain cautious about the third quarter. Quotes for LCD key components fell by up to 20% in June since panel makers were aggressive in lowering their costs to better their profitability, according to the Chinese-language Economic Daily News.

http://www.stockmarketbeat.com/

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

EMC and a Changing Security Landscape

Stock Tickers: EMC, RSAS, SYMC, MSFT, HPQ, IBM, CSCO, JNPR, ENTU, ALDN, VDSI, ACTI, BCSI, TMIC, CHKP, MFE

EMC (EMC) is being punished this morning after announcing its acquisition of RSA Security (RSAS). Its shares are down 7% or more, and this puts it at right at the bottom of what looks like a $10.00 to $14.00 trading band that has been in place for about 3-years.

After forming some internal opinions and after browsing over numerous research reports, the reasoning behind this drop would seem to be the price that EMC paid for RSA. It isn't the $28.00 cash, it is the $2.1 Billion. All in all that actually is not overly expensive when you compare the valuation of RSA to others in the data security industry (see DOUG's ARTICLE from yesterday), so this may just be creating another opportunity.

This will take some time for EMC to fully absorb and digest, but it will ultimately round out EMC's product offering. It looks like the street decided that since RSA at the buyout price is about 8.5% of the size of EMC and trades at a higher earnings multiple than EMC, then they should sell EMC off at close to the same rate. No one can give you a bottom tick prediction, but this feels a bit remedial.

This merger also has many industry ramifications. If you consider the marriage of data and storage, it actually endorses the model that Symantec (SYMC) has chosen with its old acquisition of Veritas. That stock was mutilated after it made that transaction and has never been able to recover. Even though this ultimately means more competition for Symantec and the landscape, this deal may make investors revisit the Symantec business model now.

This also puts other smaller security players into play with storage and other hardware providers. Microsoft (MSFT) has long been a quiet outside deal-maker in security, which is no surprise since they are the NO. 1 TARGET for any hacker in the world. Hewlett Packard (HPQ) has been expected to do security deals, as has IBM (IBM). Cisco (CSCO) has done security deals, as has Juniper (JNPR). CNET ran an article long ago discussing the coming trend of consolidation in data security players (LINK HERE).

So, what security companies could be looked at?

Entrust (ENTU) is a name that is being tossed around as a potential target, and it is down 50% from its 52-week highs and has a paltry $190 million market cap that would be easier than breathing for a large company. It doesn't help that Entrust has been losing money, but that could be fixed potentially by a larger parent.

Aladdin Knowledge Systems Ltd. (ALDN) is another name that has been tossed around as a takeover name before. They are based in Tel Aviv, Israel and there have been hopes that someone would acquire them for literally years and years. It has a meager market cap of $287 million and a fairly low P/E multiple of 20.00 and an even lower forward earnings multiple of about 17.35 based on consensus estimates.

VASCO Data Security (VDSI) is another name that has been elusive. It has a lofty earnings valuation with a 40 P/E, but would probably not require a ridiculous premium to acquire and has some valuable digital certificate operations that could easily be integrated into a larger hardware or software vendor's product offerings. It also has a substantial insider ownership, so IF they were convinced that this was the right fit then the deal could happen smoothly.

ActivIdentity Corp. (ACTI) is another name that is up marginally on hopes that they will be more attractive. Unfortunately they are not profitable, have been a poor performer, have had very sporadic revenues, and may need more of a consumer play to take traction.

Blue Coat Systems (BCSI) was a name thought of for a while as a candidate, but they have now entered their own deal to acquire Network Appliance's (NTAP) NetCache business.

Trend Micro (TMIC) has been an elusive company. It is based in Japan and has had a security deal with Microsoft for email security, but it is largely not thought of by many. It also has a large value at $4.5 Billion, but it hardly trades in the US at all.

Check Point Software (CHKP) is the name that has been elusive and probably would not benefit from this. They are perhaps the world leader in firewalls and corporate data security, based in Israel. The company had a failed private deal over US national security concerns and over protectionism, and they may actually have to go make some outside transactions of their own to be competitive and attractive again.

In the US, McAfee (MFE) is another name that may be left out of the deal landscape. The company is thought of as a bit maxed-out, and it may be on hold until the next PC upgrade cycle has taken hold. It is worth $3.9 Billion today and has a P/E of 28.9 based on trailing numbers, and it has had "issues" in the past.

In truth, this deal new acquisition of RSA by EMC validates the combined offering model. It will heat up competition in other areas as well, and companies that have sluggish patterns and that aren’t able to adapt may have a hard time hanging out with the big boys.

