Market Wrap August 31, 2006

The Dow was down .02% to 11,381.15. Nasdaq was off .09% to 2,183.75. The S&P was off .04% to 1,303.81.

The big action was in the telecom equipment sector and in M&A.

JDS Uniphase was pounded on poor guidance. The stock traded a breathtaking 130.2 million shares and was down 13.7% to $2.27.

JDSU competitor Ciena also gave disappointing guidance and announced a 1-for-7 reverse split. The stock dropped 8.4% to $3.95 on 70.6 million share.

Most big techs were off in a range from just under 1% to 2% including Intel, Sun, and Dell.

On the M&A front, GoldCorp's plan purchase of Glamis Gold sent the stocks in opposite directions. GoldCorp was off 9.2% to $27.66, and Glamis rose 18.7% to $46.12.

Few of the most actives on the NYSE were up. Pfizer, GE, Corning, Motorola and Qwest were all off modestly.

Douglas A. McIntyre

Regional Jet Orders Likely to Continue (ERJ)

By William Trent, CFA of Stock Market Beat

Watch List member Embraer (ERJ) rallied yesterday on news of a large order from China for its regional jets.

Embraer Shares Climb on Sale of 100 Jets: Financial News - Yahoo! Finance

Shares of Brazil’s Embraer soared Wednesday after the world’s fourth-largest aircraft maker said it would sell 100 regional jets to China’s Hainan Airlines Co. for $2.7 billion.

Embraer said it will start delivering the 50 E145 and 50 larger E190 jets in 2007, and analysts described the order as a significant entry into the important Asian market for a company whose commercial jet sales have been largely stagnant in recent years.”This deal substantially raises the company’s firm order backlog, which had been stuck at around $10 billion for some time,” said Pedro Galdi, aviation analyst at ABN Amro in Sao Paulo.

The purchase from the state-owned HNA Group that owns Hainan raises Embraer’s firm orders by about 25 percent to $13.6 billion, analysts estimated. It also means Embraer will deliver more planes than the 150 that had been predicted for 2007 and increase deliveries in 2008.

Any given order is a positive sign, but by the time the news is out it is difficult for investors to take advantage of it. Rather, investors should buy if they expect other similar announcements in the future. We think there are several reasons to expect this may happen:

The only most successful US airline, Southwest (LUV) earned its success by offering non-stop flights from smaller airports. Rejional jets could open point-to-point non-stop service to an even larger number of even smaller airports - paving the way for the next Southwest.
Smaller jets can be loaded and unloaded quickly, saving precious time for passengers and precious money for the operator - who can keep the jets flying (earning money) rather than sitting on the ground (costing money).
Smaller airports allow passengers to pass more quickly through security, further saving time. Plus, greater point-to-point service to more markets means they also save time by not having to connect through hubs.
Lacking the dramatic potential of larger jets, regional jets are likely to be avoided by terrorists.
Embraer has sufficient financial qualifications (ROE, growth, valuation) to pass our screening criteria for the Watch List. The list above provides further qualitative comfort with the stock.

http://stockmarketbeat.com

Morningstar Takes on HR Outsourcing

By William Trent, CFA of Stock Market Beat

We recently profiled the travails of Human Resources outsourcing firm Hewitt (HEW). Although the stock price had triggered a buy alert we previously set, the uncertainty regarding past revenue (which now is being restated) caused us to remain on the sidelines.

Then yesterday we read an interesting article from Morningstar called Four Top HR Outsourcing Stocks. In many ways, Morningstar appears to share our views.

One caveat though–the one-stop-shop HR outsourcing model has struggled. Often termed human resource business process outsourcing, this new offering focuses on large corporations–usually with more than 10,000 employees–and handles nearly every HR function. Although it has great potential to cut costs for clients, the benefits are much less evident for the service provider.

That sounds quite a bit like our own comment, “One of the things we like about the HR Outsourcing business is that the complexity of the HR function makes many companies prefer not to do it themselves. For the same reason, we wonder why there are so many companies willing to do it for others.” The high competition drove Hewitt to price contracts too aggressively, and was the source of their latest slip.

Still, Morningstar lists Hewitt as one of their fab four, saying:

Hewitt’s position as both a consulting and outsourcing firm creates valuable synergies. With the information accumulated from its benefits outsourcing experience, Hewitt consults for firms that need help with benefit programs but aren’t willing to take the outsourcing leap. Through its 60-year history, Hewitt has gained expertise that keeps more than 90% of its clients coming back every year.

Recently, Hewitt’s stock has been hurt by troubles in its HR business process outsourcing service. Unfortunately, Hewitt swam too deep before the waters in this complicated business had been tested. Still, Hewitt’s non-HR business process outsourcing business (80% of revenue) continues to perform and generates more than enough value to support our opinion that Hewitt’s stock is cheap.

On this we disagree. Our previous conclusion still holds:

Furthermore, the lack of profitability shows that Hewitt was too aggressive in pursuing contracts. As a result, investors should not expect the company to grow as fast as the historic results would suggest. This is already showing, with consulting revenues down 3% year-to-date.

So what we’ve got here are shares that are pricing in no growth on an EV/FCF basis, an assumption that seems appropriate given the circumstances. We’ve also got a company with what we estimate as sustainable earnings power of $1.00 per share - on which a share price of $20+ appears on the high side in the current market.

http://stockmarketbeat.com

Rockwell Automation Downgrade Too Late for Investors

By William Trent, CFA of Stock Market Beat

We recently discussed the selloff in Rockwell Automation (ROK) asking “will investors ever learn?” The answer appears to be no.

Rockwell Automation Downgraded: Financial News - Yahoo! Finance

A Credit Suisse analyst downgraded shares of Rockwell Automation Inc. Wednesday, saying the factory automation equipment maker’s stock has few reasons to grow.Credit Suisse analyst Nicole Parent reduced her rating to “Underperform” from “Neutral” and lowered her target price to $58 from $64.

Shares have increased about 60 percent due to good news over the past couple years, as the company refocused on efficiency, end market diversity, global expansion, and spinoffs of segments, wrote Parent.

But while the stock is down about 28 percent from its 52-week high of $79.47 on April 24, shares are unlikely to rise, Parent said, because she believes investors have already priced the good news into the stock, and that margins are likely to come under pressure down the road.

A 28% decline means investors are pricing in good news? I’d hate to see what happens when they price in bad news - or perhaps in the Sell Side’s alternate universe it would take a 50% rally for the bad news to be priced in. Here is what we had to say in our previous post, which we continue to believe:

Not the kind of news one expects to send a stock down more than 10 percent for the day. In part, Wall Street was disappointed that after beating estimates the full-year guidance wasn’t really raised. In fact, some analysts consider the company to have reduced guidance:

Deutsche Bank analyst Nigel Coe wrote in a research note that the profit beat Wall Street expectations largely due to a lower-than-expected tax rate. The lower tax rate, he said, means that “the quality of this (full year profit forecast) number has been lowered.”

Whatever. Management reiterated on the call their past comments that the tax rate can jump around from quarter to quarter due to the timing of various items.

This all brings us back to April, 2005. The stock sold off sharply because the company “missed” its earnings target for the quarter. Problem is, Rockwell doesn’t give quarterly guidance. The high ticket prices of their equipment means there is too much volatility in quarterly numbers just because a sale occurs a few days earlier or later than the quarter end. No matter. Wall Street came up with their estimates and punished the stock for failing to meet them.

Of course, the company went on to exceed the annual guidance it had provided, the selloff marked the low of the year and by the following April the share price had nearly doubled.
We can understand the analyst’s embarassment as the shares have fallen this year. It has happened to everyone. We would also be willing to listen to reasonable arguments as to what has changed in the fundamental story for Rockwell. But the reasons listed by Credit Suisse were much more valid at $79 than they are today at $56.

http://www.stockmarketbeat.com/

Keeping Up With The Dow Jones

Stocks: (DJ)(NYT)(RTRSY)

Dow Jones does not seem to be able to do anything to get its stock price up. The company replaced the CEO with an aggressive manager who succeeded an executive that Wall St did not much admire. The company got itself a new CFO. And, Dow Jones is talking about selling its community newspapers, which bear little or no relationship to the company's core business of providing financial news.

Goldman Sachs still has a sell rating on the pubisher of the Wall Street Journal and owner of MarketWatch.

The Dow Jones stock has barked like a dog since 2000, the peak of the internet bubble. The stock is now down from nearly $80 then to $36. One of the things investors hate about the company is that it has been controlled for generations by the family of the company's founder. The chance that a raider could take control of the company and break it into pieces is unlikely. Jim Cramer tried when he was still managing money, and the Dow Jones management was able to fend him off.

Dow Jones' management has been considered bumbling up until recently. The old CEO, Peter Kann, was savaged in a cover story in Forbes a decade ago. The company sold its trading terminal business to Bridge Information Systems, which promptly went bankrupt. Dow Jones was left with payments to Cantor Fitzgerald which had a guaranteed payout under the deal.

Dow Jones was also fairly late to moving its products to the internet. The Wall Street Journal online is considered a success, both financially, and in terms of audience (ranking 381 for all websites in Alexa). The purchase of MarketWatch (396 in Alexa) appears to be a success, and is used to promote other Dow Jones products. But sites like the New York Times online (Alexa rank 75),Reuters (ranked 231 in Alexa), and BBC News (Alexa rank 23) still run far ahead of the Dow Jone properties in audience.

Wall St continues to be concerned with the company's exposure to the print newspaper business. The price of delivering papers is rising due to oil costs. The same is true for printing and ink. Investors remain skeptical that advertising and subscription rates can rise fast enough to cover these costs.

At $36, Dow Jones trades near the bottom of its 52-week range of $42.23/$32.55. New management will have to do more than replace a few executives and offer to sell some of its smaller newspapers to get the stock moving up again.

