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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, July 31, 2006

Cramer's MAD MONEY Recap (July 31, 2006)


(XMSR) XM Satellite Radio: XMSR is cheap according to Cramer, as they have supply issues that make it hard for them to build enough units. He thinks it has bottomed on itws own and he thinks SIRI could acquire it.

(AMZN) Amazon: Cramer compared Amazon.com to BGP and BKS. He said AMZN is not cheap even down $6 and should be sold.

(HUM) Humana: Cramer also interviewed the CEO of Humana (HUM). Cramer says this was one to buy in insurance when there were insurance implosions elsewhere.

Cramer also said that the way to defend your portfolio against a tightening Fed was to buy defensive stocks like Pepsi (PEP), General Mills (GIS) and even Heinz (HNZ). Also noted were Wedlls Fargo (WFC) and Altria (MO). He noted that it may be 14 weeks before market conditions improve, if 2001 can be used as a comparison.

13G Disclosures: Goldman's stake in HILL Carlyle

By Yaser Anwar, CSC of Equity Investment Ideas

Goldman Capital Management Raises Stake in Dot Hill (HILL)

In a 13G filing released to the SEC, Goldman Capital Management disclosed a 5.1% stake (2.27 million shares) in Dot Hill Systems (HILL). This is up from the prior 907.5K share stake the investment firm disclosed in a quarterly 13F filing with regulators.

Dot Hill is the market leader in providing flexible storage offerings and responsive service and support to OEMs and system integrators, from engagement through end of life.
Carlyle Offshore Partners Discloses 5.3% Stake in Focus Media Holding (FMCN)

In a 13G filing released today to the SEC, Carlyle Offshore Partners disclosed a 5.3% stake (27.5 million shares) in Focus Media Holding Ltd. (Nasdaq: FMCN). At the Carlyle Group website, the firm notes a past position in Focus Media, but does not disclose the size.

Focus Media Holding Limited is China's leading out-of-home multi-platform life-style media company, which operates the largest out-of-home advertising network in China using audiovisual flat-panel displays

Note: The Carlyle Group is one of the world’s largest private equity firms, with more than $41.9 billion under management.

Sources: SEC & SI


Market Wrap (July 31, 2006)


DJIA 11,185.68; Down 34.02 (0.30%)
NASDAQ 2,091.47; Down 2.67 (0.13%)
S&P 500 1,276.66; Down 1.89 (0.15%)
10YR-Bond 4.988%

Today we had Chicago Purchasing Managers show a stronger than expected 57.9 reading, although we ended up down on the day. We also had duelling Fed Governors with Poole saying there was a 50-50 chance of a rate hike in the August 8th meeting and another stating that the jury was still out.

In a move that had been discussed previously, SanDisk (SNDK) did confirm it would acquire M-Systems (FLSH) in an all stock trasaction valued at $1.55 billion. SNDK fell 1% to $46.60 and FLSH rose $4.18 to $35.97.

UAL (UAUA) fell 4.8% to close at $26.18 as traders "sold the news" of it finally posting an operating profit, mainly because it looked like the numbers were shy of estimates after you backed everything out properly.

Agco (AG) missed current estimates, but it said it would not miss for the entire year. AG shares fell 10.8% to $22.92. Deere (DE) fell in conjunction and closed down 1.8% at $72.60.

Scottish RE Group (SCT) fell a massive 76% to close down at $3.83 after its CEO announced he was leaving AND after the company company forecast a very wide loss. It is also suspending its dividend, its board has essentially stepped down, and it has hired bankers for Strategic Alternatives.

Apple (AAPL) rose 3.5% to close at $67.94 after Bank of America lifted its target and rating a BUY, and that was the call of the day.

Audible (ADBL) closed Flat at $7.42 after disclosing an audio book pact with Apple, although ADBL had traded up over 3% earlier in the day.

Imclone (IMCL) fell over 4% to close at $32.48 after a court rejected the argument that Repligen's patent had expired on its Erbitux. Relpigen (RGEN) is the direct beneficiary of this and its shares rose a lofty 24% to close at $2.99.

Cephalon (CEPH) shares fell 0.3% to $65.83, but had been down as much as 5% in sympathey with Bristol-Myers (BMY) adverse ruling over its Apotex settlement. It was not directly involved, but it was in similar circumstances.

Barr Labs (BRL) rose 2% to close at $49.83 after the new FDA head said he move to make Barr's "Plan B" pill, otherwise known as "the morning after" pill, available on an over-the-counter status for girls 18 years and older.

Wyndam (WYN-WI) and Realogy (H-WI) both rose as the companies were going into the S&P 500 ahead of the Cendant (CD) spin-off and dissolution from parent trading. WYN rose 0.4% to $33.13 and H rose 3.3% to $24.95. Both will trade as normal tickers tomorrow without the "WI" status.

With natural gas prices so much higher on the Midwest and Northeast heatwaves, the two most leveraged names to natural gas rose substantially. Cheniere (LNG) rose 2% to $35.14 and NGAS Resources (NGAS) rose 11.5% to $8.90.

Foot Locker (FL) rose 3.5% to close at $27.16; Women's Wear Daily ran an article saying they were clearing out inventory ahead of 2 private equity buyout firm's were preparing a formal bid.

Tribune (TRB) rose almost 1% to close at $29.75 after some billionaire private investors were interested in the LA Times and other individual papers.

Tyson (TSN) fell about 3% to $14.15 after disclosing its first loss in years.

Avon Products (AVP) fell about 11% to close at $28.99 after the company missed earnings on further restructuring; Cramer said the woman CEo should be canned.

Pfizer (PFE) closed down 0.5% at $25.97 but had been up most of the day. The company got rid of Hank McKinnel about 18 months ahead of time and replaced him with the Chief Legal Counsel.

XM Satellite Radio (XMSR) fell 8% to $11.63 after reporting NO NEWS to account for the mystery run-up on Friday.

We should have another earnings barrage this week, so get ready for that. And, another month is done as July ended. Where does the time go?

Jon C. Ogg
July 31, 2006

The New SanDisk After Acquiring M-Systems (SNDK, FLSH)

What will the new SanDisk (SNDK) look like now that they have announced the intent to acquire M-Systems (FLSH)?

For starters, an inch may go a mile. The company claims that there are essentially no overlaps in company operations.

SanDisk (SNDK) is a $9.1 billion market cap flash memory company that is mostly into consumer electronics and gadgeets, although recently the company began selling its own line of media players. M-Systems (FLSH) makes PDA and gadget flash as well, but they are also on the corporate side for larger systems and larger design contracts with many outide companies in and out of the semiconductor realm.

When you factor out the small amount of dilution, it will barely affect any of the multiple of SNDK stock. SNDK has a $9.1 Billion market cap; FLSH will have an implied $1.5 Billion market cap. SNDK has a P/E of nearly 25; FLSH has nearly a 28 P/E. The combined company according to the CEO should have $10 Billion in annual revenues in 4 to 5 years, which he said is a stretch but doable.

The company also got to do this deal for all stock, allowing it to keep its powder dry. SNDK did just soar last week after beating expectations. It also has close to $2.4 billion in liquid assets and it has a very little in long-term debt. It does have to list a $1.15 billion convertible note offering, but if the company can keep up its fast pace that will essentially take care of itself as far as the balance sheet is concerned.

The other interesting part here is that further out this will require the index fund managers to have to acquire more SNDK stock. SNDK is a member of the S&P 500, the NASDAQ 100, the Semiconductor HOLDRs, and various Russell index member weightings as well. By guestimation it looks like certain index funds may have to increase their weighting in SNDK by anywhere from 8% to 11%. That is a broad range, but should provide a decent level of support for the stock when this deal gets closer to the Q4 closing.

This is subject to various approvals in the US and in Israel, but there are no major hurdles expected.

Jon C. Ogg
July 31, 2006

Oops On Apple


Apple's shares took a nice tick up on an upgrade form Bank of America. The analyst who covers the computer and iPod wonder increased his price target from $68 to $79, So, the stock has to move up 16% from where it trades now to hit the B of A target. The reasons for the upgrade are improved sales of the iPod Nano and Mac laptops later in the year.

Where did B of A find a crystal ball?

Maybe a new iPod will sell better, but, maybe it won't. Mac laptops are nifty computers, but Dell, Gateway, and HP are cutting prices to gain share as the big PC manufacturers bleed margin. Intel has dropped Pentium prices as much as 61% to make way for its new chip. That means that PC pricing could be even lower in the second half of the year.

Another interesting piece of news is that Verizon will introduce a cell phone that doubles as an MP3 player. Of course, Microsoft is entering the iPod look-alike market as well. Investor should expect big marketing pushes from both Verizon and Microsoft in a market where Apple had very little competition for the iPod a year ago.

According to Apple's 10-Q for the period ending April 30, sales of portables/laptops were up only 8% from the same quarter last year. This was a sharp slowdown from the immediately previous quarter growth rate. And, iPod unit sales are no longer growing at a torrid pace, hitting 8.5 million units in the last reported quarter.

Will unit sales of iPods and portables jump up as 2006 closes. Maybe. But, the competition in both markets will provide a stiff headwind.

The B of A crystal ball my be right, but, it may not be.

With Apple's stock up almost 30% since mid-July, buying in now could be an expensive gamble.

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

Nortel: Taxes Aren't The Issue, Survival Is

Stocks: (NT)(MOT)(ALA)(LU)(NOK)(SI)

Nortel is engulfed in another set of problems with its P&L and balance sheet. It seems to be an annual ritual like the gulls returning to Capistrano. The result of the confusion over tax credits was raised in the Wall Street Journal, based on a study by research firm Glass, Lewis. If Nortel continues to lose money, the tax credits could go away and send the company's shareholder equity. The company is holding on to the credits on the basis that it will be profitable soon.

The conversation is interesting, but it begs the question of whether Nortel is a viable entity under any circumstances. Nortel's shares hit a 52-week low on the tax credit news, dropping to $1.92. The company's shares are down almost 50% over the last 12-month period from a high of $3.57. The stock was at $4 in the Fall of 2004.

Nortel's core business in optical network equipment is a fairly good one, but the costs to run the business as a standalone business are clearly too high. And, its balance sheet is hardly a thing of beauty. According to Morningstar, cash and cash equivalents are $2.7 billion. Long-term debt is $2.5 billion.The company has $5.2 billion in accrued liabilities and only $675 million in equity. The company still commands a market cap north of $8.4 billion.

With the Alcatel merger with Lucent, and the Siemens joint venture with Nokia to combine telecom infrastructure unites, Nortel is the odd man out. And, the stock trades that way.

