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
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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.

News Article
BusinessWeek.com
September 15, 2006
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Stocks Rise after Mild Inflation Data

The Dow pulled within 170 points of its all-time high after CPI data met expectations. Also in focus: DaimlerChrysler, Ford

Stocks finished higher Friday, though off session peaks, following economic reports showing a firm economy and modest inflation. Investors were looking ahead to next week's Federal Reserve meeting, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 33.38 points, or 0.29%, to 11,560.77, an increase of 1.4% for the week. The broader Standard & Poor's 500 index added 3.59 points, or 0.27%, to 1,319.87, a weekly advance of 1.6%. The tech-heavy Nasdaq composite gained 6.86 points, or 0.31%, to 2,235.59, climbing 3.2% on the week.

NYSE breadth was positive, with 20 issues advancing for every 14 declining. Nasdaq breadth was 15-14 positive.

Inflation numbers were in focus Friday. The consumer price index (CPI) rose 0.2% in August, accompanied by a 0.2% increase in the core CPI, which excludes food and energy. On a year-over-year basis, the core CPI accelerated to a 2.8% rate, the fastest pace in about five years.

The CPI report was in line with expectations, says Action Economics. "Though the lack of an upside surprise on the core is a relief to the markets, the Fed isn't out of the woods yet," the economic research outfit says.

Meanwhile, the Empire State index of regional manufacturing activity improved to 13.84 in September, after falling five points to an upwardly revised 11.04 in August. The University of Michigan's consumer sentiment index rose to 84.4 in the preliminary September data, from a final August reading of 82.0. Industrial production fell 0.1% in August, following a 0.4% increase in July.

Looking ahead, the Fed's interest-rate meeting is set for Wednesday. Policymakers are expected to hold the federal funds rate steady at 5.25%. "Signs of economic moderation have intensified since the last meeting," says Bank of America economist Mickey Levy.

Monday's docket holds second-quarter current account data and the National Association of Home Builders' housing index. Other data releases due next week include housing starts, the producer price index, jobless claims, leading economic indicators, and the Philadelphia Fed survey.

In corporate news Friday, DaimlerChrysler (DCX ) was lower after the automaker slashed its full-year operating profit forecast by $1.27 billion.

Automaker Ford (F) was sharply lower as the company announced an expanded restructuring plan that aims to slash the company's ongoing annual operating costs by about $5 billion.

On the M&A front, media conglomerate News Corp. (NWS ) was reportedly considering swapping its controlling stake in DirecTV Group (DTV ) to Liberty Media (LCAPA ) in a deal for Liberty's stake in News Corp.

Utility group Excelon (EXC ) was higher after abandoning its $17.8 billion purchase of Public Service Enterprise Group (PEG ), blaming an impasse with state regulators.

Shares of Bristol-Myers Squibb (BMY ) gained on a report fellow drugmaker Schering-Plough (SGP ) was considering approaching Bristol-Myers about a possible merger.

In earnings news, Adobe Systems (ADBE ) was sharply higher after the software maker reported a 35% drop in third-quarter profit on a 24% rise in revenue.

In the energy markets, October West Texas Intermediate crude oil futures closed up 11 cents at $63.33 a barrel. OPEC lowered its oil-demand forecast for the rest of the year.

European markets finished mostly higher. In London, the Financial Times-Stock Exchange 100 index edged down 0.2 points, or less than 0.01%, to 5,877. Germany's DAX index added 30.5 points, or 0.52%, to 5,937.87. In Paris, the CAC 40 index was up 21.03 points, or 0.41%, to 5,144.88.

Asian markets ended mixed. Japan's Nikkei 225 index lost 75.46 points, or 0.47%, to 15,866.93. In Hong Kong, the Hang Seng index advanced 54.2 points, or 0.32%, to 17,237.65. Korea's Kospi index gained 2.35 points, or 0.17%, to 1,361.1.

Treasury Market

Treasury yields drifted higher as Kansas City Fed President Thomas Hoenig's remarks on the lack of recession risk countered the relatively tame core CPI reading. The 10-year note edged up in price to 100-22/32 for a yield of 4.79%, while the 30-year bond rose modestly to 93-20/32 for a yield of 4.91%.

News Article
BusinessWeek.com
September 14, 2006
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Stocks End Mixed as Oil Falls

Crude futures tumbled near $63, while downgrades weighed on Boeing and General Electric. Investors awaited Friday's inflation data

Stocks finished narrowly mixed in choppy trading Thursday, as investors considered analyst downgrades, mixed economic data, and falling energy prices. Traders seemed anxious about the inflation numbers due Friday, says Standard & Poor's Equity Research.

Also in focus was quadruple witching, when the monthly stock and index option expirations coincide with the quarterly expiration of stock and index futures contracts.

The Dow Jones industrial average slipped 15.93 points, or 0.14%, to 11,527.39. The broader Standard & Poor's 500 index shed 1.79 points, or 0.14%, to 1,316.28. The tech-heavy Nasdaq composite edged up 1.06 points, or 0.05%, to 2,228.73, boosted by strength in semiconductor stocks.

NYSE breadth was negative, with 20 issues declining for every 13 advancing. Nasdaq breadth was 16-13 negative.

After four straight sessions of gains, market optimism seems to be on the rise, some analysts say. "While we still need some more things to fall into place to say that the long, strong run is here, this is the best chance in four months for the equity jitters to conclude," says Brian Reynolds, chief market strategist at MS Howells.