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

Citi's Investment Bank Looks Good, Goldman Doesn't

Stocks: (C)(LEH)(GS)

According to Reuters, Goldman Sachs and Lehman Brothers lost ground in Q3 M&A and equity underwriting. The data came from Dealogic. Goldman's numbers were down two-thirds from the previous quarter in the equity underwriting category. Its M&A activity was down 58% from the immediately previous quarter.

Citigroup appeared to be one of the few exceptions to the downturn, which was probably driven by higher interest rates and a choppy stock market. Citi turned out to be the top underwriter for the period. A number of observers, including Barron's, have expressed concern that the current market is more hostile to investment banking activity. Citi appears to have dodged that bullet for now.

Citi and Goldman have taken opposite paths in the stock market, and Citi has been under pressure from institutional investors to consider breaking the big financial institution into pieces. Goldman's stock is at the high end of its 52-week range at $147, up from a low of $109.84. Citi had been at the lower end of its range around $47, but has recently moved up to $49.

If the investment banking numbers are any indication of revenue and earnings for the third quarter of the year, then Goldman could be in for a fall, and Citi may regain some of its luster.

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

Do Mutual Funds Perform When it Matters Most?

From Value Discipline


However, having read a fascinating article, I could not wait to bring it to your attention.

The combined assets of U.S. mutual funds totals some $9.4 trillion of which about $5.2 trillion is stock funds. Year to date cash flows have been about $110 billion of inflows into stock mutual funds.

Mutual fund underperformance has been widely documented by both the popular press and academic research. Though historically much of the underperformance has been attributed to poor stock-picking by professional money managers, more recent research has attributed the phenomenon to poor portfolio composition and excessive portfolio turnover. The high portfolio churn leads to after-tax performance that further reduces returns.

Noted thinkers such as Charlie Ellis argue that it is exceedingly difficult for institutionalal investors to outperform the market when, in aggregate, they actually are the market. John Bogle, of Vanguard fame, has similar thoughts, essentially that all investors, in aggregate earn precisely the market return before the costs of investment are subtracted. And management fees, transaction costs, distriubtion costs are substantial, particularly given current relatively low rates of return.

But this paper counters some of the negatave arguments that have long been attributed to the industry. The study, written by Robert Kosowski of INSEAD covers the U.S. domestic equity
industry for the period 1962-2005.

The paper demonstrates that indeed, during periods of expansion, the mutual fund industry, in general, fails to generate alpha...the risk-adjusted return is less than the benchmark index return. However, in periods of recession, the industry on balance achieves positive alpha, a risk-adjusted return greater than the benchmark.

During recessions, investors' marginal utility of wealth is high...in other words, there is much greater sensitivity about loss of wealth. At such a time, the mutual fund industry is more likely to show positive alpha and enhanced returns.

The difference in alpha between expansionary and recessionary years is very significant amounting to 3 to 5% a year. The sudy also addressed the performance differences between aggressive growthm growth, growth and income, and balance or income fund classifications.

The numbers are quite astounding:

Alpha generation:

Type of Fund...........Overall Period.......Expansionary Period.........Recessionary Period

All................................(-0.43).......................(-1.33)..............................+4.08

Aggressive Growth...(-0.98).......................(-1.63)..............................+0.82

Growth.......................(-0.41)........................(-1.22).............................+3.21

Growth & Income....(-0.40).........................(-1.21).............................+3.27

Balanced & Income..(-0.71).........................(-1.69).............................+5.48

Once again, the evidence is strong...most mutual funds subtract rather than add value over the long run. Clearly, there are exceptions to this, generally from low-turnover, disciplined funds. The real surprise is that most of the industry adds value when you need it most! Hence, it is possible to exploit business cycle predictability to achieve positive risk-adjusted returns from mutual funds.

http://www.valuediscipline.blogspot.com/

Ciena's Tough Call

Ciena announced earnings today. Its forecast, like that of JDS Uniphase and ADC Telecom, two competitors, was not rose. After Ciena's revenues rose 16% over the immediately previous quarter to $153 million, the company forecast an increase of only 5% for the next quarter-over-previous quarter figure. The company's operating loss improved marketly for the quarter ending July 31, from $53.5 million last year to $12.8 million in the most recent quarter.

In early trading before the market opened, the stock was flat at $4.33.

The more troubling news from Ciena is that it will set a 1-for-7 reverse split to get the price of its stock up, in the hopes of appealing to more institutions which often will not buy shares that trade below $5. Unfortunately, stocks have a history of dropping after reverse splits. As MSNBC said yesterday: "Reverse stock splits also have a spotty history." Or, as Small Cap Sentinel pointed out: "Often times a reverse split leads to the company's market cap rescinding as the stock price seeks its previous value."

Ciena's results may not move the stock down much. Guidance may have been weak, but that may be offset by an improving bottom line.

But, when the reverse merger takes effect, the stock may fall.

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

Google's Schmidt On Apple Board Means Options Problems Are Modest

Stocks: (AAPL)(GOOG)

There is a great deal of speculation about what the CEO of Google would join the board of Apple. Perhaps Google video, the company's program for selling commercial programming online and allowing user-created video to sit on Google's servers and be watched by the whole world, will begin to interoperate with the iPod. Or, maybe iTunes will be put on the Google ToolBar which gets millions of downloads onto PCs across the world.

All speculation.

But, one this is very likely. Apple's options dating problems are not as severe as investors may far. Apple has already received a delisting notice from NASDAQ for filing its 10-Q late, and the company is attempting to release financial statments to the SEC while the NASDAQ review of the listing issue goes on.

It is unimaginable that Schmidt would joint the Apple board without satisfying himself that the options problem, the financial restatement problem, and the Nasdaq listing issue can and will be resolved shortly. Schmidt would not expose himself to the ridicule that would come from joining the corporate board of a company that was about to release even worse news about its options backdating problems and the financial filing issues that go with it.

Whether Apple and Google form any business alliances or not, Schmidt moving to the Apple board means that investors have less to fear from Apple's options problems.

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

Chrysler: Zero Percent Financing Forever

Stocks: (GM)(F)(DCX)(TM)

According to the Wall Street Journal, Chysler will begin offering zero percent financing for 72 months. That's a very long time. It is also probably an indication that the car sales figures for August that will come out next week will be poor for yet another month. Toyota is also offering incentive. Odd, given that their North American sales have been strong this year, but the company's models have had more than their share of defects and recalls.

GM is beginning to offer cash-back incentives probably sensing a new round of marketing techniques to get buyers into dealerships. Almost all involve some form of discount. Ford is offering incentives on 2006 models.

The incentives are an indication that Detroit still has not been able to arrest its drop in unit sales and loss of market share, especially to Toyota. Sales of large SUVs and pick-ups have been badly hurt by high gas prices, and these models are usually the most profitable that the car companies sell.

If August unit sales are poor for Ford, Chrysler, and GM, and they have to continue incentives to clear out 2006 model inventories or jump start 2007 model sales, look for poor earnings numbers in the third and fourth quarters of 2006.

That is not what Detroit needs.

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

WiMax Nation: SprintNextel Is Just The First

Stocks: (MOT)(INTC)(AMD)(S)

Samsung is saying that four more global wireless operator will announce the use of WiMax for their next generation systems and that another six are conducting trials of the technology, according to a report by Reuters. Samsung, Intel, and Motorola have been the big backers of the new technology, and huge roll-outs of WiMax in the US and abroad should bring them billions of dollars in new revenue.

Samsung says that it will provide network gear and handsets for these deployments, while Intel will supply chips. This new business may help offset the lackluster sales of chips for PCs that have damaged the stocks of both Intel and AMD. However, AMD does not have a way out of the slowing PC market while Intel's investment in WiMax may boost its revenues over the next several years. Intel's stock trades at $19.84, just above its 52-week low of $16.75. The company has lost over $80 billion in market cap over the last year.

The annoucement also make the decision by Sprint/Nextel to use WiMax for its next generation high-speed wireless phone system look smart, even though it will cost the company $3 billion. Sprint has been pilloried for its poor intergration of the Nextel customer base, and the company's president recently departed. A correct call on WiMax may help the company recover some of its share price and reputation.

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

Cellphone Nation: Samsung's News, Motorola's Benefit

According to Reuters, Samsung is forecasting sales of 950 million handsets worldwide this year. The figure revises upward their previous number of 910 million, issued in July.

Motorola's RAZR phone is part of the reason handset sales are rising so fast. And, the news of increasing handset sales probably indicates that the company will have solid numbers the last two quarters of 2006. The company is already trading near its 52-week high of $24.99 up from the low of $18.66.

Motorola's numbers in its last reported quarter were spectacular. Revenue hit $10.5 billion and operating income jumped to $1.5 billion.

Wall St. should look for even better numbers ahead.

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

eBay 1, Google 0

Stock: (EBAY)(GOOG)

According to a report at MarketWatch, consumers are having trouble using the new Google Checkout online payment system, the program that was going to devastate eBay's market leading PayPal. Apparently, the Google software has technical problems. MarketWatch added that a survey of 40 online retailers by Piper Jaffray found that 81% of them would not use the new Google product.

Google announced an alliance with eBay just days ago. The search giant will offer advertising on eBay auctions sites outside the US. The arrangement shows how large internet companies have created complex relationships with one another, operating both in cooperation and as competitors.

PayPay is eBay's fastest growing unit according to its 10-Q. Any severe market share lose to the Google product would damage eBay's growth.

eBay's stock has been hurt badly by perceptions that its domestic growth has slowed, by concerns that it paid too much for VoIP giant Skype, and that Google Checkout could take share from PayPal. As a consequence, eBay's stock has dropped from its 52-week high of $47.86 to $28.45.

Perhaps there is evidence emerging that concerns about eBay are overblown.