The balance sheets and pricing power of these new entities, created by "mergers" of telecom equipment vendors, puts Nortel's back to the wall. It cannot afford to see margins drop in the hopes of pricing its products to gain share. It simply does not have the financial power to do it.

Motorola, the other bride left at the altar in the consolidation of telco equipment giants, may be Nortel's last, best hope. Without a well-financed parent, Nortel has little chance of surviving.

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

Geron & Stem Cells: Why the Traders Had It Wrong


This morning was an interesting day for shares of Geron (GERN). The company reported slightly wider losses than the "consensus estimates." The question to ask here is simply SO WHAT? Before you interpret this as an open buy or purely a positive opnion, please understand that this is not. The headlines and summaries say "Losses Widen" and this appears to have concerned the day traders and short-term players.

What is important to understand about emerging biotech, and particularly Stem Cell companies, is that Earnings Per Share and even Revenue analysis may be completely worthless. There was a declining revenue base, but once again that needs to be qualified. This company is essentially a non-revenue company even though revenues are mentioned. Most other stem cell companies are essentially in the same boat. The "revenues" these companies report are merely one-time or short-term payments they receive from other partners or as grants. What you have to look at is the cash-burn rates, and that is why the shares have recovered from being down almost 4%.

The company's R&D expenditures are up and should stay up as they are in more collaborations and are in further steps toward trying to commercialize some products. The total Operating expenses were almost $12.2 million. Let's almost double this to be safe and average it out at $20 million per quarter to be safe. This company has NO long-term debt and essentially has $183 million in net tangible short term assets that are almost all comprised of cash and short-term interest securities. This is almost 2 and a half years of operations before cash concerns creep up, and that is without the company going to the trough to raise any capital. This number can change on a dime, but it sure looks like the day traders focused on the wrong items this morning.

Below are the company's highlights in the press release for the second quarter:

Clinical Development

* Geron initiated clinical testing of its lead anti-cancer compound, GRN163L, in patients with solid tumor malignancies at The University of Chicago Cancer Research Center. This study will evaluate the tolerability of IV infusions of GRN163L at various rates of administration, and enable an assessment of the pharmacokinetic profile of GRN163L at escalating doses and at decreasing infusion durations.
* Collaborators and independent researchers gave several presentations at the 2006 AACR Annual Meeting, including a preclinical study of the Company's telomerase inhibitor drug, GRN163L, from the laboratory of Dr. Jerry Shay at the University of Texas Southwestern Medical Center and a clinical study of the Company's telomerase vaccine, GRNVAC1, in advanced prostate cancer patients from the laboratory and clinic of Dr. Johannes Vieweg at Duke University Medical Center.
* New data published in Clinical Cancer Research demonstrating the broad efficacy of GRN163L, Geron's telomerase inhibitor drug, against multiple types of breast cancer cells as well as the significant reduction of metastatic activity in vivo. The research was authored by Dr. Brittney-Shea Herbert and colleagues at the Indiana University Cancer Center along with Geron collaborating scientists.
* Geron and TA Therapeutics, Ltd., a joint venture between Geron and the Biotechnology Research Corporation of Hong Kong (BRC), announced the presentation of studies demonstrating that their small molecule telomerase activator, TAT0002, enhances the anti-viral activity of CD8 T-cells from HIV/AIDS donors against infected CD4 cells from the same donors. TA Therapeutics is exploring multiple applications for telomerase activators in chronic degenerative and infectious diseases. The company's most advanced program is HIV/AIDS, and it has selected TAT0002 as the lead development candidate for this indication.

Intellectual Property

* The U.S. Patent Office granted to Geron U.S. Patent No. 7,033,831, covering the production of insulin secreting cells from human embryonic stem cells (hESCs). The new patent covers methods developed by Geron scientists working towards the scalable production of pancreatic islet cells from hESCs for use in new cell-based treatments for diabetes.
* The Opposition Division of the European Patent Office ruled at a hearing on claims of Geron's granted European Patent No. EP 0 841 396. The patent is directed to the cloned human telomerase gene and its uses. Pharmexa had filed an opposition to the patent, seeking revocation of all 47 claims in the patent. The ruling maintained 44 of the claims and canceled three.

Business Development

* Geron and Corning Incorporated entered into a collaboration and license agreement for the development and commercialization of synthetic surface matrices for the growth of hESCs. Geron and Corning Life Sciences will work together to develop synthetic growth surfaces to replace the biological surface coatings that are widely used today to grow hESCs.
* Invitrogen licensed Geron intellectual property related to the growth of hESCs to develop, manufacture and sell media, additives and reagents for use by hESC researchers subject to certain commercial use restrictions.


There was alos talk that the UK's Tony Blair was out visiting biotech companies to develop more stem cell and genomic initiatives in the UK. While Genentech (DNA), Stem Cells (STEM), and Gilead (GILD) were noted as the target visit companies, this has implications for the whole group. These stem cell companies are the potentially largest beneficiaries as most are small and would be leveraged winners to any developments there. Some other stem cell companies are Aastrom (ASTM), ViaCell (VIAC); and this Osiris Therapeutics (OSIR) that is set to IPO this week will be the first pure-play stem cell company we have seen come out in years.

Jon C. Ogg
July 31, 2006

Confusion Engulfs Yahoo!


Amtech/JSA Research upped Yahoo! from "Hold" to "Buy" today according to Briefing.com. MarketWatch reported that First Global Securities downgraded the net giant on concerns that it will continue to lose share to Google and Microsoft's MSN.

With Yahoo!'s shares off almost 2% to $27, the bearish view seems to be ascending. AOL's announcement that it would launch a major video site probably did not help Yahoo!'s cause.

It is becoming increasingly difficult to determine who is right about Yahoo!. One thing is for certain. Very few stocks have seen their prices cut nearly in half (from $43.66 in January to $25 this month) while growing at a rate of 30%. Especially a company as large as Yahoo! ($5.3 billion in 2005 according to Yahoo!Finance). Morningstar projects that Yahoo! will continue to grow at a 23% per annum clip over the next five years. Not bad.

Depending on which measurement service investors look at, Yahoo! is still the most visited web destination in the world. It is not a "one legged table" like Google. Short-term, diversifying beyond search may have hurt Yahoo! some, but over time having a number of strong online businesses should help the company. The identity crisis at AOL may also benefit Yahoo! A seemless transition from its subscriber model to advertising is likely to be difficult for the Time Warner web unit. MSN also seems to be making little progress. ComScore says that Microsoft's share of the global search market is a mere 9%.

If Yahoo! is well-positioned as a combination search and content destination, the share price will catch up to the success of the business model. If that happens, Yahoo! is will be on its way back toward $40.

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

Sirius Radio's Dead Cat Bounce

Stocks: (SIRI)(XMSR)

Share of Sirius jumped up 4% on new that it had signed a deal to put it products in Mitsubishi cars. Not all of them, just four models.

Now, Mitsubishi sells about 8,000 cars a month in the US, so the arrangement is with one of the smallest car marketers in North America.

With the Sirius stock at $4.30 on a 52-week high/low of $7.98/$3.60, almost any news about distribution of the company's products is good news.

But, Sirius still trades at 18 times its revenues, and that is probably too expensive.

Rival XM Satellite recently reported a loss of $232 million for its last quarter. Revenue did grow 82% to $228 million, but the company cut its year-end subscriber target. XM has set a goal of being profitable by the end of 2006, but management stated after its poor performance last quarter that generating cash in Q4 would be more of a challenge.

The market often assumes that what is bad for XM is good for Sirius. Not necessarily. Several analysts have suggested that the behavior of XM subscriber base will be the same for Sirius as its base gets closer to 7 million users. That would mean a higher churn rate. The theory, which will not be proven until Sirius grows some, is that once a base of customers hits a certain level, higher cancellation rates are inevitable.

Wall St. continues to have concerns that Sirius may have to raise more money to reach profitabilty and dilute its already huge count.

One thing is certain. Most of the large car companies are now partners with one or both of the satellite radio companies. Investors can tell that when a Mitsubishi deal rates press.

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

Will Private Equity Call On Avon?

Stocks: (AVP)

Avon's earnings were not particularly good, but the company has the advantage of being able to say that they were not supposed to be. The company has cut 10% of its work force and several layers of management, and the costs of much of that restructuring were in the quarterly numbers out today.

Revenue at the company did rise 5% over the same period last year, hitting $2.08 billion. Operating profit was down 35% to $225 million, but some of the drop can be attributed to restructuring.

The company's cash position equals its debt. The cash flow from operations for the quarter was almost $290 million. Shareholder equity is $1 billion.

The question is whether a private equity firm would pay 13 times net tangible book value.

If the company can be engineered as a private enterprise to produce cash flow of $1.5 billion, the company's $17 billion market cap may not be a huge obtacle. The stock now trades at $30. If it moves closer to its 52-week low at $24.33, it will be on a lot of radar screens.

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

Diversity is Tur-key at Semiconductor Companies

Stocks: (AMD)(INTC)

By William Trent, CFA of Stock Market Beat

Barron’s says the price war between Intel and AMD (our discussion here) should send investors to more broadly diversified (less PC-oriented) semiconductor stocks.

With semiconductor stocks, diversity is key-Barron’s Reuters.com

A price war between chipmakers Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD) highlights a slowdown in the PC market and investors intent on the semiconductor industry might do well to consider shares in companies with more diversified revenue streams, Barron’s financial newspaper reported on Sunday.

Diversity is seldom what you should seek in semiconductors. Typically you want pure-play exposure to an end market that is working. If there are no end markets that are clearly working, you may just want to avoid the semis altogether.


BAIT SHOP UPDATE: Foot Locker's Buyout & Who May Be Next

Stock Tickers: FL, FINL

Topics: M&A, Private Equity, Buyout, Merger, Acquisition, Foot Locker, Finish line

Foot Locker (FL) is up another 4% today as an article in Women's Wear Daily says they are clearing out inventory ahead of it selling itself to two private equity groups. The issue you have to ask is that since the street has gotten wind of this and buyout speculators have been in it, is the stock fully valued or close to it? Private equity buyers are probably not going to try to reward newer shareholders who have chased up the price, and Foot Locker executives and board members probably will not feel the need to reward last minute speculators either.

HERE is the link to the "WWD" article, but a subscription is required for the bulk of this article and we cannot post the rest because of copyright issues.

This brings up a point we have made to clients. If someone really wants to acquire Foot Locker (FL), then someone else should be looking at Finish Line (FINL) as a better buyout candidate. The ONLY real issue we have surmized in comparing the deal is that with so much private equity funding having been raised it allows the private equity firms to put more capital to work in a faster basis. We have a full comparison of the values and future strategies as well. There is still the issue of Class A and B shares, and that is something that could also require resolution.

