24/7 Wall St.
Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Thursday, August 31, 2006

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.


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.


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.


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


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


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.


Pre-Market Stock Notes (Aug. 31, 2006)

(AD) A D V O stock down 37% after Valassis sued A D V O to terminate its merger agreement saying that AD materially misrepresented their financial situation.
(BF/B) Brown Forman $0.76 EPS vs $0.71e.
(CIEN) Ciena $0.02 EPS vs $0.01e (before items); Revenues $152.2M vs $143+M(e); sees up to 5% sequential revenue growth; announced 1 for 7 reverse stock split.
(CUB) Cubic won a $32.8 million Air Force contract.
(DRYS) DryShips $0.53 EPS vs $0.54e.
(EGLE) Eagle Bulk Shipping filed to sell 5M share or $220 million in mixed securities.
(GLG) Glamis Gold being acquired by GoldCorp (GG) for $51.49 per share.
(GNVC) GenVec said phase I HIV trials support ongoing testing as safety was well tolerated and showed clinical response consistent with preliminary expectations.
(HEI) Heico $0.31 EPS vs $0.28e.
(HNZ) Heinz $0.58 EPS vs $0.53e.
(IMGN) ImmunoGen extends its anti-cancer research pact with Sanofi-Aventis.
(INTC) Intel took a 10% stake in InComm a flash card designer.
(JDSU) JDS Uniphase stock traded down 14% after having slight loss (rounded to $0.00, but revenues were $318.2M vs $315M(e); guided next quarter $$312-328M vs $332.5M(e).
(JOYG) Joy Global $0.63 EPS vs $0.58e.
(LTXX) LTX Corp $0.23 EPS vs $0.22e.
(NCS) NCI Building Systems $1.00 EPS vs $1.01e.
(NMTI) NMT Medical received FDA approval to modify their MIST II migraine study.
(PMID) Pyramid Brewing chief accounting officer resigned.
(RELL) Richardson Electronics posted a net loss instead of having expected positive earnings.
(SEAC) SeaChange rose 17% after posting a profit instead of a loss expected and higher revenues.
(THOR) Thoratec Labs CFO will leave by the end of the year.
(TIF) Tiffany's $0.29 EOPS vs $0.31e; sees next quarter $0.16 vs $0.19e; increased share buyback plan by $700 million.
(TiVo) TiVo -$0.07/R$59.2M vs -$0.13.$51.8M(e); sees next quarter R$54-56M vs $$53.8M(e); stock barely up after hours.
(VCI) Valassis sued ADVO(AD) to terminate a merger pact over AD misrepresenting their financial health; VCI up 5%
(ZILG) Zilog CEO resigned.
(ZLC) Zales $0.02 EPS vs $0.02e; sees fiscal 2007 EPS $1.98 to $2.08 vs $2.08e.

Select Analyst Calls (Aug. 31, 2006)

AET cut to Neutral at Prudential.
AHD started as Buy at AGEdwards.
ALD started as Hold at Citigroup.
CHKP raised to Buy at Jefferies.
CVH cut to Neutral at Prudential.
GHDX started as Sector Perform at RBC.
HCA cut to Underweight at Prudential.
HNT cut to Neutral at Prudential.
IMH cut to Reduce at UBS.
KBAY started as Overweight at JPMorgan.
KCP started as Neutral at Prudential.
MFE raised to Hold at Jefferies.
MGLN started as Hold at Deutsche Bank.
NEW cut to Reduce at UBS.
SHOO started as Overweight at Prudential.
SKX started as Neutral at Prudential.
SLAB started as Buy at First Albany.
STM cut to Sell at Citigroup.
UHS cut to Underweight at Prudential.
VCI raised to Neutral at Prudential.

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


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


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.


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.


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.

``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.


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

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

Wednesday, August 30, 2006

Market Wrap (August 30, 2006)

DJIA 11,382.91; Up 12.97 (0.11%)
NASDAQ 2,185.73; Up 13.43 (0.62%)
S&P500 1,304.27; Down 0.01 (0.00%)
10YR-Bond 4.763%

You wouldn't have known we had a GDP revised number by the market trading today as most of the "A-Team" traders and investors are out in the Hamptons and in other places. Oil prices also fell another $0.36 per barrel to $69.35 as a rise in oil inventories gave hopes that prices could come down. M

BCE (BCE) rose 0.5% to $25.10 after the Globe & Mail reported it will do an IPO for its satellite unit instead of an outright sale.