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

Europe Stock Market Report 8/31/2006 Deutsche Telekom, Diageo, Vodafone Down

Stocks: (BCS)(BP)(BT)(BAB)(GSK)(DEO)(PUK)(RTRSY)(VOD)
(AZ)(BAY)(DCX)(DB)(DT)(SI)(ALA)(AXA)(FTE)(V)

European market was down modestly at 5.45 AM New York time.

The FTSE was down .1% to 5,923. Barclays was up .4% to 664. BP was flat at 592. British Air was up .7% to 410.75. BT was down .5% to 247. Diageo was down 2.9% to 931. GlaxoSmithKline was up .4% to 1497. Prudential was down .3% to 592. Reuters was up .3% to 402.5. Vodafone was down .9% to 114.

The DAXX was down .1% to 5,862. Allianz was up .3% to 132.37. Bayer was down .5% to 38.71. DaimlerChrysler was up .3% to 41.05. Deutsche Bank was up .1% to 89.12. Deutsche Telekom was down 1.4% to 11.31. Siemens was down .3% to 66.4

The CAC 40 was down .2% to 5,172. Alcatel was down 1% to 9.89. AXA was up .5% to 28.93. France Telecom was down .8% to 16.5. ST Micro was down 1.7% to 12.92. Vivendi was up .2% to 26.92.

Douglas A. McIntyre

Media Digest 8/31//2006

Stocks: (GC)(GLG)(DEO)(MRK)(ERTS)(ALA)(DCX)(LU)

According to Reuters, Goldcorp has agreed to buy Glamis Gold for $8.6 billion in stock, creating one of the world's largest gold companies.

Reuters writes that Samsung forecast higher global handset sales. The company thinks that the figure will hit 950 million. Samsung believes its handset sales will reach 115 million.

Reuters writes that Diageo, the world's largest alcoholic beverage company, reported a 10% rise in "underlying earnings."

The Wall Street Jounal reports that a federal judge ruled that a $51 million awared against Merck in a suit against it over Vioxx was "grossly excessive."

The WSJ writes that Electronic Arts will begins to distribute advertising over the internet with its games.

The WSJ reports that Chrysler has begun offering zero percent financing for up to 72 months while its rivals also offer incentives to boost sales.

The New York Times writes that Alcatel is racing criticism over it purchase of Lucent.

The New York Times also reports that loses at Tivo rose due to legal costs.

Douglas A. McIntyre

Asia Markets 8/31//2006 Lenovo,KDDI, NEC, Toshiba Up Sharply

Asian markets were up sharply.

The Nikkei was up 1.7% to 16,141. Fuji Photo was up 1.9% to 4300. Fujitsu was up 1.1% to 941. Hitachi was up 1.2% to 745. Honda was up 1.5% to 3990. Japan Airlines was up 2.3% to 223. KDDI was up 3.3% to 775000. Mazda was up 1.3% to 752. NEC was up 4.3% to 683. Nissan was up 2.4% to 1334. NTT was up .7% to 593000. Docomo was up 1.1% to 182000. Sharp was up 1.9% to 2100. Softbank was up .5% to 2040. Sony was up 1.8% to 5080. Toshiba was up 3.2% to 836. Toyota wa up 1.3% to 3090.

The Hang Seng was up .6% to 17,393. Cathay Pacific up .4% to 14.52. China Mobile was up .7% to 52.3. China Netcom was down .6% to 13.66. China Unicom was down .4% to 6.97. HSBC was up .4% to 141.2. Lenovo was up 6.2% to 3.25. PCCW was up 1.8% to 4.87.

The Straits Times was up .5% to 4% to 5940.

The KOSPI was up .9% to 1,353.

The Shanghai Composite was up .2% to 1,659.

Does the Jobs/Schmidt Pairing Signal a Future Alliance?

By Chad Brand of Peridot Capitalist

Who are the two leading innovators in the technology industry today? Google (GOOG) and Apple (AAPL) would likely garner a lot of votes should we take an official survey. News that Google CEO Eric Schmidt will join Steve Jobs on Apple's Board of Directors is very interesting. Warren Buffett and Bill Gates expanded their relationship in part via sharing seats on a board. That relationship has grown over the years and eventually resulted in Buffett's gigantic donation to the Gates Foundation.

Does this mean that some sort of Apple-Google alliance or partnership is only a matter of time now that Jobs and Schmidt are on the same board? Not necessarily. Closer relationships can certainly lead to business ventures, but this is by no means assured. Does the potential for two technology leaders mean investors should consider buying shares of Apple or Google based on this news? Hardly.

Nonetheless, it is clear that Steve Jobs feels strongly that input from Google's CEO could help it continue to grow. Five years ago Apple and Google would have had no place on a list of leading innovators in Silicon Valley. Things certainly do change rapidly in the industry, and that won't be changing anytime soon.

http://www.peridotcapital.blogspot.com/

Analyzing The India Fund (IFN)

By Yaser Anwar, CSC of Equity Investment Ideas

The following are my thoughts on IFN after analyzing: Sentiment, Technicals & Fundamentals:

Fundamentals: India has good long-term prospects. IFN seems to have halved from it's May tops, thus the 6% premium is attractive. The underlying holdings of IFN are well diversified over construction, technology, financials & oils.


Sentiment: The 6% premium can be interpreted as a measure of US retail investor enthusiasm for the Indian market. Based on that I think holding a big chunk of this fund is quite risky. Even if the Indian market continues to perform relatively well, if it just stays more or less stagnant and investor enthusiasm wanes you could possibly see a 10-15% drop that has very little to do with the earnings or performance of the underlying companies in the fund.


Technicals: Based on technical analysis, IFN looks bad. IFN's volume according to the OBV has continuously been dropping, IFN is below its 50 and 200-day MAs. What worries me is the structure of the fund. Since its a closed-end index fund, it has very low trading volume. IFN recently witnessed distribution due to its rights offering, which was oversubscribed (a positive, check image below) IFN needs to cross the 50-day MA on good volume, otherwise this fund could fall lower. I wouldn't be surprised to find it trading sideways for the coming few months.


What i would recommend to you is, if you want to take a position (if you don't already have one) in it now (just incase it resumes its rally) but wait for a pull back. IFN had a double bottom & witnessed support at 37.5, where i would be more willing to add to the current position.


We're entering a historically bad time for the markets. September & October are two of the worst months for the markets, so you might be able to get IFN at a discount later. That being said the 6% premium at the moment is not too bad for a good fund.

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

The Bullish Case for Oil & It's Implications for Energy, Natural Gas & Utility Companies

By Yaser Anwar, CSC of Equity Investment Ideas

Oil has come down quite a bit from its summer highs due to the ease in hurricane fears & partly due to rise in inventories. However, these short-term trends should not sway investors from the bigger picture.


The world now consumes 28.6 billion barrels of oil in a year and that number continues to grow. According to estimates, there are just over 1 trillion barrels of oil left in the world. That's only enough to last another 35 years, as long as we keep burning it at today's rate.


With improvements in standards of living in emerging market and third world countries, we will witness increase in oil consumption at homes, for our vehicles etc.


The International Energy Agency predicts that global energy needs will surge 30-40% by 2020 & prices will skyrocket if capacity is not significantly increased. We need to build more refineries, find more oil & invest in alternate energy sources.


At the same time, we're witnessing an increase in rolling blackouts, surging heating and air conditioning bills and continuous unrest in Middle East, especially Iran & continuous attacks on oil workers in Nigeria. Don't count hurricanes out even though we've had quite a mild season. So you see, an increase in oil prices is inevitable.


Today is deadline United Nations deadline for Iran, the number four oil producer, to halt enrichment of uranium, which can be used in the production of nuclear weapons. If they don't comply, the UN could impose economic and diplomatic sanctions.
Investors remain concerned that Iran could block oil exports if sanctions are imposed. U.N. and European officials said Wednesday that Iran has persisted in enrichment until at least Tuesday.


As global competition for energy intensifies and tightening supplies leave no room in the system for unforeseen disruptions (such as the recent BP catastrophies), well run oil companies (such as Exxon, COP, Valero & Haliburton to name a few) will continue to do well.


Utility companies such as Dynergy will surge from helping America expand and modernize its aging electric grid, Devon for its exploration expertise, Valero will benefit due to lack of refinery building, not to mention the natural gas companies such as Nabors & EOG who are set to benefit from higher natural gas prices. Jacobs Engineering will see a boost due to its infrastructure & engineering expertise.
UPDATE 01:13 AM

``Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal.


In its 2005 Energy Outlook, Exxon Mobil says the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day. That's almost 57% more than it did last year to satisfy the world's needs


Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers.


Even with high prices, it will be very difficult for world production of oil to exceed 90 million barrels per day within the next 10 years. That's millions of barrels a day short of what the EIA says the world will need in 2015.


IMO it doesn't matter what UN does with Iran today because long term oil is going a lot higher.


Disclosure: I don't have positions in any of the stocks mentioned above.

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

JDSU Can't Get Away From Themselves

JDS Uniphase (JDSU) looks like a tale of two miseries. Its shares are down
almost 15% at $2.24 after what can obviously be called nothing less than
crummy.

The company still has a handful of miserable shareholders who are long and
wrong from many multiples higher, but it has an army of newer shareholders
at lower prices that do not care about them. Going into the earnings report
it would have been difficult to find many that were willing to go on record
saying they think the company is now turning a new leaf. How sad.

The company is stuck in a quagmyre that can only be compared to Iraq. There
is actually still a need for the products, but it just seems like no one
wants theirs. They have a good product, but there are just too many
disinterested participants. The intentions are good, but the ability to
deliver is fleeting.

The company posted revenues of $318.2 million compared to estimates of about
$314.5 million. The company posted net EPS of $0.00 but that was rounded up
from less than a penny net loss per share.

