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BusinessWeek.com
September 29, 2006
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Stocks Fall to End Strong Third Quarter

The Dow bobbed above its all-time closing high, only to stumble. A key inflation gauge came in above the Fed's comfort zone

Stocks finished lower Friday to end their best third quarter in 11 years, while the Dow Jones industrial average pulled back from above record highs. Investors were digesting a report showing that inflation remains above the Federal Reserve's comfort zone.

The Dow fell 39.38 points, or 0.34%, to 11,679.07, after briefly bobbing above its all-time closing high of 11,722.98, reached Jan. 14, 2000. The broader Standard & Poor's 500 index slipped 3.3 points, or 0.25%, to 1,335.85. The tech-heavy Nasdaq composite dropped 11.59 points, or 0.51%, to 2,258.43.

NYSE breadth was negative, with 20 issues declining for every 13 advancing. Nasdaq breadth was 18-12 negative.

For the quarter, the Dow rose 4.7%, its biggest third-quarter advance since 1995. The S&P 500 added 5.2%, while the Nasdaq gained 4%.

A busy docket of economic data was in focus Friday. The core personal consumption expenditure (PCE) deflator, a closely watched gauge of inflation, rose 0.2% in August after a 0.1% bump in July. Year over year, the core PCE deflator increased at 2.5% rate in August, up from a 2.3% pace in July. Personal income rose 0.3% in August, as expected.

The Chicago purchasing managers index unexpectedly jumped to 62.1 in September, from 57.1 reading in August. Separately, the University of Michigan's consumer sentiment index rose to 85.4 for September, up from 82.0 in August.

Meanwhile, St. Louis Fed President William Poole offered some dovish remarks on inflation. "The worst of the inflation news is behind us," Poole said, noting the recent decline in energy prices

Still, inflation could still be a threat, some analysts say. "Despite the downward revision to second-quarter core PCE prices, core inflation hit the top of the Fed's forecast range for 2006 in August," says John Ryding, chief U.S. economist at Bear Stearns. "Core PCE inflation is now 0.5%-point above the Fed's 'comfort zone' and stands at the highest rate in more than 11 years."

In corporate news, Research in Motion (RIMM ) was sharply higher after the BlackBerry maker's second-quarter results and third-quarter forecast topped analyst' estimates.

On the downside, Ford (F) was lower as the automaker's financing arm said it will cut 2,000 jobs from its payroll as it restructures North American operations.

Shares of Wal-Mart (WMT ) fell reports the retail giant may pay $200 million to buy 27 stores from Taiwan-based supermarket outfit Trust-Mart.

Electronics maker Sony (SNE ) was lower as Dell (DELL ) raised the number of recalled Sony batteries from 4.1 million units to about 4.2 million.

Retailer J. Crew (JCG ) was lower after the company announced the resignations of three board members.

In the energy markets, November West Texas Intermediate crude oil futures rose 15 cents to $62.91 a barrel.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index fell 10.5 points, or 0.18%, to 5,960.8. Germany's DAX index rose 15.17 points, or 0.25%, to 6,004.33. In Paris, the CAC 40 index was flat at 5,250.01.

Asian markets ended mostly higher. Japan's Nikkei 225 index gained 102.73 points, or 0.64%, to 16,127.58. In Hong Kong, the Hang Seng index advanced 12.48 points, or 0.07%, to 17,543.05. Korea's Kospi index crept lower 0.02 points, or less than 0.01%, to 1,371.41.

Treasury Market

Treasury yields rebounded following the inflation data. The 10-year note fell in price to 101-28/32 for a yield of 4.63%, while the 30-year bond slipped to 95-27/32 for a yield of 4.76%.

News Article
BusinessWeek.com
September 28, 2006
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Stocks Gain as Dow Skirts Record

The blue-chip benchmark posted its all-time second-highest close. Second-quarter GDP was revised down, while weekly jobless claims declined

Stocks finished modestly higher Thursday following a downward revision to second-quarter economic growth and a drop in weekly jobless claims. The Dow Jones industrial average briefly touched above its record closing high, only to pare gains. Investors were squaring up their portfolios for the end of the third quarter, while the outlook for economic growth and inflation remains unclear, says Standard & Poor's Equity Research.

The Dow rose 29.21 points, or 0.25%, to 11,718.45, its second-best close ever, after temporarily crossing its all-time closing high of 11,722.98, reached Jan. 14, 2000. The broader Standard & Poor's 500 index added 2.56 points, or 0.19%, to 1,339.15. The tech-heavy Nasdaq composite gained 6.63 points, or 0.29%, to 2,270.02. 

NYSE breadth was slightly positive, with 18 issues advancing for every 15 declining. Nasdaq breadth was 16-14 positive.

A report on economic growth was in focus Thursday. Gross domestic product (GDP) growth was revised down to 2.6% in the final reading for the second quarter, from a preliminary 2.9% and 2.5% in the advanced report. "Quarterly figures continue to bounce around either side of 3.0%, and we suspect this pattern will continue through 2007," says Action Economics.

The numbers did not sway the markets much, some analysts say. "Markets [are] showing little reaction to [the] report because it's old news," says Beth Ann Bovino, senior economist at S&P. "Traders are more likely focused on the fourth quarter and the following year."

Investors were also weighing unemployment figures. Jobless claims fell 6,000 to 316,000 in the week ended Sept. 23, from an upwardly revised 322,000 a week earlier.

Reports due Friday could shed more light on the economic outlook. Data releases on tap include personal income, inflation, the University of Michigan's consumer sentiment index, and the Chicago purchasing managers index.

On the company side, Hewlett-Packard (HPQ) announced the resignation of its general counsel, Ann Baskins, effective immediately. In Washington, D.C., recently ousted Chairwoman Patricia Dunn told Congress an outside investigator assured her that the phone records at the center of the company's leak-probe scandal were obtained legally.

Shares of General Motors (GM) gained on reports that billionare investor Kirk Kerkorian's Tracinda group has expressed interest in buying up to 12 million more shares of the automaker, boosting its stake to more than 10%.

Earlier, GM CEO Rick Wagoner said he's "absolutely confident" the company can survive without an alliance with fellow automakers Renault and Nissan (NSANY ). He said talks could continue past a previously set Oct. 15 deadline.

In M&A activity, Disney's (DIS ) Buena Vista Games videogame unit agreed to buy racing games outfit Climax Racing from the U.K.'s Climax Group for an undisclosed sum.

Steelmakers such as U.S. Steel (X ) came under pressure following a report that steel inventory pile-ups are creating worries of a glut.

An analyst downgrade weighed on Time Warner (TWX ). The shares fell after J.P. Morgan lowered its recommendation on the stock from overweight to neutral.

In other analyst calls, ThinkEquity reportedly downgraded chipmakers Advanced Micro Devices (AMD ) and Nvidia (NVDA ) from buy to sell. Separately, Citigroup raised its its price target on AMD from $27.50 to $31, maintaining a buy rating.

In the energy markets, November West Texas Intermediate crude oil futures closed down 20 cents at $62.76 a barrel. Reports that some OPEC members would "unofficially" cut productions caused a short-lived jump in crude futures, but prices eased as Kuwait denied the reports, says Action Economics.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index rose 41.2 points, or 0.69%, to 5,971.3. Germany's DAX index edged down 0.55 points, or 0.01%, to 5,989.16. In Paris, the CAC 40 index added 6.91 points, or 0.13%, to 5,250.01.

Asian markets ended higher. Japan's Nikkei 225 index gained 76.98 points, or 0.48%, to 16,024.85. In Hong Kong, the Hang Seng index crept higher 9.06 points, or 0.05%, to 17,530.57. Korea's Kospi index advanced 11.4 points, or 0.84%, to 1,371.43.