Altria (MO) rose 1.1% to $84.48 after the company hiked its dividend, and Kraft (KFT) rose 0.75% to $33.69 after MO did not outline plans to divest the remaining 87% of the stock.

Merck (MRK) rose 0.1% to $40.83 after a federal judge threw out a $50 million award in New Orleans.

CostCo Wholesale (COST) fell 4% to $47.17 after the company lowered guidance because of higher-end items and electronics margins.

eBay (EBAY) rose another 4.5% to $1.23.

Apple (AAPL) rose 0.7% to $66.93 after Google's CEO Eric Schmidt joined the Apple Board of Directors.

Priceline.com (PCLN) fell 3% to $32.66 as Stifel Nicolaus cut the rating from a Buy to a Hold; and Travelzoo (TZOO) fell 11.8% to $31.16 as the same analyst cut the rating of Hold down to a sell.

ADC Telecom (ADCT) fell 7% to $13.67 after missing lowered EPS and lowering guidance again.

Micros Systems (MCRS) rose a sharp 20.5% to $46.35 after beating earnings expectations.

AnorMED (AOM) rose a massive 95% to $9.84 after Genzyme offered to acquire the the company in a rebuffed attempt declined by AnorMED; GENZ closed down 0.6% at $66.28.

Embraer (ERJ) ADR's rose 7% to $38.70 after winning a 100 jet order out of China.

Jon C. Ogg
August 30, 2006

Is There an Underlying Value to 3Com? Maybe a Backdoor Play

Stock Tickers: COMS, CSCO, JNPR, ALA, LU, NOK, SI, CY, SIVB, RNWK, MOT, NT, "Huawei,"

3Com (COMS) is a name easy to hate, and it is a crying shame what they allowed to happen to their company. They used to be neck and neck once upon a time with Cisco (CSCO) and other key networking companies, and they even spun off their Palm (PALM) operating system and PDA unit in a separate IPO that was never given out to COMS holders. You will have to hear some additional ranting and some personal attacks, but there may still be some hope for the company.

I personally have come out swinging against this company publicly, privately, under the table, and over the table. I even have used the analogy that management needed to be marched out the back door and gunned down in the alley, but that has such a harsh and mean tone that I won't use that analogy any longer (even to them). Until Mr. Benhamou is 100% gone and completely out of the company to the point that no one inside the company will take his calls there is risk. It isn't fun attacking people personally, but from everything we have been able to deduce he is still active in some of the key decisions since he is still a non-executive Chairman. He is also the chairman of Cypress Semiconductor (CY) and sits on the boards of RealNetworks (RNWK) and Silicon Valley Bankcshares (SIVB), which may make those shareholders worry.

Even with him still wedged in there, COMS has a hidden weapon and may have a hidden value. It is the majority owner of the Huawei joint venture now called H3C that designs and markets enterprise-networking products, including switches and routers, and owns its marketing and intellectual resources. This is the one that has been noted by many industry insiders that was dubbed the "Cisco knock-off" because of so many similarities from the look and feel of the interface all the way down to the basic source code. Those legal issues with Cisco were also settled some time ago. COMS even gets to now count the revenues as its own now since it bought the extra 2% from Huawei to get to the 51% controlling interest. That may be a sketchy practice to count 100% of it as their own and there are have been many complicated and intertwined structures inside the deal, but this is still the remaining hidden value in COMS. I even questioned them in my last article why on earth in their last restructuring why they don't just close all other operations to focus on this H3C.

I have seen several articles (including 2 from contributors here at 24/7 Wall St.) stating that it is too bad that Huawei is not a public company, but very few of them ever refer to the Huawei-3COM 'H3C' venture. This may even be a legitimate "Backdoor Play" into Huawei as I have dubbed it in many other articles discussing IPO spin-offs and other special investing situations. This is the only area growing and industry insiders have said that this is sufficient so long as a company doesn't need massive tech support from their networking equipment makers.