The real issue here is the guidance. While no one was expecting gangbuster
performance for next quarter, they weren't really pricing in a flattish
revenue. The company gave guidance of $312 million to $328 million in
revenues versus an expected $332.5 million estimate, which is still under
most street estimates even on the lower-end of the range.

This would normally be swept under the rug just like a case of spilled milk
from the golden child, but the problem is that since Cisco raised the bar
for telecom and networking equipment providers the stock has somehow managed
to crawl up from $2.13 to a Wednesday pre-earnings close of $2.63. That
means that even though no one was really expecting a gangbuster report, they
were not prepared for yet another weak guidance. The company's problems and
the tragic story are just getting old. The 52-week trading range is $1.54
to $4.30, and $4.00 now seems as long ago as $90.00.

What more can be said. The markets are cruel, and when this happens the
markets just want to pounce and pounce hard on the suspects. JDSU may have
tried to sugar coat this as best as they could, but now they have just
established a lower resistance level that will encourage new sellers to take
profits when they can.

Jon C. Ogg
August 31, 2006

Exxon, Conoco, Chevron, BP, And Shell: What If Oil Drops

Stocks: (XOM)(BP)(CVX)(RDS-A)(COP)

Three or four years ago, if you had told most Wall St analysts who cover the oil industry that crude would hit the mid-$70 dollar range, you would not get many believers. Now, pundits like Jim Rogers say it will go to over $100 and stay there for awhile.

Well, oil dropped again today on word that crude supplies rose 2.4 million barrels for the week ending August 25. Probably less than one in ten analysts will lay even money that prices will continue to decline. But the same might have been said about the increase if you look back far enough.

Profits at Big Oil, Inc. have been stupifying. One the strength of rising prices, Exxon's stock has gone from $54.50 this year to $69, a huge move for a company with a $410 billion market cap. Likewise, Chevron has gone from $53.76 to $65 over the last 12 months, a 21% increase. And, the stock has a 3.2% yield.

Of course, Conoco would not want to be left out. The stock has gone from about $57 to $64 this year. And, it has a 2.2% yield.

It is good to remember that it was not always thus. In late 2002, Conoco traded just above $20. Chevron traded just above $30 and so did Exxon.

The run in Big Oil profits is not likely to abate soon, but, when it does, these stocks could head back toward those 2002 levels. And, if oil supplies keep creeping up, the Big Five could certainly drop part of the way.

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

Acer Results Confirm PC Slowdown

Stocks: (DELL)(HPQ)(AMD)(GTW)(INTC)(AAPL)(MSFT)(SNDK)

Acer of Taiwan, the fourth largest PC company in the world, issued results that global computer sales are no longer accelerating at the rate that he industry has come to expect. The company's second quarter operating income fellfell 8.6% to $46.2 million. According to the Associated Press, this was the lowest operated income for any quarter since 2002.

The company blamed the poor results on "aggressive PC price war and a worldwide notebook market slowdown."

This can hardly be considered good news for Dell, HP's PC division, or Gateway, which is in the midst of a takeover struggle. Acer's main base is in Asia, an area that US PC companies have targeted for growth as the domestic market slows. The promise of those markets now seem less spectacular.

It would appear that the Acer results confirm that any uptick in the PC market is not just around the corner. This is not terribly good news for Intel or AMD, both of which supply the chips at the heart of almost every PC sold in the world. It also does not bode well for Apple's Mac line which may have to take up some of the slack from the recently beleaguered iPod which is faced stiff competition from both Microsoft and Sandisk.

It may take the launch of Microsoft's Vista operating system to drive a move up in PC sales. If so, it will be well into 2007 before the manufacturers and chip companies see relief.

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

Costco's Mixed Message

Stocks: (COST)(WMT)(TGT)

Costco said that is next fiscal quarterly report (Sept 3) would show that earnings would be below expectations. But, not for the usual reason. Income tax charges would be high and gross margins low.

Costco said that August sales were up 11% to $4.55 billion and that same-store sales rose 7%. Those are impressive numbers by almost any measurement.

While its may not be good for investors that tax rates went up at the huge discount retailer, the core numbers give reason for optimism.

Investors in Wal-Mart and Target should also breath a sigh of relief. The Costco numbers would indicate the fuel prices and rising interest rates are not keeping customers away from the "big box" stores.

The betting has been against the large retail firms as worries about a slower economy has moved into their stock prices. At $44.50, Wal-Mart trades near its 52-week low. At $48.72, so does Target. Costco has been somewhat more fortunate. At just under $50, it trades in the middle of its 52-week range of $57.94/$40.51.

Discount retail is alive and well, at least for the time being. Shareholders who have seen their fortunes fall with the prices of Wal-Mart and Target should take heart.

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

ADC Telecom's High Fiber Diet

Stocks: (JDSU)(ADCT)(CIEN)(VZ)(T)

ADC announced disappointing earnings. Sales, at $344 million, were down slightly from the immediately previous quarter. At $11 million, net income was down from the same period a year ago.

The company lowered forecasts and, according to MarketWatch, blamed a fiber inventory glut at Verizon and slower-than-expected fiber roll-out at AT&T pending its merger with BellSouth.

ADC's stock has been hit hard this year. Shares are down by half from just below $28 for a 52-week high to $13.88 after hours yesterday.

As TheStreet.com pointed our, ADC is something of a canary in the coal mine for large rivals Ciena and JDS Uniphase. JDSU reports earnings today. Its stock has been knocked down from $4.30 to $2.65 this year. At $4.26, Ciena's stock has done the best, at about double its 52-week low of $2.09. The company's last quarter was slightly better than expected, as was guidance.

The issue with the three companies does not appear to be if they will do well, but when. Fiber-to-the-home deployments are likely to benefit all three, but the timing of these projects by Verizon, and, especially AT&T are a moving tarket.

Merriman Curhan Ford is predicting a 30% increase in the optical fiber networking market over the next year, according to the Associated Press. So, ADC Telecom's relatively weak numbers are probably not a real set-back for the sector. But, the choppy surf is not going away.

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

A Funny Thing Happened On The Way To The Merger: Lucent And Alcatel

Stocks: (ALA)(LU)(VZ)(BT)(DT)(NOK)(SI)

After being panned by Proxinvest, a French institutional investor advisory firm, and pilloried by analysts in both the US and France, it appears the markets have begun to warm to the Alcatel merger with Lucent. Lucent's stock has moved from $2.20 to $2.32 in the last three days. The stock traded close to $2 in early July. Alacatel's shares were up sharply in trading on the French exchange today. Their recent movement has mirrored Lucent's.

Two factors seem to be at work as both stocks rise just ahead of the merger. The first is that the investment world appreaciates that size and scale will matter a great deal in the telecom equipment business. Chinese companies like Huawei, currently only provided equipment to telecom companies within that country, will enter the world markets within a few years. Their products will probably be priced below most that are currently available. Huawei has already done deals with BT Group and Deutsche Telekom. The new Lucent/Alacatel will also compete with the Seimens-Nokia joint venture, Ericsson and Motorola. Size will matter.

The other reason the market may be having a positive reaction to the merger is that the customer base for telecom equipment is doing well. Companies like Verizon, AT&T, BT and Deutsche Telekom are revamping and upgrading vast portions of their networks to deliver everything from next-generation wireless to IPTV. The cash flow from their old fixed-line businesses may be dropping, but in most cases it still provides a huge pool for system-wide retooling of the largest telecom operators.

It would appear that the market believes that Alcatel and Lucent are better off together than separate.

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

Europe Stock Market Report 8/30/2006 Alcatel,BT, Prudential Up Sharply

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

Markets in Europe were up slightly at 5.00 AM New York time.

The FTSE was up .4% to 5,911. Barclays was up .6% to 664.5. BP was down .1% to 592.5. BT was up 1.8% to 249.5. GlaxoSmithKline was up .7% to 1477. Prudential was up 2.3% to 592. Reuters was up .8% to 398.25. Unliver was up .5% to 1254. Vodafone was up .7% to 114.25.

The DAXX was up .4% to 5,869. BASF was up .9% to 64.52. Bayer was down .8% to 38.95. DeutscheBank was up .4% to 89.35. Deutsche Telekom was down .1% to 11.49. SAP was up 1.5% to 150.31. Siemens was up .6% to 66.43. DaimlerChrylser was up .5% to 41.14.

The CAC 40 was up .5% to 5,185. Alacatel was up 2.7% to 9.87. AXA was up .8% to 28.59. France Telecom was up .1% to 16.6. ST Micro was up 1.5% to 13.15. Vivendi was up 24.07.

Douglas A. McIntyre

Media Digest 8/30/2006 Reuters, WSJ, NYT

Stocks: (SBUX)(T)(GOOG)(AAPL)(SGP)(MO)(KFT)(NOVL)(BKS)

According to Reuters, Starbucks withdrew an offer for free iced coffee to some employess, their families and friends located in the southeastern US.

Reuters writes that AT&T announced that hackers had stolen credit card data on some of the company's customers. The telecom company said that fewer than 19,000 records were involved.

Reuters writes that the CEO of Google has joined Apple's board bringing the number of board members to eight.

The Wall Street Journal reports that Schering-Plough agreed to pay $435 million to settle allegations of fraudulent drug marketing and pricing.

The Wall St Journal writes that Barnes & Noble has received a subpoena from the U.S. Attorney for the Southern District of New York about options backdating.

The Wall St Journal also writes that Novell has started an internal investigation on options pricing and will delay filing its 10-Q.

The New York Times says that Kraft is getting closers to being spun off from Altria. With the Altrai board meeting soon and the last large suits against its cigarette unit behind it, the company can begin the process of a tax free transaction to spin out Kraft.

Universal Music and a new company, SpiralFrog, will begin an ad supported service for music downloads which will be free to customers. The program is a challenge to Apple iTunes. SpiralFrog said it was approaching other record companies with the same program.