Treasury Market

Treasury yields ticked higher after the day's economic reports came close to expectations. The 10-year note fell in price to 102-00/32 for a yield of 4.62%, while the 30-year bond dropped to 95-28/32 for a yield of 4.76%.

 

News Article
BusinessWeek.com
September 27, 2006
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Stocks Rise as Dow Flirts With Record

Durable goods orders unexpectedly dropped, while new home sales posted surprising gains. Crude futures surged near $63

Stocks finished modestly higher Wednesday, paring early gains and narrowly missing record highs after a mixed bag of economic data. End-of-quarter portfolio adjustments helped influence trading, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 19.85 points, or 0.17%, to 11,689.24, its second highest close and within 33 points of its all-time best of 11,722.98, reached Jan. 14, 2000. The broader Standard & Poor's 500 index edged up 0.25 points, or 0.02%, to 1,336.59. The tech-heavy Nasdaq composite added 2.05 points, or 0.09%, to 2,263.39. 

NYSE breadth was decidedly positive, with 21 issues advancing for every 13 declining. Nasdaq breadth was 17-13 positive.

The market's recovery from summer lows is just the latest rebound in the current market cycle, some analysts say. "For the eighth time in this bull market, an apparent technical breakdown has been followed by higher prices," says Brian Reynolds, chief market strategist at M.S. Howells. "We are at a point similar to the prior times where bearish investors are just beginning to realize that their fears were again overblown."

Still, a number of technical indicators are putting up warning flags, others say. "These signs of weakness do mean that investors need to remain alert and not become complacent about the market's prospects in the months ahead," says Richard Dickson, senior market strategist at Lowry's Reports.

Investors were digesting mixed economic reports Wednesday. New home sales rose 4.1% in August, the National Association of Realtors said. Economists were expecting a 3% decline.

On the other hand, durable goods orders fell 0.5% in August, compared to projections for a 1.5% increase. Investors were also awaiting Thursday's final reading on second-quarter economic growth.

In corporate news, Intel (INTC ) was higher after a federal judge dismissed part of Advanced Micro Device's (AMD ) antitrust lawsuit against the rival chipmaker.

Meanwhile, General Motors (GM ) was reportedly asking for a multibillion dollar payment from Nissan (NSANY ) and Renault as a condition for forming an alliance with the two automakers.

Drugmaker Merck (MRK ) was higher after a federal jury in New Orleans found the company not liable for the heart attack of a 56-year-old man who took the Vioxx painkiller.

Fast-food giant McDonald's (MCD ) was higher as the company raised its quarterly dividend by 49%.

Telecom stocks hampered the Dow. AT&T (T ) and Verizon (VZ ) were the blue-chip benchmark's biggest losers.

Also on the downside, Red Hat (RHAT ) was sharply lower after the open-source software distributor reported a 34% drop in second-quarter earnings.

Shares of BearingPoint (BE) sank after the consulting company said it would have to delay a regulatory filing following a court's finding that BearingPoint was in default on its debt.

On the M&A front, shareholders of Univision Communications (UVN ) approved the proposed $12.3 billion sale of the Spanish-language broadcaster to a private investor group.

In the energy markets, November West Texas Intermediate crude oil futures closed up $1.95 at $62.96 a barrel amid speculation that OPEC may move to boost prices. Earlier, a weekly inventory report showed that crude supplies dropped much less than expected.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 56.5 points, or 0.96%, to 5,930.1. Germany's DAX index added 29.08 points, or 0.49%, to 5,989.71. In Paris, the CAC 40 index was up 23.51 points, or 0.45%, to 5,243.1.

Asian markets ended sharply higher. Japan's Nikkei 225 index rallied 390.42 points, or 2.51%, to 15,947.87. In Hong Kong, the Hang Seng index climbed 213.43 points, or 1.23%, to 17,521.51. Korea's Kospi index advanced 16.06 points, or 1.19%, to 1,360.03.

Treasury Market

Treasury yields ticked higher following the unexpectedly firm housing report. The 10-year note edged down in price to 102-07/32 for a yield of 4.59%, while the 30-year bond fell to 96-12/32 for a yield of 4.73%.

 

News Analysis
BusinessWeek.com
September 27, 2006
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Don't Let Housing Haunt Your Retirement

With home-lending debt stretching further into the "golden years," older Americans may need extra income. Here are ways to counteract the crunch

Nowadays the old American dream of owning your own home outright can seem like just that: a dream. For reasons good and bad, Americans are increasingly carrying mortgage debt later in life. Retirees or soon-to-be retirees who haven't factored these mortgage payments into their retirement plans could need to come up with some extra income.

Meanwhile, the cooling housing market may be leaving many Americans with less home equity. Prices of existing houses fell in August for the first time in 11 years, the National Association of Realtors said on Sept. 25. Homebuilders like Beazer Homes (BZH ), KB Home (KBH ), and Lennar (LEN ) are also feeling the hurt (see BusinessWeek.com, 9/8/06, "Builders Brace for a Housing Downturn").

About a quarter of U.S. census respondents aged 70 and older reported having a mortgage in 2000, up from 19.9% in 1980. The number of census respondents in their 60s with a mortgage rose to 44.6%, from 34% two decades earlier. This mounting debt load "may suggest that the traditional rules of thumb for determining appropriate levels of retirement income are outdated," according to a recent report by the Financial Planning Assn.

OFFSETTING THE SHORTFALL.  In other words, many Americans may need even more money than they had planned on for retirement. The average 401(k) balance at yearend 2005 was $58,328, according to a study released last month by the Employee Benefit Research Institute and the Investment Company Institute. "There is a looming shortage on the retiree balance sheet that needs addressing, and it is spelled I-N-C-O-M-E," says David Rosenberg, North American economist at Merrill Lynch, in a Sept. 18 report.

The old retirement nest egg isn't what it used to be. While there's no easy solution, this week's Five for the Money looks at ways investors can bolster their retirement income to make up the mortgage gap.

1. Plan ahead
First of all, investors shouldn't necessarily be in a hurry to pay off their entire mortgage, so long as it has a fixed interest rate. "Being debt-free is an inherited ideal from older generations," says John Scherer, principal of Madison (Wis.)-based Trinity Financial Planning and a member of the Alliance of Cambridge Advisors. "That ideal, good in most respects, is misplaced in the context of an appreciating asset such as one's home."

Staying in debt may not sound appealing, but it makes financial sense. Historical returns suggest investors will get more from their money by investing it rather than using it to pay off their mortgage in a lump sum, financial advisers say. The actual cost of mortgage payments should decrease with inflation, and mortgage interest may also qualify homeowners for tax benefits.

However, retirees shouldn't carry a mortgage that will exceed more than 15% to 25% of their overall retirement income, notes South Riding (Va.)-based financial planner Phil Bour. It's also important that investors develop a plan for their retirement spending and build their mortgage payments into that plan to ensure they're living within their means.

"Some have suitable resources to carry a reasonable mortgage in a way that has advantages during retirement," says J. David Lewis, president of Knoxville (Tenn.)-based financial planning firm Resource Advisory Services. "Others do not. It is the appropriate balance that makes the difference."

2. Consider downsizing
Tough decisions could be in order. If investors haven't saved enough to sustain their expected spending during retirement, they might just have to sell the family homestead and buy something more affordable. After all, a smaller mortgage can mean smaller mortgage payments.

In some cases, retirees and soon-to-be retirees may want to talk with their children about other possibilities. Potential heirs might decide to help subsidize costs in the short run to inherit the property later, says Jenny Angel, a financial planner with Norcross (Ga.)-based Sanders Financial Management.

A reverse mortgage could be another option. Under this arrangement, homeowners can borrow against the value of their houses and receive a monthly check from a mortgage lender to boost their income (see BusinessWeek.com, 5/1/06, "Buy the Nest, Keep the Egg"). However, a reverse mortgage can have high fees, and if the homeowner's heirs can't repay the debt, they might lose the house.

