News Analysis
BusinessWeek.com
June 16, 2006
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Cuban's Maverick Stocks Site

The tempestuous NBA team owner aims to expose corporate shenanigans with a new Web site. Raising eyebrows: He'll base stock plays on that info before making it public

Tech billionaire Mark Cuban may soon go from making the news to breaking it. The high-profile owner of the NBA's Dallas Mavericks is throwing his financial clout behind a new Web site aimed at ferreting out corporate fraud. This time, though, he may be out of bounds.

The reason: Cuban has said he'll buy and sell stocks based on scoops the site uncovers, even before they're published. “There are a million ugly stories in the financial underground,” Cuban told BusinessWeek.com in an e-mail. “We plan on finding and sharing and profiting from them.” He declined to comment further.

The fledgling Web publication will have an experienced journalist at the helm. St. Louis Post-Dispatch business reporter Christopher Carey is leaving the newspaper after 17 years to become the editor of the site, called Sharesleuth.com. Carey was a finalist in 2005 for the Gerald Loeb Award, business journalism's highest honor, and he recently completed a prestigious fellowship at the University of Michigan.

CONFLICT OF INTEREST.  While Cuban's Mavs seem close to an NBA championship, his online venture is hardly a slam-dunk. Cuban's plan to buy and sell stocks based on Carey's reporting should pose inevitable conflicts of interest, and the site's business model remains unclear. Further, Carey says he and the famously mercurial Cuban—whom the NBA has fined more than $1 million for his sideline behavior—have only communicated via e-mail.

“At first blush, it just sounds so weird it's kind of hard to get my mind around,” says Dean Mills, dean of the School of Journalism at the University of Missouri-Columbia. “Whether online or in print or any other form, the main mission of journalism is to give the best, most accurate, most objective news it can to its readers. You just have to think that this kind of personal individual investment motive would contaminate the journalism.”

On his blog, Blog Maverick, Cuban has swept aside questions of journalism ethics. “A journalistic conflict you say?” he wrote May 31. “Not anymore. Not in this world. It will be fully disclosed and explained.” Neither he nor Carey would reveal the amount of Cuban's investment in Sharesleuth.com.

Meanwhile, Carey maintains that Cuban's trading decisions won't affect his reporting, hinting that the rules are different online. Critics “are viewing this as a traditional journalistic enterprise,” Carey says. “I am going to do things the way I always do things. Our stories are going to be based on facts. Let's face it, when you write these kinds of stories, it's pretty high-risk stuff. You need to be right -- otherwise you're likely to get sued.”

WHISTLE- BLOWING.  Ethical questions aside, the site's aim in itself seems laudable. Searchsleuth.com will focus on investigative journalism, seeking to find unsavory companies and share the tales behind their malfeasance, Carey says. The stories will take an “anti-fraud, pro-investor” point of view and will likely steer away from the “he-said, she-said” approach of much contemporary journalism.

Nor is Cuban's plan necessarily illegal. Under the law, Cuban must disclose his interest in the securities Carey covers and Carey's stories must be true, according to Mike Missal, a partner at Kirkpatrick & Lockhart Nicholson Graham specializing in securities regulatory matters. “Then they'll probably be OK,” Missal says.

As an enforcement attorney for the Securities & Exchange Commission in the 1980s, Missal prosecuted a landmark case of journalist insider-trading. Then-Wall Street Journal reporter Foster Winans was convicted of fraud in 1985 for passing tips to stock brokers about information that would appear in upcoming Heard on the Street columns. The brokers allegedly reaped about $675,000 from the arrangement and paid about $31,000 to Winans and his partner. However, one key element in that case was that Winans didn't disclose the trading up-front, according to Missal.

BUSINESS PLAN.  It's uncertain whether Sharesleuth.com has a feasible economic model. The site was originally conceived as a subscription-based service intended for traders, money managers, and other high-end users, according to Carey. “Then Mark decided that, rather than cast about for subscriptions without a track record, we should just put it all up there in a blog-style format for a year or so.” After the site proves its value, so the plan goes, its founders will look for ways to generate revenue.

Cuban's multimedia empire could give the business a boost. His film-production companies backed the Oscar-nominated biopic Good Night, and Good Luck and documentary Enron: The Smartest Guys in the Room, and he owns the high-definition television network HDNet (see BusinessWeek.com, 4/24/06, "Almost Ready for Prime Time"), a movie distributor, and the Landmark Theatres chain. Sharesleuth.com would take advantage of those capacities, as reporting done for the website could be adapted to other media, such as video.

It also helps that overhead will probably be low. Carey says he'll do most of the reporting, aided by some paid stringers. He also expects help from a network of amateur researchers, “people with whom I've been corresponding for years,” he says. “In essence, they provide tips and some supporting documentation and I take it from there.”

THE NEW JOURNALISM.  This collaborative vision of the future of online journalism may not even be far off the mark. “Does anyone in mainstream media honestly believe user-generated content stops with parodies of “Lazy Sunday” [a popular Saturday Night Live sketch]?” (see BusinessWeek.com, 4/3/06, "Designs on the Disaffected") Cuban wrote on his blog. “Troll through MySpace (NWS ). It's not only for personal branding.”

Still, even if NBA officials long ago stopped calling traveling violations, credibility remains the cornerstone of the journalistic endeavor. Carey says doing business with Cuban solely through e-mail “is not uncommon.” Nevertheless, their virtual relationship will soon become a working relationship. It will be worth watching how long a veteran reporter and an entrepreneur notorious for his tantrums can continue to break the news before the news breaks up their partnership.

News Article
BusinessWeek.com
June 15, 2006
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Stocks Jump amid Firm Earnings, Data

The major indexes climb for a second day amid solid earnings from Bear Stearns, firm economic data, and a dovish tone on inflation from Bernanke

Stocks jumped on Thursday, building on Wednesday's gains amid short covering, a fresh batch of economic data, and tame words on inflation by Federal Reserve Chairman Ben Bernanke. The recovery reflects sentiment that worries about inflation and higher interest rates have been digested, says Standard & Poor's Equity Research.

The Dow Jones industrial average jumped 198.27 points, or 1.83%, to 11,015.19, paced by Caterpillar (CAT ). The broader Standard & Poor's 500 index rose 26.12 points, or 2.12%, to 1,256.16. The tech-heavy Nasdaq composite climbed 58.15 points, or 2.79%, to 2,144.15.

Short covering in the wake of solid earnings by investment bankers this week had a hand in the rally, says Action Economics. Fed Chairman Bernanke spoke, but didn't spook the market, saying longer-term inflation expectations "bear watching." Says Action Economics: "The speech and Q&A by Bernanke also largely avoided major pitfalls that could rattle investors and appeared a little more even-handed on the topic of inflation gaining traction from higher energy prices."

Other Fed speakers on Thursday included Boston Fed President Cathy Minehan, who said domestic inflation is increasingly affected by global forces. Meanwhile, Fed Governor Randall Kroszner stayed away from policy in a speech before a banker's assocation. The Fed is widely expected to raise interest rates when it meets June 28 and 29.

Solid economic reports were in the spotlight Thursday. Initial jobless claims unexpectedly fell 8,000 to 295,000 in the week ended June 10. The Empire State index of manufacturing activity surged to 29.01 in June, more than triple the expected reading, according to Action Economics, while the Philadelphia Fed index slipped to 13.1 from 14.4 in May. Industrial production dropped 0.1% in May after rising 0.8% in April.

The lower industrial production number is no cause for worries about economic growth, some analysts say. "Despite the decline, the three-month growth rate in manufactured production is fairly robust at 4.4%," notes John Ryding, chief U.S. economist at Bear Stearns. "Although capacity utilization slackened a little in May, it is still significantly above its long-run average and likely to be a concern to the Fed from an inflation perspective."

Reports coming Friday include the preliminary June reading for University of Michigan consumer sentiment, whihc is expected to stay fairly stable at 79.0 from 79.1. The first quarter current account deficit is expected to moderate to $222 billion from the fourth quarter's record of $225 billion.