Douglas A. McIntyre

Asia Markets 8/30/2006 China Netcom, Lenovo,Canon, Toshiba Up Sharply

Stocks: (CAJ)(FUJ)(NIPNY)(NTT)(SNE)(TM)(CHL)(CN)(HBC)(PCW)

Asian markets were mixed with the Nikkei down and Hang Send Index up.

The Nikkei was off .1% to 15,872. Canon was up 2.1% to 5710. Fuji Photo was up 1.9% to 4220. NEC was down .8% to 655. NTT was up .2% to 589000. Sharp was down 1% to 2060. Softbank was down 3.3% to 2030. Sony was down .2% to 4990. Toshiba was up 2.5% to 810. Toyota was flat at 6290.

The Hang Seng was up .7% to 17,194. China Mobile was up 1.9% to 51.94. China Netcom was up 2.7% to 13.6. HSBC was up .2% to 140.4. Lenovo was up 2% to 3.05. PCCW was up 1.3% to 4.76.

The KOSPI was was down .2% to 1,341.

The Straits Times Index was up .3% to 2,461.

The Shanghai Composite was up .3% to 1,655.

Douglas A. McIntyre

Is The Market Getting Over Options Backdating?

From Ticker Sense

During the latest reporting period for quarterly earnings, it seemed as though any mention of stock options in an earnings release or conference call, no matter how good the earnings report was, caused the stock to drop. Shoot first ask questions later, was the rule of the Summer.

Today, however, we saw an exception to that rule. Restoration Hardware (RSTO) beat EPS forecasts on stronger than expected revenues, and also raised guidance. In addition the company reported that it used "incorrect measurement dates with respect to the accounting for certain previously granted stock options." Instead of the stock going down 18% on the options news, the stock is currently up 18% on its strong earnings news. Now we realize this is only one data point, but it is something to watch for going forward. If more companies start to react in similar fashion, then maybe we can finally say that this issue is fully priced into the market

http://tickersense.typepad.com/

Investing in China for Growth with FXI, EWH & EWC

By Yaser Anwar, CSC of Equity Investment Ideas

Few other countries have been able to match the pace of China's sustained economic growth. With GDP increasing, on average, more than 8 percent annually since 1978, China has become a major player in the global economy.


To play Chinese growth investors should take a look at the FXI exchange-traded fund. The index consists of 25 of the largest and most liquid Chinese companies.


The FXI ETF in itself is well diversified. From holdings in Oil (PetroChina, Sinopec & CNOOC), Technology (China Mobile), Financial Institutions (China Life Insurance & CITI Pacific) & Construction (China Construction Bank). The top five companies represent 40% of the index.


The FXI is up 27% YTD and is trading just below its 52 week high of $83.90 hit in early May. FXI has recouped 19% in two months after falling to $66 during the early summer doldrums, hence this goes to show relative strength & momentum in FXI.


China's exports rely on what may be an unsustainably low fixed exchange rate, this could play to your advantage. Investors can utilize an indirect vehicle tha benefits from not only Chinese growth but also currency movements through Hong Kong iShares EWH is one of them. This ETF has sizable allocations to Hong Kong real estate (33%), utilities (17%) and banking (16%).


While perusing Forbes, i read an unorthodox method to play China. The article talked about investing in the Canada iShares EWC as an indirect China play. The Chinese are going on a buying spree investing in Canadian energy companies and recently plunked down $2 billion to build a thousand-mile pipeline from Alberta tar sands to a port on the west coast and onward to Beijing and Shanghai.


The Canada iShares ETF EWC has 40% exposure to Canada’s energy & materials sector.

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

SAC Capital Raises Stakes in Interlink (SORC), AC Moore Arts & Crafts (ACMR) and Greenbrier Companies (GBX)

By Yaser Anwar, CSC of Equity Investment Advisors

SAC Capital Raises Stake in Source Interlink (SORC) to 5.4%
08-29-2006 09:41:20 AM

In a 13G filing just released to the SEC, SAC Capital disclosed a 5.4% stake (2.8 million shares) in Source Interlink (SORC). This is up from the 2.5 million share stake the investment firm disclosed in a quarterly regulatory filing.

Source Interlink Companies is a leading marketing, merchandising and fulfillment company of entertainment products including DVDs, music CDs, magazines, books and related items.

Shares of Source Interlink were up 2.23% to $10.99 in early action Tuesday.

SAC Capital Raises Stake in AC Moore Arts & Crafts (ACMR) to 5.3%
08-28-2006 10:20:30 AM

In a 13G filing just released to the SEC, SAC Capital disclosed a 5.3% stake (1.05 million shares) in AC Moore Arts & Crafts Inc. (ACMR). This is up from the 52K share stake the investment firm disclosed in a quarterly regulatory filing.

A.C. Moore operates arts and crafts stores that offer a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. The Company operates 114 stores in the Eastern United States.

SAC Capital Raises Stake in Greenbrier Companies (GBX)
08-17-2006 03:57:31 PM

In a 13G filing released to the SEC, SAC Capital disclosed a 5.1% stake (805K shares) in The Greenbrier Companies (GBX). This is up from the 650K share stake the firm disclosed in a quarterly 13F filing.

The Greenbrier Companies. headquartered in Lake Oswego, OR, is a leading supplier of transportation equipment and services to the railroad industry.

Run by Steven A. Cohen, SAC Capital is one of the world's largest hedge funds.

Sources: SEC Filings & 13G Filings at Street Insider

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

US Investments for Oil

By Yaser Anwar, CSC of Equity Investment Ideas

The WSJ talks about, Driven by a growing desire to lower dependence on foreign oil, the U.S. is set to help two of the world's biggest energy companies seeking to extract oil from stone in the Rocky Mountains - a venture that previously has been polluting and prohibitively expensive.

More than 70% of the U.S.'s oil shale is found on federal land, mostly in Colorado, Utah and Wyoming in what's known as the Green River Formation. The research and development plots are in Northwest Colorado in the Piceance Basin.

A Department of Energy study last year estimated that crude prices would have to stay at $70 to $95 a barrel for a first-of-kind shale-oil operation to be profitable, though costs would come down as technology improved. This isn't a view shared by Shell, which, with 20 years of research under its belt, believes it will be able to make money at crude prices of $30.

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

Retail Details

By William Trent, CFA of Stock Market Beat

Value Line’s latest investment survey noted the slowdown in consumer spending, but suggests that there could still be some opportunities in retail.

Companies in the department store sector of the Retail Store Industry are generally faring well, but there are some clouds on the horizon in the form of the high consumer debt burden and a relatively low level of year-to-year spending growth in recent months. A sound economy was a prime factor behind the healthy same-store sales increases in 2005 for the department store companies in this group. That said, consumer spending, which accounts for about two-thirds of total economic activity, has been sluggish in recent months. The portion of disposable income devoted to paying off debt is at a record level, and a rising interest-rate environment has put a squeeze on many households in the U.S. In this environment, management effectiveness is particularly important in the Retail Store Industry and is an important differentiation point that investors should focus on when reading the company reports in this industry.

The Retail (Special Lines) Industry is comprised of a diverse group of companies and subsections with distinct business operations. These merchants cater to individuals with various levels of wealth. Therefore, as the economy has slowed in recent periods, those retailers that primarily focus on individuals with low-to-moderate incomes have experienced the greatest decreases in sales, while those that carry high-end merchandise have fared slightly better. Even so, this has forced many companies to work even harder to increase value for shoppers, which includes offering price discounts. It might also be worthwhile to seek out stocks of companies that have a loyal customer base. Based on this industry’s diversity, however, we think investors will find some appealing opportunities here. Long-term investors should pay particular attention to those companies that have growth initiatives under way, which should provide a boost to earnings over the next 3 to 5 years.


Gauging the consumer’s health is getting tricky. Watch List member TJ Maxx (TJX) topped Wall Street expectations with a 25% surge in profits and Zale (ZLC) posted a modest gain, but same store sales for YUM Brands (YUM) fell 3%.

On the BJ’s Wholesale (BJ) conference call, management said:

The main factors affecting financial results for the second quarter 2006 were lower than planned sales, and significantly lower gasoline profitability attributable to rising gasoline prices throughout the quarter. These factors were partially offset by significantly lower accruals for incentive-based compensation.

Looking at our traffic trends, as in the first quarter, our members shopped us less frequently but spent much more money on each trip. Interesting to note, more than 50% of the decline in trips was attributable to trips with basket sizes of $30 or less, which indicates a significant decrease in convenience or fill-in trips compared to last year’s second quarter. And three quarters of this decline was attributable to members who lived more than four miles from their nearest BJ’s. This is a trend that began in last year’s third quarter after the fuel spikes. As a result, we believe the traffic will turn positive midway through the third quarter when we cycle.

That is, unless oil prices continue to rise. What we don’t understand, given the relative convenience of other shopping outlets and the minimal potential cost savings for such a small order, is why anyone ever drove more than four miles to a BJ’s for a purchase of less than $30.

At any rate, higher fuel prices and a slowing housing market are beginning to pinch consumers. Just how much of a pinch it will be is the question.

http://stockmarketbeat.com/blog1/

Transports Slowing?

By William Trent CFA of Stock Market Beat

Add a slowdown in transportation to the housing slowdown and rising gas prices as indications the economy is slowing dramatically. FedEx (FDX) is down nearly 20% from recent highs, and the sector as a whole has posted mediocre performance. Yesterday, Watch List member Landstar (LSTR) hosted its mid-quarter conference call, where instead of raising guidance as is their custom they merely reaffirmed existing guidance.

The third quarter appears generally to be shaping up as we thought. However, we have seen some softening in certain accounts as previously mentioned. Based upon the continuation of current business levels, and the anticipated increase in seasonal demand in the September period, I’m reaffirming our prior revenue guidance for the 2006 third quarter for revenue in a range of 645 million to $665 million.