3. Put your money to work
Retirees looking for extra money to meet their expenses may want to allocate a greater portion of their assets to income-oriented investments. More income tends to carry with it more risk, so the right investment option will depend on an investor's risk tolerance, notes Matthew Paladini, president of Irving (Tex.)-based Paladini Financial Management. He points to bonds, high-dividend real estate investment trusts, and large-cap stocks.

A "laddered" bond portfolio can also make sense for investors seeking income, adds Stacy Francis, president of New York-based Francis Financial. This strategy involves buying short-term bonds that mature in one, two, three, four, and five years, then reinvesting the proceeds in the five-year bonds as each group matures.

Immediate annuities are another option, suggests George Middleton, a financial planner with Vancouver (Wash.)-based Limoges Investment Management. An immediate annuity is a contract with an insurance company where a lump sum is paid up front in exchange for a monthly income stream (see BusinessWeek.com, 7/25/05, "Insuring Your Income").

4. Stay diversified
Older workers may find the risk of more aggressive investments just isn't worth it. In fact, retirees and soon-to-be retirees should typically maintain a more conservative asset allocation, because they are relying on their investment returns to cover basic living expenses. "It's a Catch-22," says Annette Simon, a financial planner with Bethesda (Md.)-based Mosaic Wealth Management.

From an investment perspective, it's important for older Americans to remain broadly diversified, whether or not they're making mortgage payments, financial advisers say. One fairly aggressive approach is cited by Sean Sebold, president of Naperville (Ill.)-based Sebold Capital Management: "We would recommend that clients put their money into a portfolio that is made up of at least 50% large-cap domestic stocks, 25% small-cap stocks, 15% international, and the balance in short-term bonds." Sebold says this allocation "keeps a moderate volatility in the portfolio, but a portfolio that is designed to beat the cost of a mortgage over a 7-10 year time horizon."

5. Revisit the labor market
Unfortunately, scrimping and prudent investment can only go so far. Many people will have only one realistic route to additional retirement income: earning it the old-fashioned way. About 77% of today's workers expect to work for pay even after they retire, according to a survey released on Sept. 21 by the Pew Research Center.

Workers who haven't yet reached their full retirement age for Social Security can earn up to $12,480 in 2006 without a loss in their Social Security benefits. A growing economy should provide plenty of openings for older workers, financial planners say. "The good news is that retirees will probably be able to find remunerative, challenging work well into their 70s," says Susan Fulton, principal at Bethesda (Md.)-based financial planning firm WealthTrust FBB.

Of course, not everyone will be able to stick with their current employer, particularly as companies look to cut costs. "You are starting to see things like couples who go out and drive a truck for a living," says Eve Kaplan, a Berkeley Heights (N.J.)-based financial planner. "It's a small number of people, but I think it's just going to snowball."

With no magic cure for the retirement crunch, Americans may need to change not their investment strategies, but their expectations. The first step to restoring the golden years' luster might be recognizing the problem that mortgage debt can pose during those years.

News Article
BusinessWeek.com
September 26, 2006
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Dow Nears Record as Confidence Climbs

A key gauge of consumers' mood came in higher than expected. Lowe's warned on profits and Lennar posted lackluster earnings

Stocks advanced to multi-year highs Tuesday, as investors drew confidence from stronger-than-expected consumer confidence numbers despite a flurry of earnings warnings.

The Dow Jones industrial average rose 93.85 points, or 0.81%, to 11,669.39, a new six-year closing high and within 55 points of its all-time best of 11,722.98, reached Jan. 14, 2000. The broader Standard & Poor's 500 index added 9.97 points, or 0.75%, to 1,336.34, its highest close in five and a half years. The tech-heavy Nasdaq composite gained 9.97 points, or 0.55%, to 2,261.34, hampered by a revenue warning from chipmaker PMC-Sierra (PMCS ). 

NYSE breadth was decidedly positive, with 22 issues advancing for every 12 declining. Nasdaq breadth was 16-14 positive.

Rebounding consumer confidence was in the spotlight Tuesday. Consumer confidence rose to 104.5 in September, from an upwardly revised 100.2 in August. The improvement isn't surprising given recent recent bullish headlines and falling gas prices, says Action Economics.

In other economic data, the Richmond Federal Reserve's manufacturing index rose to 9 in September, from 3 in August. The solid reading came as traders look for data to corroborate the Philadelphia Fed index's recent slump.

The Richmond Fed index number helps offset the worries sparked by the Philly Fed index, some analysts say. "It negates some of the pessimism about the economy perhaps slowing too much," says Peter Cardillo, chief market analyst at SW Bach. "It's also the end of the quarter, so we're seeing willingness on the parts of institutions to take this market higher on window-dressing. That's the combination."

Others say the markets are prematurely pricing in a soft landing for the economy. "I just don't think we have enough data at this point to be pricing in a perfect scenario for 2007," says Steve Sachs, director of trading at Rydex Investments.

Economic reports later in the week could determine whether major indexes can hold their new record levels. Figures on durable goods orders and new homes sales are due Wednesday, followed Thursday by a final reading on second-quarter economic growth.

Oil prices resumed their recent slump following an uptick Monday. In the energy markets, November West Texas Intermediate crude oil futures fell 44 cents to $61.01 a barrel.

Major indexes withstood a new batch of profit warnings. Home-improvement retailer Lowe's (LOW ) cut its full-year earnings outlook, citing a slowing housing industry.

Meanwhile, homebuilder Lennar (LEN ) reported a 39% drop in third-quarter profit and lowering its guidance for the fourth quarter.

Another profit warning came from Pentair (PNR), which makes pool and spa equipment. Shares skidded after the company lowered its third-quarter and full-year earnings estimates.

Elsewhere, General Motors (GM ) was higher on reports that talks on a potential alliance with fellow automakers Renault and Nissan (NSANY ) have been productive.

Health care giant Johnson & Johnson (JNJ ) sued Boston Scientific (BSX ) and Abbott Laboratories (ABT ) for $5.5 billion, claiming the two companies breached Johnson & Johnson's now-scuttled merger deal with Guidant (GDT ).

Department-store shares dipped after Credit Suisse downgraded Kohl's (KSS ), Nordstrom (JWN ), and J.C. Penney (JCP ) from neutral to underperform.

Computer maker Hewlett-Packard (HPQ) also remained in focus as two of its executives and an outside investigator were served subpoenas related to the company's probe into media leaks.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 75.3 points, or 1.3%, to 5,873.6. Germany's DAX index added 58.97 points, or 1%, to 5,960.63. In Paris, the CAC 40 index was up 73.1 points, or 1.42%, to 5,219.59.

Asian markets ended lower. Japan's Nikkei 225 index lost 76.36 points, or 0.49%, to 15,557.45. In Hong Kong, the Hang Seng index retreated 237.96 points, or 1.36%, to 17,308.08. Korea's Kospi index shed 11.24 points, or 0.83%, to 1,343.97.

Treasury Market

Treasury yields ticked higher after the solid consumer confidence data and hawkish inflation comments from former Fed Chairman Paul Volcker and former New York Fed President Gerald Corrigan. The 10-year note fell in price to 102-09/32 for a yield of 4.58%, while the 30-year bond dropped to 96-22/32 for a yield of 4.71%.

 

News Article
BusinessWeek.com
September 25, 2006
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Stocks Climb on Fed Remarks, Housing Data

The Dallas Fed's Fisher struck a positive tone on the economy, while August existing home sales declined slightly less than expected

Stocks finished higher Monday, though off session peaks, as a report on the housing market showed slightly less weakness than expected and a Federal Reserve official touted the strength of the economy. A rebound in oil futures helped energy shares bounce back from early losses. End-of-quarter portfolio adjustments were also boosting stocks, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 67.71 points, or 0.59%, to 11,575.81, paced by Caterpillar (CAT ). The broader Standard & Poor's 500 index added 11.6 points, or 0.88%, to 1,326.38. The tech-heavy Nasdaq composite climbed 30.14 points, or 1.36%, to 2,249.07.