Among stocks in focus Thursday, Bear Stearns (BSC ) gained ground after the brokerage reported an 83% jump in second-quarter profit.

Meanwhile, Goldman Sachs (GS ) was higher after a consortium led by the brokerage raised its bid for Associated British Ports. Also reportedly bidding for the U.K. ports operator is a group led by Macquarie Bank.

Shares in Intel (INTC) also rose, extending the its gains the previous session after Goldman raised its recommendation on the chipmaker's stock to outperform.

On the downside, General Mills (GIS ) was lower after the packaged foods maker lowered its earnings guidance for fiscal year 2007.

On the brokerage front, Morgan Stanley upgraded 3Com (COMS ) from underweight to equal-weight. UBS Financial boosted SanDisk (SNDK ) from neutral to buy.

In the energy markets Thursday, July West Texas Intermediate crude oil futures rose 36 cents to $69.50 a barrel.

European markets finished solidly higher. In London, the Financial Times-Stock Exchange 100 index advanced 112.5 points, or 2.04%, to 5,619.3. Germany's DAX index added 116.23 points, or 2.19%, to 5,422.22. In Paris, the CAC 40 index was up 109.14 points, or 2.36%, to 4,724.58.

Asian markets finished mostly higher after the Bank of Japan voted to keep interest rates at essentially zero. Japan's Nikkei 225 index rose 161.2 points, or 1.13%, to 14,470.76. In Hong Kong, the Hang Seng index climbed 187.16 points, or 1.23%, to 15,435.08. Korea's Kospi index slipped 2.33 points, or 0.19%, to 1,219.4.

Treasury Market

Yields pressed higher as yesterday's core CPI gain was followed with another round of stronger data, signs of lower foreign demand for U.S. assets and firm-but-balanced Fedspeak on inflation risks ahead, says Action Economics. Equities rebounded aggressively and commodities generally sought equilibrium levels, which also reduced some safety premium on bonds as well, says Action Economics. The 10-year note yield rose to 5.098%.

News Analysis
BusinessWeek.com
June 14, 2006
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A Summer Slump for Stocks

Interest-rate and inflation fears are hammering stocks around the globe. Market pros advise some defensive moves to avoid getting burned

Summer doesn't officially begin until June 21, but investors are already feeling burned. Stocks have tumbled almost across the board since May 10, as worries about inflation, rising interest rates, and slowing economic growth caused a flight from riskier asset classes (see BusinessWeek.com, 6/1/06, "A Miserable May for Markets"). As the meltdown continues, many market strategists recommend that investors seek protection and stay defensive.

The numbers don't look pretty. Through June 13, the Dow Jones industrial average was down 8% since May 10, when it reached a six-year closing high of 11,642.65. Over the same period, the broader Standard & Poor's 500 dropped 7.5%, and the tech-heavy Nasdaq composite lost 10.7%. All three of those indexes are in negative territory for the year. The late spring swoon has spread to major equity indexes in other countries, as central banks across the globe joined the rate-hike party (see BusinessWeek.com, 6/9/06, "A Global Assault on Inflation").

It's no coincidence that the Dow's peak coincided with the Federal Reserve's most recent meeting on interest rates. Stocks' rally in April and early May owed partly to expectations the Fed would stop hiking rates after May 10, analysts say. Instead, policymakers left the door open to further increases, rattling the markets. "The Fed's suddenly inconsistent communication caused volatility to quickly rise," wrote Richard Bernstein, chief investment strategist at Merrill Lynch, in a June 13 report.

FEARFUL FED.  The nasty climate for stocks could linger. Pending any clear signal from the Fed, the markets should continue to see-saw, with sellers in charge of the action, according to some strategists. "Until there is evidence that slower growth will contain inflation, market price movements will probably be quite 'choppy,'" wrote Gordon Fowler, chief investment officer of the Glenmede Trust Co., in a June 12 report.

The Fed is widely expected to raise the federal funds rate to 5.25% when it meets June 28 and 29. Its next step after that is anybody's guess. Fed Chairman Ben Bernanke and other policymakers have sounded a hawkish note on inflation in recent speeches. On June 12, Dallas Fed President Richard Fisher noted the central bank is feeling "some angst" over the issue.

Nevertheless, inflation fears may be overdone, some analysts maintain. Gold prices, traditionally an indicator of inflation, have fallen sharply after surging earlier this year. On June 13, gold fell to $566.80, its lowest level since March and down 22.6% from a 26-year high of $732 reached May 12.

Energy prices, too, have been on the downswing. Oil futures fell to $68.56 a barrel on June 13, after hitting a record $75.35 in April. Meanwhile, the International Energy Agency recently lowered its forecast for global oil demand in 2006 to 1.24 million barrels a day, down 30% from its projection in January.

GROWING PAINS.  A key wholesale inflation reading came out in line with Wall Street expectations on June 13, with data on consumer prices due on June 14. Figures so far in the second quarter suggest inflation is moderating, according to John Ryding, chief U.S. economist at Bear Stearns. "If consumer spending continues to grow at the slower pace in June, the Fed may be encouraged to take no action in August and wait for data on the strength of the third-quarter economy," Ryding notes.

Indeed, some market watchers say concern about growth, not inflation, is what's actually roiling markets. " 'Growth fears' are driving the markets lower," Citigroup analyst Albert Richards wrote in a June 12 report. "The market seems to be thinking that growth (and earnings) may well suffer as a result of the inflation fight."

Others say the recent global downtrend stems from a reassessment of the risks in various asset classes after a long period of rosy outlooks. The market has simply been pricing in the uncertainty about the Fed's plans, explains Joseph Battipaglia, executive vice-president and chief investment officer at Ryan Beck & Co. "Investors shouldn't go for the head fake that there's a recession looming, but rather, that certain markets are cheaper than others, that the Fed will not aggressively move higher on rates, that the inflation surge will subside, and the economy can continue to expand into 2007," Battipaglia says.

SIDELINE SAFETY.  From a technical standpoint, stocks don't seem to have touched bottom yet, analysts say. Leading up to the Fed meeting, expect anxiety to continue as markets zig-zag lower in volatile trading, says Chris Johnson, managing quantitative analyst at Shaeffer's Investment Research. "Until we see buyers start to enter into the fray, the market's not going to have much stability under it," he says.

In the meantime, investors might want to consider the safety of the sidelines. "Now's not a bad time to get a little bit more defensive," says Bill Larkin, portfolio manager of fixed income at Cabot Money Management. He says raising cash levels and taking advantage of high short-term bond yields could be smart moves within a well-diversified portfolio.

The winners of the past few years — such as emerging markets, energy stocks, and small-cap stocks — will continue their recent downtrend, predicts Jeffrey Knight, chief investment officer of global asset allocation at Putnam Investments. "This isn't a run-of-the-mill correction," Knight says. "This is a very important transformational event."

LARGE CAPS, LONG TERM.  As volatility continues, Knight likes cash and Treasury bonds. After the dust settles, he recommends an emphasis on large-cap stocks and stocks with high dividend yields.

Indeed, many market pros favor relatively stable U.S. large caps. "We would be wary of small caps, and we would prefer larger caps at this juncture," wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup, in a June 9 report. Stocks he likes include United Technologies (UTX ), Federated Stores (FD ), Johnson & Johnson (JNJ ), General Electric (GE ), Wal-Mart (WMT ), Caterpillar (CAT ), Merrill Lynch (MER ), and Cisco Systems (CSCO ), among others.

Investors generally shouldn't try to time the market, because they'll tend to lose, others say. "Ordinary investors shouldn't really change from what their long-term strategies are," says Stewart Beach, senior vice-president at Old Second Wealth Management. "If you were waiting to add money to equities, take the volatility as an opportunity. If you were thinking of changing your allocation to having 40% stocks instead of 50%, you take this weakness to be gradually adding in." If you take that tack, just be more defensive to avoid getting hurt.