Oddly enough, Juniper Networks (JNPR) was reportedly in talks to buy this venture earlier this year. Unfortunately Juniper has been riddled and plagued with departures and other ongoing problems. Both NorTel (NT) and Motorola (MOT) have agreements with Huawei. Now that Cisco (CSCO) is just about set up to literally offer every single solution (except for laying the actual fiber) for data literally leaving web servers all the way right up to your ethernet port or web device (same analogy for phones and VoIP devices now), you have to wonder if someone else will give any value to COMS. The mergers combining Alcatel (ALA) and Lucent (LU) and combining the Siemens (SI) and Nokia (NOK) networking operations are really forcing the "global one-stop shop" business model, and this hidden value in COMS "could" be one of the ways a company would roll the solution into their portfolio.

Juniper (JNPR) was recently thought of in the same light, but they may have so many issues that need to be fixed outside of their next generation routers and switches that it may just not be in the cards. It is quite obvious that there are still many spots and holes in many networking and communications equipment/solutions companies out there that this argument can still be made.

Regardless of what happens, if anything, this H3C may be the last saving grace at COMS. I criticized COMS back on June 21 and on June 29 and have criticized them on many other occasions before then. On June 21 the closing price was $4.61 and when I questioned the post-earnings rally on June 29 the closing price was $5.10. COMS has traded up to a high of $5.31 shortly thereafter, but the shares now sit at back down at $4.39 after a 3% rally today. The 52-week trading range is $3.29 to $5.70.

COMS now has a mere market cap of $1.73 Billion, which means if you gave the ex-H3C value of $0 from COMS that the entire value of H3C would be approximately $3.45 Billion. It is very difficult to trust analyst estimates, but they have COMS generating a $0.02 EPS for fiscal May 2007 and $0.19 EPS for fiscal May 2008. They will have some substantial charges for their ongoing restructuring, but their balance sheet is actually ok as of the last available report. The company holds $864+ million cash and short-term securities, and it has $178 million in receivables. Its inventories and "other" assets are $206.6 million, but we'll value those as close to Nil for break-up comparison. That leaves their current assets valued at $1.035 Billion. We will allow them to count plant & equipment at 50 cents on the dollar, so $44.5 million, will give them $0.00 for their Goodwill ($354 million on the books), will also give their intangibles and "other" assets a Zero value (combined as $168+ million on the balance sheet). $1.079 Billion is what we are counting the underlying raw assets. We know there is some value in the other assets, but this is how to really break out raw values. The company's total Liabilities and minority interests come to just under $659 million, but $173.9 million of that is a minority interest that also "may" have some negotiated play left. This still leaves a raw $620 million net net left over after all liabilities as far as a raw value, and any company worth their weight in salt would know how to squeeze out some value out of the garbage assets I assigned a Zero value to.

Even after Juniper's (JNPR) massive sell-off they still have a market cap of $7.99 Billion, so you would have to pay way up for what the street feels is a company with a black eye if you wanted to use the same theory for that company. Personally I cannot officially endorse COMS yet because of the management and its SNAFU of an operating history that graduating business students would love to have as their exit case study. But it would just be foolish to not acknowledge that there are many big sharks out there needing to increase offerings that could look at an acquisition. COMS "may" be deemed as a cheap way to play in this group, but we would encourage anyone who was going to acquire the company to unload all non-H3C management without any questions.

In summary we can argue that there is some value here, but it isn't without risk and it certainly isn't without some painful memories.

Jon C. Ogg
August 30, 2006

Jon Ogg can be reached at jonogg@gmail.com and he does not own positions in any of the companies he covers.

A Backdoor Play For Telesat Canada IPO?

BCE Inc. (BCE) is going to pursue a $1 billion IPO for its Telesat Canada commercial satellite unit, according to an article in Canada's The Globe & Mail. BCE had been in discussions to sell its Telesat unit to a private equity group in a "club deal" that included Ontario Teachers’ Pension Plan and one that previously included SES Global SA and Eutelsat SA. Buyout talks had reportedly been called off but it wasn't just on price. There were some issues over who would run this, but one major hurdle was the foreign ownership and management limitations that keep infrastructure domestic.