NYSE breadth was decidedly positive, with 23 issues advancing for every 11 declining. Nasdaq breadth was 18-12 positive.

From a technical perspective, stocks could make another run at bull-market highs, says Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch. "If new recovery highs are achieved we do not believe this is a new leg of a bull market move and prefer to remain defensive into October," Bartels says.

Others see stocks headed for a change in direction. "Multiple markets look poised to reverse course over the next week: reversals in equities and treasuries to the downside, and rebounds in commodities," says Morgan Stanley technical analyst Mark Newton.

A report on the housing market Monday showed less weakness than analysts expected. Existing home sales declined to 6.3 million in August, from 6.33 million in July. Homebuilder shares gained on the news.

Elsewhere, Dallas Fed President Richard Fisher sounded an upbeat note on the economy. "I continue to fret more about inflation than I do about growth," Fisher said, adding that most of the economy is doing "extremely well."

Consumer confidence numbers highlight the economic calendar Tuesday. Consumer confidence is expected to rise to 103.0 in September, from 99.6 in August, says Action Economics.

Oil prices rebounded after briefly sinking below $60. In the energy markets, November West Texas Intermediate crude oil futures rose 90 cents to $61.45 a barrel after OPEC said its members had discussed oil's recent slump, less than two weeks since the group agreed to keep output unchanged.

Among stocks to watch, Hewlett-Packard (HPQ) said Friday that Chairwoman Patricia Dunn resigned, taking responsibility for a probe into media leaks. CEO Mark Hurd succeeds Dunn as chairman.

Tobacco shares dropped as a federal court judge certified a potential $200 billion class-action case against Altria's (MO ) Philip Morris USA and other light cigarette makers.

Media conglomerate Viacom (VIA , VIA.B) announced Chairman Sumner Redstone's salary would be cut and his long-term pay would be aligned more closely to the performance of Viacom's stock.

On the downside, Chiquita Brands (CQB) was sharply lower after the banana producer suspended its dividend and issued a third-quarter profit warning over worries about spinach safety and lower banana prices.

Drugstore chain Walgreen (WAG ) was lower after the company reported a 25% increase in fourth-quarter profit on a 16% sales rise.

Shares of General Motors (GM) edged down amid news CEO Richard Wagoner and Nissan-Renault head Carlos Ghosn are set to meet this week in Paris as they consider a possible alliance between the three automakers.

In analyst calls, UBS lowered its recommendation on U.S. Steel (X ) from neutral to reduce. UBS also cut its recommendation on fellow steelmaker Nucor (NUE ) from buy to neutral.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index fell 24 points, or 0.41%, to 5,798.3. Germany's DAX index rose 18.34 points, or 0.31%, to 5,901.66. In Paris, the CAC 40 index added 4.54 points, or 0.09%, to 5,146.49.

Asian markets ended mixed. Japan's Nikkei 225 index edged down 0.86 points, or 0.01%, to 15,633.81. In Hong Kong, the Hang Seng index lost 54.61 points, or 0.31%, to 17,546.04. Korea's Kospi index gained 6.83 points, or 0.51%, to 1,355.21.

Treasury Market

Treasury yields dipped despite the slightly firmer than expected housing data. The 10-year note rose in price to 102-17/32 for a yield of 4.55%, while the 30-year bond climbed to 96-28/32 for a yield of 4.69%.

News Analysis
BusinessWeek.com
September 23, 2006
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An Autumn Chill for Stocks

Major indexes approached all-time highs, then suffered a two-day decline on economic jitters. Where do they go from here?

The late-summer rally is fading, and stocks are feeling a seasonal autumn chill. On Sept. 20 major indexes notched their best closing levels since early May and pulled within striking distance of new records.

The Dow Jones industrial average, for one, rose to around 100 points shy of its all-time closing high of 11,722.98. Then worries about slowing economic growth helped send stocks down for two straight sessions, as Wal-Mart's (WMT ) generic-drug discounts and Hewlett-Packard's (HPQ ) leak probe fallout also weighed on the market (see BusinessWeek.com, 9/22/06, "HP's Hurd on the Hot Seat"). On Sept. 22 the Dow fell to 11,508.1, the Standard & Poor's 500-stock index dipped to 1,314.78, and the Nasdaq composite landed at 2,218.93.

An uncertain economic outlook and the prospect of dwindling corporate earnings could keep investors in a cold sweat heading into the November elections and possibly beyond, analysts say, despite lower energy prices and a calmer geopolitical climate. "The actions of equity investors over the past three days tell us that it is likely that the equity jitters will continue for at least the first part of the fall," says Brian Reynolds, chief market strategist at M.S. Howell.

Recent economic reports have added to investors' worries. On Sept. 21 the Philadelphia Federal Reserve index skidded to -0.4%, down from 18.5 in August. It was the regional business activity gauge's first negative reading since April, 2003. "The negative report is very discouraging for manufacturing," says Beth Ann Bovino, senior economist at S&P. The next report on national manufacturing activity, the Institute for Supply Management's purchasing manager's index, on Oct. 21, should show whether the Philly Fed was an aberration.

TREASURY TROUBLE.  The Federal Reserve's policy on interest rates hasn't provided much relief either. On Sept. 20 the Fed kept interest rates steady but declined to rule out further interest rate hikes (see BusinessWeek.com, 9/20/06, "Bernanke's Steady Course Cheers Markets"). In its policy statement, the central bank said inflation worries remain even amid a slowing economy. The comments were less sanguine about inflation than expected, says Action Economics, and Treasury yields ticked higher on the news.

Indeed, the Fed may have still have more rate-hiking to do, some analysts say. "There is clearly a lingering concern regarding the current level of inflation that is being weighed against possible downside growth risks related to housing," says Lehman Brothers economist Drew Matus.

At the same time, the Fed signaled that the housing market's slowdown is more rapid than previously anticipated. Policymakers removed the word "gradual" from the Fed's description of the housing slowdown, following a drumbeat of disappointing data (see BusinessWeek.com, 9/8/06, "Builders Brace for a Housing Downturn"). Investors await the release of August existing home sales, set for Sept. 25.

LIMITED VISIBILITY.  Other analysts say the housing market weakness could drag down the economy and force the Fed to start cutting interest rates early next year. "The U.S. demand slowdown is poised to come sooner and prove more persistent than generally expected," says Merrill Lynch's global economics team in a Sept. 18 report. And some extreme pessimists see signs of a recession (see BusinessWeek.com, 9/18/06, "The Gloomy Side of the Street").

If the economy slows, corporate profits could decelerate with it. S&P 500 companies have posted 17 straight quarters of double-digit earnings growth, leaving some analysts wondering how long the streak can last. Earnings visibility for 2007 "remains murky," according to notes from the S&P Investment Policy Committee meeting on Sept. 21 (see BusinessWeek.com, 9/22/06, "Significant Slowing for Economy in 2007").

Investment banks Goldman Sachs (GS ), Lehman Brothers (LEH ), and Morgan Stanley (MS ) already kicked off the current third-quarter earnings season with solid results. However, on Sept. 21, a strong earnings report from FedEx (FDX ) was accompanied by a lower-than-expected outlook. Meanwhile, companies like Yahoo! (YHOO ), Dow Jones (DJ ), and New York Times (NYT ) have issued third-quarter profit warnings.