News Analysis
BusinessWeek.com
June 12, 2006
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A Tale of Two Retailers

Drugstore chain Rite Aid recently hit a 52-week high, while RadioShack smacked a 52-week low. Neither stock looks like an impulse buy

One sells drugs, the other plugs. You may be able to cruise by Rite Aid (RAD ) and RadioShack (RSH ) on the same trip -- maybe even in the same strip mall -- but the two retailers' stocks have been moving in opposite directions. Rite Aid shares climbed recently as demographic trends have pointed in the drugstore chain's favor. Meanwhile, investors have so far left electronics merchant RadioShack's nascent turnaround effort on the shelf.

On June 5, Rite Aid's share price touched a 52-week high of $4.90, up 51.7% from a low of $3.23 set on Nov. 14, 2005. The stock's rise followed surprisingly strong earnings reports the previous session from larger rivals CVS (CVS ) and Walgreen's (WAG ). Shares in Camp Hill (Pa.)-based Rite Aid sold for $4.59 in afternoon trading on June 9.

RadioShack shares scraped their 52-week low of $14.17 on June 8, amid a severe intraday equity market selloff on worries about rising global interest rates (see BusinessWeek.com, 6/9/06, "A Global Assault on Inflation"). A day earlier, Stifel Nicolaus analyst David Schick downgraded the stock from hold to sell. Shares in the Fort Worth-based retailer were at $15.16 in afternoon trading on June 9, down 44.3% from a high of $27.24 reached on Aug. 11, 2005.

PHARMACY GAME.  Is it time for these stocks to reverse course, or will they each remain on their respective tracks? Well, sometimes a product's sticker price is just right. Although Rite Aid's shares have risen and RadioShack's have tumbled, analysts suggest that neither stock is poised for a significant move anytime soon, for better or for worse.

Rite Aid runs about 3,300 drugstores in 28 states and Washington, D.C. On Apr. 6 the company posted fiscal fourth-quarter profits that fell below some analyst estimates, boosted by a 9.9% increase in sales. Despite positive long-term trends, Rite Aid faces a number of challenges as it jostles for space in an increasingly competitive industry, analysts say. A company spokesperson declined to comment on the share price.

The drugstore business overall stands to gain over the long term from aging baby boomers, who will presumably buy more medications, analysts observe. Pharmacy sales were a bright spot in the company's fourth-quarter results, increasing 2.5% amid gains related to Medicare Part D, the new drug benefit plan. Rite Aid's fundamental outlook remains difficult, but upside is large if a solid (although not heroic) turnaround occurs, wrote Credit Suisse analyst Edward Kelly in a May 4 report rating the stock outperform. (Credit Suisse acts as a market maker in Rite Aid and RadioShack securities.)

EXPANSION BENEFITS.  Still, Rite Aid's dependence on filling prescriptions could also be a liability. The company's relatively low profit margins mean that changes in Medicaid, Medicare, or generic drugs will have a greater impact on Rite Aid than on its rivals, according to HSBC Global Research analyst Mark Hutton in an Apr. 28 report. Hutton has an underweight rating on the stock.

At the same time, Rite Aid's front-of-the-store sales (i.e., nonpharmacy) lag behind those of its competitors, but analysts say that's not a critical variable. Given the company's well-developed merchandising skills, this laggard performance remains a bit of a mystery, writes Goldman Sachs analyst John Heinbockel in a May 4 report. Nevertheless, Heinbockel rates the stock a buy. (Goldman owns 1% or more of Rite Aid common equity, expects or intends to seek compensation for investment banking services from Rite Aid, and had an investment banking relationship with Rite Aid in the past 12 months.)

Rite Aid's share price hit its peak as the drugstore industry is enjoying an expansion phase. Some say Rite Aid's additions have been right on the money. Their growth has been pretty savvy, says George Whalin, president and CEO of San Marcos (Calif.)-based Retail Management Consultants.

SHACK SHAKEUP.  However, Rite Aid's low cash flow relative to its peers may impose another hurdle as the company tries to keep getting bigger. With major competitors also focusing on expanding their asset bases, and competition increasing from other formats, we remain concerned that [Rite Aid's] high debt levels may limit its longer-term growth prospects, wrote Standard & Poor's analyst Joseph Agnese in January. He has a hold recommendation on the stock. Still, Rite Aid has slashed its debt to about $3 billion from $6 billion in 1999, when the company brought in new management.

Meanwhile, RadioShack faces challenges of its own. The company runs about 6,600 stores under company-owned and dealer-franchised formats, making it the largest electronics retailer by number of locations, but it lags behind Best Buy (BBY ) and Circuit City (CC ) in sales. We clearly have a lot more work to do to get this company back to levels of profitability and growth that we all expect, said Claire Bobrowski, president and acting CEO of RadioShack, in an Apr. 21 conference call. (A company spokesperson declined to comment on financial performance before second-quarter earnings are announced on July 21.)

A management shakeup is only one of the question marks hanging over the company. On Feb. 20 then-CEO Dave Edmondson stepped down following a report that he did not have the bachelor's degree listed on his résumé (see BusinessWeek.com, 2/22/06, "RadioShack's Lesson: Trust, But Verify"). A search for a permanent CEO is ongoing.

The recent turmoil in company leadership&ellip;has, as we expect, introduced an element of turmoil throughout the organization, wrote Raymond James analyst Budd Bugatch in an Apr. 24 report reaffirming a market perform rating. (Raymond James expects to receive or intends to seek compensation for investment banking services from RadioShack.)

SERIES OF LETDOWNS.  RadioShack's cell-phone business also continues to ring up disappointment following last year's switch of carrier affiliation from Verizon (VZ ) to Cingular. The transition remains challenging, Deutsche Bank analyst Mike Baker noted in a May 15 dispatch, with the main issue being a slow ramp in Cingular trends in areas where the company does not have a large market share.

Baker likes the company's decision to reduce capital expenditures on new wireless kiosks but says the lack of share buybacks forecast in 2006 is a bad signal. He rates the stock a hold. (Deutsche Bank makes a market in RadioShack securities, owns 1% or more of the company's common equity securities, and expects to receive or intends to seek compensation for investment banking services from RadioShack.)

Unlike Rite Aid, RadioShack has many locations in enclosed malls. These roughly 1,200 stores could represent one of the bigger issues long-term, writes Credit Suisse analyst Gary Balter, who has a neutral rating on the stock. Mall traffic -- which skews toward teenagers, mothers, and senior citizens -- isn't necessarily ideal for RadioShack's product mix, analysts say.

Then there's customer service. Higher staffing levels contributed to higher first-quarter spending, but the effort was less successful in driving sales than executives had hoped. Meanwhile, rival Best Buy has scored a marketing success with its Geek Squad, a 24-hour customer-service group.

BOTTOMING OUT.  RadioShack's customer-service push may face an uphill battle, according to some analysts. That's fine to talk about, but to actually implement it, and implement it from mall-based locations? says Michael Tesler, president of Norwell (Mass.) retail consulting firm RetailConcepts.com. I wish them luck.

While the electronics retailer's stock might look like a deep-value opportunity at current lows, some analysts caution against buying too soon. Although the stock has already shed half its value in 18 months, share prices may not be ready to rise, analysts say. We believe results could be so far below current consensus that EPS estimate revisions could be tough on share performance in the near term, Stifel Nicolaus' Schick wrote on June 7. (Stifel Nicolaus expects to receive or intends to seek compensation for investment banking services from RadioShack.)

Consumers seeking blood-pressure pills or RCA cables may need to pay Rite Aid or RadioShack a visit. But investors might not want to put the retailers' stocks on their shopping lists just yet.

News Analysis
BusinessWeek.com
June 9, 2006
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A Global Assault on Inflation

From Ankara to Washington, central banks are hiking rates -- and investors are spooked. What lies ahead?

For many market observers, June 8 seemed to be World Tightening Day. The European Central Bank raised its benchmark interest rate by 25 basis points, to 2.75%, as expected. But in a surprise move, South Korea's central bank hiked its key interest 25 basis points, too, to 4.25%. Central banks in Denmark, India, South Africa, and Turkey raised rates as well.