Telesat owns five satellites and has a growth story (according to the article) that would support an IPO. Last year, revenue rose 31 per cent to $478-million, with the company generating $203-million in cash from carrying North and South American television and telephone traffic.

This IPO filing does not prohibit BCE from going back to the table for discussions, but even though a federal review panel recommended easing foreign ownership and investment rules Ottowa has been holding firm because of "fears of job losses and national security."

We'll have to see what the real terms end up looking like before making a firm pat judgement this far out. Usually deals that cannot go private and ending up having to become a quasi-IPO means that the overall valuation isn't there as a private company and the company needs the public investor premium. So while this is in the beginnings of a bad formula, we will give it the benefit of the doubt for now by at least remaining neutral for the time being.

While we would normally call BCE a backdoor play, that usual tie is not really true here. That is why we left a Question Mark in the Title of this article. BCE in the US equivalent has a $20 Billion market cap, so a 20:1 ratio is probably not worth the homework. If we uncover anything broader we will re-address this situation.

Jon C. Ogg
August 30, 2006

Viisage and Identix Transform Into L-1 Identity

We have now seen the formal merger of Viisage (ex-VISG) and Indentix (IDNX) completed and the two companies have formed L-1 Identity Solutions, Inc. (ID-NYSE). This will be one of the leading homeland security and ID management pure-play stocks in the sector.

The portfolio of L-1 Identity Solutions companies - Viisage and Identix, together with Integrated Biometric Technology, SecuriMetrics, Inc., and Iridian Technologies, Inc. - offers the most comprehensive and technologically-advanced set of solutions for protecting and securing personal identities and assets. The companies have a combined 20-year history of trust and reliability in the private and public sector gained by solving the toughest problems associated with credentialing and managing human identity.

Based on Viisage's closing price on Monday, August 28, 2006, L-1 Identity Solutions has an aggregate market cap of approximately $1.1 billion. The Company offered guidance of fourth quarter revenue of approximately $60 million and Adjusted EBITDA of $15-$17 million.

ID shares are up 2.1% at $15.24 on about 145,000 shares late morning.

Jon C. Ogg
August 30, 2006

Investing in Space: The Final Frontier

Stock Tickers: NOC, BA, LMT, ATK, TXT, UTX, SPDV, SPAB

In about 24 hours, we should know the design and award contracts for NASA's multi-billion dollar new launch and capsule design wins to take manned-flights to the International Space Station and then to the moon again. The new capsule (leaked name is 'Orion') is going to carry crews of up to 6 persons to the International Space Station and will then take 4 to the moon. This design will end up being (as of today's claims anyway) the basis of designs that will ultimately take manned-flights to Mars. The first piloted mission is scheduled for September of 2014, which will be 4 years after the phase-out and retiring of our space shuttle fleet that is designed on 1970's and early 1980's technology.

A team led by Northrup Grumman (NOC) and Boeing (BA) is competing against Lockheed Martin (LMT) to build Orion that may be in the $18 billion in the initial design phase alone. In the NOC-BA team Northrup Grumman is involved in the earth orbital designs that will be for earth orbits and space station docking and Boeing will lead the design for the craft and systems needed for the next manned-flight to the moon. Lockheed Martin (LMT) already received over $1 Billion for its failed X-33 design, but it is still in the bidding process for this contract award.

This award is just under two weeks after NASA awarded private SpaceX and Rocketplane-Kistler a nearly $500 million split contract to demonstrate delivery and return of cargo to the International Space Station, known as the Commercial Orbital Transportation Services (called 'COTS'). Both SpaceDev (SPDV-OTC) and SPACEHAB (SPAB) were in the bidding for that lower-cost contract, but it went to the SpaceX and Rocketplane-Kistler teams.

The Government Accounting Office has already warned against awarding this contract without any formal plans. You can see their report HERE. While this will be a huge win for the winning team, there are other companies that will likely benefit from this as well.

Alliant Techsystems' (ATK) unit ATK Thiokol is also still involved in booster rockets, and particularly part of the Ares 1 launch booster for crews and the Ares 5 will consist of ATK's 5 segment solid rocket boosters. Before the company benefited from so many bullets and munitions orders recently it used to be heavily reliant on set space shuttle booster rocket launches, so any launch delays put the company's EPS and top-line at risk in any given quarter.