Landstar is likely to make up any shortfalls through their FEMA contract, under which they provide transportation for disaster relief, clean-up and rebuilding. Although it looks to be a relatively minor storm, Landstar has already been activated to prepare for Ernesto.

Other transportation names have more to be concerned about, and bulls should be concerned by the growing number of signals that the economic slowdown may be more than a soft landing.

http://stockmarketbeat.com/blog1/

Despite Housing Weakness, Cashouts to Jump in 2006

By Chad Brand, Peridot Capitalist

Given that we know the housing martket is slowing dramatically and interest rates have been on the rise for a while now, it may be surprising to many that Americans are expected to draw $257 billion out of their homes in 2006, up $13 billion versus 2005 levels, according to Freddie Mac. This likely helps to partly explain why the consumer has yet to fall of a cliff despite housing market woes.


The bearish argument for consumers has been the fact that billions in adjustible rate mortgages are set to begin resetting this year, which will shock the monthly budgets of many people who could only move into the house they wanted with very low teaser mortgage rates. However, it appears that refinance activity is picking up as ARMs are about to readjust. With 30-year fixed rates around 6.5%, hardly an unaffordable rate for most, refinancing adjustible rate mortgages into fixed mortgages are helping to cushion the blow.


Now it's certainly true that even a move from 3% to 6% might prove too much of an increase for some lower end home buyers and speculators, but it is hardly something that seems likely to send the U.S. economy into recession all by itself. I do expect housing to remain weak for a while, given that inventories are hitting multi-year highs. However, unless mortgage rates take a dramatic turn upwards, say to 8 or 9 percent, consumers might be able to hold up a little better than some expect.

http://www.peridotcapital.blogspot.com/

Is Apple Still A "Buy"?

Bear Stearns confirmed it "outperform" rating on Apple today. Hard to believe.There is a rumor, probably true, that Universal will launch a free music service to compete with iTunes.

Sandisk is in the process of introducing a new multimedia player. They are second in the market behind iPod, and the new product will have more storage space for less money.

Toshiba showed the new blueprints for the Microsoft Zune player. It would appear to have at least one edge on the iPod. It supports WiFi that can hook up to at least four devices at a time.

On the computer front, Apple has now had to recall batteries for over one million Macs. The fault in the units lies with Sony, who built them, but that action hardly drives consumer confidence in Mac computers, or those built by Dell, which had a similar recall. Will sales of Mac be affected. Perhaps.

Then there is the options pricing issue at Apple and the delisting notice sent by the Nasdaq. Will Apple file on time? Will it make it through the appeals process at Nasdaq? Probably, but no one knows for sure.

At $67, Apples stock is still double what it was in late 2004. It does not need much of a push to move down. It probably needs a big one to move up alot.

A "buy". It's a hard case to make.

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

Is Apple Still A "Buy"?

Bear Stearns confirmed it "outperform" rating on Apple today. Hard to believe.

There is a rumor, probably true, that Universal will launch a free music service to compete with iTunes.

Sandisk is in the process of introducing a new multimedia player. They are second in the market behind iPod, and the new product will have more storage space for less money.

Toshiba showed the new blueprints for the Microsoft Zune player. It would appear to have at least one edge on the iPod. It supports WiFi that can hook up to at least four devices at a time.

On the computer front, Apple has now had to recall batteries for over one million Macs. The fault in the units lies with Sony, who built them, but that action hardly drives consumer confidence in Mac computers, or those built by Dell, which had a similar recall. Will sales of Mac be affected. Perhaps.

Then there is the options pricing issue at Apple and the delisting notice sent by the Nasdaq. Will Apple file on time? Will it make it through the appeals process at Nasdaq? Probably, but no one knows for sure.

At $67, Apples stock is still double what it was in late 2004. It does not need much of a push to move down. It probably needs a big one to move up alot.

A "buy". It's a hard case to make.

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

WiFi Nation: Starbucks and Caribou

Stocks: (CBOU)(SBUX)

Caribou is a tiny company, especially compared to Starbucks. The company did only $56 million in sales in the quarter ending July 2, and lost $2.4 million. But, this week Caribou did something that may have a broad reaching affect on Starbucks. It started offering free WiFi service in its stores. Starbucks offers T-Mobile WiFi, but the service costs about $10 a month.

Starbucks does not disclose what T-Mobile makes from offering the service or if Starbucks get a cut.

A casual walk through most Starbucks will undoubtedly find several people with laptops surfing the internet. The WiFi service is and important draw, but, if it is free elsewhere a few Starbucks customers might be drawn away. With Starbucks same-store sales running below where Wall St. would like them, this is another, albeit modest, reason for people to get their coffee, sandwichs and fruit drinks somewhere else.

Starbucks said that one reason same-store sales dropped is that its takes longer to serve people now that it offers drinks that take longer to make. Maybe the people in line will get tired of using their paid WiFi service as well.

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

Detroit Ostrich Farm: Gas Prices To Stay High

After months of $3 gas and predictions that crude oil coud climb above $80 by the end of the year, Detroit executives are admitting that they need to brace for another several years of high fuel prices. They appear to have been the last to know.

According to The New York Times, the head of the Chrysler Group said the the company expects gas prices to stay in the $3 to $4 range for the rest of the decade. Ford's chief sales analyst joined the small chorus.

Chrysler also said that it would "prepare a new business model" in light of its new viewpoint of the price of gas.

What was left unsaid is that the higher gas prices will cause a more lengthy depression in the domestic auto industry. Sales of SUVs and pick-ups are still the most profitable vehicles in the line-ups of the Big Three, although sales of these models were off 30% to 40% in July. The reality of the situation is that companies like Toyota and Honda already have product lines replete with cars that get better than 30 miles per gallon. They depend less on light trucks.

The consequences for Detroit are fairly dire. GM and Ford has been very public about their attempts to cut costs through lay-offs, worker buy-outs, and plant closings. Ford has even cut its dividend and board compensation.

The recognition that gas will stay high is also a signal that sales from domestic car makers will stay low, at least for the foreseeable future. Moving production from SUVs and pick-ups to smaller cars will be time consuming and expensive. The auto giants also have smaller margins on petite cars with tiny engines, which will put further pressure on margins.

Industry reports indicate that designing and changing models can take a car company from 18 months to two-and-a-half years. Toyota does it faster than average. GM's track record is fairly good, but Ford's time to market with new products has been poor. That means that as sales of older vehicles fall due to poor fuel economy it will be easier for Japanese competition to take market share, at least until Detroit redesigns and retools. By then, foreign cars could have a huge share of the North American car market.

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

Has Goldman Sachs Gone Too Far?

Stocks: (GS)(LEH)(BSC)

Small red flags are appearing in Wall St’s view of Goldman Sachs, the global gold standard for investment banks. Goldman’s stock traded below $100 in May 2005. It rose to $169 this May and now trades at about $150. The company’s earnings certainly justify the move. In the quarter ending May 26, revenue hit $18 billion. Net income was $2.3 billion. By way of contrast, Lehman Brothers did $11.5 billion in revenue in the last quarter and had operating income of $ billion. Bear Stearns did $4.3 billion and had operating income of $539 million in its last quarter.

Barron’s wrote last week that investment banking stocks may be driven down by a slower economy, poor stock market performance and the fact that private equity deals cannot keep their pace forever. A drop-off in M&A may also hurt Goldman’s financials. All of these things will happen at some point, it simply leaves investors to guess when Goldman may fall victim to its own fabulous growth.

The single largest concern about Goldman has to be its trading operations where a wrong bet or two and the market’s increasing volatility drive a high probability that something will go wrong in that large segment of Goldman’s business. As Morningstar pointed out this week: “Goldman's greatest risk is the potential for large losses on its trading portfolio.”

Goldman is likely to be the leading firm in its industry for decades to come. But, it is unlikely to sustain the kind of stock price growth it has had over the last 18 months. At some point “what can go wrong, will go wrong.”

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

European Stock Market Report 8/29/2006 ST Micro And British Air Up, Bayer Off

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

Europe markets were slightly higer at 5.30 AM New York time.

The FTSE was up .5% to 5,906. Barclays was up 1.2% to 657. BP was down .2% to 504. British Air was up 2.4% to 407.5. BT was up .6% to 244.75. GlaxoSmithKline was up 1.2% to 1458. Prudential was flat at 576.5. Reuters was up .4% to 391. Unilever was up .8% to 1252. Vodafone was up .9% to 113.5.

The DAXX was up .1% to 5,861. Allianz was up .7% to 132.33. Bayer was down .9% to 39.18. DaimlerChrysler was flat at 40.96. Deutsche Bank was up .1% to 89.17. Deutsche Telekom was off .3% to 11.55. SAP was up 1.3% to 149.83. Siemens was up .3% to 66.27.

The CAC 40 was up .4% to 8,154. Alcatel was up 1.2% to 9.61. AXA was up .6% to 28.46. France Telecom was up .2% to 16.61. ST Micro was up 2.4% to 13.01. Vivendi was up .2% to 26.98.

Douglas A. McIntyre

Media Digest 8/29/2006: WSJ, NYT, Reuters

Stocks: (BAY)(BP)(BF-B)(INTC)(AMC)(SNE)(AAPL)(DCX)

Reuters reports that Bayer is overhauling its agrochemicals business after strong healthcare performance helps the company increase earning 14% in the June quarter.

The Wall Street Journal reports that the federal government is probing whether BP manipulated the price of crude oil and unleaded gas. The CFTC has sent subpoenas to both BP and some energy traders.

Reuters also reports that Brown Forman will buy the premium tequila maker, Mexico's Casa Herradura for $876 million.