Oil prices continued to tumble Thursday. In the energy markets, October West Texas Intermediate crude oil futures closed down 75 cents at $63.22 a barrel, as natural gas prices hit two-year lows following a report showing an unexpectedly large increase in supplies.

Investors were also digesting a full plate of economic data. Retail sales rose 0.2% in August, and also edged up 0.2% excluding autos. Import prices added 0.8% in August, following a 1.0% increase in July. Business inventories gained 0.6% in July, as expected.

Meanwhile, jobless claims fell 5,000 to 308,000 in the week ended Sept. 9, after an upwardly revised 313,000 a week earlier.

Federal Reserve Governor Susan Bies avoided commenting on interest rates or the economy in her prepared testimony before the House Financial Services subcommittee. New York Fed President Timothy Geithner was set to speak late Thursday on hedge funds.

The main event Friday is a report on consumer inflation. Data releases are also on tap for consumer sentiment, industrial production, and the Empire State index of regional manufacturing activity.

In corporate news, shares of two blue-chips were lower after analyst downgrades. UBS lowered its rating on shares of Boeing (BA ) from neutral to reduce and cut General Electric (GE ) from buy to neutral.

GE also announced a $3.8 billion deal to sell a majority stake in its advanced materials unit to private investment group Apollo Management.

Software giant Microsoft (MSFT ) was higher as the company raised its quarterly dividend by 11%.

Shares of automaker Ford (F) dipped amid news the automaker and the United Auto Workers Union plan to offer buyouts to the company's 75,000 UAW workers in the U.S.

Oil and gas producer Anadarko Petroleum (APC ) said it agreed to sell Canadian subsidiary Anadarko Canada for $4.24 billion to Canadian Natural Resources (CNQ ).

On the earnings front, Bear Stearns (BSC ) was higher after the investment bank reported a 16% increase in third-quarter profit, on the heels of solid results from Lehman Brothers (LEH ) and Goldman Sachs (GS ).

Retailer Pier 1 Imports (PIR) was lower after the company posted a wider second-quarter loss on 15% lower same-store sales, but said it expects to do better over the holiday season.

Elsewhere, Stanley Furniture (STLY) was lower after the wood furniture maker cut its forecasts for third-quarter and full-year results, citing weaker-than-expected sales.

Shares of XM Satellite Radio (XMSR ) climbed after Credit Suisse upgraded the stock from neutral to outperform.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index fell 15 points, or 0.25%, to 5,877.2. Germany's DAX index edged up 1.25 points, or 0.02%, to 5,907.37. In Paris, the CAC 40 index was down 14.08 points, or 0.27%, to 5,123.85.

Asian markets ended mostly higher. Japan's Nikkei 225 index climbed 192.34 points, or 1.22%, to 15,942.39. In Hong Kong, the Hang Seng index slipped 26.59 points, or 0.15%, to 17,183.45. Korea's Kospi index rallied 25.62 points, or 1.92%, to 1,358.75.

Treasury Market

Treasury yields ticked higher following the mixed reports on the economy. The 10-year note fell in price to 100-22/32 for a yield of 4.79%, while the 30-year bond dropped to 93-18/32 for a yield of 4.92%.

News Analysis
BusinessWeek.com
September 14, 2006
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CEOs in the Sweet Spot

Amid a spate of high-level shakeups, these chief executives can point to five years of strong returns on their watch

Chief executives have been an embattled group lately. Bristol-Myers Squibb (BMY), Ford (F ) and Viacom (VIA , VIA.B ) each replaced their top executives in recent days. Last week, Five for the Money looked at CEOs whose corner offices could be vulnerable (see BusinessWeek.com, 9/7/06, "CEOs in the Hot Seat"). This week, it's the sunnier side of the suite: CEOs basking in the glow of torrid stock performance.

It's probably no coincidence that each recent CEO shakeup came at companies with languishing stock prices. In fact, Tom Freston's departure as president and CEO at Viacom could have been linked to stock performance, some analysts say (see BusinessWeek.com, 9/6/06, "What Freston's Departure Means for Viacom"). Chairman Sumner Redstone's comments suggest the "abrupt news reflects [Viacom's] lackluster share price," Standard & Poor's analyst Tuna Amobi says in a Sept. 5 note.

Of course, stock performance is hardly the only criterion of a CEO's success, but it's the one nearest and dearest to shareholders' pocketbooks. A strong multiyear track record is nice, too. Here are the five S&P 500 CEOs with more than five years on the job whose stocks have posted the biggest total returns over the past five years.

1. Steve Jobs, Apple
It's hard to imagine a list of top-performing CEOs without Steve Jobs (see BusinessWeek, 2/6/06, "Steve Jobs' Magic Kingdom"). In the late 1970s, Jobs and Apple (AAPL) co-founder Steve Wozniak paved the way for the personal computer. More recently, Jobs has presided over the launch of new products that have boosted profits and captured the media's imagination. He also sits on the board at one of the biggest media companies, Disney (DIS ).

After an ouster in the mid-1980s, Jobs rejoined Apple in 1996. Two years later, he helped rejuvenate sales with the original gumdrop-shaped iMac. In 2001, Apple unveiled the iPod music player, which has since expanded its content offerings to TV shows and, just this week, feature films (see BusinessWeek.com, 9/13/06, "Apple's Latest Fruits").