The moves by inflation-wary central bankers have put world equity markets on the defensive, as investors seek the safety of less-risky vehicles (see BusinessWeek.com, 6/8/06, "Stocks Recover Amid Bargain Hunting"). With further monetary tightening expected, investors may have to face continued volatility in the months ahead, analysts say.

TWO EXCEPTIONS.  Stock markets worldwide took the June 8 rate-hike spree hard. Asian markets got the ball rolling downward, with both Japan's Nikkei and Korea's Kospi indexes falling more than 3%. European bourses also suffered, as major indexes in Britain, Germany, and France each shed more than 2.5%.

In the U.S., the Dow Jones industrial average recovered from triple-digit intraday losses to finish up 0.07%. The broader Standard & Poor's 500 squeaked higher by 0.14%, and the tech-heavy Nasdaq composite dropped 0.3%.

Two other central banks stood pat on June 8, but they might be the exceptions that prove the rule. The Reserve Bank of New Zealand, which held its rate at a lofty 7.25%, cited a worse-than-expected outlook for inflation. While the Bank of England left British interest rates at 4.5% for the 10th straight month, it's less likely to do so next time, analysts say.

"What we're seeing is a global full-court press on inflation control," says Alan Gayle, senior investment strategist at Trusco Capital Management (STI ).

THE PARTY'S OVER.  Against this backdrop, U.S. central bankers have stepped up their own tough talk on inflation, likely paving the way for the 17th consecutive interest-rate hike. On June 5, Federal Reserve Chairman Ben Bernanke said the recent uptick in a closely watched inflation measure was "unwelcome" (see BusinessWeek.com, 6/6/06, "The Chill in Bernanke's Words"). In afternoon trading June 8, futures markets reportedly assessed a 76% chance that the Fed will raise rates 25 basis points at its next meeting, to be held June 28-29.

In recent years, an environment of low interest rates and easy liquidity has emboldened investors to place riskier bets, boosting volatile asset classes like commodities and emerging markets. But as rates increase, market players fear that liquidity will dry up, analysts say. "The central banks are taking the punch bowl away," explains Jack Ablin, chief investment officer at Harris Private Bank (BMO ).

Even deflation-wary Japan has gotten in on the tightening act. In March, the Bank of Japan officially ended its so-called quantitative easing policy, which injected excess reserves into the nation's banking system (see BusinessWeek.com, 5/12/06, "Easing Out of Quantitative Easing").

PRICING RISK.  Japan's accommodating monetary policy allowed for "carry trade," a strategy where hedge funds and other investors would borrow cheap yen and use it to buy assets around the world. "The jitters in the marketplace actually started at the end of February, when you started to hear the Japanese talk about the ending of quantitative easing," says Quincy Krosby, chief investment strategist at The Hartford (HIG ).

Of course, tighter monetary policy isn't the sole factor behind the recent stock-market downturn. In a June 8 press conference broadcast via the Web, European Central Bank president Jean-Claude Trichet said ongoing market volatility reflects a renewed appreciation of investment risks.

"There was a certain level of underpricing of risks in the global financial market," Trichet said, observing that other central bankers share this view. "If this pricing of risk goes a little bit up, it would be perhaps going in a direction of better pricing of risks."

BAD COMBO.  Risk aversion has helped drive stocks downward as investors move to less-volatile issues, analysts say. "It's not a pricing reassessment," Harris' Ablin says. "It's a risk rebalance." Indeed, riskier asset classes have tended to see bigger declines (see BusinessWeek.com, 6/8/06, "No May Flowers for Investors").

Also on June 8, short-term Treasury yields rose above their long-term counterparts for the first time since March. An inverted yield curve, as this phenomenon is known, has traditionally been viewed as a signal of an upcoming recession. The Treasury market seems to be worried that Fed tightening "plus the combination of the weakness we see in housing and consumer sentiment is going to cause weakness in the economy this year and next year," says Brian Gendreau, investment strategist at ING Investment Management (ING ).

Of course, the markets could be wrong. One factor that could forestall a potential extended downturn is a strong second-quarter earnings season, analysts say. S&P analysts project that second-quarter earnings will increase 8% from the same period a year earlier, ending 16 consecutive quarters of double-digit percentage gains (see BusinessWeek.com, 5/5/06, "Second-Quarter Preview").

OIL WATCH.  "I don't think we're at the end of the bull run," says Jean-Michel Six, chief European economist at S&P. "Earnings growth might not be as strong as it was in 2005, but it's still going to be decent. The corporate sector's health is certainly a mitigating factor."

A sustained decline in energy prices could also potentially support equities, analysts say. On June 8, July West Texas Intermediate crude oil futures closed down 47 cents at $70.35 a barrel, after falling as low as $69.10 after the death of Abu Musab al-Zarqawi, the al-Qaeda leader in Iraq.

"The issues in Iraq and Iran will be there and probably put a floor under crude oil prices, but to have oil trade back under $70 would be a helpful development for stocks," says Michael Wallace, global market strategist at Action Economics.

Some say investor sentiment has to worsen before the market bottoms out. "One thing that would be really helpful to get this out of the way would be if sentiment were to get really bad," says Linda Duessel, equity market strategist at Federated Investors (FII ). "Without poor sentiment, it's hard to think that we have a sustainable low."

BOLSTERING CRED.  Meanwhile, Duessel and others argue that the inflation threat -- ostensibly the reason central banks are hiking rates -- may be overblown. Fed economists actually lowered their inflation forecast at the May 10 meeting, points out David Rosenberg, North American economist at Merrill Lynch (MER ).

"The Fed is barking about inflation, but it is noticeably absent in their forward-looking models," Rosenberg wrote in a June 7 research report. "This is 100% about bolstering a perceived loss of credibility" (see BusinessWeek.com, 6/7/06, "No More Hints and Whispers").

Until the interest-rate saga plays out, investors will continue to wrestle with uncertainty, analysts say. And that's one thing markets like even less than higher interest rates.

News Article
BusinessWeek.com
June 8, 2006
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Stocks Recover Amid Bargain Hunting

The major U.S. indexes came back after interest-rate hikes in Europe and Korea rattled world markets. Crude futures eased on news of terrorist Abu Musab al-Zarqawi's death

Stocks finished mixed, recovering in the afternoon from heavy losses in early trading Thursday on bargain hunting after four days of losses and speculation the indices had reached a near-term bottom, says Standard & Poor's Equity Research. Global markets got slammed Thursday amid fears the uptrend in interest rates globally will drain liquidity from the markets, says S&P.

On Thursday, the Dow Jones industrial average rose 7.92 points, or 0.07%, to 10,938.82 -- after tumbling as much as 173 points in early trading. The broader Standard & Poor's 500 index was up 1.78 points, or 0.14%, to 1,257.93. The tech-heavy Nasdaq composite fell 6.48 points, or 0.3%, to 2,145.32.

The major indexes may have found some support in news from optimistic White House economists. President Bush's Council of Economic Advisers predicted the U.S. economy will accelerate from last year's growth pace of 3.2% to 3.6% in 2006 and inflation will remain tame. It forecasts inflation as measured by the CPI to rise 3.0% this year, down from 3.7% in 2005.

Interest-rate concerns continued to nag the markets Thursday. The European Central Bank raised its key interest rate, while the Bank of South Korea also unexpectedly raised its benchmark rate. In the U.S., investors increasingly expect the Federal Reserve to raise the federal funds rate to 5.25% when it meets at the end of the month.

Also hurting sentiment were the hawkish comments from Atlanta Federal Reserve Bank President Jack Guynn Wednesday, notes S&P, as well as the inversion of 10-year/two-year Treasury yield curve.

In company news, oil producers Exxon Mobil (XOM ) and Chevron (CVX) were lower, as oil prices declined. In the energy markets, July West Texas Intermediate crude oil futures fell 47 cents to $70.35 a barrel, on reports that a U.S. air raid north of Baghdad killed Jordanian terrorist Abu Musab al-Zarqawi.

Some chipmakers were pressured after Citigroup lowered its earnings projections for Intel (INTC ) and rival Advanced Micro Devices (AMD ).