The Wall Street Journal reports that Intel is introducing a new high-end chip to compete with AMD. The new Xeon chip, named Tulsa, is aimed at high-end servers which run at least four chips.

The Wall St Journal also writes that Sony and Apple could have a major effect on the chop market in the second half. The two companies could be 40% of the global demand for NAND flash memory chips. Demand for the product has been weaker than expected causing prices to drop. Toshiba and Samsung are the largest manufacturers of the chips.

The New York Times writes that the Chrysler Group expects gas prices to remain in the $3 to $4 range for the balance of the decade. The company is preparing a business model based on the higher fuel prices.

Pfizer Hits A High Note

Stocks: (PFE)

Shares in Pfizer managed to hit their highest price since mid-2005. The shares hit $27.75 during trading after nearly touching $20 in November.

For the last four quarters, Pfizer’s financial results have been relatively strong, but somewhat mixed. In the quarter ending July 2, revenue was $10.8 billion. That number was stronger in each of the previous three quarters, but at $3.2 billion, operating income made for a better comparison with previous periods.

A jury also recently found that Pfizer did not infringe on a Synthon patent covering high blood pressure medication.

Pfizer is not without problems. Patent protection for its best-selling drug Lipitor will expire soon, and cholesterol generics are already in the market. According to the Associated Press, Pfizer’s soon-to-be released diabetes drug has just had a portion of its underlying intellectual property challenged. But, Pfizer has drugs that will be launched soon for people who want to stop smoking and a new inhaled insulin drug.

But, a lot of the rise in Pfizer’s stock is based on the intangible of having a new CEO whose predecessor was viewed as a failure. Hope springs eternal in the stock market, and Pfizer is not exception.

Investors can watch from the stadium seating and see how the new management does. Since Pfizer has a 3.5% yield, the presence of their coupons can warm them if Pfizer’s stock gets a little cool again.

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

The French Case Against Lucent

Stocks: (T)(NOK)(ALA)(SI)(ERIC)


According to Reuters, the French institution advisory firm Proxinvest thinks that Alacatel is paying too much for Lucent. Proxinvest also said the deal would harm corporate governance, although that part of the case seems a bit thin.

Lucent’s stock has traded almost in tandem with Alcatel’s since the deal was announced. Based on the current market caps of the two companies, Lucent will get about 40% of the combined company’s shares. Lucent’s price to sales is 1.1 according to Yahoo!Finance. Alacatel’s .9 times, so on that basis, the deal is a bit expensive.

Last year, Alcatel’s revenue was $15.5 billion. Lucent’s was $9.4 billion. Again, on that basis, the deal may be a bit rich for Alcatel.

The issue left our of the Proxinvest analysis seems to be that without a merger, both companies are likely to fall behind competitors like Motorola and the new Siemens joint venture with Nokia, and Ericsson. And, Ericsson has bought telecom equipment maker Maconi to strengthen its hand. For the same reason, Motorola has build a partnership with Chinese telecom equipment maker Huwai.

Right now, the only company that appears to have been left out in the cold is Nortel, and its finances and future prospects are a mess.

Scale will matter as the large telecommunications equipment companies vie for business with the likes of AT&T and Deutsche Telecom. So, will efficiency. The Nokia deal with Siemens will reduce the JV by thousand of jobs. They will also run joint R&D.

Proximvest fails to mention that Alactel and Lucent need the merger to stay in the first tier of suppliers. Without it, either one could fall back into a position closer to Nortel’s and investors can’t put a price on that.

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

The Divx IPO Starts To Look Better

When Divx started the process of filing papers for its IPO in April, the numbers were a bit thin, but the first half of 2006 has made the company a more attractive candidate for the public markets.

During the six months ending in June, revenue almost doubled from $14.1 million last year to $27.3 million in 2006. For the full-year 2005, revenue was $33 million, so the multimedia player company might be able to get an enterprise value of $200 million based on a comparable from RealNetworks, a competitor that trades at five times sales.

Divx had income from operations of $6.7 million in the first half.

The risks surrounded the Divx business model are still daunting. The company uses the MPEG-4 compression software for its video, and this technology comes from a patent pool. AT&T has challenged some of the technology, suggesting that its IP may have been violated, so the cost of doing business with MPEG could go up.

Another major issue is that Google represented 20% of Divx’s revenue in the first six months of 2006. Divx downloads some of Google’s software with its products and collects a fee. If the relationship were to be modified, the affect on the Divx revenue base could be considerable.

The last significant risk with Divx is that it is up against products like Apple Quicktime, RealNetworks RealPlayer, and, most important, the Microsoft Windows Media Player. With huge amounts of content already delivered in these formats to both PCs and portable devices, there is a real question as to whether Divx can turn itself into a big business. Microsoft’s stronghold in this business has been close to insurmountable for both Real and Quicktime.

In the Divx S-1, the company also talks about building a video community around its player distribution and content that has already been created using its format or will be in the future. With companies like You Tube enjoying a huge head start, this would seem like a difficult business to enter.

Unlike many other companies in the multimedia sector, Divx has proven that its can grow at a rapid pace and make money.

Balancing the company’s financial success with the risks that it points out in its won document, it would be fair to assume that in this market, the company may be able to support a market capitalization of $175 million to $200 million. Whether they can raise enough money from that valuation to sustain their momentum is another question.

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

Asia Markets 8/29//2006 Lenovo,China Mobile,Toyota and Canon Higher

Asian markets were sharply higher.

The Nikkei was up .8% to 15,891. Canon was up 1.5% to 5590. Fuji Photo was up .7% to 4140. Fujitsu was up .4% to 932. Hitachi was down .1% to 736. Honda was up 1.6% to 3930. Japan Air was up .9% to 219. NEC was up 1.5% to 660. NTT was up .5% to 588000. Docomo was up 1.7% to 180000. Sharp was up .7% to 2080. Softbank was up 4% to 2100. Sony was up .6% to 5000. Toshiba was .9% to 790. Toyota was up 1.2% to 6290.

The Hang Seng was up 1% to 17,088. Cathay Pacific was up .7% to 14.36. China Mobile was up 2.2% to 51. China Netcom was up 1.4% to 13.28. HSBC was up .6% to 140. Lenovo was up 2.1% to 2.98PCCW was flat at 4.69.

The KOSPI was up 1.3% to 1,345.

The Straits Times was up 1.1% to 2,453.

The Shanghai Composite was flat at 1,651.

Douglas A. McIntyre

Financial Pulse

By William Trent, CFA of Stock Market Beat

ValueLine profiled the Banking industry in their latest Investment Survey, saying:

Bank stocks have generally performed well in the last few months, reflecting better-than-expected June-quarter earnings and expectations that the Fed wouldn’t raise interest rates in August. Few stocks in the group are ranked favorably for Timeliness, but a number have decent dividend yields and moderate total return potential to 2009-2011. Underpinning this outlook is our belief that there are still opportunities for growth in the bank sector in areas such as providing bank services for newly arrived immigrants and investment products for baby boomers.


By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week.”


The saying goes that if you owe the bank a little you are in trouble, but if you owe the bank a lot the bank is in trouble. Although the banks work hard to spread the risk by securitizing loans and selling them to investors, frequently they turn around and buy them back anyway. Collectively, we owe the banks a lot of money, which goes a good way toward explaining why the Watch List is contains the minimum 50 percent weight in financials.

http://stockmarketbeat.com/blog1/

Consumer Confidence Index Level- What to Expect

By Yaser Anwar, CSC of Equity Investment Ideas

Consensus Notes: The Conference Board's consumer confidence index surprisingly rose to 106.5 in July from 105.4 in June. Overall, the index remains moderate despite consumer concerns
over high gasoline prices.

Confidence Index Consensus: 103.0 Consensus Range: 99.0 to 104.5

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

Successful Investing Eddie Lampert Style

By Yaser Anwar, CSC of Equity Investment Ideas

I hardly consider myself a value investor but i don't ignore the powerful returns investors can harness by picking healthy businesses that will still be here 5 to 10 years (& more) from now.

After all one of my main inspirations comes from Eddie Lampert, who i consider to be the best wealth manager as well as top value investor amongst the value cohort. In my opinion, he's even better than Warren Buffet.

So today i'd like to provide how you can invest for success Eddie Lampert style:
Be a long-term value investor. The key words here are "long-term" and "value"


Constantly on the lookout for situations in which the conventional wisdom of the commentators and "experts" is incomplete. Eddie gave his favorite example: The view that Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company in 2003 - has turned out to be only "conventional" and not at all "wisdom."


Be an avid reader of books, newspapers, and magazines.


In college, Lampert spent countless hours reading Buffett's famous detailed annual letters to Berkshire shareholders. And he's also reversed engineered all of Buffett's main purchases, examining the businesses at the time of Buffett's purchases and trying to get inside Buffett's head to understand his thinking


Approach much of what is written and said with an appropriate amount of healthy skepticism. Lampert belongs to the selective contrarian's camp.


Be particularly careful with respect to the loudest views, the most widely held views, or the so-called "expert" views.


Double check the accuracy and the sources of your data. For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles - not on the accuracy of their writing or of their predictions.


Lampert's prescription for investors: "Read broadly, and be appropriately skeptical of the so-called experts." Example: Most pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JC Penney, missed the emergence of Google, and missed the resurrection of Kmart - until it was abundantly clear that those companies had succeeded.


Lampert's advice for managers: "Think about and understand one's business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters."

Sources: Sears Holdings (Message from Chairman, Sep 05 issue) & GuruFocus

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

AMZN Buyback

Amazon.com (AMZN) is trading up 3.2% today after announcing a $500 mln share buyback, but upon closer inspection this financial decision ranks right up there with how the company used to spend $1.10 for every $1.00 of revenue. With the stock trading at a current P/E ratio of nearly 40, its earnings yield is a meager 2.5%. This compares to a US 10-Year Treasury that currently pays 4.8% on an annual basis.