Jobs polished Apple's brand image, but his emphasis on aesthetics—and easy-to-use, tightly integrated products—has also made shareholders a pretty penny. In the five years ended Sept. 12, shares posted a 53% total annualized return. Since the day before Jobs returned to Apple's corner office on Sept. 16, 1997, shares have surged a split-adjusted 1,250%, compared with a 42.8% gain for the broader S&P 500 index.

Of course, Apple hasn't always made all the right moves. In August, the company delayed filing its second-quarter earnings after disclosing that it had found stock-options "irregularities" (see BusinessWeek.com, 8/17/06, "Apple's Options Overdose").

While much remains unclear about Apple's options troubles, Jobs deserves credit for righting the ship he helped launch, analysts say. "We attribute the turnaround to Apple's co-founder, Steve Jobs," says S&P analyst Richard Stice in a Sept. 6 note.

2. Lew Frankfort, Coach
Talk about a winning streak. Coach (COH) Chairman and CEO Lew Frankfort has skippered the bag designer through 17 straight quarters of double-digit growth in same-store sales, a key retail performance metric (see BusinessWeek.com, 10/25/05, "For Coach, Profits Are in the Bag"). Shares posted a 49.5% total annualized return in the five years ended Sept. 12.

Slowing consumer spending hasn't been a problem for the New York-based retailer. For $200 or more, Coach's customers have so far continued to buy the company's trendy handbags and accessories even in the face of rising gas prices. Coach unveils new products every month, cultivating an upscale image while selling discounted items through its factory stores (see BusinessWeek, 11/7/05, "BW 50: Coach's Split Personality").

Frankfort has helmed Coach since November, 1995, before the company split off from Sara Lee (SLE). In 2005, he brought home annual compensation of $2 million, plus $48 million in stock options. Morningstar analyst Kimberly Picciola notes, "We don't think this compensation is egregious," given the stock's gains since going public in 2000.

The bag retailer isn't slowing down yet, some analysts say. "We think that as long as category growth in premium accessories remains strong, [Coach] will deliver on its growth plans," says JPMorgan analyst Brian Tunick, who has a neutral rating on the shares, in an Aug. 1 report. (JPMorgan (JPM ) has a non-investment banking relationship with Coach.)

3. Eli Harari, SanDisk
Success hasn't come in a flash for SanDisk (SNDK ) President and CEO Eli Harari. When the tech boom turned bust in 2001, his flash-memory outfit's share price tumbled from its March, 2000, peaks. In the past five years, though, the company's shares have posted total annualized returns of 46.9%.

Harari has helmed the Sunnyvale (Calif.)-based company since he co-founded it in 1988. While SanDisk's flash memory cards are used in digital cameras, cell phones, and USB flash drives, the company earlier this year unveiled a music player to compete with Apple's megahit iPod (see BusinessWeek.com, 5/8/06, "Will SanDisk Sour Apple's Tune?").

On July 31, SanDisk also announced its $1.35 billion acquisition of Israeli firm M-Systems, which makes storage devices for computers (see BusinessWeek.com, 8/1/06, "Flash Free-for-All?"). The deal drove the stock up 4% in one day.

Strong performance will likely remain more than just a memory for SanDisk, analysts say. "We see significant near-term upside and reiterate our $68 price target," says Bear Stearns (BSC ) analyst Gurinder Kalra in an Aug. 30 report. Kalra has an outperform recommendation on the stock.

4. Bob Simpson, XTO Energy
It's no secret that energy stocks have performed well in recent years. XTO Energy (XTO ), led by Chairman and CEO Bob Simpson, has stood out even among the oil-rich crowd. Shares posted a 46.5% total annualized return in the five years ended Sept. 12.

The Fort Worth (Tex.)-based oil-and-gas company has been buying productive oil fields and squeezing more out of them through technology (see BusinessWeek, 4/5/05, "BW 50: XTO Energy Profile"). Simpson co-founded the company and has served as CEO or held similar positions since 1986.

As XTO shareholders have gained, so has Simpson. Too much, some analysts say. In 2005, Simpson's pay package included $32 million in cash—an "extraordinary" sum, according to Morningstar (MORN ) analyst Eric Chenoweth. "We like to see veteran management with such a significant stake in company stock, but a number of other factors reduce our enthusiasm for this team," notes Chenoweth, who rates the stock four stars out of five but gives it a "D" grade for corporate stewardship.

Higher production guidance and lower costs bode well for future earnings, some analysts say. On July 26, S&P upgraded the stock from hold to buy, citing the company's success in two Texas energy plays.

5. Michael McCallister, Humana
Is there a CEO in the house? Six years ago, Humana (HUM ) was in critical condition, hemorrhaging red ink (see BusinessWeek, 7/12/04, "Vital Signs at Humana"). Since before Michael McCallister took over in February, 2000, the Louisville-based insurer's shares have climbed 87.2%, including a 40.1% total annualized return over the past five years.

Investors continue to like the company's prospects. On Sept. 13, shares hit a new 52-week high of $66.30. A day earlier, Jefferies (JEF ) analyst Brian Wright began coverage of the stock with a buy rating and a $75 price target, citing potential growth for Humana's private Medicare plans.