If you would like to see the research we have compiled on this, please send an email to jonogg@gmail.com to receive this via email. This is one of the FREE Bait Shop reports we are making available, but it is only available upon request.

Jon C. Ogg
July 31, 2006

Wal-Mart's Bad News

Wal-Mart (WMT) made a number of announcements over the last several days. None of them were good. The market's view was that same store sales being up 2.4% was a net positive, and Wal-Mart's shares rose about 1% to $44.86.

The news about Wal-Mart's same store sales is only positive in light of its meager 1% increase in same store sales in June. The July figure is better, but no much above the rate of inflation.

Wal-Mart's retreat from Germany, at a loss of a reported $1 billion, demonstrates that the model that has been so successful in the US and places like the UK, does not necessarily work in all markets. Given the size of the German market, the lesson is a particularly difficult one. Wal-Mart's sales in Japan have also been disappointing. And, the company's earlier exit from South Korea may be further evidence that the Wal-Mart model does not play everywhere.

The last bit of news is the most difficult to read. Wal-Mart employess in China have begun o unionize workers in the company's stores. The unions are controlled by the state-run All-China Federation of Trade Unions. Some initial press reports about the organization of workers at the big retailer chain (WMT has 30,000 workers in China) indicated that the union was viewed as pro-management. However, the move puts the Chinese government at the wheel of the labor issue in Wal-Mart's stores, a measure that the firm is unlike to have wanted.

With sales in the US running about flat with inflation and failures in South Korea and Germany, Wal-Mart must look to markets like China and possibly India for its growth. Indian legislation is keeping the company out of that country for the time being. And, Wal-Mart is now a partner, probably unwillingly, of the Chinese government's labor union organization.

Wal-Mart still trades near its 52-week low of $42.31, and will have to do more radical "reinvention" to move out of its hole.

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

Erbitux New Woes for Imclone and Bristol-Myers Squibb

Stock Tickers: RGEN, IMCL, BMY

If you take a look at the summary of the press release you can tell that it won't kill the Imclone (IMCL) and Bristol-Myers Squibb (BMY) dealings, but it is probably going to require some substantial payments that retroact. That may also require one or both firms to restate past quarters if they cannot include it as a current one-time expense.

Repligen Corporation (RGEN) today reported that on July 28, 2006, the US District Court in Massachussetts issued a Summary Judgment ruling in favor of Repligen and The Massachusetts Institute of Technology (MIT) and rejected ImClone Systems' (IMCL) defense of patent exhaustion in the ongoing patent infringement lawsuit over the production of Erbitux®. In their complaint, Repligen and MIT allege that ImClone's production of Erbitux® infringes U.S. patent 4,663,281 which covers certain genetic elements that increase protein production in a mammalian cell. This patent is assigned to MIT and exclusively licensed to Repligen. ImClone has previously reported that it produced approximately $1 billion worth of Erbitux® prior to the expiration of the patent-in-suit in 2004 and that Bristol-Myers Squibb, ImClone's commercial partner, has paid ImClone $900 million in up-front and milestone payments as well as a 39% royalty on the net sales of Erbitux® in the United States. Repligen and MIT intend to seek damages adequate to compensate Repligen and MIT for ImClone's unlicensed use of the patented technology and they will also seek a multiplier of any damage award based on ImClone's willful infringement.

It looks like both RGEN and IMCL are halted pending the street digesting the news. Bristol-Myers seems to in one week have bad news after bad news hitting the tape.

Repligen (RGEN) has a mere $72 million market capitalization of its common stock. It only has about 2.8 million in stated revenues per quarter. As of last quarter it had $18.8 million in cash and equivalents with $2.9 million in current obligations and NO long-term debt.

Jon C. Ogg
July 31, 2006

WSJ Update

By Yaser Anwar, CSC of Equity Investment Ideas

AOL to Launch Portal for Videos
AOL plans an Internet video portal featuring content from both users and cable networks.

SanDisk Agrees to Buy msystems
SanDisk agreed to buy msystems for $1.55 billion in stock in the latest sign of consolidation in the flash-memory sector.

Verizon Introduces New Music-Playing Phone
Verizon Wireless will release a cellphone that plays music and resembles Apple's iPod as carriers edge into the MP3 market.

Live Nation to Buy Stake in Musictoday
Live Nation is to acquire a majority stake in Musictoday, which runs services for such acts as the Rolling Stones.

White House Will Skip Climate Talks
Blair is to meet with Schwarzenegger and a group of CEOs in California on climate change and clean energy, but Bush's top environmental adviser won't attend.

'Miami Vice' Busts 'Pirates' to No. 2
"Miami Vice" overtook "Pirates of the Caribbean" to capture the top spot at the weekend box office, taking in $25.2 million, compared to $20.5 million for "Pirates," which became Disney's highest-grossing release to date.

Faurecia Chief Is Investigated in Germany
Frankfurt prosecutors said they are investigating the CEO of car-parts firm Faurecia on suspicion he abetted corruption by covering up bribes.

Investor AB CEO Charts a Bold New Course
Sweden's Investor AB has been creating a ruckus akin to the wheeling and dealing usually associated with private-equity firms. Behind the change: Boerje Ekholm, who last year became the investment firm's new chief executive.

Sony Remains Guarded in Its Outlook
Sony remains conservative about its outlook, despite a strong fiscal first quarter on a rebound in its electronics business.

U.S. Court Upholds Ebbers Conviction
An appeals court upheld the fraud conviction and 25-year prison sentence of former WorldCom CEO Bernard Ebbers. (Court ruling)

Market Volatility Takes Investors for a Ride
Stock-market volatility could persist for at least several more weeks while investors continue to assess the Federal Reserve's strategy for fighting inflation. Share prices are ending July close to where they started.


Digging Into GDP

By William Trent, CFA of Stock Market Beat

The market rallied on Friday on news that the economy was weaker than expected, with all of the convoluted logic about the fed pausing on rate hikes and blah-de-blah. Far be it from us to take away the punchbowl. Yet, as often is the case, actually reading through the data yielded some interesting insights.

Consider the chart, which breaks the GDP number into its four main constituents: consumer (personal consumption), business (PDI), trade (net exports) and government spending.

The second quarter marked only the second time (though there were some close calls) that all four constituents had a positive impact. However, in one way that tidbit shows just how weak the economy has become. The last time we fired on all four cylinders, GDP grew at an annualized rate of more than 7 percent. This time it got us 2.5 percent.

The second thing we want to touch on is the maxim we keep hearing about how business will take over when the consumer tires out. Let’s face it: all of the other categories have, at least for one quarter, been a drag on GDP within the last four years. It seems reasonable to believe that the consumer may take a turn resting. As has been the case when other components failed to pull their share, isn’t it possible that total GDP could come in at a reasonable number - say 3 percent?
The problem here is one of magnitude. In the second quarter, total GDP was a little more than $13 trillion. In round numbers, $9 trillion of that was consumer, business and government put in a little more than $2 trillion each, and net exports took that “little over” back by being negative (they had a positive impact on GDP because they were slightly less negative than they were last quarter.)

So now let’s do the math, and assume that consumers spends 1 percent less than they did last year. That creates a $90 billion drag the others need to make up. But if we want the whole pie to grow 3 percent, that is $390 billion that needs to be added to GDP overall, plus the $90 that needs to be made up equals $480 billion. That would mean business and government each growing 10 percent, or one of them growing 20 percent. It just doesn’t seem all that likely.

There is one wild card, and that is net exports. If we made the assumption that consumers only bought less foreign goods, then the personal consumption would be neutral to GDP rather than a drag. But even in that optimistic (unless you are an importer) case business and government would have to grow faster than 8 percent each for the economy to grow 3 percent overall in the face of flat consumer spending.


LCD Market

By William Trent, CFA of Stock Market Beat

The good news is that companies are seeing the light and cutting back on planned capacity expansions.

CMO to delay equipment installation at 8G plant, say sourcesFurthermore, the lower prices are starting to spur some demand. On their recent earnings conference call, tech reseller CDW Corporation said:
Continuing the recent trend, average selling prices of large format LCD monitors have declined significantly year over year. The more affordable prices havedriven unit volume.

The bad news is that some manufacturers continue to pour on the capacity. Sharp will invest 500 billion yen (about US4.26 billion) to build a tenth-generation (10G) TFT LCD plant, with construction to begin in the third quarter of 2007 and volume production to begin in mid-2008, according to the Japanese-language Nihon Keizai Shimbun. The plant will process 2,850×3,050mm glass substrates into eight 57-inch panels or six 65-inch panels.

Prices are now expected to fall a further 25% by year-end for some categories:
The ASP (average selling price) for a sixth-generation (6G) substrate is expected to drop to 14,000-15,000 yen (US$119-128) by year-end, according to the Chinese-language Economic Daily News (EDN).

First-tier makers are now offering prices for a 6G substrate at 20,000-19,000 yen while prices from second-tier makers are about 22,000-23,000 yen, the paper indicated citing sources as saying.

Other news:
The currently tight supply of 19-inch monitor panels will ease by September, when supply will have increased at panel makers, according to assistant general manager Gatti Park at LG Taiwan, as quoted by the Chinese-language Apple Daily.

Samsung Electronics sustained profitability for its LCD division in the second quarter despite weak LCD TV sales, inventory pile-ups and an ASP (average selling price) reduction while LG.Philips LCD turned to losses during the period. There are several factors that contributed to Samsung’s success, including an earlier ramp up at its seven-generation (7G) LCD plants and strong support from downstream LCD TV brands.

Taiwan liquid crystal display panel maker AU Optronics Corp. said its second quarter net profit dropped nearly two-thirds because of steep price declines.


Plavix Settlement Fallout

Stock Tickers: BMY, SNY, CEPH

Bristol-Myers Squibb (BMY) is down 1.8% pre-market at $24.01 after the state attorneys general rejected their pact with Apotex over generic Plavix. This was formalized on Friday afternoon, but had been telegraphed before this after the earnings because of the DOJ/FTC issues. This of course means that Sanofi-Aventis (SNY) was left in the lurch as well.

What is interesting is that Cephalon (CEPH) is trading lower in sympathy, but even worse in terms of percentages. CEPH stock was down as much as almost $5.50 pre-market, but is now trading down $3.73 at $62.31 in pre-market trading. This company is merelt deemed as a potential patent "at risk" situation because of its patent agreements with generic companies over its Provigil, which "could" face the same scrutiny at some point. While this seems extreme, that is the way the ball bounces sometimes.