SOFTER OIL.  Nevertheless, the global economy may allow corporate profits to stay strong even as U.S. economic growth moderates, others say. "The connection between corporate profits and national GDP is becoming much weaker," says Daniel Chung, president and chief investment officer at Fred Alger Management.

On the bright side, the threat of $100 oil seems like a distant memory (see BusinessWeek.com, 9/11/06, "Will Oil Stay Soft?"). Prices for oil and other commodities have fallen in recent weeks, with November West Texas Intermediate crude oil futures settling at $60.55 on Sept. 22.

The November elections may also provide a bullish factor (see BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock "). Stocks have tended to post their best returns in the fourth quarter of previous midterm election years. Still, some analysts question whether past election-cycle performance continues to have predictive value.

AVOID CONSUMER ISSUES.  "The frequency of the discussion surrounding the four-year cycle is likely to cause it to play out in a much different fashion from what most imagine," says Morgan Stanley technical analyst Mark Newton. "We remain skeptical that the yearly lows were made in the June/July period, and suspect that pullbacks could unfold over the next few months."

In a slowing economy, investors should avoid stocks of companies that depend on domestic consumer spending, including many retail, restaurant, housing and auto-related stocks, says Brian Belski, U.S. sector strategist at Merrill Lynch, in a Sept. 22 report. Belski prefers stocks that should benefit from capital expenditures, a weaker dollar, or a favorable commodity outlook, including 3M (MMM ), Caterpillar (CAT ), Intel (INTC ), and Exxon Mobil (XOM ).

With the Dow sitting within 215 points of its peak, major indexes could get another shot at record heights. Still, how far stocks can rise depends on how softly the economy lands, and that remains anybody's guess.

News Article
BusinessWeek.com
September 22, 2006
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Stocks Fall amid Growth Worries

Major indexes finished a volatile week lower after Thursday's reports showing a slowing economy. Also in focus: Cablevision, HP

Stocks finished lower Friday, extending a decline that began Thursday on reports indicating the economy could be slowing more than expected. Reports next week on housing and economic growth could shed further light on whether the economy is headed for a hard or soft landing, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 25.13 points, or 0.22%, to 11,508.1, for a weekly decline of 0.5%. The broader Standard & Poor's 500 index shed 3.25 points, or 0.25%, to 1,314.78, down 0.4% for the week. The tech-heavy Nasdaq composite dropped 18.82 points, or 0.84%, to 2,218.93, a weekly loss of 0.7%.

NYSE breadth was decidedly negative, with 21 issues declining for every 13 advancing. Nasdaq breadth was 21-9 negative.

Investors continued to digest Thursday's unexpected drop in the Philadelphia Federal Reserve index. The measure of regional manufacturing activity dipped into negative territory for the first time since 2003.

The weak Philly Fed reading could dash traders' hopes the economy will slow at a moderate pace, some analysts say. "The soft landing scenario is put into question following the Philadelphia Fed Index shock, and the severe inter-market chart reactions appear to validate the number," says Roger Volz, chief technical analyst at Swiss American Securities.

Others say lower energy costs, among other factors, could help keep the economy afloat. "The recent drop in energy prices will free up some extra income for consumers, part of which will go towards goods consumption," says Goldman Sachs economist Andrew Tilton. "Easier financial conditions will also help cushion any deceleration."

Oil prices were on the downswing again Friday following a short-lived rebound. In the energy markets, November West Texas Intermediate crude oil futures fell $1.05 to $60.54 a barrel.

Among stocks in focus, Cablevision (CVC ) reportedly granted stock options to a vice chairman after his death but backdated them to when he was alive.

Computer maker Hewlett-Packard (HPQ) was lower as CEO Mark Hurd was set to speak on the company's probe to ferret out the source of board leaks dating back to January 2005.

Retailer Target (TGT ) says it will match rival Wal-Mart's (WMT ) new, lower prices on generic drugs in the Tampa Bay area beginning immediately.

Chipmaker Texas Instruments (TXN ) approved repurchase of an additional $5 billion of its common stock and raised its quarterly dividend.

Meanwhile, General Motors (GM) has reportedly made little progress toward an alliance with Renault and Nissan, with the automakers' top executives set to meet next week.

Coffee giant Starbucks (SBUX ) raised the price on its drinks by five cents, or an average of 1.9%.

In earnings news, Nike (NKE ) was higher after the shoemaker posted an 8.6% rise in first-quarter sales despite a 13% drop in quarterly profit.

The economic calendar was quiet Friday, before kicking off next week with existing home sales data due Monday.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 74.4 points, or 1.26%, to 5,822.3. Germany's DAX index dipped 78.71 points, or 1.32%, to 5,883.32. In Paris, the CAC 40 index was down 66.37 points, or 1.27%, to 5,141.95.

Asian markets ended lower. Japan's Nikkei 225 slid 199.56 points, or 1.26%, to 15,634.67. In Hong Kong, the Hang Seng index slipped 19.32 points, or 0.11%, to 17,600.65. Korea's Kospi index skidded 18.41 points, or 1.35%, to 1,348.38.

Treasury Market

Treasuries extended their advance amid speculation the Fed might be done tightening for the year. The 10-year note rose in price to 102-06/32 for a yield of 4.59%, while the 30-year bond climbed to 96-07/32 for a yield of 4.74%.

News Article
BusinessWeek.com
September 21, 2006
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Stocks Fall after Philly Fed Index

The index of manufacturing activity dove more sharply than expected. Also in focus: Hewlett-Packard, Wal-Mart

Stocks finished lower Thursday, giving up early gains as a reading on Philadelphia-area manufacturing activity dove more sharply than expected. Investors were also digesting Hewlett-Packard's (HPQ ) ongoing leak probe scandal and price cuts on prescription drugs at Wal-Mart (WMT ).

The Dow Jones industrial average fell 79.96 points, or 0.69%, to 11,533.23, pulling back from near record highs. The broader Standard & Poor's 500 index shed 7.15 points, or 0.54%, to 1,318.03. The tech-heavy Nasdaq composite dropped 15.14 points, or 0.67%, to 2,237.75.

NYSE breadth was negative, with 20 issues declining for every 14 advancing. Nasdaq breadth was 19-11 negative.

Economic reports continued to indicate a slowing economy Thursday. The Philadelphia Fed index tumbled to -0.4 in September, down from 18.5 in August. "This breaks a string of 14 straight monthly gains and is much weaker than expected," says Action Economics.

The Philly Fed index's slide was disturbing, some analysts say. "If this weakness in Philadelphia-area manufacturing is corroborated in other indicators for September (which we think is unlikely), then we will have to reconsider our view that the Fed will raise rates at one of the remaining meetings this year," says John Ryding, chief U.S. economist at Bear Stearns.

Elsewhere, leading indicators fell 0.2% in August after a downwardly revised 0.2% drop in July. Jobless claims rose 7,000 to 318,000 in the week ended Sept. 16, from a downwardly revised 311,000 a week earlier.

The economic calendar is quiet Friday, before kicking off next week with existing home sales data due Monday.

Oil prices rebounded Thursday after falling to their lowest levels since March. In the energy markets, November West Texas Intermediate crude oil futures closed up 85 cents at $61.59 a barrel.

Among stocks in the news, Hewlett-Packard lost 5% after the company said it would hold a press conference after the closing bell regarding its investigation of boardroom leaks. The news follows reports CEO Mark Hurd may have played a larger role in the probe than previously disclosed.

Retail giant Wal-Mart said it would cut prices to $4 per prescription on generic versions of nearly 300 prescription drugs. Drugstore shares dropped on the news.

Software maker Novell (NOVL) was lower as the company said it received a delisting warning from Nasdaq and a default notice from Wells Fargo Bank, both related to delayed financial reports because of an options probe.

Meanwhile, Tribune's (TRB) board called a meeting amid pressure from the publishing company's shareholders. The company will reportedly consider options including going private in a leveraged buyout or spinning off its TV unit.