United Technologies' (UTX) Pratt & Whitney unit is involved on the engine design and Textron (TXT) is in the hunt for the replaceable heat shield design win. There are probably dozens of other sub-contractors that may benefit, but these are the ones known out of the immediate information we could find.

So far from the available data it feels as though the Northrup Grumman and Boeing team is set up to better win the business as a joint and diversified effort, particularly after the prior X-33 blunder from Lockheed Martin. We just have to remember that the government doesn't always do what makes sense, so it may not be fair to try to formally predict who will win the contract.

If they have an extra seat for me on the next flight, you might not get a steady flow of usual reports for a few days or weeks.

Please understand that this is based on numerous data points and there could easily be some errors or discrepancies. The information could have also changed with no notification.

Jon C. Ogg
August 30, 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


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.

New Frontier's Proposed Buyout of the Adult Entertainment Company

New Frontiers Media (NOOF), a company specializing in adult entertainment movie distribution to hotels that operates as 'The Erotic Network', may actually be acquired by a private investment group. In a SEC Filing yesterday the company disclosed that Warren Lichtenstein of Steel Partners II LP told its board of directors on August 15 that it was interested in leading a management buyout of the company. The terms are for an undosclosed premium and the company has yet to receive any additional information about the potential offer.

Steel Partners started acquiring shares last summer and now owns about 3.2 million shares as of July. Since the August 15 meeting, shares were only up about 1.2% as of yesterday's close.

An analyst at Merriman Curhan who rates the stock as a Buy updated notes to clients saying this stock could be aggressively purchased up to $10.00. The 52-week high is $9.38 and the low is $5.40. Overthe last 5-years this stock has only briefly traded above $10.00 before selling back off.

Steel Partners II LP has a history of doing buyouts. It has been involved with Icahn on KT&G (which failed), involved in the Fox & Hound buyout, involved in Stratos and the Angelica deals, Bairnco and others.

If New Frontiers is to be acquired the buyout would likely have to be on friendly terms because the company has means to thwart unwanted buyouts that are not deemed of value or not deemed as serious.

Jon C. Ogg
August 30, 2006

Pre-Market Stock Notes (Aug. 30, 2006)

(AACE) Ace Cash Express $0.50 EPS vs $0.44e.
(AAPL) Apple said Eric Schmidt, CEO of Google, will join its board of directors.
(ADCT) ADC Telecom down 5% after lower earnings and guidance.
(AOM) AnorMED rejected the Genzyme unsolicited bid of $8.55.
(COOL) Majesco names new interim-CEO.
(COST) Costco trading down 6% at $46.00 after lowering guidance.
(DSW) DSW $0.35 EPS vs $0.30e.
(DY) Dycom $0.25 EPS vs $0.21e.
(ELX) Emulex will pay $180M to acquire private Sierra Logic.
(HBI) Hanes Brands(when issued) will replace TECUA in S&P Mid Cap 400 Index on or about 9/5/06
(HNAB) Hana Biosciences says FDA accepts the review of NDA for Zensana filing.
(ID) L-1 Identity is the new formation of Identix and Viisage after the merger that begins trading today.
(LAYN) Layne Christiansen $0.47 EPS vs $0.40e.
(LNUX) VALinux $0.01/R$10.51M vs $0.01/$10.8M(e).
(MCRS) Micro Systems $0.58 EPS vs $0.53e.
(MEAD) Meade Instruments said it has found stock option errors.
(MET) MetLife may net $5B in NYC proprty sale.
(NOOF) New Frontiers may get a buyout offer from Steel Partners at an unspecified premium. Steel Partners owns 3.2M shares of NOOF.
(NOVL) Novell $0.03 EPS vs $0.03e; starting its own stock options probe and may delay its quarterly filing.
(RACK) Rackable Systems is acquiring private Terrascale for $38M.
(RAI) Reynolds said a suit in Massachussetts brought against it and other tobacco companies was dismissed.
(RMI) Rotonics Manufacturing is being acquired for $3.00per share.
(TASR) Chairman Philip Smith will retire and Tome Smith will become new chairman; Kathleen Hanrahan promoted to President.
(UNFI) United Natural Foods $0.30 EPS vs $0.30e.
(VGZ) Vista Gold filed to sell 4M shares.