Jon C. Ogg
July 31, 2006

Pre-Market Stock Notes (July 31, 2006)

(ABT) Abbott Lab gets Humira FDA approval for treatment of ankylosing spondylitis.
(ADBL) Audible in pact with Apple over books.
(ARM) Arvin Motors $0.73 EPS vs $0.70e.
(ASMI) ASM Int'l up 5% after earnings overseas.
(ATVI) Activision gets letter on stock options from SEC.
(ATW) Atwood Oceanics $0.87 EPS vs $0.73e.
(AVP) Avon $0.40 EPS vs $0.37e.
(BMY) Bristol Myers and Sanofi failed to win antitrust clearance over its Apotex settlement over Plavix from state attorneys general.
(BRCM) Broadcom suspended its buyback plan until it can get its quarterly filing in.
(BYD) Boyd Gaming filed to sell 11.8M shares for holders.
(CELL) Brightpoint $0.16 EPS vs $0.16e; $549.9M vs $565+M(e).
(CNTF) China Techfaith announced $40M for share buybacks.
(DALRQ) Delta reportedly said no to a merger with US Air according to WSJ.
(DCO) Docummon $0.31 EPS vs $0.29e.
(EBAY) eBay filed to sell 15M shares of common stock for holders.
(ENSI) Energy South $0.20 EPS vs $0.19e.
(EXC) Excelon $0.85 EPS vs $0.81e.
(FLSH) M-Systems Flash up 9% pre-market as San Disk will acquire it for $36 per share in stock.
(GEHL) Gehl $0.75 EPS vs $0.73e.
(GERN) Geron -$0.14 EPS vs -$0.15e.
(GMRK) Gulfmark $0.63 EPS vs $0.49e.
(GVHR) Gevity $0.36 EPS vs $0.35e.
(HERO) Hercules Offshore $0.70 EPS vs $0.63e.
(HTRN) Healthtronics CFO stepped down.
(HUM) 0.53 EPS vs $0.36e.
(IRBT) iRobot gets $3M navy order.
(ITRI) I-Tron filed to sell $300M in notes.
(LWAY) Lifeway Foods is paying $8M to acquire Helios Nutrition.
(MNTA) Momenta Pharma filed new drug application with the FDA over an anticoagulent.
(NOC) Northrup Grumman may sell its navigation operations for up to $1 Billion.
(PD) Phelps Dodge trading up 4 points after merger update.
(PFE) Pfizer named the replacement for Hank McKinnel earlier than planned.
(PYX) Playtrex $0.17 EPS vs $0.15e.
(QTWW) Quantum Fuel -$0.27 EPS vs -$0.20e.
(RGC) Regal Entertainment $0.23 EPS vs $0.27e.
(SGP) Schering-Plough Japan has approved Temodal for malignant glicoma.
(SLAB) Silicon labs in litigation settlement with PWER.
(SNDK) SanDisk is acquiring FLSH for $1.55 Billion.
(STAA) STAAR Surgical-STAA gets approval to market Visian ICL in China.
(TTEK) Tetra Tech positive article on water bet according to Barron's.
(TWX) Time Warner's AOL will launch video portals this week according to WSJ.
(UAUA) UAL $1.09 EPS vs $1.12e.
(WMT) Wal-Mart said its pit July s-s-s at +2.4% .

Select Analyst Calls (July 31, 2006)

AAPL raised to Buy at B of A.
AYE cut to Neutral at Credit Suisse.
BBG cut to Neutral at Goldman Sachs.
CENX cut to Underweight at MSDW.
CVX cut to Neutral at JPMorgan.
EQ raised to Neutral at JPMorgan.
IDXX raised to Neutral at Merrill Lynch.
ITY cut to Neutral at UBS.
JBL raised to Buy at Goldman Sachs.
JEC raised to Buy at Goldman Sachs.
LEA raised to Hold at Citigroup.
MAN cut to Neutral at Merrill Lynch.
ME started as Buy at Goldman Sachs.
NT cut to Neutral at RWBaird.
PD raised to Overweight at Prudential.
RNOW raised to Outperform at RWBaird.
SCHW raised to Outperform at MSDW.
SCT cut to Sell at Oppenheimer.
SNDK raised to Outperform at CIBC.
SPIL raised to Buy at Goldman Sachs.
SPSN started as Buy at UBS.
TFSM raised to Outperform at Piper Jaffray.
TGIC raised to Outperform at KBW.
UHS reitr Buy at Jefferies.
WCG cut to Neutral at Goldman Sachs.
WMG started as Equal Weight at Lehman.
XOM raised to Overweight at JPMorgan.

Morgan Stanly raised its equity allocations for model growth portfolio from 65% to 70%; bonds were trimmed by 5%.

McAfee Will Rise Again

Stocks: (MFE)(SYMC)

McAfee’s stock has been beaten like a red-headed mule. The company, best known for its computer anti-virus software, has been dogged by a history of poor corporate governance that has lead to financial restatements and the ouster of senior management for inflating revenue from 1998 to 2000. The company was known as Network Associates until recently.

McAfee announced its second quarter results with the proviso that they may have to be revised due to improper accounting for back-dated stock options. The company also said that previously issued financial statements “could not be relied upon”. That is, of course, a lot of bad news.

The company’s results were not half bad. Revenue rose to $277 million from $245 million a year ago. Net income was off to $31 million compared to $42 million in the period a year ago. The company’s cash position was just shy of $1.2 billion. McAfee expected revenue in Q3 to be flat with Q2 revenue. However, that would be a healthy increase from the 2005 third quarter when revenue was $253 million.

A little over a month ago, Friedman Billings Ramsey had an “outperform” rating on the stock with a price target of $35. The firm pointed to healthy cash flow, a “compelling valuation” and the launch of the new Falcon consumer anti-virus line as reasons to look at the stock. It is easy to look at the Friedman Billings analysts as dupes and lamebrains, but, in the long run they may be right.

The McAfee announcement of a less than stellar second quarter and possible restatements dropped the stock to below $21, before it closed at $22.35. This is well below the twelve-month high of $33.24. The company is actually doing relatively well. The last four quarters have shown revenue increases over the immediately previous quarter. The company had positive operating income in each of these periods.

McAfee is in a business that is likely to continue to growth as the number of threats to computer security expands. Aside from consumer PC anti-virus products, the company has carrier class security services used by large businesses and the government.

Because of the company’s revenue trend and the value of its products to both consumer and enterprise computer systems, McAfee is likely to be in reasonable shape to continue to increase it top line over the course of the next several year. With the company’s cash backed out, McAfee has a market cap of $2.5 billion against a revenue run rate of $1 billion.

Companies that get hit with earnings restatements and SEC investigations usually fall into one of two categories: those they are destroyed by the actions and those that pass through them with some distraction but move on to continued success. McAfee looks like it falls into the latter category.

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

Time For The NYT To Sell The Boston Globe

The New York Times Company has a stock price sitting at multiyear low as its advertising lineage and circulation continue to drop. Revenue at its newspaper online businesses grew 25% last quarter, slower that the online units of most other newspaper companies. The company’s debt was recently downgraded by S&P because of the cost of its new headquarters, deteriorating margins, and the closing of one of the company’s large printing facilities.

In addition to the other bad news, the company’s CFO retired, a little early it would seem, and the company’s flagship property was forced to cut the width of its newspaper to save costs.

Although none of the properties owned by the company is having a spectacular year, the real drag on the company’s financial progress is what the company quaintly describes as the New England Media Group, known to the rest of the world as The Boston Globe. The NYT bought The Globe’s parent in 1993.

In the second quarter of 2006, advertising revenue at the New England Media Group fell 10% to $109 million. Circulation revenue fell 7% to $40 million. Both figures accelerated downward from the numbers in the first quarter.

Based on the most recent numbers, the New England Media Group will have annual revenue of about $1.2 billion this year. Based on the multiples that successful publicly traded newspaper companies get today, the operations could be worth as much as $1.7 billion. The New York Times showed total debt of $1.4 billion at the end of Q2. Times management has said that they won’t sell the unit, but, who knows, if their jobs depend on it.

Imagine the Times, debt free, with its New York flagship, regional newspapers (which are good little money makers) and broadcasting unit, in a position to drive forward on the Internet and make a go of it. Certainly a better picture than a stock trading at $22, down from over $40 in the Fall of 2004.

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

The Money Center Bank Problem: Citi and B of A

Stocks: (JPM)(C)(BAC)(WFC)

The environment that has been driving near-record results at the nation’s largest money center banks is running out of steam. Not unlike the year 2000, when the banks hit record high stock prices, problems in consumer lending and investment banking cut some of the stock prices of the big money centers by as much as 50% by 2003.

Because of the success of the stocks at the large banks, investors have been pressuring the management at Citigroup to improve returns, or even break the bank into pieces to improve shareholder value. The bank has been trading at $48, around its 52-week low. By contrast, Bank of America has been trading near its 52-week high at $51.66. Another huge U.S. bank, Wells Fargo, also trades near a one-year high at $72.41. So does JPMorgan, which is just a $1 below its 12-month high at $45.48.

While Citicorp may be viewed as the worst off of the lot, all the banking firms face the same, acute problems.

The consumer-based real estate mortgage business is in retreat. As a matter of fact, mortgage defaults are rising. According to a recent article in the Chicago Tribune: "For many people, buying meant using exotic mortgage products such as adjustable-rate mortgages, with low initial rates that typically jump after a few years, which can raise payments by thousands of dollars a year. As interest rates rise, experts say potential buyers should be cautious before agreeing to one of these loans .A person can lose money on a home — especially if the housing market cools, as many analysts predict. People in over their head with mortgage payments who made a low down payment might have to sell a house for thousands less than they have to pay their lender."

According to RealyTrac, which keeps track of problem real estate loans, delinquencies rose 25% this spring compared to a year ago. The firms said that there were 272, 000 homes facing foreclosure in the second quarter.

Jamie Diamond, the head of JPMorgan and Citi’s CFO have both made statements regarding their concern about the potential problems in their consumer lending businesses. Quoted in the Houston Chronicle, they voiced their worries about consumer credit: Jamie Dimon, JPMorgan Chase's chief executive officer, said credit delinquencies and defaults have been at extremely low levels. This has allowed banks to reduce reserves against possible defaults, adding to their profitability.That's changing, Dimon warned.He said rising interest rates and a likely increase in bankruptcy filings — which were depressed after the bankruptcy law was toughened last fall — could lead to credit card losses at JPMorgan Chase of "several hundred million dollars" in the third quarter, and perhaps as much as $500 million before year's end."In credit cards, we know it's going to happen. ... We're telling people upfront," Dimon said. Sallie Krawcheck, Citigroup's chief financial officer, also expressed concern about credit quality as consumers grapple with the higher minimum payments on credit card bills that went into effect earlier this year. Still, she said, consumers were handling the rule change better than expected.