Networking site Facebook.com was reportedly in discussions to sell itself to Yahoo! (YHOO ) for as much as $1 billion, following separate talks with Microsoft (MSFT ) and Viacom (VIA ).

Investors were also digesting earnings news. FedEx (FDX) was lower after reporting a 40% increase in first-quarter profit. The company's outlook for the second quarter and full-year 2006 was lower than the consensus forecast.

Retailer Bed Bath & Beyond (BBBY ) was up after posting a 2.9% rise in second-quarter profit on higher gross margins.

Shares of General Mills (GIS ) gained after the packaged-foods maker said its first-quarter earnings rose 5.9%.

In analyst calls, Cisco (CSCO ) was lower despite its stock being upgraded from market perform to outperform by Piper Jaffray.

European markets finished modestly higher. In London, the Financial Times-Stock Exchange 100 index rose 30.5 points, or 0.52%, to 5,896.7. Germany's DAX index added 7.65 points, or 0.13%, to 5,962.03. In Paris, the CAC 40 index was up 15.58 points, or 0.3%, to 5,208.32.

Asian markets ended higher. Japan's Nikkei 225 index gained 115.56 points, or 0.74%, to 15,834.23. In Hong Kong, the Hang Seng index advanced 107.01 points, or 0.61%, to 17,619.97. Korea's Kospi index edged up 0.35 points, or 0.03%, to 1,366.79.

Treasury Market

Treasury yields skidded following the Philly Fed index plunge, the dip in leading indicators, and the increase in jobless claims. The 10-year note rose in price to 101-25/32 for a yield of 4.64%, while the 30-year bond climbed to 95-17/32 for a yield of 4.78%.

News Analysis
BusinessWeek.com
September 21, 2006
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A Game Plan for D.C. Gridlock

Analysts think Democrats may win one or both houses of Congress in November. Here are some investment strategies to cash in on a divided government

Wall Street could soon be eyeing some unfamiliar faces in Washington, D.C. In recent reports, Goldman Sachs and Prudential both say the odds favor Democratic gains in the Nov. 7 Congressional elections, possibly including a shift in leadership at the House of Representatives. While it's too early to count the Republicans out, it still might be a good time to prepare for the legislative alternative.



Democrats have their eyes on more than three dozen vulnerable Republican Congressional seats this fall, while only 10 or fewer Democratic districts are in the GOP's reach, according to Prudential Equity Group's political analyst Charles Gabriel. "We are raising our odds of the Democrats' retaking the House of Representatives to 55%, while maintaining our one-in-three odds of a Senate takeover," Gabriel said in a Sept. 5 report.

The latest polls have picked up a bit for Republicans, but their electoral outlook remains unclear. The most recent USA Today/Gallup poll showed President George W. Bush's approval rating at 44%, a slight increase from 42% in August. In Congressional races, the same poll showed a generic Republican and a generic Democrat in a dead heat.

An increasingly Democratic Congress won't alter the basic economic and earnings trends that drive the stock market, but it could have implications for a few sectors and stocks. This week's Five for the Money looks at strategies investors can use to benefit should Democrats retake one or both houses of Congress.

1. Stay on the defensive.
Next year should be a crucial time for investors who follow presidential election cycles. The third year of a President's term in office, whether it's his first or second term, has historically been the strongest for the stock market. Since 1945, the Standard & Poor's 500 index has posted an average annualized gain of 18% during such periods, compared to 9% for all years.

This year could be an exception, some analysts say. "Usually in the third year of a President's term in office, he tries to put forth some sort of legislation that will be stimulative for the economy and therefore increase the chance that either he or his party will get reelected," says Sam Stovall, chief investment strategist for S&P Equity Research. Given low poll numbers and a potentially divided Congress, "I question what kind of stimulative package [Bush] could offer," he adds

A lack of catalysts for a strong third-term year is yet another reason investors should keep a cautious stance, according to Stovall. Regardless of which party controls Congress, investors should stick with high-dividend, high-quality stocks, he says (see BusinessWeek.com, 7/28/06, "Quality Time?").

2. Check your prescriptions.
Wall Street typically views the health-care sector as the most politically sensitive segment of the stock market. Much of the industry's revenues are linked to government programs, such as Medicare. For instance, the new Medicare prescription drug program could provide opportunities for host of companies, from drugmakers Pfizer (PFE) and Johnson & Johnson (JNK) to insurers UnitedHealth Group (UNH), WellPoint (WLP), and Humana (HUM) (see BusinessWeek, 1/30/06, "Plan A: Hook Them with Part D").

With so much riding on politics, some analysts worry what a change in House leadership would mean for such stocks. "Prospects of major Democratic gains may pressure health care," Goldman Sachs (GS) strategist David Kostin says in a Sept. 5 report.

However, others say any effect would be mostly psychological—and could represent a buying opportunity. "Our studies have shown that pre-election underperformance is often matched by post-election outperformance in health care," says Jack Ablin, chief investment officer at Harris Bank. "The impending election could create some compelling values in this attractively ranked area of the market."

Merrill Lynch analyst Brian Belski, who has a market-perform recommendation on the sector, makes a similar point. "We are increasingly enthused regarding longer-term earnings and valuation trends, which appear to have bottomed," Belski wrote in a Sept. 11 report. "While the sector will probably be a political target later this fall, we believe valuations (especially within growthier areas) could become more attractive as a result."

3. Don't count out energy.
Like health care, energy is another sector likely to suffer negative headlines in the event of Democratic Congressional gains. Leading Democrats favor more environmental regulations to limit the emission of greenhouse gases, which could affect fossil fuel companies from Exxon Mobil (XOM) to Peabody Energy (BTU).

Many Democrats support the Kyoto climate change treaty, which former President Bill Clinton's Administration signed but which Republicans, including Bush, have opposed. More recently, former Democratic Presidential nominee Al Gore has called for an immediate freeze on carbon-dioxide emissions. "A Democratically controlled Congress would probably be much more likely to pass environmental safeguards, which would affect any number of industries," says Brian Gendreau, investment strategist at ING Investment Management.

Energy stocks have already taken a hit in recent weeks. As of afternoon trading Sept. 20, the Vanguard Energy ETF (VDE) has shed 10.4% since Aug. 25. Crude futures have tumbled near six-month lows amid fading worries over geopolitical tensions and hurricane season (see BusinessWeek.com, 9/11/06, "Will Oil Stay Soft?").

Still, energy could follow healthcare in performing better than investors might infer from Democratic gains. Global unrest and overseas demand both remain high, which bodes well for energy prices, according to Goldman Sachs' Kostin, who has a bullish stance on the sector. The oil and gas equipment and services sub-sector is particularly poised to outperform, Kostin says.

4. Watch for a wage hike.
Could it be time for a raise? It has been nine years since Congress last raised the federal minimum hourly wage, currently set at $5.15. Most Democrats in Congress support increasing the minimum wage, while Republicans have sought to tie any wage hike to estate-tax cuts. A bill passed by the House in July has yet to reach the President's desk.

Democratic gains in November could change the political calculus. "It seems that companies with a large contingent of U.S.-based low-wage workers are facing a significant increase in their labor costs," says Thomas McManus, chief investment strategist at Banc of America Securities (BAC), in a Sept. 5 report. The U.S. Chamber of Commerce and the National Restaurant Assn. are among business groups opposing a wage hike.

Still, the effects of a federal minimum wage hike might be smaller than some fear, McManus notes. Entry-level pay at big-box retailers, for instance, is often already above the lowest rate, and Wal-Mart (WMT) has called on Congress to raise the minimum wage. Meanwhile, 17 states have minimum wages above the federal mandate, and several states have increases in the works, including California.