Meanwhile, Texas Instruments (TXN ) was lower ahead of a mid-quarter update set for after the close of trading. National Semiconductor (NSM ) was down before its fiscal fourth-quarter earnings report, also slated to follow the closing bell.

Shares in Novellus (NVLS), which provides semiconductor-making equipment, were higher after the company said it expects second-quarter earnings to come in higher than previously forecast.

Handheld-device maker Palm (PALM ) was higher. After the close, the stock will replace Anteon International in the S&P MidCap 400.

On the economic front Thursday, initial jobless claims fell 35,000 to 302,000 for the week ended June 3, a bigger drop than expected. Separately, wholesale sales are expected to rise 1.2% in April, while inventories increase 0.7%, says Action Economics.

Coming Friday are reports on trade. The April trade deficit is expected to widen back out to $65.0 billion following the narrower-than-expected deficits in February and March. May import prices are expected to increase 0.6%, while export prices climb 0.3%.

European markets were trading lower. In London, the Financial Times-Stock Exchange 100 index fell 77.5 points, or 1.36%, to 5,628.8. Germany's DAX index slid 83.17 points, or 1.5%, to 5,460.76. In Paris, the CAC 40 index retreated 93.94 points, or 1.95%, to 4,730.83.

Asian markets finished sharply lower. Japan's Nikkei 225 index tumbled 462.98 points, or 3.07%, to 14,633.03. In Hong Kong, the Hang Seng index dropped 366.44 points, or 2.32%, to 15,450.11. Korea's Kospi index skidded 43.71 points, or 3.45%, to 1,223.13.

Treasury Market

Prices of Treasury issues edged up Thursday as investors sought the relative safety of U.S. government debt. "Rate hikes around the globe, including Europe, South Korea, Turkey, and India took a toll on equity sentiment and bled into the U.S. markets, with resulting asset allocation out of stocks and into Treasuries," says Action Economics. The yield on the 10-year note fell to 4.99%.

News Article
BusinessWeek.com
June 7, 2006
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Stocks Fall as Fed Jitters Persist

The Dow and Nasdaq slid for the fourth straight day amid lingering concerns about interest rates, inflation, and economic growth

Stocks continued to retreat Wednesday, finishing lower as investors fretted over inflation, economic growth, and interest rates. Early gains failed to generate follow-through buying, but the market seems to be in the process of finding a near-term bottom, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 71.24 points, or 0.65%, to 10,930.9 -- its first close below 11,000 since Mar. 9. The broader Standard & Poor's 500 index dropped 7.7 points, or 0.61%, to 1,256.15. The tech-heavy Nasdaq composite shed 10.99 points, or 0.51%, to 2,151.8, a seven-month closing low.

The Federal Reserve's interest-rate intentions continued to loom over the markets Wednesday. Atlanta Fed President Jack Guynn added to the recent chorus of hawkish remarks on inflation, saying the Fed is watching the issue "very, very carefully."

The Fed is highly likely to hike interest rates for the 17th consecutive time when it meets again June 28 and 29, analysts say, but some argue inflation fears are overblown. "The only explanation we can come up with if the Fed decides to go again is that 'a stitch in time will save nine,'" writes David Rosenberg, North American economist at Merrill Lynch, in a research report. The Fed may be betting "that another rate hike is worth the cost in terms of lost near-term economic growth in order to cement Mr. Bernanke's inflating-fighting credentials early in his mandate, and thereby buy him the chance to more easily influence the markets down the road."

Bond-market action suggests stock investors should be more concerned about slowing growth than rising inflation, others say. "We now believe the bond market is more likely indicating it has faith the Fed will go far enough -- or possibly too far -- in its effort to rein in inflation," says Sam Stovall, chief investment strategist for S&P Equity Research Services. "As a result, the real worry is not about inflation, but rather the possibility that the U.S. economy will slow more rapidly than currently estimated."

Also on the economic docket, former Fed Chairman Alan Greenspan testified about oil and the economy, but his comments held little of interest to markets, says Action Economics. Separately, consumer credit growth jumped 5.9% to $10.6 billion in April, its fastest pace since June, 2005.

The economic calendar looks relatively light again for Thursday. Reports on wholesale sales and inventories for April as well as initial jobless claims for the week ended June 3 will be on tap.

In corporate news Wednesday, analyst downgrades weighed on a pair of chemical companies, as Deutsche Bank cut both Dow member DuPont (DD ) and peer Dow Chemical (DOW ) from buy to hold.

Meanwhile, automaker General Motors (GM) was lower after the company's newly appointed president of Asia-Pacific operations reportedly said the company remains reluctant to over-invest in Asia and needs to rein in its bureaucracy.

Fellow Dow member IBM (IBM) was modestly lower in after a report that the computer maker's plan to triple its investment in India could pose challenges. Rival Dell (DELL ) was lower after announcing the first major update to its server computers in nearly two years.

Investors were also digesting M&A news. Pharmaceutical company Pfizer (PFE ) has reportedly received bids worth more than $14 billion for its consumer products unit. Rivals like GlaxoSmithKline (GSK ) and Johnson & Johnson (JNJ ) were indicated to be among the suitors.

Elsewhere, Northrup Grumman (NOC ) was lower on news that the U.S. Air Force pared back a plan to buy the defense company's Global Hawk unmanned aircrafts.

Shares in Cooper Cos. (COO ) fell after the contact lens maker dropped its fiscal-year earnings forecast to a range of $2.85 to $3.20 a share, from $3.40 to $3.60 previously.

In the energy markets Wednesday, July West Texas Intermediate crude oil futures closed down $1.68 at $70.82 a barrel, after weekly inventory data showed an unexpected increase in crude supplies.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 36.5 points, or 0.64%, to 5,706.3. Germany's DAX index climbed 41.12 points, or 0.75%, to 5,543.93. In Paris, the CAC 40 index added 26.85 points, or 0.56%, to 4,824.77.

Asian markets finished lower. Japan's Nikkei 225 index tumbled 288.85 points, or 1.88%, to 15,096.01. In Hong Kong, the Hang Seng index dropped 156.56 points, or 0.98%, to 15,816.55. Korea's Kospi index skidded 34.78 points, or 2.67%, to 1,266.84.

Treasury Market

Prices for 10-year Treasury notes fell to 100-24/32 with a yield of 5.02%, while 30-year bonds dropped to 90-30/32 for a yield of 5.09%. Investors who bought bonds Tuesday on a flight to safety were liquidating their positions, says S&P Equity Research.

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June 6, 2006
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Stocks Slip on Interest-Rate Fears

Investors continued to digest Bernanke's hawkish comments on inflation. Also in focus: Dow members IBM and GM

Stocks extended their woes for a second straight session Tuesday, finishing modestly lower amid worries over Federal Reserve Chairman Ben Bernanke's recent inflation-fighting remarks. Investors shifting into bonds and out of equities and commodities futures as part of a flight to safety, says Standard & Poor's Equity Research. But major indexes finished well above session lows, which S&P says probably indicates "bottom feeding" as the market neared a recent low point set May 24.

The Dow Jones industrial average fell 46.58 points, or 0.42%, to 11,002.14, after tumbling below the psychologically important 11,000 mark for some of the day. The broader Standard & Poor's 500 index edged down 1.44 points, or 0.11%, to 1,263.85. The tech-heavy Nasdaq composite slipped 6.84 points, or 0.32%, to 2,162.78.

Concerns about growth are joining inflation jitters in weighing on sentiment, some analysts say. "Inflation fears have suddenly morphed into a growth scare," says Richard Berner, chief U.S. economist at Morgan Stanley. "In our view it's too soon to sound the all-clear on cyclical inflation risks. But we believe that the growth scare for now will prove to be just that -- a scare."

Market players Tuesday continued to debate Bernanke's tough inflation talk from the previous session. Speaking at a forum of leading global bankers, the Fed chief called the recent uptick in core inflation "unwelcome," but he added that consumer spending has slowed "noticeably." Focus is on whether the Fed will raise interest rates for the 17th consecutive time at its next meeting, June 28 and 29.