Humana's exposure to government programs could help drive continued earnings growth, analysts say. Humana has the best long-term track record in private Medicare and is the second-largest player, according to Citigroup analyst Charles Boorady, who has a buy rating on the stock. "Humana is a Medicare bellwether," Boorady says in a July 31 report. (Citigroup (C ) has an investment banking relationship with Humana and makes a market in the company's securities.)

With CEOs seemingly dropping like flies lately, a rising stock price doesn't necessarily guarantee a company chief's longevity. As these five CEOs can probably attest, though, it sure helps.

September 11's Lessons for Investors

News Analysis
BusinessWeek.com
September 11, 2006
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September 11's Lesson for Investors

The terrorist attacks inflicted short-term market pain, but they didn't change the long-term strategy for investing success—diversify

Few Americans are likely to forget where they were on Sept. 11, 2001, especially if they were in Manhattan. The terrorist attacks that came out of the clear blue sky that morning shook a nation to its psychological and financial core (see BusinessWeek, 9/24/01, "Terror in America"). Investors have managed to move on, but they're not forgetting, either.

In the five years since the World Trade Center attacks, major stock indexes have posted modest advances. As of afternoon trading on Sept. 8, 2006, the Dow Jones industrial average has gained 18.6% since September 11, while the broader Standard & Poor's 500 stock index is up 19%. The tech-heavy Nasdaq composite index has added 27.8%.

While those gains aren't spectacular, they reflect a stock market largely unfazed by the threat of another attack. For market pros and individual investors, the events of September 11 reinforced the importance of a diversified portfolio as protection against any calamity—terrorist or otherwise. The market rumbles on, but individual stocks and sectors have sometimes lagged along the way.

BOUNCING BACK.  After the attacks, investors' immediate reaction was to panic. Stocks tumbled when the market reopened on Sept. 17, bottoming out on Oct. 9, 2002, when the Dow dropped to 7286.27. Since March, 2003, though, it has been a steady climb. On May 10, 2006, the Dow reached a six-year closing high of 11642.65, within 100 points of its all-time peak (see BusinessWeek.com, 8/21/06, "Can the Rally Keep Up?").

The same pattern has recurred after each major terrorist attack since September 11. Stocks retreated at first but eventually bounced back after the bomb blasts in Turkey in November, 2003, and the Madrid train bombing in March, 2004. It took less than a day for major indexes to recover following the July, 2005, bombing in London.

"9/11 put terrorism on the map as something you had to take into account," says Alec Young, equity market strategist at S&P Equity Research Services. "Since 9/11, every time there's a terror attack the market reaction gets smaller and smaller. The markets realize that terror events are nonrecurring, so basically they shrug them off."

POSSIBLE DRAG.  In fact, markets have responded to terrorist attacks since September 11 much as they've behaved after other cataclysms throughout history. Disasters—whether the San Francisco earthquake in 1906, the assassination of President John F. Kennedy in 1963, or the Oklahoma City bombing in 1995—typically cause only a brief wobble for the markets, analysts say.

"It just takes an awful lot to break down the capital structure of the U.S., much less the world, with any individual event," says Dan Genter, president and CEO of Los Angeles investment firm RNC Genter.

Nevertheless, terrorism could still be acting as a drag on stock prices. For whatever reason, investors are willing to pay less today for a dollar of earnings than they were five years ago. The rolling four-quarter average price-to-earnings ratio for the Dow Jones Wilshire 5000 index was 27.25 in mid-2001. On Aug. 30, 2006, that measure had fallen to 19.55. "It's hard to quantify how much of that is a contribution from additional concerns over terrorism," says Steve Foresti, managing director and head of the investment research group of Wilshire Consulting.

Meanwhile, specific sectors and asset classes have reacted to terror differently. Gold, bonds, value styles, and defensive sectors typically performed well immediately following terrorist attacks in the past five years, says Sam Stovall, S&P's chief investment strategist, in an Aug. 10 report (see BusinessWeek.com, 8/11/06, "In Response to Terror"). However, investors subsequently shifted each time to more cyclical sectors, such as consumer discretionary, information technology, and telecom stocks.

DEFENSIVE STANCE.  Overall, energy stocks such as Exxon Mobil (XOM ) and Chevron (CVX) have been among the biggest winners the past five years. The Dow Jones Wilshire U.S. Oil & Gas index more than doubled from Sept. 10, 2001, to Sept. 1, 2006. However, recent declines in oil prices could signal cooler days ahead for the sector (see BusinessWeek.com, 8/14/06, "S&P Downgrades Energy Sector to Market Weight"). "The easy money's been made," says S&P's Young.

Defense-related companies have also posted gains amid anti-terrorist efforts and the war in Iraq. "You've got longer-term trends that weren't just driven off that one event," notes Ryan Crane, chief investment officer of Stephens Investment Management. As of afternoon trading on Sept. 8, Raytheon (RTN ) has surged a dividend-adjusted 110% since Sept. 10, 2001, while Boeing (BA ) is up 82.9%.

At the same time, some groups that tumbled after September 11 have rebounded strongly. The Dow Jones Wilshire U.S. Travel & Leisure index slid for much of 2002 but rallied nearly 50% from Sept. 10, 2001, to Sept. 1, 2006. The Dow Jones Wilshire U.S. Industrial Goods & Services Index is up 36% since Sept. 10, 2001, again despite weakness in 2002.