5. Remember, it's only politics.
In general, divided government can be a positive for the equity market, analysts say. "You'll have a situation where you're not going to get much done," says Peter Cardillo, chief market analyst at SW Bach. "Sometimes gridlock is good for the markets." Just look at stocks' gains in the 1980s and 1990s, when President Ronald Reagan and Clinton each squared off with a legislative branch led by the opposing party.

It's also difficult to predict the effects of any possible Congressional investigations into the war in Iraq or other hot-button issues. "The Democrats don't have to take both houses of Congress," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "All they need to do is obtain one house, which then generates subpoena power, and at that point they're pretty much reinvestigating everything."

While the upcoming election could jostle a few stocks here and there, it's no reason to overhaul an entire portfolio. While politicians nervously glance at day-to-day poll numbers, investors should stay focused on what's best for the long term, market watchers say.

News Analysis
BusinessWeek.com
September 19, 2006
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Will Nardelli's Pay Be Retooled?

Home Depot's board is reportedly considering changing its CEO's compensation package. Here's what that could mean for investors

by Marc Hogan

 

Directors of The Home Depot (HD) may soon make some renovations, but they won't involve countertops or cabinets. According to a report published Sept. 18, the home improvement retailer's compensation committee will probably revamp Chairman and Chief Executive Robert Nardelli's pay package. Changes to Nardelli's compensation could boost investor sentiment toward the stock, analysts say, though much will likely depend on specifics.

Atlanta-based Home Depot has come under fire recently for its chief's lucrative pay (see BusinessWeek.com, 9/7/06, "CEOs in the Hot Seat"). Since the former General Electric (GE) executive took the helm in December, 2000, he has taken home roughly $200 million in salary, bonuses, stock, stock options, and other compensation. Over the same period, Home Depot's shares have fallen a dividend-adjusted 15%, while rival Lowe's (LOW) stock has surged 178%.

Adjustments to Nardelli's hot-button pay package could have a long way to go in soothing investors' ruffled feathers (see BusinessWeek.com, 7/24/06, "Bob Nardelli Explains Himself"). At Home Depot's May 25 annual meeting, Nardelli was the only board member present and declined to allow general questions. Shareholders withheld at least 30% of their votes for all but one of the company's directors, including Nardelli.

It remains unclear what form changes to Nardelli's compensation might take. Bonnie Hill, Home Depot's compensation committee chairwoman, was unavailable for comment prior to deadline. "It's a given there will be some changes," she reportedly told Bloomberg News, which first reported the likelihood of changes to Nardelli's pay package. "Shareholders want to know we understand their pain."

SHAREHOLDER BENEFITS.

Home Depot spokesman David Sandor says he can't confirm Hill's comments. "Every year is a blank slate," Sandor says. "The committee meets independently, taps outside advice, and each year makes a new and fresh decision."

Still, better aligning Nardelli's pay with shareholders' interest would likely be a positive for the stock, some analysts say. "It would be a psychological boost," says Standard & Poor's analyst Michael Souers, who has a strong buy recommendation on the shares. "Investors have been somewhat outraged that the stock has languished for the past five years while his pay has been, by any estimation, fairly excessive."

Beyond "psychological" relief, though, rejiggering Nardelli's compensation probably wouldn't have much effect on the company's performance, others say. "As much money as he makes, it's a rounding error on Home Depot's total results," says Morningstar (MORN) analyst Anthony Chukumba, who rates the stock five stars out of five.

AVOIDING A REPEAT.

Nardelli took in about $38 million in total compensation in 2005, placing him among the ranks of the highest-paid CEOs (see BusinessWeek.com, 5/23/06, "Home Depot's CEO Cleans Up"). At least $6.5 million of Nardelli's base salary plus bonus is guaranteed regardless of performance, according to Institutional Shareholder Services (ISS), a corporate governance advisory service. Lowe's Chairman and CEO Robert Niblock's 2005 base and bonus totaled $3.4 million, not including other compensation.

In May, ISS issued a report advising shareholders to withhold their votes from all directors except new nominee Angelo Mozilo over the compensation issue. "It's clear they don't want a repeat of what happened in 2006 at their annual meeting in 2007," says Patrick McGurn, executive vice-president at ISS. New SEC disclosure requirements could put other companies' compensation practices under scrutiny in the 2007 proxy reporting season, McGurn adds.

Another governance research firm, The Corporate Library, gives The Home Depot an "F" rating on compensation. Ideally, changes to Nardelli's compensation would include limiting his base salary to the $1 million limit for tax-deductible pay, removing the guarantees on his severance pay and pension, and better linking long-term incentives to performance, says Paul Hodgson, senior research associate at The Corporate Library.

PAY ARRANGEMENTS.

A pay change at Home Depot might prompt other companies under fire for excessive compensation to follow suit, according to Hodgson. "This would put significant pressure on some of the other organizations," he says.

Between 2003 and 2004, Home Depot's board changed Nardelli's pay package to emphasize financial performance rather than stock performance. Where previously Nardelli's long-term incentive pay was based on total shareholder return vs. a peer group, this portion of his compensation is now tied to diluted earnings-per-share.

By this and other financial measures, Home Depot has performed solidly under Nardelli's watch, despite its floundering stock price. Per-share earnings actually climbed 147% from 2000 to 2005. Meanwhile, sales increased 78%, from $45.7 billion to $81.5 billion.

EXPERTS DEMAND CHANGE.

Some compensation experts say they won't be satisfied by anything less than "radical" changes to Nardelli's pay package. "He is getting entrepreneurial returns for effectively managerial results," says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "Something is wrong in the philosophy of the package that creates those kinds of returns."

Meanwhile, compensation controversy is far from the only challenge facing Home Depot. On Sept. 18, Credit Suisse (CSR) lowered its recommendation on the stock from outperform to neutral, citing the slowing housing market. "Home Depot stock presents a difficult investment dilemma at this time," says Credit Suisse analyst Gary Balter. (Credit Suisse has an investment banking relationship with Home Depot and makes a market in the company's securities.)

For shareholder activists, a renovation of Home Depot's corner office pay has been a long time coming. It's still too early to say whether such changes would help to rebuild the big orange retailer's share price. Other boards will likely wait to see the details before considering similar moves of their own.

News Article
BusinessWeek.com
September 19, 2006
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Stocks Fall amid Data, Thai Coup

August PPI and housing starts came in below Street expectations. Also in focus: falling oil prices, Thailand's state of emergency

Stocks finished modestly lower in a volatile session Tuesday, as oil prices continued to drop, an Internet bellwether issued a profit warning, and economic reports came in weaker than expected. Wholesale inflation data suggested the Federal Reserve will probably keep interest rates steady at Wednesday's policy meeting, but most economists believe other inflation indicators are headed higher, says Standard & Poor's Equity Research.

Traders were also weighing news of a military coup in Thailand. Thai Prime Minister Thaksin Shinawatra, currently in New York, declared Bangkok in a "severe state of emergency." In 1997, the devaluaton of the Thai baht preceded a currency crisis in Asia and an economic downturn worldwide.

The Dow Jones industrial average fell 14.09 points, or 0.12%, to 11,540.91, led downward by Alcoa (AA). The broader Standard & Poor's 500 index shed 2.87 points, or 0.22%, to 1,318.31. The tech-heavy Nasdaq composite slid 13.38 points, or 0.6%, to 2,222.37.

NYSE breadth was negative, with 19 issues declining for every 14 advancing. Nasdaq breadth was 18-12 negative.

Oil prices extended their recent losses Tuesday. In the energy markets, October West Texas Intermediate crude oil futures tumbled $2.14 to $61.66 a barrel, near a six-month low, amid expectations for ample supplies.

An unexpectedly soft reading on wholesale inflation was also in focus. The producer price index rose 0.1% in August, while the core PPI, which excludes food and energy, sank 0.4%.