MetLife Could Net $5 Billion in NYC Land Sale

MetLife (MET) has placed its Stuyvesant Town and Peter Cooper Village properties up for sale according to the New York Times. The sale would be for approximately 110 buildings that cover 80 acres in Mahattan. The area is around First Avenue between 14th Street and 23rd Street. The sum is expected to be an unbelievable $5 Billion, and this was reportedly signaled back in July. This will ultimately be putting another neighborhood for low and middle-income renters in Manhattan at risk of going-condo and driving up adjacent rents even further. This will no doubt come with some controversy, so you can imagine that the papers and local media in and around NYC will be covering this like hawks going forward.

Jon C. Ogg
August 30, 2006

Select Analyst Calls (Aug. 30, 2006)

AAP started as Neutral at Oppenheimer.
ADSK started as Neutral at Goldman Sachs.
AHD started as Equal Weight at Lehman.
ALA started as Buy at Merrill Lynch.
ALD started as Neutral at B of A.
APC started as Equal Weight at MSDW.
APL started as Equal Weight at Lehman.
ARDI started as Buy at First Albany.
AVR started as Buy at BB&T.
AYE started as Hold at Jefferies.
AZO started as Buy at Oppenheimer.
BIVN started as Buy at AGEdwards.
BMR started as Outperform at RWBaird.
BNS cut to Neutral at UBS.
CI raised to Buy at AGEdwards.
EOC started as Buy at Deutsche Bank.
ESRX raised to Overweight at Prudential.
FPL cut to Hold at BB&T.
GENZ started as Buy at AGEdwards.
GTXI started as Buy at First Albany.
HOV cut to Neutral at JPMorgan.
HRS cut to Underweight at Prudential.
JBLU cut to Neutral at Prudential.
LMT cut to Underweight at Prudential.
MAIR cut to Underweight at Prudential.
MMS cut to Hold at BB&T.
MOG/A raised to Buy at B of A.
MRO cut to Hold at AGEdwards.
NDAQ started as Outperform at Cowen.
NOC raised to Mkt Perform at FBR.
PAAS started as Buy at Merrill Lynch.
PCLN cut to Hold at Stifel Nicklaus.
PNCL cut to Underweight at Prudential.
RI started as Buy at Robinson Humphreys.
RIG reit Buy at AGEdwards.
ROK cut to Underperform at CSFB.
RYAAY started as Overweight at Prudential.
SAN raised to Buy at UBS.
SMSI started as Outperform at Piper Jaffray.
TZOO cut to Sell at Stifel Nicklaus.
VSE started as Buy at BB&T.

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


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


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


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


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.


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


Tuesday, August 29, 2006

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.


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.


US Market Wrap (Aug. 29, 2006)

DJIA 11,369.94; Up 17.93 (0.16%)
NASDAQ 2,172.30; Up 11.60 (0.54%)
S&P500 1,304.28; Up 2.50 (0.19%)
10YR-Bond 4.783%

The markets started out weaker after a slow negative reaction to August Consumer Confidence coming in under the 100 parity mark, signalling more of a thud than a soft landing for the economy ahead. The minutes from the last FOMC meeting showed that the Fed was cognizant that continued rate hikes could harm the economy, but they also tried to telegraph that a pause in rate hikes did not translate to a definite end.

Microsoft (MSFT) fell 0.5% to $25.81 after "leaked" pricing came out on Windows Vista.

eBay (EBAY) rose another 5.5% to $27.21 on strong volume a day after its non-US advertising pact with Google.

SGX Pharma (SGXP) lost a stunning 41% to close at $2.71 after halting its key Phase II/III trials for AML.

Despite announcing a $3 Billion share buyback, Boeing (BA) gave up 1.2% to close at $73.81 as the street felt this was either wasteful or was not going to really occur.

Apple (AAPL) closed down another 0.75% to $66.48 after a free music download business from Universal may be coming.

ViroPharma (VPHM) rose 12.8% to close at $12.60 after announcing quite positive data on its Hepatitis C trials.