Consumer credit card and mortgage issues are only a part of the problems facing the banks.

Private equity deals and investment banking income are also facing a slowdown. The record pace of corporate buy-outs cannot continue. At JPMorgan, net income from investment banking rose 37% in the last quarter to $839 million.

A firm that tracks private equity investment says that the pace of such deals is at a record level according to Reuters: “The rise in private equity-backed deals comes as the volume of global mergers and acquisitions has risen to $2.18 trillion in the year to date, topping the $2.13 trillion notched up during the same period in 2000 at the height of the Internet boom, Dealogic data shows” But, as was true in the rush of money that hit the market six years ago, the financing environment cannot defy gravity forever.

After the heady days of 2000, JPMorgan’s stock dropped from over $60 to under $20 in 2003. During the same period, Citi’s stock fell from about $60 to $30. Bank of America’s traded flat.

As the market in private equity cools and consumers struggle with rising rates in adjustable rate mortgages, money center bank stocks could easily hit two or three year lows in 2007.

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

Barron’ Digest July 31, 2006 Issue


Coach, the luxury goods marketer, will likely raise fiscal 2007 guidance. Investors have been concerned about the profit growth at Coach, and the drop of its stock from a high of $37.40 to the current price of $27.56. The company says that sales have shown positive trends, especially in it stores, during June and July. The company’s new Legacy line has been selling well, according to the company CEO “blowing out” of store.

RoundRock Capital is looking for bargains in natural gas stocks. Among those it likes is Range Resources which has a large inventory of low-risk prospects and efficient costs of finding new reserves. Of the 521 wells it drilled or recompleted in the first half, 99% were successful. The firm also likes Denbury Resources, an exploration and production company which is the largest producer in Mississippi.

El Paso has cut costs and is beginning to grow again. The oil and gas company may be trading at a discount to the aggregate value of its divisions. On that basis, UBS says that the company is worth $19.62 looking at the private value of each of its units. However, the company stock trades at only $15.60.

China’s economic growth could be limited by sever water shortages, political and social problems and major health and environmental issues. Parts of the government structure are also highly corrupt. Rapid credit growth and an investment booms may also lead to profit drops and bankruptcies. The bank system has problems with embezzlement, fraud and bribery. Some analysts also believe that economic confrontation between the US and China is highly likely.

Israeli stocks may do well despite unrest in the area. Many of the company’s large companies sell most of their products and services outside the country. Teva Pharmaceutics has seen its shares rise recently. Many of the largest companies in the country are south of where the major fighting is centered. Check Point Software’s stock has dropped 5% since July 10, but the company now trades at a relatively inexpensive 12 times forward earnings. WR Hambrecht also thinks semiconductor stocks Saifun Semi and PowerDsine could be oversold.

Intel and AMD may be facing a decelerating PC market. More diversifies semiconductor stocks may be better investing bets for the time being. This would include microcontroller makers, Microchip Technology, analog semi companies Linear and Analog Devices and wireless chip company Texas Intruments.

Motorola’s management is talking about overtaking Nokia as the world’s largest cell phone maker. Over the last seven quarters, the company’s global market share has gone from 13.5% to 22.1%. Nokia’s has been flat at 33%. Most of the company’s success in cells has been based on the popular RAZR phone. The company has just introduced seven new handsets to add to the 50 million RAZRs sold since it was introduced.

Tetra Tech, which was hurt by the telecom bust is not focusing on water projects like dams and river cleanups. Analysts think that the company could add 12% to its backlog to more than $1 billion by the end of their fiscal in September. Standard Washington Research Group values that company at $22 compared to a current price of $15.54.

Epoch Investment Partners gives its market Pick and Pans. On the positive list are DeVita, Phonak Holding, OMI, Comcast, C&C Group, Bunge, and China Shineway. The investment firm is negative on AMD.

Douglas A. McIntyre

Returns Accrue When Accruals Don't

From Value Discipline

As many of you may know, I hold the CFA (Chartered Financial Analyst) designation. I am very proud to have completed this rigorous program. For many of us, the deeper learning and understanding only begins after this point. Continuing education through seminars, workshops, abstracts, and our professional journal, The Financial Analysts Journal (FAJ) is available. For those who are serious about investing as a career, it is the credential of choice. Please contact the CFA Institute, for further information.

In two interesting articles in the current FAJ, the issue of earnings quality is examined. Previous pioneering work by Richard Sloan indicated that net operating cash flow is more closely associated with future income and stock returns than accruals. His work examined annual accruals.In the current edition, Joshua Livnat and Massimo Santicchia looked at quarterly accruals and found that what has become known as the "accrual anomaly" applies to quarterly information as well. "Companies with extremely high (low) current quarterly accruals have significant and negative (positive) abnormal returns through the subsequent four quarters." In other words, stocks with earnings which show high accruals tend to provide low returns.

In the second article, Qiao Liu and Rong Qi study the persistence of the accrual anomaly and why sophisticated investors have not taken advantage of this mispricing.

What are accruals and how can the average lay investor use this fact?Accruals arise from GAAP...say a business expects great future sales and buys a pile of inventory to sell for future periods. It guesses wrong. In the calculation of earnings, the cost of inventory sold is matched against revenues generated. However, the excess inventory remains an asset on the balance sheet. In the operating section of the cash flow statement, the effect of the accumulation of excess inventory is a use of working capital that can be seen as a reduction in net operating cash flow.

Accruals can be current operating assets and liabilities such as inventories, receivables, and accounts payable, but non-current operating accruals exist as well such as deferred taxes.In short, most investors tend to view earnings reports quite literally and treat all aspects of reported earnings as having equal value, even though the accrual component of reported earnings has been demonstrated to be less reliable, and consequently have less value than the cash component.How do you find out about accruals? Cramer will not scream them to you nor will Maria Bartiroma breathe them at you! You've got to dig for them yourself.

Go to the 10-Q in Edgar or in some cases, to the press release of the company. Ensure that net income for the period is less than cash flow from operations.A quick and dirty solution to looking at cash flow from operations comes from Anumati.com. A free registration is required.

Enter the symbol and turn to the cash flow statement for the appropriate period. Compare the top line, "Net Income" versus the bottome line of the operating section, "Cash From Operating Activities." Companies with very high accruals will show net income greater than Cash Flow from operating Activities.

In truth, the analysis of the CFFO is a little more intensive than this. Various components of cash flow from operations (which in the past, have arisen from tax effects of stock options) may complicate or overstate CFFO.But as a first step toward better understanding the economics of the business in which you invest, this is important analysis.

When accruals tend to be low, returns tend to be higher than one would expect. When accruals are high, the market values these "earnings" as having lesser quality, and returns are lower than one would expect.

In short, returns accrue when accruals don't!


The Economy, Bonds & Interest Rates

By Yaser Anwar, CSC of Equity Investment Advisors

Bond yields declined for the third week in a row as weaker than expected economic data diminishes the odds of additional Fed rate hikes (2nd Q GDP was reported rising only 2.5%, well below the 3% expected).

According to surveys conducted by ISI Group on a weekly basis, there is the sharp and rapid decline in new home sales expectations, which is not new. The surveys also points to the increasing odds of a hard landing in housing which will echo throughout the economy, since housing has been responsible for alot of the employment.

In a study released last week, the Dallas Fed noted that the fraction of components experiencing annualized increases of more than 3 percent had grown to 57 percent, from 33 percent in December. Prices have risen more in the past three months than in the preceding three months, regardless of whether owners' equivalent rent is included or excluded. A model developed by a Fed researcher puts the odds of a recession occurring in the next year at more than 35 percent.

PIMCO finds that real house prices are pro-cyclical and tend to reach a maximum near business cycle peaks, often after a prolonged period of buoyant growth in activity has raised output above its potential level and inflation pressures have begun to emerge. With the core PCE deflator in the GDP report increasing 2.9%, in line with expectations but above the Fed’s comfort level, could lead to Fed raising rates further.

The bond market is signaling a slowing economy, an impending pause in the Fed's rate hiking campaign and lower bond yields going forward. If the Fed takes rates to 5.75 it will exacerbate the inversion of the yield curve & longer-term be more beneficial to the bond market by further dampening inflation pressures and creating a headwind for the economy.

The credit spreads are also indicating a cooling of in the economy. A slower economy increases credit risk, hence the expansion in the risk premium demanded by creditors.

Real house prices fall for about five years and their previous run-up is largely reversed. Real GDP growth slows during the first year or so after house prices peak as do growth rates of private consumption and investment.

An index of trucking companies sales expectations shows that while the its absolute level is in neutral territory, the index suffered its largest decline in the history of the survey. This is another indicator that the economy is slowing faster than many expect (Pointing to a possible Fed hike sometime soon).

Bond prices usually bottom several months before the last Fed Funds hike as the market begins to anticipate the Fed, which in turn is attempting to anticipate the economy and inflation. With the Fed near the end of its tightening cycle and the economy increasingly looking vulnerable, it may present an opportunity to add some bonds in your portfolio.

Sources: ISI Group, Reuters & PIMCO


Europe Stock Market Report 7/31/2005


European markets were off slightly just before 5.30 AM New York time.

The FTSE was down .3% to 5,959. Barclays was up .1% to 634.5. British Airways was up 1% to 393.25. BP was down .4% to 648.5. BT was up .1% to 239.5. GlaxoSmithKline was down ..6% to 1484. Prudential was down 1.1% to 571. Reuters was down .1% to 395.75. Unilever was down .6% to 1264. Vodafone was down 1.5% to 117.5.

The DAXX was off .2% to 5,694. Bayer was down .7% to 38.82. BASF was up .6% to 63.04. BMW was up .4% to 40.45. DaimlerChrysler was up .4% to 40.61. DeutscheBank was down .5% to 90.71. Deutsche Telekom was down .9% to 12.16. SAP was down .2% to 142.97. Siemens was off .2% to 62.9.

The CAC 40 was off .2% to 5,020. Alcatel was up 1.6% to 8.93. AXA was up .4% to 26.98. France Telecom was down .3% to 16.38. ST Micro was up 1% to 11.66. Vivendi was down .3% to 26.51.