The data could help the Fed justify keeping rates unchanged, some analysts say. "This bodes well for a soft landing and is great news for the stock market," says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

Still, the core PPI figure was skewed by discounts in vehicle prices, others note. "The 0.1% figure that would otherwise have printed was about in line with our expectation for core prices outside the vehicle sector," says Goldman Sachs.

Homebuilders' shares dipped after their latest dose of disappointing housing-market news. Housing starts fell 6% to 1.67 million in August, below analyst expectations, while building permits dipped 2.3% to a pace of 1.72 million.

The housing data helped prompted profit-taking ahead of Wednesday's Fed meeting, some analysts say. Investors were taking profits ahead of the upcoming Fed meeting, some analysts say. "Investors fear that if the housing market's decline should accelerate, obviously that would impair consumer spending," says Peter Cardillo, chief market analyst at SW Bach. "That's probably one of the reasons why the market is acting the way it is today."

The Fed meeting highlight's Wednesday's economic calendar, with policymakers expected to stay on the sidelines. Investors will be watching for what, if anything, central bankers say about future interest-rate moves.

Among stocks to watch, Yahoo! (YHOO) was sharply lower after the Internet media company said third-quarter revenue will come in at the bottom end of its forecasts due to a slowdown in auto and financial advertising. Shares of Google (GOOG ), eBay (EBAY ) and other Internet companies also declined.

On the upside, Target (TGT ) was higher after the big-box retailer said same-store sales may rise about 5% this month, at the upper end of management's previous forecast.

Wireless company Motorola (MOT ) agreed to buy Symbol Technologies (SBL ) for about $3.9 billion, or $15 a share. Symbol Technologies makes such devices as bar-code scanners and handheld computers.

Internet music store Napster (NAPS) was sharply higher after the company said it hired UBS to evaluate strategic alternatives, including a sale or an alliance, after possible suitors expressed interest.

Publisher Dow Jones (DJ ) was lower after the company trimmed its forecast for third-quarter earnings, citing declining ad revenue.

Elsewhere, automaker DaimlerChrysler (DCX) said it expects retail shipments to fall by 90,000 vehicles in the third quarter and market share to drop amid declining truck and SUV sales.

Coffee giant Starbucks (SBUX ) said it plans to more than double its U.S. stores.

Shares of Sirius Satellite Radio (SIRI ) dipped on a report that on-air personality Howard Stern could return to free radio in some capacity.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 58.4 points, or 0.99%, to 5,831.8. Germany's DAX index dropped 52.87 points, or 0.89%, to 5,873.46. In Paris, the CAC 40 index was down 30.97 points, or 0.6%, to 5,115.99.

Asian markets ended mixed. Japan's markets Nikkei 225 index gained 7.35 points, or 0.05%, to 15,874.28.In Hong Kong, the Hang Seng index slipped 40.51 points, or 0.23%, to 17,346.7. Korea's Kospi index edged down 0.35 points, or 0.03%, to 1,373.95.

Treasury Market

Treasury yields dove following the soft core PPI data and drop in housing starts. The 10-year note rose in price to 101-03/32 for a yield of 4.73%, while the 30-year bond climbed to 94-14/32 for a yield of 4.86%.

News Analysis
BusinessWeek.com
September 18, 2006
Link

The Gloomy Side of the Street

They don't call it the dismal science for nothing. While Wall Street nears multiyear highs, some economists make the case for recession

What September sell-off? On Sept. 15, the Dow Jones industrial average rallied to within 170 points of its all-time high, while a fresh batch of data suggested a firm economy with modest inflation. So far, the stock market's historically worst month isn't exactly matching its bearish reputation.

Not so fast. Despite Wall Street's high spirits, a voluble minority of economists continues to warn of a coming recession, possibly arriving as early as this year. The slowing housing market, an inverted Treasury yield curve, and lingering inflationary pressures could mean the U.S. economy is in for a hard landing, some economists say.

POOR TRACK RECORD.  They're not alone. A Ried Thunberg survey out Sept. 11 showed 41% of money managers polled place 50% odds that the Federal Reserve will successfully curb inflation without a recession, while 38% put the odds at 75%. Among chief financial officers, economic pessimism resides at its highest level in more than five years, according to a survey released Sept. 13 by Duke University and CFO Magazine.

On Sept. 15, Morgan Stanley (MS ) economists acknowledged a "vigorous" internal debate over the recession threat. "We all agree that the U.S. housing downturn has escalated recession risks," says Richard Berner, Morgan Stanley's chief U.S. economist. "But the argument over how much collateral damage will result and the nature of the offsets to U.S. housing weakness is far from settled."

Economists have a poor track record for predicting recessions. According to The Economist, 95% of economists in March, 2001, thought a recession would not occur that year, though one actually began the same month. "Professional forecasters…are always way overoptimistic and systematically miss the turn downward of the business cycle," notes New York University economist Nouriel Roubini, who pegs the odds of a recession in 2006 at 70%.

"WHEN, NOT WHETHER."  The cooling housing market is a key impetus behind many recession fears (see BusinessWeek.com, 8/23/06, "A Cool July for Housing"). Recent years of consumers tapping home equity to make purchases could give way to a consumer-spending slowdown, according to some analysts.

"As we've said before, it is a case of when, not whether, falling consumption will precipitate the next downturn," says U.S. Bank (USB ) economist Tucker Hart Adams, who sees a 75% chance of recession before the end of 2007.

Even economists who project continued economic expansion have found the housing weakness unsettling. "The dramatic softening of the housing market has increased the probability of recession in 2007 to one-third," says Larry Adam, chief investment strategist for Deutsche Bank Alex. Brown (DB ). The International Monetary Fund cited the housing slump Sept. 14 as it trimmed its forecast for 2007 U.S. economic growth.

BOND MARKET FACTOR.  Elsewhere, the inverted Treasury yield curve has added fuel to the pessimistic fire. An inverted yield curve occurs when long-term rates drop below short-term rates. Since 1970, every time the yield curve has inverted, a recession has followed (see BusinessWeek.com, 1/9/06, "Does the Yield Curve Matter?").

This historical precedent bodes poorly for corporate profits, some analysts say. "Earnings expectations for 2007 are probably too optimistic," says Richard Bernstein, chief investment strategist at Merrill Lynch (MER ), in a Sept. 7 report. "A profits recession is reasonably likely around mid-to-late 2007."

Meanwhile, inflation may continue to rear its ugly head globally, others say. Central bankers are tolerating higher inflation in order to keep stimulating growth, and so far the bond market is going along, says Andy Xie, chief Asia economist at Morgan Stanley, in a Sept. 10 report. "The decisive downturn in this cycle may happen if the bond market should conclude that policymakers are seeking to accommodate inflation to extend growth," Xie says. "A global hard landing could unfold in 2008."

A SOFT LANDING?  Hugh Moore, partner at Greenville (S.C.)-based Guerite Advisors, says his firm has developed a proprietary economic model that would have predicted all seven recessions since 1960. The indicator is again flashing a "high-risk" signal. "When you take the slowing of the economy and you place on it the largest housing bubble since 1955, I don't see how we're going to avoid a recession," Moore says.

Still, most economists forecast that economic growth will slow without slipping into recession. The chances for a soft landing are better than they might seem, according to Standard & Poor's Investment Policy Committee.

In fact, the housing slowdown need not lead to a broader downturn, some analysts say. "The 2006 housing market retrenchment was relatively easy to foresee," says Citigroup (C ) senior economist Steven Wieting in an Aug. 28 note. "U.S. recessions, however, are much harder to predict than many observers seem to believe."

Nevertheless, the bearish views are worth keeping in mind, even when market gains make them all the more tempting to ignore. While a recession may not lurk on the horizon, investors shouldn't let a surprising September blind them to the risks.