Bernanke may have misfired by targeting specific inflation measures in his comments, says Michael Englund, chief economist at Action Economics. "If all he needed to do was hand-signal a tightening, it should have been easy," Englund says. "By bringing all these issues into play, he's adding volatility to the market and uncertainty as to just how many tightenings we're going to see."

In company news, IBM (IBM) was higher after a report the computer maker will spend $6 billion in India by 2009 to provide more consulting and computer services to global customers.

Shares in General Motors (GM) fell after CEO Rick Wagoner reportedly said the annual stockholders' meeting is likely to produce praise for the company's reductions in health-care and pension spending.

Chipmaker Advanced Micro Devices (AMD ) was lower despite saying it will extend market-share gains this year. Rival Intel (INTC) also fell, after a report the company might sell a major part of its communications businesses in an effort to strengthen the company against competition in its main markets.

Meanwhile, Google (GOOG ) was up on news the Internet search giant was set to launch an online spreadsheet application, offering a free alternative to Microsoft's (MSFT ) Excel program.

Analyst downgrades weighed on the financial sector. Credit Suisse cut both Fannie May (FNM ) and Freddie Mac (FRE ) from outperform to neutral.

In pharmaceuticals, Swiss drugmaker Novartis (NVS ) was down after striking a licensing deal reportedly worth up to $507.5 million for the rights to Human Genome Sciences' (HGSI ) hepatitis C drug.

The economic calendar was relatively quiet. Fed Governor Susan Bies said she is "uncomfortable" with the level of core inflation and doesn't know when the Fed will stop raising rates. Kansas City Fed President Thomas Hoenig said core inflation is "at the upper end" of his comfort zone, but is staying within a range. His remarks were relatively dovish, says Action Economics.

On the docket Wednesday, economists expect April consumer credit to rise $3 billion. In Washington, former Fed Chairman Alan Greenspan is set to testify on oil and the economy.

In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed down 10 cents at $72.50, after the European Union gave Iran a set of incentives to curb its nuclear program.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 92.3 points, or 1.6%, to 5,669.8. Germany's DAX index dropped 118.38 points, or 2.11%, to 5,502.81. In Paris, the CAC 40 index skidded 118.12 points, or 2.4%, to 4,797.91.

Asian markets finished lower. Japan's Nikkei 225 index tumbled 283.45 points, or 1.81%, to 15,384.86. In Hong Kong, the Hang Seng index slipped 43.12 points, or 0.27%, to 15,973.11. Korea's Kospi index was closed for a holiday after Monday sliding 7.42 points, or 0.57%, to 1,301.62.

Treasury Market

Treasuries ticked higher amid stagflation fears, after dipping initially on a report of hawkish comments by St. Louis Fed President William Poole, says Action Economics. Prices for 10-year Treasury notes rose modestly to 100-30/32 with a yield of 5%, while 30-year bonds climbed to 91-04/32 for a yield of 5.08%.

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June 5, 2006
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Stocks Tumble On Fed, Iran News

Bernanke's remarks on inflation worried investors already rattled by a rise in crude futures amid threats from Iran

Stocks finished broadly lower Monday, as comments from Federal Reserve Chairman Ben Bernanke fanned fears of further interest-rate hikes, while a warning from Iran pushed oil prices higher. Concerns of inflation and slowing growth also weighed on the market before the Fed chief's speech, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 199.15 points, or 1.77%, to 11,048.72, its lowest close since March 8, led downward by Caterpillar (CAT ). The broader Standard & Poor's 500 index dropped 22.93 points, or 1.78%, to 1,265.29. The tech-heavy Nasdaq composite shed 49.78 points, or 2.24%, to 2,169.62.

Market players were assessing Bernanke's tough inflation talk Monday. Speaking at a forum of leading global bankers, the Fed chief called the recent uptick in core inflation "unwelcome," but he added that consumer spending has slowed "noticeably." After the speech, futures markets reportedly assessed a 74% chance the Fed will raise rates when it meets June 28 and 29.

Still, Bernanke's remarks don't substantially alter the outlook on interest rates, some analysts say. "If you go back to the minutes there was a long discussion about inflation expectations, and talking macho like this with regard to rates helps contain those inflation expectations," says Keith Hembre, chief economist at First American Funds. "It's one of the policy tools you use without actually moving the funds rate up."

Some analysts worry about "stagflation," or slow economic growth with high inflation. "What the market is really looking at here is a situation where interest rates are moving up to chase inflation, and at the same time a softening economy," says Peter Cardillo, chief market analyst at S.W. Bach.

Others maintain that a slowdown should be a bigger concern than inflation. "Inflation fears are overblown," says Stephen Roach, chief economist at Morgan Stanley. "They stem mainly from the statistical fiction of an increase in shelter costs in the U.S. and fail to take account of the increasingly powerful disinflationary headwinds of globalization."

Earlier in the session, the Institute for Supply Management's service index slipped to 60.1 for May, close to expectations, after April's stronger-than-expected 63.0.

Investors were also weighing an overnight rally in oil prices, driven partly by reports Iran will cut off oil supplies through the Persian Gulf if the U.S. takes actions against its nuclear facilities. In the energy markets Monday, July West Texas Intermediate crude oil futures closed up 27 cents at $72.60 a barrel, well off early highs, but the pullback failed to aid equities.

In corporate news, Apple (AAPL ) was lower after reportedly deciding to close a proposed support center in Bangalore, India.

Internet phone company Vonage (VG ) was higher despite its customers filing a class action suit that charges the company with violating securities laws and improperly selling shares.

Chipmaker Micron Technology (MU) was lower after an initial rise on a report the company could add $1 billion in revenue for fiscal 2007 from NAND flash memory, a component of digital cameras and music players.

Shares of Nasdaq (NDAQ ) fell despite an early boost from J.P. Morgan Chase, which initiated coverage of the stock with an overweight rating.

In other analyst calls, Citigroup reportedly downgraded FTD Group (FTD ) from buy to hold. Meanwhile, Prudential upgraded JetBlue (JBLU ) from underweight to overweight.

Pharmaceutical companies like Amgen (AMGN ), AstraZeneca (AZN ) and Bristol-Myers Squibb (BMY ), among others, were also in focus after the American Society of Clinical Oncology annual conference.

M&A activity continued. Laserscope (LSCP ) was sharply higher on news the medical equipment maker was being acquired by American Medical Systems (AMMD ) in a $715 million deal.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index edged down 2.5 points, or 0.04%, to 5,762.1. Germany's DAX index fell 65.85 points, or 1.16%, to 5,621.19. In Paris, the CAC 40 index dropped 43.66 points, or 0.88%, to 4,916.04.

Asian markets finished mixed. Japan's Nikkei 225 index fell 121 points, or 0.77%, to 15,668.31. In Hong Kong, the Hang Seng index rose 103.52 points, or 0.65%, to 16,016.23. Korea's Kospi index slid 7.42 points, or 0.57%, to 1,301.62.

Treasury Market

Treasury yields ticked higher on Bernanke's remarks. Prices for 10-year Treasury notes fell to 100-25/32 with a yield of 5.02%, while 30-year bonds slipped to 90-26/32 for a yield of 5.1%.

News Analysis
BusinessWeek.com
June 3, 2006
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Behind the Big Board's Big Bet

The NYSE-Euronext hookup may bring drastic changes to the way stocks are traded. Here's what you need to know

The Big Board is looking to get a lot bigger. On June 2, New York Stock Exchange owner NYSE Group (NYX ) and European exchange operator Euronext unveiled a deal to create the world's biggest securities marketplace, a trans-Atlantic behemoth valued at $20 billion. The merger could have implications for investors and publicly traded companies worldwide, provided it can leap through international regulatory hurdles.

NYSE Euronext, as the combined exchange would be known, would offer stock trading through exchanges in New York, Paris, Lisbon, Brussels, and Amsterdam, as well as futures and options trading through the electronic Euronext.liffe exchange in London. The deal also gives the NYSE a foundation in the profitable business of derivatives (see BW Online, 6/02/06, "NYSE, Euronext Detail Merger Plans").