As the following very basic example assumes, AMZN would be better off just putting the money in some investment grade corporate bonds. We realize this example makes a lot of assumptions, but it still illustrates that shareholders would be better served if AMZN opted to put the $500 mln to some other use.

Let’s assume that AMZN has $500 mln lying around burning a hole in its pocket. If they take that $500 mln and actually buy back stock, the share count will decrease by 17.2 mln shares. If earnings over the next four quarters were to equal earnings over the last four quarters, the earnings per share would increase from $0.74 to $0.77 due to the lower share count. Now let’s assume that AMZN takes that $500 mln and decides to invest the money in investment grade corporate bonds. With investment grade bonds currently yielding 97 basis points above the 10-Year, AMZN would pick up a yield of 5.77%, which translates into $28.85 mln. Again, if we assume that earnings remain the same, spreading that $28.85 mln across the 419 mln shares would increase EPS by $0.07 from $0.74 to $0.81 per share! Which choice makes more sense to you?

http://tickersense.typepad.com/

Ebay And Google: Friends Or Foes?

Stocks: (EBAY)(GOOG)

Ebay was rightly concerned when Google launched a direct competitor to PayPal, Ebay's online payment system. A look at Ebay's 10-Q shows that PayPal is the auction company's fastest growing division.

But, Google and Ebay will now cooperate on a program that should bring significant revenue to both. First, and perhaps most important, Google will supply text ads to Ebay's auction sites overseas. This could certainly bring both companies tens of millions of dollars each year given the audience and page-views that Ebay has. The company now claims to have over 200 million registered users. EBay's international business is also growing faster than its domestic auction business.

Less clear is how the second componet of the partnership will work. The two companies said they will cooperate on a VoIP "click-to-call" feature so that buyers can talk to sellers and advertisers. It is unclear whether this is something that buyers want. If its is, Ebay's Skype and PayPal divisions could be helped, which is odd since Google has both VoIP-like and online payment businesses of its own.

What is clear is that this is one of the partially-baked deals that the large internent and "content" companies are forming hoping that some aspects of the deals will "stick to the wall." Whether that will happen here, beyong the component of text ads at Ebay auction sites, which is almost certainly a winner, is unclear.

Ebay's stock may rise on the news, but that could be premature.

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

Google's Tepid Move Into Business Software

Stocks: (GOOG)(MSFT)

Google is challenging Microsoft in the business software arena. At least that is how the headlines read. But, it is a limp beginning.

Google will bundle its Gmail program, its scheduling software, and instant messenging applications so that they can be used by small businesses and non-profits. Universities will also be targeted. The strongest part of the offering is probably that Google will host the software on its own servers which means that small companies will not have to keep the software on their PCs. Google maintains that this PC hosting function is expensive for smaller firms.

Google will also offer a premium version of the service that will be free of advertising and will have the administrative functions that larger enterprises want.

The move is viewed as a challenge to the Microsoft OS and server platforms which will be upgraded next year under the name Vista.

The Google offering does not have spreadsheet or Word-like features to create written documents. Although the hosting aspect of the software my be attractive to businesses, the lack of important features like work processing make it a partial solution at best. It is difficult to imagine that many companies will make the change. It may be used as a supplement to Vista, but it is hardly a direct competitor.

Microsost has no need to worry, unless Google adds the other critical features that make the bundles applications complete.

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

Kinder Morgan: A Strong Wind Cannot Blow All Day

Stocks: (KMI)(KMP)(KMR)(GS)(MER)(JPM)

The Chinese philospher, Lao Tzu made the observation that "a strong wind cannot blow all day".
Kinder Morgan today announced that it would go private at a sharp premium to its stock price. At a purchase price of $107.50, the buy-out represents a 27% premium over Friday's close pricing the deal at $15 billion. The buyers will also assumer $7 billion in debt. Goldman Sachs, which seems to have a stake in most private equity deals, AIG, Carlyle and Riverstone will put up most of the money. The company will take on some debt, provided primarily by banks including Deutsche Bank and Wachovia.

Morningstar recently remarked that future growth in the company should be "tempered". Earnings in the last quarter were a bit disappointing. But, the company is one of the biggest operators of oil and natural gas pipelines, a business that grows at the need for oil, and the price, ramps up. The research firms expects operating earnings plus gains on equity investments to be $1.6 billion in 2006. Although this numer is impressive, does it justify a $22 billion buy-out?

Over this weekend, Barron's made the point that shares in companies like Goldman Sachs, Merrill Lynch, and JPMorganChase may have reached their peaks. M&A activity and private equity transactions are bound to slow as the economy cools off, interest rates rise, and the stock market moves down.

One of these big equity deals will burn its financial supporters. In every cycle, there is a signature deal which signals the beginning of the end and economic historians look back on ther period. If Barron's is right, Kinder Morgan could be that deal.

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

Barron’s Digest August 28, 2006 Issue

Stocks (NSRGY)((CA)(SONO)(DELL)(WRNC)(MDV)(HOV)(WCI)(HD)(LOW)
(MHK)(CFC)(DHI)(CTX)(PHM)(LEN)(KBH)(LEV)(WHR)(H)(ANAD)(BCS)
(GS)(LEH)(MS)(MER)(C)(JPM)

Nestle’s came out with excellent results last week. Despite pressure from commodities prices sales and net profits rose 11% for the first half of 2006. Programs to cut costs and make the company more efficient seem to be working.

CA, the former Computer Associates, is trying to put its accounting and business model issues behind it. But Wall St is not buying the new act. The company is making some intelligent acquisitions and buying back stock with some of its cash flow. With some of its core businesses growing again, CA could deliver double-digit earnings growth.

Sonosite, which makes medical imaging equipment, missed Wall St’s numbers, but know that the miss is behind the company, AG Edwards thinks the stock could rise 45% over the next 12 months. The company’s position in the hand-held ultrasound market is improving. The company says it should still make consensus forecasts for the year.

Dell may be getting beyond its recent problems, including its battery recall and poor earnings. One of the keys may be improved customer service. The company’s CEO will not give quarterly forecasts, but in an interview said he was comfortable that Dell was doing what it had to improve revenue and margins over time. Dell admits that cutting back on customer service was a mistake and will put $150 million into its call centers in the US. Dell’s CEO also said that although global PC sales growth has dropped 9%, there is still an opportunity to do well in developing markets like Asia. The company also said that it will not increase its retail sales presence. The CEO also says that Dell dropped prices too fast particularly in relationship to the company’s costs. The company also indicated that its sales to corporations were doing well, better than its next three competitors combined.

Warnaco has tried several turnarounds, without real success. Now a hedge fund, Barington, has bought a big share of the company’s stock. Sales have been flat this year and operating margins are running 7%, below expectations in the 10% range. The hedge fund is threatening a proxy fight. He is also suggesting that the company might be sold to Philips Van Heusen. But, such an acquisition would dilute PVH’s earnings growth. If the company’s shares are going to rise, it will still probably have to be on its own strength in revenue and earnings improvements.

With the housing market taking a beating, it may be worth looking at stocks in related industries, especially those they have dropped substantially. Barron’s thinks some of them could have attractive valuations, particularly if the housing market recovers in 2007. These include Centex, DH Horton, Hovnanian, KB Homes, Linnear, Levitt, MDC, Pulte, Toll Brothers, WCI Communities, Black & Decker, Masco, Sherwin Williams, Lowes, Home Depot, Mohawk Industries, Whirlpool, CountryWide Financial, Ethan Allen, Furniture Brands, and Realogy.

Anadigic’s computer chips power popular cellphones and digital TV. The company’s shares have struggled despite good financial results. Fans of the stock see it at least doubling this year. Revenues this year should be up 80% over 2005. The company has close tied to Motorola, Intel Qualcomm and Cisco. It also has excess production capacity. As Qualcomm moves into 3G and Intel into wireless chips, Anadigics, which supplies both companies, could benefit.

Shares of big brokerage firms may be hurt by a dropping stock market, higher interest rates and a slower economy. These companies include Morgan Stanley, Merrill Lynch, Goldman Sachs, Citigroup, Bear Stearns, and JPMorganChase. M&A, asset management and private equity have driven earnings growth. However, with funding getting more expensive, customer activity in these segments may drop. Brown Brothers has a sell on the group because they believe that earnings will not longer grow as fast as they have in the recent past. At this point, it will be harder and harder for the firms to top their already spectacular performances.


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

Media Digest 8/28/2006: WSJ, NYT, Reuters

Stocks: (GOOG)(MFST)(F)(EBAY)(DJ)(S)(VZ)(CMCSA)(TWX)

Reuters writes that Google will launch a bundled version of its free e-mail, scheduling, and messaging software to run basic business activities. The software pieces are already offered separately. To compete with some portions of Microsoft Windows, the new package is set up to run over the internet instead of being hosted on the PC. The product is aimed at small business and non-profits, but Google plans to announce a paid version for large enterprises.

Reuters writes that a report in the Detroit News says that Ford is considering selling a large part of Ford Motor Credit. The potential transaction is one reason Robert Rubin of Citigroup stepped off the automakers board.

The Wall Street Journal writes that EBay has signed a deal with Google to exclusively display its text ads on Ebay auction sites outside the US. The companies will also cooperate in ways for consumers to call merchants.

The Wall Street Journal writes that its parent plans to sell six of its Ottaway regions papers as its continues to push into electronic delivery of news.

The New York Times writes that the nation's largest cellular companies look to expand their sevice reach and keep competitors out of the business by buying large numbers of teh radio spectrum being auctioned by the FCC. About 60% of the total bids are from Verizon Wireless, Cingular, and T-Mobile. Only about 20% are from an alliance of Time Warner, Comcast and SprintNextel.

Douglas A. McIntyre