Douglas A. McIntyre

Media Digest 7/31/2006


According to Reuters, GM and the UAW are supporting the new pension bill which will be voted on by the US Senate. The bill requires all major corporations, except some major airlines, to fully fund their pensions within seven years.

Reuters says banking giant HSBC has a profit increase of 18% in the first half of the year.

Reuters writes that Sandisk will buy Msystems, which develops memory for mobile phones. The price is $1.55 billion in stock.

According to the Wall Street Journal, two California defence operations have been put up for sale. One is Northop's navigation system unit, which could be sold for $1 billion. The other is Wyle Labs, which is on the market for under$400 million.

The WSJ writes thatAOL says it plans a video content portal for both material provided by users and cable TV content.

The WSJ reports that Verizon Wireless will release a new handset that plays music as the cellphone company moves into the MP3 market.

The New York Times reports that a Chinese union has begun to organize workers at Wal-Mart in China. The union is known for supporting management rather than employess.

Douglas A. McIntyre

Asia Markets 7/31/2006

Stocks: (CAJ)(FUJ)(HMC)(NTT)(SNE)(TM)(CHL)(CN)

Most Asian markets were up.

The Nikkei was higher by .7% to 15,457. Canon was up .9% to 5510. Daiwas Securities was up 2.9% to 1281. Fuji Photo was up 1.9% to 3860. Hitachi was up 1.4% to 734. Honda was down 1.2% to 3780. Japan Airlines was down .9% to 211. Mazda was up .4% to 746. NEC was up 2.1% to 634. NTT was up .8% to to 599,000. Softbank was up 2.2% to 2105. Sony was up 1% to 5280. Toshiba was up 1.4% to 741. Toyota was up .7% to 6060.

The Hang Seng was up .4% to 17,017. Cathay Pacific was up .1% to 13.94. China Mobile was up .4% to 50.45. China Netcom was up .3% to 14.18. HSBC was up .1% to 140. Lenovo was down .2% to 2.47. PCCW was up .6% to 4.87.

The KOPSI was up .1% to 1,298.

The Straits Times Index was up .5% to 2,442.

The Shanghai Index was down 3% to 1,613.

Douglas A. McIntyre

Sunday, July 30, 2006

Media Digest 7/30/2006 Management Buy-Out Pitfals

According to Reuters, Hilton Hotels reached agreeement with its North American hotel workers. The agreement covers the next five years.

According to the Sunday Telegraph, Swiss company Xstrata, plans to raise $5.1 billiion in a rights issue to underwrite the costs of buying Canadian mining company Falconbridge.

According to the Boston Globe, Morgan Stanley is in talks to acquire 20 acres of waterfront land in Boston that is currently owned by News Corporation.

According to the Wall Street Journal, CA Inc, the former Computer Associates, appointed Nancy Cooper as its new CFO as part of an effort to rebuild the company which has been involved in an accounting scandal.

The New York Times writes that buy-out deals of public companies, turning them into private enterprises, may no be a good deal for shareholders if company management is involved. The premium payed for management-led buyouts is only 20%. Buy-outs lead by outside firms paid an average premium of 27.5%. The data is based on stock prices average of the 30 days before a buy-out was announced.

Saturday, July 29, 2006

Media Digest 7/29/2006


According to Reuters, a courts will not block the sales of three California papers that McClatchy bought in its acquisition of Knight-Ridder. The antitrust suit was filed against several companies including MediaNews Group, Gannett and Hearst.

Reuters writes that Inco dropped its plans to buy Canadian mining company Falconbridge. Xstrata, a Swiss company has increased its holdings in Falconbridge. Inco itself may now be in play, although US firm Phelps Dodge has bid to acquire the company.

The Wall Street Journal reports that Pfizers board has named its general counsel, Jeffrey Kindler, to become the drug giant's next CEO.

The WSJ also reports that U.S. Airways approached Delta about a possible merger. Delta apparently rejected the offer.

The WSJ also writes that same-store sales at Wal-Mart were up 2.4%, the high end of the projected range. The figure showed a rebound from slower growth in June.

The WSJ writes that a proposal by Bristol-Myers and Sanofi to delay a generic version of Plavix by drug firm Apotex was rejected by state attorneys general. The move by state officials appears to signal a tightening of restrictions on deals between generic drug makers and branded drug companies to keep generics off the market for some time period.

The Wall Street Journal reports that Chevron's net rose 18% to $3.45 billion in its most recently reported quarter.

The New York Times reports that the ability of handsets to make WiFi calls has telephone companies concerned. Cell companies like Nokia, Samsung and Motorola will introduce phones with the new feature. The success of these projects could pose problems to Verizon Wireless and Cingular, which is owned by AT&T and BellSouth.

The New York Times also reports that Wal-Mart will exit the German market selling its 85 stores to a German retailer at a loss of $1 billion. Wal-Mart faced stiff competition from other retailers in the country.

The New York Times also reports that the SEC has asked for options data from Activision, the video game company.

Douglas A. McIntyre

Friday, July 28, 2006

XM Shareholders Grab the Pom Poms

You can imagine on a Friday when the market is up a little over 1% and you see +4.2% on SIRI and +16% on XMSR some heads had were being scratched.

We, well let me say I, have been pretty critical of XM Satellite Radio (XMSR) and on Sirius Satellite Radio (SIRI). It isn't so much about the company or about the prospects of the company, but the performance of the stock has been just atrocious. XMSR has lost more than 50% this year and SIRI is not that far behind. These guys need to deliver for shareholders with some new great initiatives. If it is a merger, great. If it isn't then they better do some better content deals and more bundling deals. Or maybe they just do nothing after releasing bad news since that seemed to work today.

Early this morning there was a very brief note on CNBC about the chances of deal happening or not, maybe that was taken to an extreme. This has been mentioned before by us, by CNNMoney, and by numerous others with SIRI and potentially several others being potential acquirers. As of today, there was nothing known publicly.

Its earnings were out yesterday. We had no corporate press releases this morning for this, but there was an S-4 filing after the close. The company's SEC filing shows 2 different exchange notes of $600 million and $200 million, but this will not result in real net proceeds going to the company per se. It looks like there may be some more favorable terms for the company, but on a Friday after the close it is almost academic (particularly if I am on the way out to a baseball game). Here is the summary:


The exchange offer is to satisfy certain of our obligations under the registration rights agreement covering the notes. We will not receive any proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive, in exchange, an equal number of outstanding notes in like principal amount. The form and terms of the exchange notes will be identical in all material respects to the form and terms of the outstanding notes, except as otherwise described under “The Exchange Offer—Terms of the Exchange Offer.” The outstanding notes surrendered in exchange for exchange notes will be retired and canceled by us and cannot be reissued.

The funny thing is that RBC lowered its target to $20 today, Bear Stearns had no rating change but noted some caution over near-term prospects, and CIBC downgraded it early this morning to a Sector Perform. That analyst at CIBC probably isn't answering the phine this weekend.

XMSR traded 19.7 million shares, compared to about 8.8 million on an average day. The August $12.50 Calls traded over 7,400 contracts, but that isn't even the equivalent of 1 million shares leverage on a translations basis. If they have any huge corporate news announcements on Monday or over the weekend you can be sure there will be some investigations into a news leak. Have a nice weekend.

Jon C. Ogg
July 28, 2006

Jon can be reached at jonogg@gmail.com. He does not own any securities in or have any positions in companies he writes about.

Weekly Wrap (July 28, 2006)

Daily Change:
DJIA 11,219.70; Up 119.27 (1.07%)
NASDAQ 2,094.14; Up 39.67 (1.93%)
S&P 500 1,278.55; Up 15.35 (1.22%)
10YR-Bond 4.99%

Point Changes for the week in US Index trading:
DJIA: +351.32
NASDAQ: +73.75
S&P 500: +38.26


This was one of the best weeks for the markets since last year. Israel's attacks into Lebanon haven't spilled over elsewhere and the street has convinced itself that a Q2 reading on GDP of 2.5% is an engineered soft landing out of the Fed. They are now betting that August will essentially be it for the fed rate hikes.

With well over 250 companies reporting earnings each day, it is pretty difficult to single these out. We decided once again to show a wrap-up of how the DJIA 30 components have performed since each reported earnings. We will have some DJIA and S&P components having their estimates trimmed by rating and analytics agencies, but the earnings from the DJIA components have actually been ok. Here we compare the average DJIA component's closing price the day before earnings to the close today (July 28). We have now had 22 of the 30 DJIA components report earnings or give guidance since the start of the month.


Microsoft (MSFT): on July 20 after the close MSFT beat earnings at $0.31 EPS vs $0.30e, but announced its two $20 billion share buyback plans.
July 20 Close: $22.85
July 28 close: $24.28

Intel (INTC): on July 19 after the close INTC reported earnings of $0.15 EPS vs $0.138e, but we won't bother reminding the poor guidance impact.
July 19 close: $18.49
July 28 close: $18.19

IBM (IBM): on July 18 after the close IBM reported EPS at $1.30 vs. $1.29e.
July 18 close: $74.26
July 28 close: $76.96

JPMorgan (JPM): on July 19 pre-market JPM reported $0.99 EPS vs $0.87e, but its CFO said to use $0.94 as EPS so it still Beat Estimates.
July 18 close: $40.71
July 28 close: 45.46

Alcoa (AA): On July 10 after the close AA beat earnings with $0.90 EPS vs $0.86e, but it was $0.86 after estimates so it met expectations.
July 10 close: $33.41
July 28 close: $29.70

Citigroup (C): Citigroup reported on July 17 pre-market EPS of $1.05 from operations vs. $1.05e, but items created a missed earnings reaction.
July 14 close: $47.58
July 28 close: $48.33

Caterpillar (CAT): on the morning of July 21 CAT reported EPS of $1.52 vs $1.43e.
July 20 close: $69.08
July 28 close: $71.18

General Electric (GE): GE reported on the morning of July 14 EPS of $0.47 EPS vs $0.47e.
July 13 close: $32.67
July 28 close: $32.95

3M (MMM): MMM on July 7 right before the open came clean and lowered guidance ahead of earnings.
July 6 close: $81.39
July 28 close: $70.47

United Tech (UTX): On July 18 pre-market UTX beat earnings with $1.09 EPS vs. $1.01+e.
July 17 close: $57.96
July 28 close: $62.09

Honeywell (HON): HON reported pre-market on July 20 of $0.63 EPS vs $0.61e, but items were a concern.
July 19 close: $38.24
July 28 close: $38.25

Johnson & Johnson (JNJ): J&J posted earnings pre-market on July 18 of $0.98 EPS vs $0.97e.
July 17 close: $60.91
July 28 close: $62.89