AVOIDING EMOTION.  Automotive stocks such as General Motors (GM ) and Ford (F), however, have declined steadily the past five years. The Dow Jones Wilshire U.S. Automobiles & Parts index lost 19% from Sept. 10, 2001, to Sept. 1, 2006, despite a modest bounce in late 2004. Meanwhile, technology stocks gained only slightly over the period after steep losses in 2000 and 2001.

With or without terrorism, investors should be prepared for the unexpected, analysts say. "If there's a lesson to be had from the tragic event, it's that event risk is with us, and it's not going to go away," says Rob Brown, chief investment officer of Genworth Financial Asset Management.

Ultimately, the risk of a major terrorist attack is yet another reason for investors to diversify their portfolios and avoid making investment decisions based on emotion, says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "Your emotions tend to lead you to an easy response to stop whatever pain you're in, but that may not necessarily be the best investment advice," Ritholtz says.

The September 11 attacks changed everything, politicians often remind us, and to some extent they're right. However, the wisest investing approach is one that held true before that terrible event, and still applies today: a diversified portfolio geared for the long term. Don't forget it.

News Analysis
BusinessWeek.com
September 7, 2006
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CEOs in the Hot Seat

Blue chips Ford and Viacom just sacked their chief executives after lackluster stock performance. Who could be next?

These are trying times for chief executives with underwhelming stock prices. On Sept. 5, Viacom announced that Tom Freston had resigned as president and CEO (see BusinessWeek.com, 9/6/06, "What Freston's Departure Means for Viacom"). Later the same day, Bill Ford ended a troubled five-year run as CEO of Ford Motor (see BusinessWeek.com, 9/6/06, "Ford's Latest Recall"). The automaker named Alan Mulally, previously No. 2 executive at Boeing (BA ), as its new president and CEO. Ford will stay on as executive chairman.

With many blue chips treading water, Viacom (VIA , VIA.B ) and Ford (F ) probably aren't the only big companies eyeing C-level shakeups. This week's Five for the Money looks at five CEOs who could be vulnerable due to lackluster stock prices, shareholder pressure, or other factors.

1. Richard Parsons, Time Warner
Time might be running out for Richard Parsons, CEO and chairman at Time Warner (TWX ). The New York media conglomerate's share price has fallen 8.3%, adjusted for dividends, since the day before Parsons became CEO on May 15, 2002. The broader Standard & Poor's 500 index has gained 18.5% over the same period.

Parsons took over at Time Warner Center in the messy aftermath of the company's ill-fated AOL acquisition. "Parsons pulled Time Warner through the turmoil," notes Morningstar (MORN ) analyst Jonathan Schrader. "However, we're not sure that he has what it takes to unlock significant value at Time Warner." Schrader has a perfect five-star rating on the stock, but he gives its corporate stewardship a mediocre "C" grade.

For months, billionaire investor Carl Icahn pushed to oust Parsons and split up Time Warner. He dropped the effort in February after reaching an agreement with management. The shareholder activist isn't going away, however, and in August he boosted his Time Warner holdings to 49.6 million shares, or around 1.2% of the total (see BusinessWeek.com, 8/14/06, "Carl Icahn Increases Time Warner Stake").

With a breakup off the table for now, the pressure is on Parsons. "We think investors will increasingly look at management to improve operations at each of its businesses," says Citigroup (C ) analyst Jason Bazinet in an Aug. 18 report. Bazinet has a buy recommendation on the shares. (Citigroup has an investment banking relationship with Time Warner, owns 1% or more of the company's shares, and makes a market in its securities.)

It's not as if Time Warner has been sitting on its hands. The company is in the midst of buying back up to $20 billion of its shares. And on Aug. 2, Time Warner announced that most AOL services would now be free to broadband users, in the latest effort to shore up the struggling Internet services provider (see BusinessWeek.com, 9/5/06, "AOL—Crashing").

Parsons plans to stay at least until his contract wraps up at the end of 2008, according to Time Warner spokesman Edward Adler. Meanwhile, Time Warner's stock continues to lag, underperforming both News Corp. (NWS ) and Disney (DIS ) so far this year. The New York Times and New York magazine recently suggested Parsons could go into public service, whether on a federal level or in a bid for mayor of New York City.

2. Robert Nardelli, Home Depot
Could Home Depot's (HD) corner office be due for a remodel? Since the day before Chairman and CEO Robert Nardelli's arrival on Dec. 14, 2000, the Atlanta-based home-improvement retailer's dividend-adjusted share price has slid 20.9%. Arch-rival Lowe's (LOW ) is up 164%.

Critics have hammered Nardelli for his hefty pay package. In 2005, the former General Electric (GE ) executive took home $38.1 million in total pay (see BusinessWeek.com, 5/23/06, "Home Depot's CEO Cleans Up"). "Management compensation is excessive," says Morningstar analyst Anthony Chukumba, who gives the stock a perfect five-star rating but a "D" for corporate stewardship.

The annual shareholder meeting on May 25 only intensified the heat on Home Depot's CEO (see BusinessWeek, 7/24/06, "Bob Nardelli Explains Himself"). Nardelli was the only board member to attend the event, and he declined to answer questions, wrapping the event up in 30 minutes.

The retailer has also gotten enmeshed in the SEC's stock-options probe, though executives have said they don't foresee a "material adverse impact." The AFL-CIO, a Home Depot shareholder, wrote a letter June 29 calling for the resignation of Kenneth Langone, a director who served on the committee overseeing stock options. The labor federation is set to meet with Home Depot officials on Sept. 7.