Rite Aid (RAD) rose another 0.9% to $4.30 after offering in-line guidance.

Armor Holdings (AH) rose 1.3% to $52.52 after getting an additional $73 million armored Humvee order.

CBRL Group (CBRL) rose 4.5% to $37.26 after posting stronger August sales at its core stores.

NVIDIA (NVDA) rose 4.6% to $28.66 after Pacific Growth started it as a Buy.

Brinker International (EAT) rose 4.7% to $38.56 after it announced a $450 million share buyback plan.

Time Warner (TWX) rose 0.6% to $16.54 on word that it has received bids for its AOL unit in Germany.

InfoSpace (INSP) fell 0.4% to close at $21.91 after an analyst at WRHambrecht initiated the company with a "Sell" rating, although the company was lucky because they had been down as low as $20.82 after the negative call.

Jon C. ogg
August 29, 2006

What Are eBay Investors Pricing In?

eBay (EBAY) is doing even better today than it did yesterday and it looks like it will be on even stronger volume. Oddly enough, the Google (GOOG) advertising pact was announced yesterday?

EBAY closed up $40.49 at $25.79 yesterday on just over 17.8 million shares. It trades 18.55 million shares on an average day, yet as of 3:10PM EST today it traded 18.18 million shares and was up another $0.91 to $26.70. Volume is supposed to decrease each day this week in the overall markets ahead of the holiday and this is up more than on the day of the good news. The market is trying to price in an event now, and it isn't pricing in a sudden loving touchy feely we love you letter to customers.

Maybe today's buying interest in EBAY is just the market strength since the FOMC Minutes were released, but this seems to specific to the buy interest in the stock. The stock is getting back over its 50-day moving average, but it has failed to stay above that level in recent trading days.

After reviewing an email from Bambi Francisco, I decided to back and look over HER SITE to review. She works for Down Jones' MarketWatch and is not a traditional blogger.

I have been looking at the myriad of reports in recent days where the company is just making a point over and over of royally agitating and alienating its key customers who run eBay storefronts. This new initiative with Google is good for eBay, but it "can" have the propensity to lead shoppers not just away from the eBay merchant storefront. It may encourage the shopper to go to Amazon.com or other competing online stores. So the ones who have loaded up massive inventory on eBay stores are going to essentially have eBay's new partner leading shoppers away. It doesn't work exactly this way, but it is pretty close. It is damn close if you are an eBay merchant. This is the case for the Yahoo! search pact here in the US, and true for the non-US listings and searches with Google.

Unfortunately, the merchants are going to have to deal with the search features....PERIOD. Search can lead browsers and shoppers and customers away from a site directly to a competitor, and that won't change. The path of the Internet has already been informally drawn out if it isn't set in stone. Even net neutrality won't change that on a drastic basis, although that is a different topic. What the merchants won't have to deal with is constant shanking from the parent partner. Merchants can't get a betterdeal elsewhere with the same base and the same traction, because if they could they would have already migrated en-masse. eBay needs to stop forcing these guys out though, and they need to roll back "some" of their hikes. Even if they say they will have slightly lower margins they need to roll back some of the hikes. It will be bad business for them to not give in a little.

There is also probably going to be a management change soon. Meg Whitman didn't take the Disney job, but EBAY investors probably wish she had. There is no way to know if she will be gone soon or not, but if I had to place a bet I would put the Win bet on the next earnings date or sooner. I would put the Place bet by the end of the year, and my third bet for Show would be no later than next summer. It is possible she won't be the one to go. Maybe she will surface in a month and announce a replacement of several key executives and she will claim they were the dark side of the force behind the merchant treatment. Something is probably brewing as far as future "leadership" though.

Sorry for such a long dissertation, but this trading action for such a dead week on a day when there was no huge upgrade and there was no organic news out of the company seems too telling to just leave alone.

Jon C. Ogg
August 29, 2006

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.


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.


"Leaked" Windows Vista Pricing

Reposted from 10:38 AM EST

Yesterday we had the pricing of Windows Vista get "leaked out," and it is all over the web today. We found a table here, and you can determine if it is valid. It was found on CNET and ZDNet was sourced.