Current NYSE Chief Executive John Thain will remain in that position with the combined company, while Euronext Chief Executive Jean-Francois Théodore becomes deputy CEO and head of European operations. "We believe that our combined listing firepower will be very effective in competing with the big listing venues around the world for the big global IPOs," Thain said at a June 2 press conference in Paris, broadcast via the Web.

A wave of consolidation is making securities marketplaces increasingly global and electronic-based. "People think of exchanges as kind of exotic creatures, but to be honest this is no different from something like eBay (EBAY )," says David Bertocchi, fund manager at Baring Asset Management in London. "eBay works in many national jurisdictions and does it off a single platform. There's no reason why stock exchanges can't do the same."

Still, the transaction promises to be complicated. What does it mean for average investors? For traders? Will there be a longer trading day? Here, we've tried to answer some of the key questions:

What does the deal mean for ordinary investors?
They won't see significant changes at first. But potentially, investors could see trading costs fall as the combined company passes along the economies of scale. NYSE Euronext will be converting six trading platforms into two, one for derivatives and one for cash equities. "The cost benefits of doing that are substantial," Bertocchi says.

But lower costs might be just the beginning. U.S. and European investors would likely be able to trade seamlessly in their respective foreign markets, exchange watchers say. In theory, at least, someday investors from any country could readily trade any security listed on any exchange.

Wouldn't that require a longer trading day?
Probably. Trading hours for each of the exchanges will remain as they are for the time being, NYSE and Euronext executives said at the June 2 press conference. But NYSE's Thain called an expanded trading schedule "one of the things we will explore."

The NYSE currently opens for its regular trading session at 9:30 a.m. New York time and closes at 4 p.m., while the bourse in Paris starts trading at 3 a.m. New York time. Combined, that's a 13-hour trading day -- and it could get longer. "The arrow points toward 24/7, 365-day global trading, but that's almost futurism," says Clement Chambers, CEO of ADVFN, a British Web site that tracks the markets. After-hours trading is already available on the NYSE, but volume tends to be low.

What about the traders on the NYSE floor?
That's tricky. The NYSE-Euronext alliance accelerates the momentum for closing the trading floor as more and more trades are conducted electronically, several observers suggest. "They're going to be saying, 'Well, who needs a floor anymore?' " says James Angel, associate professor of finance at Georgetown University's McDonough School of Business.

The Big Board has already been going electronic in a big way. In 2005, the NYSE merged with electronic exchange Archipelago Holdings, and Euronext's platform is also all-electronic. In recent months, the NYSE has rolled out a computer-human "hybrid" system, which allows investors to choose whether to send their trades through specialists on the floor or through the NYSE's computers for instant matching (see BW Online, 3/6/06, "From Dinosaur to Dynamo").

The middlemen are more optimistic. Robert Fagenson, vice-chairman and CEO of Van der Moolen Specialists (VDM ), hopes the deal will give floor folks a bigger role in bourses where they were previously absent. "As small exchanges in Europe and throughout the world have gone to electronic platforms, the missing element has been a liquidity provider," Fagenson says. "That has held back the effectiveness of many markets around the world."

How will the merger affect companies that list on the exchanges?
Again, not much right off the bat. However, in the long run it could give foreign companies access to domestic investors without having to comply with cumbersome U.S. regulatory requirements, such as Sarbanes-Oxley.

Listed companies would also stand to benefit from a larger pool of liquidity. "They want it to be as easy and cost-effective for investors around the world to buy their stocks as possible, so I think both issuers and investors will look positively on this consolidation trend," says Bill Cline, managing director for consulting firm Accenture's global capital-markets practice.

There's also speculation that NYSE Euronext could offer two-for-one deals to prospective issuers. "If you're listed in the NYSE, you'll get a break on your Euronext fees, and vice versa," Georgetown's Angel says. "I would expect to see something like that."

The good news for European companies is that costly U.S. regulations probably won't creep over to them, at least not as a result of this transaction. "There is no risk of Euronext-only listed companies having [to become] subject to Sarbanes-Oxley," the NYSE's Thain said at the press conference.

What's next?
The NYSE and Euronext need to get approval from their various regulatory agencies. Securities & Exchange Commission Chairman Christopher Cox reportedly said the SEC is in discussions with authorities in France and the Netherlands to work out a cooperative response to the proposed merger. "There are very fundamental regulatory, jurisdictional issues that would have to be worked out," says Mike Zuppone, chair of the securities practice group at law firm Paul, Hastings, Janofsky & Walker and a former SEC branch chief.

Meanwhile, expect consolidation to continue (see BW Online, 5/22/06, "The Battle for the Bourses"). On June 2, Germany's Deutsche Börse issued a statement reiterating its own bid for a combination with Euronext. Meanwhile, negotiations on a possible alliance between Euronext and Italy's Borsa Italiana are reportedly set to start next week. NASDAQ (NDAQ ) recently bought up a 25.1% stake in the London Stock Exchange, and the two bourses are said to have been in merger talks (see BW Online, 4/11/06, "Nasdaq Takes a Slice of the LSE").

Markets in Asia and the Pacific are the next likely deal candidates, observers say. But don't count on NYSE Euronext to announce a merger in that region anytime soon. "The focus will be on closing this transaction and on capturing the planned synergies," says Accenture's Cline.

In the long term, the U.S. may be following Europe's lead in transitioning beyond national securities exchanges. "Are we moving to a day where there will be the equivalent to a world market, or world markets, in a blue-chip list of securities traceable throughout the globe under common standards?" asks Joel Seligman, president of the University of Rochester and author of a book on securities regulation. "This is a step in that direction. But it's only a first step."

News Analysis
BusinessWeek.com
June 2, 2006
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Corrections Corp. Breaks Out

Shares in the private-sector detention company have surged, thanks to a growing inmate population

Crime may not pay, but punishment has been doing pretty well lately. Shares in Corrections Corp. of America (CXW ) recently touched a 52-week high of $52.45, and the stock was up 13.6% for the year at the close on June 1. A growing U.S. prison population suggests the Nashville-based company can continue to deliver solid profits.

Corrections Corp. is the biggest domestic player in the burgeoning private-sector detention business. The company runs 63 prison facilities in 19 states and Washington, D.C., with bed capacity for 71,000 inmates. In 2005, the company brought in a profit of $70.9 million, a 22.9% increase from 2004, on revenues of $1.19 billion. "We've never seen the wind at our back like it is today," Chief Executive John Ferguson said in a May 3 conference call.

LOTS OF COTS.  Certainly, the forces of supply and demand are working in the company's favor. State and federal authorities are projected to seek 21,600 beds in the private corrections sector in the next two years, but only 13,450 beds are currently available, according to Bank of America analyst T.C. Robillard, who has a buy rating on the stock. Corrections Corp. "is the best-positioned company to benefit from the supply imbalance within the correction industry," Robillard wrote in a May 3 report. (Bank of America has led or co-led an offering of securities for Corrections Corp. and has received compensation from the company for investment banking services.)

On May 3, Corrections Corp. posted a $21.3 million first-quarter profit, after a loss of $8.9 million for the same period a year earlier. Management also raised its full-year profit outlook 2006 by 10 cents, to a range of $2.20 to $2.27 per share. Shares surged to a 52-week high of $49.38. They went on to hit their most recent one-year peak on May 23.

Share prices have since eased, to $51.08, down 2.6% from their zenith. On May 30, shares dropped as low as $50.19 on the news that the Federal Bureau of Prisons awarded a contract for the housing of 1,200 low-security inmates to a competing bidder. Despite the setback, Corrections Corp. reaffirmed its outlook for 2006. "Although psychologically disappointing on the margin, there is no change to our estimates," wrote Avondale Partners senior analyst Patrick Swindle in a May 30 report, reiterating an outperform rating. (Avondale has received compensation for investment banking services from Corrections Corp.)