The stock's malaise notwithstanding, Home Depot has nailed down solid financial results during Nardelli's tenure. Sales rose from $45.7 billion in 2000 to $81.5 billion in 2005, a 78% increase, while per-share earnings jumped 147%. "His performance over the past five years speaks for itself," says company spokesman David Sandor, who notes that Nardelli enjoys the board of directors' support. "Stock price isn't something that is within the direct control of any chief executive."

Recently, Home Depot has taken some steps to answer its naysayers. On Aug. 15, the fix-it chain reversed a first-quarter decision to stop disclosing same-store sales, a key retail benchmark. On Aug. 29, the company said it revised its bylaws to require that each director be elected by a majority vote, not just a plurality. The company also recently boosted its stock buyback program to $17.5 billion. As of Sept. 1, Institutional Shareholder Services (ISS) rated Home Depot's corporate governance above 99.8% of S&P 500 companies.

Still, not even an ambitious share repurchase program has been able to boost the company's stock price. Challenges remain, as Home Depot's new wholesale business looks to expand while the big orange stores weather a housing-market slowdown. If the stock continues to languish, shareholders could demand some retooling.

3. Kevin Rollins, Dell
Dell's (DELL) Kevin Rollins is another CEO having trouble booting up his company's stock price. Shares of the Round Rock (Tex.)-based computer maker have tumbled 37.6% since the day before Rollins became CEO on July 17, 2004. Rival Hewlett-Packard's (HPQ ) shares are up 87.3%, adjusted for dividends, while Apple's (AAPL ) more than tripled.

Dell has endured one mishap after another this summer (see BusinessWeek, 9/4/06, "Dark Days at Dell"). On Aug. 17, disappointing second-quarter earnings were reported just three days after a recall of 4.1 million laptop batteries. The company also disclosed that the SEC is looking into its accounting practices.

The rash of bad news would be less disconcerting if profits were still rising (see BusinessWeek.com, 8/18/06, "Dell Disappoints Once More"). However, slimmer margins and tougher competition could put the brakes on earnings growth, some analysts say. On Aug. 18, UBS (UBS ) downgraded the stock from neutral to reduce. "We believe struggles can be largely attributed to company-specific issues," says UBS analyst Benjamin Reitzes in an Aug. 17 report. (UBS has an investment banking relationship with Dell and makes a market in the company's securities.)

Dell has also been moving from its exclusive relationship with Intel (INTC ) and using more chips from Advanced Micro Devices (AMD). Some analysts attributed a second-quarter drop in gross margin to this changing relationship. "We believe Dell likely lost significant 'co-marketing' dollars from Intel this quarter, either as a result of Dell's decision to start using AMD processors or resulting from AMD's lawsuit against Intel," says Deutsche Bank (DB ) analyst Chris Whitmore in an Aug. 17 report. (Deutsche has a non-investment banking relationship with Dell, owns 1% or more of the company's shares, and makes a market in its securities.)

In mid-August, Rollins found himself fielding questions on CNBC about how long he would remain in his position. Dell spokesman Bob Pearson says such speculation is unfounded. "Kevin's got [company founder] Michael Dell's full support, and 98% of the shareholders voted in favor of Kevin at our shareholder meeting in July," Pearson says. "This speaks for itself."

Rollins is no Dell newcomer. He joined the company in 1996 from consultancy Bain & Co. before taking over as CEO from Michael Dell, who remains as chairman. Still, with big institutional investors such as Fidelity trimming their stakes, the pressure is on for the computer maker to deliver.

4. William Johnson, Heinz
Condiment king Heinz's (HNZ) stock has had some mustard on it lately. Shares of the Pittsburgh-based company have risen 27.6% since Feb. 6. That's when speculation arose about financier Nelson Peltz's activist involvement in the stock.

Before that, Heinz's stock performance gave investors less to relish (see BusinessWeek, 6/30/03, "Drooling over Heinz?"). Shares shed a dividend-adjusted 11.6% from the day before William Johnson became Heinz CEO on Apr. 30, 1998, through Feb. 6. The S&P 500 added 15.6% over the same period. Peer ConAgra Foods (CAG ) held steady, though Campbell Soup (CPB ) tumbled 25%.

In other words, the recent rise in Heinz's share price came alongside the company's showdown with the billionaire investor. Peltz's Trian hedge fund has pressured the company into reducing overall spending while shifting more cash to promoting core brands. On Aug. 16, Trian said it had likely secured some seats on the Heinz board (see BusinessWeek.com, 8/17/06, "Peltz Pours It On at Heinz"). The final results won't be available until Sept. 15.

Some analysts say Peltz's plans won't ultimately improve the ketchup maker's fortunes. On Sept. 6, Sturdivant & Co. analyst Beth Ann Loewy downgraded the stock from market perform to market underperform. "Fundamental improvement is still somewhat elusive," Loewy says.

Others are more optimistic. Bear Stearns (BSC) analyst Terry Bivens has an outperform recommendation on Heinz. "A Peltz team presence could, in our opinion, promote continued earnings expansion," Bivens said in an Aug. 31 report.

Heinz spokesman Michael Mullen says Johnson's place as CEO is secure. "Johnson is supported by both the board and Heinz shareholders as the company implements its plan to enhance shareholder value," Mullen said in a statement.