There is also a myriad of private companies in the US, Europe, Israel, EU, and Eastern Europe that have been fertile recruiting grounds and quiet takeover bait for years now. Many of these companies are completely unknown, and they will stay that way. They also offer (or attempt to) many of the same offerings as many of the public companies above.

Just because one deal occurs does not guarantee more deals to come. Even with the caveats, there is still a greater chance of other deals coming to fruition. The landscape is changing, so do some homework on your own to see which others will benefit. If nothing else, you can at least expect this to keep the rumor mill active.

This merger of course will have ties into the Data Storage and related sectors, but that is another story.

Jon C. Ogg
June 30, 2006

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/

Cendant's Dissolution Continues

Stock Ticker: CD

Cendant Corporation (CD-NYSE) announced a definitive agreement to sell Travelport, the Company's travel distribution services subsidiary, to an affiliate of The Blackstone Group for approximately $4.3 billion in cash and is expected to close in August 2006. The proceeds from the sale of Travelport had already been earmarked for most of the funds to reduce its Realogy and Wyndham debt levels, targeted at an approximate $750 million for Realogy and $600 million for Wyndham.

Cendant now expects to simultaneously spin-off its Realogy and Wyndham Worldwide subsidiaries in late July. This is part of an ongoing restructuring in Cendant that is actually dissolution of the company as we know it.

It is unfortunate that they are not going to use proceeds to return cash to shareholders, but they are trying to shore up their balance sheet so units are attractive. Cendant is essentially 4 different operations and each of those operations includes many facets.

The stock is up 4% pre-market on this news, but its shares are still hovering close to its 52-week lows of $15.16 and around the same lows of about 3-years. The company is honestly trying to do the right thing, but if they really ant to reward the shareholders they need to return more cash. After running many different scenarios a few months ago and trying to smooth out some of the ups and downs in units, Cendant (a BAIT SHOP member) has what is derived as a break-up value or "sum of the parts value" of between $19.00 and $22.00. The shares have been stuck mostly under $16.50 since mid-May and it is exceeding more and more difficult to find anyone that truly likes the company.

What is important is that they are full of small units and divisions that are fairly predictable and have a long operating history. They are perfect for private equity firms, and that is why Blackstone is in this deal this morning. There will probably be more and more of these, but hopefully Cendant will read this and start returning more cash to holders so that the sum of the parts actually gets returned to shareholders. Their annual meeting of shareholders is August 29, 2006, and we should have some much more clear valuation estimates by then.

This corporate structure and the dissolution process is not very clear to most, and it is not without risk. Difficult deals to understand have a hard time finding much love on the street, and that is what has contributed to the steady weakness in Cendant. The entire combined operation after the break-up and dissolution in the coming 3 to 12 months (or however long it takes) still seems to have more projected returns than risks. If something happens to private equity money in the next 3 months, then this belief and perceived valuation will come in considerably. Based on the funds that have been and continue to be raised the perceived risk of that happening is still fairly low.

Cendant is supposed to mean “change,” and that should live up to the name. Most likely in a few months the company will not look like it does today. If it handles these divestitures and spin-offs properly, it will also offer a reward to those investors that are willing to enter complex investment situations with some patience and understanding. Cendant has been perceived as a dead-money stock for a many years, but there still appears to be a favorable risk vs. reward matrix for the right investor.

Jon C. Ogg
June 30, 2006

KMG Chemicals: An Odd Secondary Offering

Stock Ticker: KMGB

KMG Chemicals (KMGB-NASDAQ), a specialty chemicals maker (in Pentachlorophenol Products, Creosote, Animal Health Products, and Agricultural Products), today announced that a public offering of 2,800,000 shares of its common stock has been priced at $7.00 per share.

This is an interesting offering, at a substantial discount in a name most have not heard of. KMG Chemicals (KMGB-NASDAQ) closed yesterday at $8.08, and this trades actually under 4,000 shares per day on average. The company only has a $71.1M market cap

The offering is 1,500,000 shares from KMG, 1,087,984 from David Hatcher, Chairman and CEO and 212,016 from Valves Incorporated of Texas, whose President is Fred C. Leonard, an outside director of KMG.

KMG will use the proceeds for working capital, to fund future acquisitions and for general corporate purposes. Boenning & Scattergood served as lead book-running manager with Sterne, Agee & Leach as co-manager.

Because this is so thinly traded the shares priced at a substantial discount. This is so small that it will likely not even show up on anyone's radar, but a pricing at that discount is reminiscent of the old Reg.-S private placements done overseas in the mid-1990's where shares were sold by companies and directors at a substantial discount.

Jon C. Ogg
June 30, 2006