FOREIGN INFLUX.  Political trends suggest the jailhouse stock's blues might not last long. White House and congressional immigration reform efforts call for more prison space to accommodate illegal aliens from countries other than Mexico. Currently, these immigrants are subject to a "catch-and-release" program. "Part of our strategy is to end catch-and-release by expanding the number of beds in detention facilities along the border," President George W. Bush said June 1 before the U.S. Chamber of Commerce (see BW Online, 05/16/06, "Huddled Masses, Tricky Politics").

Faced with budget crunches, authorities will probably get those extra prison beds from privately run corrections outfits. State and federal governments currently outsource 6.7% of prisoners to the private sector, a figure expected to reach 7% by the end of 2008, according a Mar. 30 report by Bank of America, which estimates the private corrections market at $3.6 billion of the $53.1 billion total domestic corrections market. "The private sector is in a position to provide beds at an incrementally lower cost than either the state or the federal government can provide those same beds," Avondale's Swindle says.

Corrections Corp. isn't the prison industry's only breakout stock. On June 1, Houston-based Cornell (CRN ) reached a 52-week high of $16.36, up 18.4% on the year. Boca Raton (Fla.)-based Geo Group (GGI ) finished the day at $38.32, up 67.1% on the year but down from a 52-week high of $41.40 reached on May 23.

PLANNING AHEAD.  Nevertheless, Corrections Corp.'s size and cash flow give it an advantage over rivals, analysts say. "What they do that's different from the other companies out there is effectively use their balance sheet and build ahead of demand," says Jim Macdonald, a managing director at First Analysis. "Other companies tend to operate at 100% occupancy, and they would tend to build a facility after they have a contract." (First Analysis has managed or co-managed a public offering of securities for Corrections Corp., and Macdonald has a long position in the company's stock).

Building prisons before knowing for sure that there will be inmates isn't as risky as it may sound, others say. "It's not a purely speculative build," Swindle says. "They have a pretty clear expectation of who the customer will likely be for that facility."

As a prison operator, however, Corrections Corp. faces other risks to its share price. One is the chance that abuse or other events at its facilities will make the news. In 2000, Amnesty International cited "reports of torture and ill-treatment" at Corrections Corp. facilities. The company has disputed those allegations. Corrections Corp. "has never in its history lost a federal state or local contract due to performance issues," says Louise Gilchrist, vice-president of marketing and communications at the company. "They would not rely on a contracted vendor if there was any issue about the quality of our performance."

"SOCIAL INJURY."  Earlier this year, Yale University's Graduate & Employees Student Organization, a labor union, pushed for Yale to divest its interest in the company, held in a hedge fund. Correction Corp.'s "pursuit of profit through incarceration inherently leads to social injury." Hedge fund Farallon Capital Management sold its stake in Corrections Corp. during the quarter ended Mar. 31, according to filings with the Securities & Exchange Commission. Yale spokesperson Tom Conroy says that unlike the university's recent move to divest from Sudan, Yale "did not make any decision" itself to sell out of Corrections Corp.

Another hurdle for Corrections Corp. is the uncertain timing of contract awards. Government time frames can be difficult to pin down, analysts say. "Predicting the timing of contract awards is next to impossible, but it is also highly improbable, in our opinion, that [Corrections Corp.] will not benefit in a big way over the next three to five years," writes BB&T Capital Markets analyst Barry Stouffer, who has a buy rating on the stock. (BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Corrections Corp.)

HOW MUCH UPSIDE?  It also remains to be seen whether the stock can continue its climb. At least one analyst points out that the stock already reflects the positive trends. "Typically, this industry has not traded much above 15 times earnings," says First Analysis's Macdonald. "The stock price is probably justified, but I'm not sure the upside is there."

Other analysts maintain that Corrections Corp. is poised for further gains. "We continue to view the shares as attractively priced," wrote Jefferies & Co. analyst Anton Hie in a May 3 report. Hie has a buy on the stock and a target price of $55. (Jefferies acted as a co-manager on a high-yield offering for Corrections Corp. in January, 2006.) Analyst projections range as high as a $65 target price at Bank of America. If the stock continues its run, investors might just be tempted to lock up profits.

News Article
BusinessWeek.com
June 1, 2006
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Stocks Climb as Rate Worries Ease

Markets were assessing reports on productivity, manufacturing, retail sales, auto sales and home sales, ahead of Friday's key payrolls report

Stocks finished broadly higher Thursday, as investors cheered a lower wage inflation figure amid a flurry of economic data. Bargain-hunting likely helped boost stocks after the recent dowtrend, particularly as mutual funds often see fresh inflows at the start of a month, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 91.97 points, or 0.82%, to 11,260.28, led by AT&T (T ) and Alcoa (AA ), which each gained more than 3%. The broader Standard & Poor's 500 index climbed 15.62 points, or 1.23%, to 1,285.71. The tech-heavy Nasdaq composite rallied 40.99 points, or 1.88%, to 2,219.86.

The latest economic data helped ease inflation jitters, some analysts say. "The big chunk of the sell-off is over," says Gary Wolfer, senior portfolio manager at Univest Wealth Management & Trust. "I hate to use the word oversold, but the market as embodied by the S&P 500 seems to represent really good value."

A downward revision in first-quarter unit labor cost growth to 1.6% from 2.5% fanned hopes the Federal Reserve will pause from its interest-rate hikes when it meets June 28-29, says S&P Equity Research. In the same report, first-quarter nonfarm productivity growth was revised up to 3.7% from the advanced release of 3.2%, in line with expectations.

Separately, the Institute for Supply Management's index of manufacturing activity for May fell to 54.4 from 57.3 in April, below Street estimates. Meanwhile, pending home sales dropped 3.7% in April, a much weaker reading than expected. Construction spending unexpectedly fell 0.1% in April after rising 0.9% in March.

Employment data was coming into focus, as initial jobless claims surprisingly climbed 7,000 to 336,000 in the week ended May 27. On Friday, May nonfarm payrolls are expected to rise 165,000, says Action Economics. The report could yield further clues on the Fed's interest-rate plans.

Market players were also weighing solid retail sales reports Thursday. Federated Department Stores (FD ), J.C. Penney (JCP ) and Limited Brands (LTD ) were among retailers topping Wall Street same-store sales estimates. AnnTaylor (ANN ) and Bebe Stores (BEBE ) also beat forecasts.

On the downside, Wal-Mart (WMT ) posted a 2.3% increase in same-store sales, below analyst expectations. Gap (GPS ) and Sharper Image (SHRP ) also lagged.

Auto sales figures drew attention later in the session. General Motors (GM ) said sales fell 12.5% in May, in line with expectations. Ford (F ) said posted a 1.9% decline in May, better than Street forecasts, while DaimlerChrysler (DCX ) reported an unexpected 8% decline.

Elsewhere, Sun Microsystems (SUNW) was lower on news the network equipment maker will fire 4,000 to 5,000 workers in the next six months as part of a plan to end nearly five years of negative earnings.

Software maker Novell (NOVL ) was sharply lower after reporting lower second-quarter sales and said third-quarter revenue may fall short of estimates.

On the brokerage front, Domino's Pizza (DPZ ) was higher after JPMorgan Chase upgraded the stock from neutral to overweight.

In the energy markets Thursday, July West Texas Intermediate crude oil futures closed down 95 cents at $70.34, after weekly inventory data showed a modest, unexpected increase in crude supplies.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 25.9 points, or 0.45%, to 5,749.7. Germany's DAX index advanced 14.73 points, or 0.26%, to 5,707.59. In Paris, the CAC 40 index added 17.11 points, or 0.35%, to 4,947.29.

Asian markets finished mixed. Japan's Nikkei 225 index bounced 36.41 points, or 0.24%, to 15,503.74. In Hong Kong, the Hang Seng index skidded 212.62 points, or 1.34%, to 15,645.27. Korea's Kospi index tumbled 22.61 points, or 1.72%, to 1,295.09.

Treasury Market

Prices for 10-year Treasury notes rose to 100-05/32 with a yield of 5.11%, while 30-year bonds climbed to 89-14/32 for a yield of 5.2%.