5. Arun Sarin, Vodafone
Vodafone (VOD) CEO Arun Sarin recently emerged from a shareholder battle of his own. Shares of the company have gained a dividend-adjusted 17% since a day before Sarin took over at the Newbury (Britain)-based wireless giant on July 30, 2003. Still, Vodafone's share price of $21.46 at the close Sept. 6 remains well below its peaks near $60 in early 2000.

A boardroom showdown in the first half of the year led to the departure of five directors and former CEO Christopher Gent's resignation as "President for Life" (see BusinessWeek.com, 6/6/06, "Vodafone: What Went Wrong"). Profit warnings have become the norm, and the company has pulled out of Sweden and Japan amid heady competition. The share price is flat for the year.

The company's foothold in the U.S. market remains an issue. In 2004, Vodafone bid unsuccessfully to buy AT&T Wireless. Meanwhile, some large shareholders have called on Vodafone to sell its 45% stake in Verizon Wireless, a joint venture with Verizon (VZ ).

Strong regional competitors and industrywide challenges may continue to put Vodafone's earnings on hold, some analysts say. "We remain unconvinced about the company having a competitive advantage based on its scale," S&P analyst Subhajit Gupta said in an Aug. 17 note. Gupta has a hold recommendation on the stock.

Nevertheless, Sarin may have weathered the worst of the shareholders' challenges. At the company's July 25 annual meeting, about 85% of those polled voted to re-elect Sarin as a director. "Yes, there was a minority agitating," says Ben Padovan, a Vodafone spokesman. "But the actual result when it came to people actually voting gave a very clear indication that the vast majority of our shareholders support him."

On Sept. 5, Vodafone tapped Italian media executive Vittorio Colao as chief executive of its European operations following Bill Morrow's departure. Colao was the head of Vodafone Italy from 2002 to 2004. Sarin's latest move has met generally positive reactions from analysts, though it could also signal the arrival of an heir apparent.

The head man is always the most visible target for frustrated shareholders. Of course, some sustained stock outperformance in the months ahead could quiet speculation about the tenure of Sarin—or any of the other CEOs mentioned here—in short order.

News Article
BusinessWeek.com
September 7, 2006
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Stocks Drop amid Housing News

Homebuilders KB Home and Beazer Homes cut their 2006 earnings guidance, while peer Hovnanian posted lower quarterly profit. Also in focus: July wholesale trade, a Fed speech

Stocks finished lower Thursday, as investors assessed homebuilder earnings news and a Federal Reserve official's speech on the economy. Data on wholesale trade did little to remove uncertainty over whether the economy is headed for a hard or soft landing, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 74.76 points, or 0.66%, to 11,331.44. The broader Standard & Poor's 500 dropped 6.24 points, or 0.48%, to 1,294.02. The tech-heavy Nasdaq composite shed 12.55 points, or 0.58%, to 2,155.29, despite gains by Apple (AAPL ).

San Francisco Fed President Janet Yellen said inflation was outside of the Fed's comfort zone. "The inflation outlook remains highly uncertain," Yellen told a Boise (Idaho) audience. Her tone was relatively balanced overall, says Action Economics.

The slowing housing market was also in focus Thursday. KB Home (KBH ) and Beazer Homes (BZH) each cut their full-year earnings guidance, pointing to rising cancellation rates. Shares of KB Homes gained, while Beazer Homes shares dipped.

On the upside, Hovnanian Enterprises (HOV ) was higher after the homebuilder reported a 34% drop in profit for its fiscal third quarter.

Elsewhere, Advanced Micro Devices (AMD ) was modestly higher despite declining initially. ATI Technologies (ATYT ), which the chipmaker is buying, posted fourth-quarter sales that fell below Street expectations.

Photographic giant Eastman Kodak (EK ) was modestly lower after inking a multi-year contract with Wal-Mart (WMT ) to install 2,000 picture kiosks in 1,000 stores nationwide. Financial terms of the deal were not disclosed.

Shares of Palm (PALM) slid after the handheld device maker guided its third-quarter revenue lower, citing declining retail shipments of its Treo smart phones.

In analyst calls, Martek Biosciences (MATK) was down sharply as Citigroup downgraded the shares from buy to hold following unexpectedly low third-quarter earnings guidance.

On the economic front, jobless claims fell 9,000 to 310,000 in the week ended Sept. 2, after an upwardly revised 319,000 the week before. The numbers indicate continued strength in the job market, says Action Economics. Separately, wholesale sales rose 0.4% in July, slightly below expectations.

Cleveland Fed President Sandra Pianalto tops a light economic calendar Friday. Pianalto is set to speak on inflation, (a voter) highlights Friday amid an otherwise light calendar. Of interest, she speaks on inflation, the boogy man for central bankers.

In the energy markets, October West Texas Intermediate crude oil futures closed down 15 cents at $67.35 a barrel after weekly inventory data showing an unexpected rise in gasoline supplies.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 71.2 points, or 1.2%, to 5,858.1. Germany's DAX index lost 39.34 points, or 0.68%, to 5,773.72. In Paris, the CAC 40 index was down 55.43 points, or 1.08%, to 5,060.09.