Pfizer (PFE): on July 20 pre-market PFE reported earnings at $0.50 EPS vs $0.48e.
July 19 close: $23.30
July 28 close: $26.00

Coca-Cola (KO): on July 18 pre-market KO beat earnings with $0.74 EPS vs $0.72e.
July 17 close: $42.70
July 28 close: $44.52

McDonalds (MCD):MCD on July 17 pre-market gave preliminary guidance of $0.57 EPS vs $0.56e.
July 14 close: $33.04
July 28 close: $35.29

Wal-Mart (WMT): WMT on July 6 pre-market issued EPS guidance of $0.70 to $0.74 on lower sales vs. $0.73e.
July 5 close: $47.02
July 28 close: $$44.50


American Express (AXP): On July 24 AXP reported EPS of $0.76 vs $0.74e, was $0.78 from operations.
July 21 close: $50.62
July 28 close: $52.19

Altria (MO): On July 25, Altria posted EPS of $1.41 vs $1.37e.
July 24 close: $79.49
July 28 close: $80.65

AT&T (T): Only July 25 AT&T reported EPS of $0.58 vs $0.53e.
July 24 close: $27.78
July 28 close: $29.99

Exxon Mobil (XOM): On July 27 Exxon showed $1.72 EPS vs $1.64e.
July 26 close: $66.60
July 28 close: $66.98

General Motors (GM): on July 26 GM showed $2.03 EPS after gains and benefits, well above estimates. The bottom line is debatable, but it was a huge beat.
July 25 close: $30.66
July 28 close: $32.30

DuPont (DD): on July 25 DD showed EPS at $1.01 EPS vs $0.95e.
July 25 close: $40.67
July 28 close: $40.15

Boeing (BA): on July 26 Boeing posted -$0.21 EPS vs -$0.21e.
July 25 Close: $83.75
July 28 close: $78.84

Merck (MRK) Merck posted earnings on July 24 of $0.73 EPS vs $0.65e.
July 21 close: $37.36
July 28 close: $41.10

These are the earnings we are still expecting: VZ PG WMT HPQ HD AIG BA DIS.

Jon C. Ogg
July 28, 2008

Wal-Mart Leaves Germany; Where Do They Leave Next?

After reviewing Wal-Mart's (WMT) essential failure and exit sale in Germany, this has to make you wonder where else the company may decide to exit next.

For starters Count CHINA Out as far as a market they will exit. It has about 60 stores and plans to open 15 or 16 more in the next year. China is considered the Holy Grail for Wall Street, so even if Wal-Mart had to vacate China they would do it gradually and it would be years off most likely. Wall Street would also view leaving China as a serious blow.

Here are the international markets the company operates in: Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, United Kingdom

Before we get too far here, let's identify this. They are selling 85 stores in Germany. Terms are undisclosed, but they will be taking roughly a $1 Billion charge. They were NEVER liked in Germany and if you go back through your historic releases you will see that their expansion plans into Europe have been fought tooth and nail. Europe already has its own hyper-markets and they do not want anymore. The EU governments can't afford any more either. These hyper-markets have already wiped out untold amounts of mom and pop shops, and with the amount of unemployment the EU nations don't want to support any more unemployed.

There are a couple of lay-up economies that they seemingly wouldn't leave. Mexico and Canada would seem to be a permanent core focus, as there are still many opportunities in those countries and they are on our borders and easier to manage. It will also keep its focus on the UK more likely than not.

It also in recent years made a large investment for Japan via its stake in Seiyu, so it may be unlikely that they exit there.

Could the company be looking into trimming other Latin American markets? They could easily look at the El Salvador, Costa Rica, Guatemala, Honduras, and Nicaragua as potential cuts. This is leaves out Argentina and Brazil, but who knows.

Here is what the company said about itself on the website:

The division has posted impressive financial results as well. Wal-Mart International announced that 2006 fiscal year end sales reached $62.7 billion, an 11.4 percent increase over the previous year, and that operating profit rose to $3.3 billion, an increase of 11.4 percent over the prior year. In 2006, Wal-Mart International plans to open 220 to 230 units in existing markets. Relocations or expansion of existing stores will account for approximately 35 of these units, while the remainder will represent new operating units for the company.

We are talking about the same Wal-Mart that has been in trouble in the US. Forget about the social impacts and the moral debate of Wal-Mart for a second. After all, we are discussing the stock. The chart doesn't lie. The company has an image issue, has much more negative press than the believable good press they get. Small communities (and large cities) now fight to keep them out. What does that tell you? They have a $184 billion market cap and they now average over $80 Billion in revenues Per Quarter. It has a market equivalent P/E with the S&P at about 16. It is also at the lower-end of its 52-week trading range of $42.31 to $50.87, and is at the lower-end of a 3-year $42.31 to $60.00 trading range (see 3-year chart above).

They really need to decide which markets to exit next it would seem. The street is actually rewarding them for throwing in the towel today with shares up almost 2% at $44.33. They are looking at new concept stores in the US. It is very possible that they just finally reached their maximum capacity to grow, but that may be unfair. It just seems that they need to focus where they are wanted rather than where they want to go impose their will and might.

They very well may look at other markets, but they need to use Germany as the lesson. If you are being fought relentlessly from entry, maybe you should rethink your plans. If the street is going to reward them even with a $1 Billion charge and for walking out with your tail between your legs, then they should use this as an opportunity to sell other markets that are not as profitable.

Jon C. Ogg
July 28, 2006

EchoSar's Wildest Dreams

Stocks: (DISH)(DTV)

The management and shareholders of EchoStar must think that the bankers at the local saving and loan left the vault open and put a sign on the door that says "Free Money". With local cable companies offering the "triple play" of VOIP, television, and broadband and the telcos about to offer IPTV over fiber to the home, Echostar hit a 52-week high at $35. Its low for the period is $24.44 which it hit in November of last year.

According to Morningstar, it takes EchoStar about two years to get back the acquistion costs of a new customer. The cost to convert hardware and systems, plus content costs, will grow with the demand for HDTV and other costs. There is, of course, always the problem that satellite TV does not work during a heavy rainstorm. Not a bad point to make if someone is selling cable or telco fiber products door-to-door.

Recent growth at EchoStar has been decent, but hardly spectacular. In the December 05 quarter, revenue was $2.18 billion. In the March 06 quarter, revenue hit $2.29 billion, a 5% increase. Operating income went from $252 million in the Decmber period to $274 million in the quarter ending in March.

The real engine behind the run-up in Echostar's stock is merger rumors. Pretty thin. It is also speculation to assume that the merger would value Echostar much higher than its current price. EchoStar trades at 1.74 times sales while DirecTV is at 1.62 times. Then, there is the thorny issue of antitrust and the anthropoids at the FCC.

Investing on merger chatter can be risky business. Has EchoStar's value really gone up 40% in a little over six months?

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

Conexant Falls Too Far

It does not take much bad news in this market for a stock to be flogged within an inch of its life. Conexant Systems, which makes semiconductors for broadband communications and digital home systems, has some big one-times expenses including a write-down of some Mindspeed warrants and a patent litigation settlement with Texas Instruments.

The company also guided that the next quarter will be about flat with the one just reported. Not great news.

But, the company is hardly going out of business. Revenue for the quarter ending June 30 was $251.6 million compared to $197.4 million in the quarter a year ago. The company's operating loss was $5.7 million compared to a loss of $37.8 million in the quarter last year. The company's non-GAAP core operating income was $$25.5 million compared to a loss on that basis of $11.2 million last year.

Conexant has shown revenue growth in each of the last four sequential quarters, and it is now saying it will have a period when it does not grow for at least a quarter.

Although the company has seen a slowdown in some of its business segments, all is not lost. One of the Conexant's key markets is still growing quickly according to the company: "In Broadband Media Processing, we continue to see strong customer demand across our set-top box portfolio, and we anticipate that these products will deliver yet another quarter of double-digit revenue growth".

Conexant's stock is off from $3.90 in late April to $1.68, very near its 52-week low. Is the company really worth less than half of what it was three months ago? That's probably a bit of an overreaction.

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

Intel's New Chips Can't Fix A Broken Industry

Stocks: (INTC)(AMD)(DELL)(GTW)

Intel's new Core 2 Duo chips are a marvel. The deliver more processing power, use less battery power, and throw off less heat. But, as gun owners will tell you, people get killed as often with a 22 caliber as with a 45 model. The market may not want a better chip.

Intel cut the prices on its older chips as much as 61%, which hurts competitor AMD, but does not necessarily help Intel. The PC manufacturers are squeezed. Companies like Dell, Lenovo, and Gateway are desparate to increase sales and margins, and a chip that is a better mouse trap may not be the solution.

PC companies that want to improve margins want the old chips at a 61% rake off, not an expensive new chip that most consumers cannot tell from the Pentium 4.

Dell may have wanted AMD chips when they had better performance that Intel's. But the new Core 2 Dual can run as much as $999, and that may not be much help to a manufacturer pressured ny margin problems.

Don't look for the Core 2 Dual to save Intel's bacon. Nice product, but how many people really want it? Maybe that's why Intel's stock, trading near its 52-week low at $17.60 is only up 1% on the product launch.

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

GeoMet IPO Priced

GeoMet (GMET) today announced the pricing of its initial public offering of 5,000,000 shares of common stock at a price of $10.00 per share, at the lower-end of the $10.00 to $12.00 range. Banc of America acted as the sole book-runner with A.G. Edwards & Sons and Raymond James acting as co-managers.

GeoMet, Inc. is an independent energy company engaged in the exploration for and development and production of natural gas from coal seams. Its principal operations and producing properties are located in the Cahaba Basin in Alabama and the Appalachian Basin in West Virginia and Virginia. It controls additional coalbed methane development rights, principally in Alabama, British Columbia, Colorado, Louisiana, Virginia, and West Virginia.

It is surprising that an energy play is pricing at the lower-end of the range, but this deal generated very little buzz in IPO and underwriting circles.

To Your Health

By William Trent, CFA of Stock Market Beat

Summary: Rising costs harpooned the HMOs, but could have been foreseen by looking at the detailed PPI data.
In the latest Value Line Industry Survey on the drug industry they say:

The major pharmaceutical companies that dominate the Drug Industry will report June-quarter results over the next few weeks. Year-over-year comparisons are likely to be generally unexciting, primarily reflecting pressures on the top line from significant patent expirations and the resulting assault from generic competition. The silver lining in the drug sector’s multiyear descent, however, are valuations that have reached extraordinarily low levels, from which the downside risk appears manageably low and the dividend yield temptingly high.