Unfortunately the two sources here each have different prices and we have not seen a formal press release from Microsoft with the exact numbers yet, so it is hard to know which is right. Knowing corporate America you also have to wonder if EITHER pricing list is accurate.

Dailytech.com has an article showing the following:

Ed Bott's Microsoft Report initially discovered that Microsoft's Canadian site had revealed pricing for the numerous Vista versions. US pricing was found on Amazon's website (full/upgrade):

-Windows Vista Home Basic, $199/$99.95
-Windows Vista Home Premium, $239/$159
-Windows Vista Business, $299/$199
-Windows Vista Ultimate, $399/$259

Amazon also listed the shipping date as January 30 2007. The telegraphed date that Microsoft has been maintaining is "January retail launch for Vista."

You can start getting out your calculators for this and start inputting some hypothetical estimates per version of 18 million units here, 12 million there, 16 million between these, and the like and you will start seeing some very rough and wide-ranged calculations about what this may add to calendar 2007 revenues and 2008 revenues.

Here is a copy/paste of what was on the Amazon website:

Microsoft Windows Vista Ultimate DVD-Rom
Microsoft Windows Vista Ultimate DVD-Rom (Windows XP)

Buy new: $399.00 Available for Pre-order
Microsoft Windows Vista Home Premium DVD-Rom
Microsoft Windows Vista Home Premium DVD-Rom (Windows XP)

Buy new: $239.00 Available for Pre-order
Microsoft Windows Vista Ultimate Upgrade DVD-Rom
Microsoft Windows Vista Ultimate Upgrade DVD-Rom (Windows XP)

Buy new: $259.00 Available for Pre-order
Microsoft Windows Vista Home Premium Upgrade DVD-Rom
Microsoft Windows Vista Home Premium Upgrade DVD-Rom (Windows XP)

Buy new: $159.00 Available for Pre-order
Microsoft Windows Vista Home Premium Microsoft License Pack Additional License
Microsoft Windows Vista Home Premium Microsoft License Pack Additional License (Windows XP)

Buy new: $215.00 Available for Pre-order
Microsoft Windows Vista Home Basic Upgrade DVD-Rom
Microsoft Windows Vista Home Basic Upgrade DVD-Rom (Windows XP)

Used & new from $99.95
Microsoft Windows Vista Business Upgrade Microsoft License Pack Additional License
Microsoft Windows Vista Business Upgrade Microsoft License Pack Additional License (Windows XP)

Used & new from $179.00
Microsoft Windows Vista Home Basic Upgrade Microsoft License Pack Additional License
Microsoft Windows Vista Home Basic Upgrade Microsoft License Pack Additional License (Windows XP)

Buy new: $89.95 Available for Pre-order
Microsoft Windows Vista Business Upgrade DVD-Rom
Microsoft Windows Vista Business Upgrade DVD-Rom (Windows XP)

Buy new: $199.00 Available for Pre-order
Microsoft Windows Vista Home Basic Microsoft License Pack Additional License
Microsoft Windows Vista Home Basic Microsoft License Pack Additional License (Windows XP)

Buy new: $179.00 Available for Pre-order
Microsoft Windows Vista Ultimate Microsoft License Pack Additional License
Microsoft Windows Vista Ultimate Microsoft License Pack Additional License (Windows XP)

Buy new: $359.00 Available for Pre-order
Microsoft Windows Vista Home Premium Upgrade Microsoft License Pack Additional License
Microsoft Windows Vista Home Premium Upgrade Microsoft License Pack Additional License (Windows XP)

Buy new: $143.00 Available for Pre-order

We have to unfortunately wait to see which pricing is accurate before making any calculations, and you need to always keep it in your mind that companies often "leak" out misinformation as a test basis to see how the public and how the street reacts to a pricing set on a new expected product. It is unknown if that is the case here, but remember we are referring to the Big Brother equivalent of the software world.

After giving this some more thought from earlier this morning it is (opinion here) fairly obvious that Microsoft is dipping its toes into the water to find an equilibrium in pricing where they maximize their potential sales without making it too cost prohibitive for the consumer.ad

Jon C. Ogg
August 29, 2006 posted by Jon C. Ogg at 10:38 AM

Powered by Blogger