Asian markets ended lower. Japan's Nikkei 225 index dropped 271.68 points, or 1.67%, to 16,012.41. In Hong Kong, the Hang Seng index slid 162.07 points, or 0.94%, to 17,096.44. Korea's Kospi index declined 5.84 points, or 0.43%, to 1,351.17.

Treasury Market

Treasury yields ticked lower amid the soft wholesale trade data. The 10-year note edged up in price to 100-22/32 for a yield of 4.79%, while the 30-year bond fell to 93-08/32 for a yield of 4.94%.

News Article
BusinessWeek.com
September 1, 2006
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Stocks Rise after Mild Jobs Data

August payrolls rose as expected, but hourly wage growth was softer than forecast. Also in focus: a weak housing report, solid consumer sentiment

Major stock indexes advanced to three-month highs Friday, as investors digested a favorable employment report and a mix of data on consumer sentiment, home sales, construction, and manufacturing. Markets will be closed Monday for the Labor Day holiday.

The Dow Jones industrial average rose 83 points, or 0.73%, to 11,464.15, an increase of 1.6% on the week. The broader Standard & Poor's 500 added 7.19 points, or 0.55%, to 1,311.01, a 1.2% weekly advance. The tech-heavy Nasdaq composite gained 9.41 points, or 0.43%, to 2,193.16, ending the week up 2.5%.

Trading was light ahead of the long weekend. NYSE volume was decidedly positive, with 22 issues advancing for every 11 issues declining, while Nasdaq breadth was 16-14 positive.

The monthly jobs report was the main event Friday. Nonfarm payrolls rose 128,000 in August, in line with expectations, while average hourly earnings edged up 0.1%, less than expected. Meanwhile, the University of Michigan's final August reading for consumer sentiment rebounded to 82.0, stronger than forecast, from a 78.7 preliminary print.

The National Association of Realtors' pending home sales index tumbled 7% to 105.6 in July from 113.9 in June. Construction spending fell 1.2% in July, a steeper decline than analysts projected. The Institute for Supply Management's index of manufacturing activity unexpectedly dipped to 54.5 in August.

The employment report won't dispel the Federal Reserve's inflation worries, some analysts say. "While these data will encourage the Fed to remain on hold in September, the tightness in the labor market and the rate of increase in average hourly earnings should continue to cause concern at the Fed about upside risks to inflation," says John Ryding, chief U.S. economist at Bear Stearns.

Concerns also persist over economic growth. "Any relief over the week's in-line results is likely to prove short-lived," says Goldman Sachs economist Andrew Tilton. "The housing sector is deteriorating ever more rapidly, and tenuous consumer confidence is one hint of the spillover effects we think will become evident before the end of the year."

The economic calendar is light next week. Data releases are set to include revised second-quarter productivity data, the Federal Reserve's Beige Book report, and the Institute for Supply Management's non-manufacturing business activity index.

In corporate news, Bristol-Myers Squibb (BMY ) and Sanofi-Aventis (SNY) were higher after a federal judge granted the drugmakers a preliminary injunction ceasing sales of a generic version of their Plavix blood thinner, the world's second-biggest-selling drug.

Automakers reported mixed August sales. Toyota (TM ) provided some strength, posting 17% higher U.S. vehicle sales, while DaimlerChrysler (DCX ) and Nissan each said sales fell an unexpectedly modest 3%.

Lagging analyst forecasts were General Motors (GM ) and Honda (HMC ). Ford's (F ) 12% sales decline was close to projections.

In technology, Gateway (GTW ) was lower after the computer maker said it will reject an unsolicited $450 million offer for its retail business.

Chipmaker Intel (INTC ) was higher amid reports the company will cut at least 10,000 workers from the payroll to trim $1 billion in costs this year.

Coffee retailer Starbucks (SBUX) was higher after posting a 5% increase in August same-store sales growth, down from a 7% pace a year earlier but above Wall Street expecations.

Shares of Lockheed Martin (LMT ) rose after the aerospace company won a $3.9 billion NASA contract to build a spacecraft to the moon. Fellow airplane maker Boeing (BA ) was up on the successful completion of a missile defense flight test.

Among other stocks in focus, Qualcomm (QCOM ) was higher after the wireless technology provider won an antitrust suit against chipmaker Broadcom (BRCM ).

In the energy markets, October West Texas Intermediate crude oil futures closed down $1.07 at $69.19 a barrel in a shortened pre-holiday session.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 43 points, or 0.73%, to 5,949.1. Germany's DAX index added 16.97 points, or 0.29%, to 5,876.54. In Paris, the CAC 40 index was up 18.41 points, or 0.36%, to 5,183.45.

Asian markets ended mixed. Japan's Nikkei 225 index edged down 6.51 points, or 0.04%, to 16,134.25. In Hong Kong, the Hang Seng index gained 31.45 points, or 0.18%, to 17,423.72. Korea's Kospi index advanced 3.93 points, or 0.29%, to 1,356.67

Treasury Market

Treasury yields bounced higher initially after the as-expected payrolls number and the firm consumer sentiment print, but pulled back following the weak housing data. The 10-year note edged up in price to 101-06/32 for a yield of 4.73%, while the 30-year rose modestly to 94-06/32 for a yield of 4.87%.

"The bond market may have needed more weakness than we saw in today's August nonfarm payroll data to sustain the impressive rally of the past few weeks, but make no mistake-- this was a very soft report," notes David Rosenberg, North American economist at Merrill Lynch.