The New York Times says the pharmaceutical industry is beginning to reap a windfall from a surprisingly lucrative niche market: drugs for poor people.

PPI data shows that hospital costs are rising faster:

As are pharmaceutical costs:

But a doctor’s visit is not rising as quickly.

Watch List news:

Israeli generic drug maker Taro Pharmaceutical Industries Ltd. said Friday it received notice it may be delisted from the Nasdaq Global Select Market for failing to file its annual report on time. In July the company said it was completing an audit of financial statements for the year ended Dec. 31, 2005 and expects to finish the audit in August. Taro has requested a hearing before Nasdaq’s listing qualifications panel to review the possible delisting. Its shares will remain listed pending the review.

Home healthcare company Apria Healthcare Group Inc. (AHG) said earnings ballooned from a year-ago period weighed down by a hefty charge, and said its finance chief is stepping down. In the second quarter, Apria’s net income increased to $18.5 million, or 43 cents per share, up from $3 million, or 6 cents per share, a year earlier. Year-ago results were hurt by a charge for a $20 million settlement of a government lawsuit over Medicare billing. Analysts, on average, expected earnings of 40 cents a share, according to a Thomson Financial survey.

Biosite says will pay in settlement of patent litigation

Other news:

Johnson & Johnson (JNJ) earned $2.82 billion, or 95 cents per share. A year go it earned $2.59 billion, or 86 cents per share. Excluding special items, J&J earned 98 cents per share. Analysts, on average, expected 97 cents per share, according to Reuters Estimates. Company sales rose 4.7 percent to $13.4 billion, a bit higher than Wall Street expectations of $13.29 billion.

Pfizer earnings rise on sales growth

ImClone profit up, stock sinks

The author may hold a position in the securities discussed.


Getting Defensive

By William Trent CFA of Stock Market Beat

In reviewing yesterday’s Durable Goods report, one segment jumped out at us: Defense aircraft and parts. A look at the table to the right, which presents the year/year change in shipments, orders, inventories and backlog shows that something interesting may be going on.

Shipments have been poking along at barely above last year’s numbers (and actually below last year in June.) The lag from orders to shipments can be extended in aircraft (less so for parts) so the decline in orders from April was a predecessor to June’s decline in shipments. This was also foretold in the stock prices, which peaked in March (ahead of the rest of the market) and in most cases have not fully recovered.So what has happened to orders since April? They have been rising at an accelerating pace.

Our bet is - you guessed it - defense aircraft and aircraft parts should have strong shipments ahead. Meanwhile, the performance of related stocks has been mixed this year. Names worth researching include L-3 Communications, Rockwell Collins, Precision Castparts, Boeing, Lockheed Martin and Teledyne.


Rackable Getting Racked

Rackable Systems (RACK) is feeling the wrath of what can happen to high growth companies if they miss on any cylinders. The company beat estimates yesterday with $0.28 EPS vs $0.22 estimates and revenues were $88.64 million vs. $84.4 million estimates. The guidance is light, and that has shares down over 30% pre-market. The company forecast $0.18 to $0.21 EPS vs $0.21 estimates, and revenues at $80 to $85 million vs. $85.25M estimates. Its fiscal EPS targets were put at $0.98 to $1.02 vs. $0.96 estimates, and revenues for the year are put at $345M to $355M vs $345M estimates.

The company is blaming a slowdown in business with one of its largest customers due to decreased cap-ex spending. There was also a much larger portion of the income tied to interest income from its cash balance.

Even with shares down over 30% at $23.30, this is still nearly double from the 52-week lows. Rackable has also traded as high as $56.00 this year.

ChevronTexaco Misses EPS Targets

ChevronTexaco (CVX) did what no one anticipated after the huge Exxon Mobil (XOM) numbers Yesterday. They missed earnings expectations. It reported EPS at $1.97, which up from the $1.76 EPS number last year but lower than the $2.21 EPS estimate. Even if you add back in the charges of $0.13 from hurricane damage and other items it is still short. Revenues were just over $53.5 billion. Shares had been trading on 52-week highs yesterday before this release, but are now trading down 2.2% at $66.23 pre-market.

Pre-Market Notes (July 28, 2006)

(ABAX) Abaxis $0.11 EPS vs $0.08e.
(ADBL) Audible -$0.03 EPS vs -$0.05e; but revenues $19.1M vs $21.3M(e).
(ALEX) Alex & Baldwin $0.68 EPS vs $0.50e.
(ALSK) Alaska Communications $0.31 EPS vs $0.06e (on items before charges); R$85.1M vs $84M(e).
(AMMD) American Medical $0.23 EPS vs $0.17e.
(ANDE) Andersons $0.66 EPS vs $0.71e; stock down 12% pre-market.
(ANLT) Analytical Surveys filed to sell 9+ million shares for holders.
(APC) Anadarko Petroleum $1.28 EPS vs $1.26e.
(APCC) Amer Power Corp $0.13/$560M vs $0.17/$548M(e); unsure if EPS is comparable.
(ARDI) AtRoad -$0.02 EPS vs $0.01+e; unsure if comparable.
(AXL) Amer Axle $0.40 EPS vs $0.35e.
(BCGI) Boston Communications -$0.05 EPS vs -$0.14e.
(BDX) Beckton Dickinson $0.81 EPS vs $0.79e.
(BHI) Baker Hughes $1.07 EPS vs $0.98e.
(BLDR) Builders First Source $0.79 EPS vs $0.76e.
(CA) CA is considering layoffs according to online reports.
(CAMD) California Micro $0.07 EPS vs $0.03e; guides EPS in-line.
(CCJ) Cameco $0.21 EPS vs $0.18e.
(CEG) Constellation Energy $0.56 EPS vs $0.46e.
(CENX) Century Aluminum $1.92 EPS vs $1.82e.
(COLM) Columbia Sportwear $0.13 EPS vs $0.05e.
(CSH) Cash America $0.31 EPS vs $0.31e.
(CVH) Coventry Health $0.85 EPS vs $0.82e.
(DENN) Denny's $0.02 EPS vs $0.00e.
(DSCM) Drugstore.com -$0.02 EPS vs -$0.04e.
(DRIV) Digital River $0.41 EPS vs $0.38e.
(DSCO) Discovery Labs -$0.13 EPS vs -$0.23e.
(ENS) EnerSys filed to sell 12.5M shares.
(GNSS) Genesis Micro $0.04 EPS vs $0.00e; was $0.11 before option charges.
(FALC) FalconStor Software $0.03 EPS vs $0.02e.
(FORM) FormFactor $0.32 EPS vs $0.28e.
(FRNT) Frontier Air $0.10 vs $0.05e.
(FSS) Federal Signal $0.24 EPS vs $0.21e.
(FSTR) L.B.Foster $0.28 EPS vs $0.21e.
(GMET) GeoMet 5M share IPO priced at $10.00, at the bottom of its $10-12 range.
(GNW) Genworth $0.72 EPS vs $0.68e.
(GPN) Global Payments $0.41 EPS vs $0.38e.
(HAS) Hasbro authorized $350M for share buybacks.
(HCR) HCR Manor Care $0.58 EPS vs $0.54e.
(HIG) Hartford Insurance $1.83 EPS vs $1.70e.
(IDXX) Idexx Labs $0.78 EPS vs $0.64e.
(IR) Ingersoll Rand $0.95 EPS vs $0.95e.
(ITMN) Intermune -$0.42 EPS vs -$0.35e.
(ITT) ITT $0.80 EPS vs $0.77e.
(KLAC) KLA-Tencor $579M vs $574M(e); will not release earnings until options probe is released.
(LNCE) Lance $0.21 EPS vs $0.14e, unsure if comparable because revenues were light.
(LWSN) Lawson lowered guidance and said the CFO is leaving.
(MCK) McKesson $0.60 EPS vs $0.62e.
(MFE) McAfee $0.30 EPS vs $0.31e; guides next quarter lower; will miss filing dealine.
(MGLN) Magellan Health $0.52 EPS vs $0.41e.
(MHK) Mohawk $1.73 EPS vs $1.56e.
(MOBE) Mobility $0.04 EPS vs $0.01e.
(MRCY) Mercury Computer beat earnings but lowered guidance.
(MRT) Mortons $0.15 EPS vs $0.14e.
(MSCC) Microsemi $0.28 EPS vs $0.27e.
(MSTR) Microstrategy $1.21 EPS vs $1.19e.
(NATI) National Inst. $0.25 EPS vs $0.19e.
(NNI) Nelnet $0.82 EPS vs $0.64e; unsuree if comparable.
(NTGR) NetGear $0.30 EPS vs $0.27e.
(NTY) NBTY $0.43 EPS vs $0.37e.
(NYX) NYSE $0.39 EPS vs $0.35e.
(ODP) Office Depot $0.43 EPS vs $0.40e.
(PKI) Perkins Elmer $0.26 EPS vs $0.26e.
(PXLW) Pixelworks -$0.16 EPS vs -$0.17e.
(RACK) Rackable Systems down 30% on earnings and revenue warning.
(RMBS) Rambus accepted the lower damages award that had been reduced in recent weeks against Hynix.
(RNWK) RealNetworks $0.22 EPS vs $0.20e.
(SIVB) SVB Financial $0.36 EPS vs $0.60e, but had charges.
(SMI) Semiconductor Manufacturing gets design manufacturing pact with Qualcomm.
(SOHU) Sohu.com $0.19 EPS vs $0.19e.
(SWIR) Sierra Wireless $0.15 EPS vs $0.10e; guides next quarter lower.
(SYNA) Synaptics $0.15 EPS vs $0.14e.
(TE) Teco Energy $0.30 EPS vs $0.24e.
(TFX) Teleflex $0.92 EPS vs $0.83e.
(THQI) THQ -$0.16 EPS vs -$0.20e.
(TUNE) Microtune $0.03 EPS vs $0.02e.
(TWTC) Time Warner Telecom is making a $531M acquisition of Xspedius.
(WDC) Western Digital is conductubgf its own options probe.
(WMI) Waste Mgmt $0.45 EPS vs $0.43e.
(WMT) Wal-Mart sold its German stores for an undisclosed sum to Metro AG.
(WSPI) Website Pros 3.5+ million share secondary priced at $9.25; was originally set for over 4 million shares.
(YRCW) YRC Worldwide $1.62 EPS vs $1.56e.

Business Week: positive article on Bear Stearns (BSC), positive article on Bally Tec (BYI), positive on Emisphere,.

GDP at 8:30 AM EST.

Cramer noted Valero (VLO) and Halliburton (HAL) positively. Positive on Kellogg (K) after interviewing the CEO.

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