News Analysis
BusinessWeek.com
July 6, 2006
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The S&P 500's Hottest—and Coldest—Stocks

Metals outfit Allegheny Technologies led the pack while KB Homes brought up the rear. Both could improve in the months ahead

Red-hot metals and cooling housing. For the first half of 2006, the best- and worst-performing stocks in the Standard & Poor's 500 index reflected those two themes. Coming off a surge in commodity prices, metals producer Allegheny Technologies (ATI ) sprinted to the head of the index with a 92% half-year gain. On the flip side, homebuilder KB Homes (KBH ) brought up the rear with a 37% loss amid a softening housing market (see BusinessWeek.com, 7/5/06, "Second-Half Outlook: Housing").

What's next for the leader and the laggard? The two stocks have taken different paths in 2006, but each could have room to grow in the year's second half, analysts say. Recent market volatility may signal an opportunity to buy Allegheny on the cheap, according to some analysts. Meanwhile, homebuilders may not be out of the woods yet, but KB's high profit margins and favorable valuation could put in prime position when the housing market recovers.

One caveat—both stocks have exposure to cyclical industries, so investors should bear those risks in mind. Here's the down and dirty on each:

Allegheny Technologies
Pittsburgh-based Allegheny makes stainless steel, titanium alloys, and other specialty metals. The jump in its share price came amid strong demand for metals, as the company unveiled expansion plans and posted healthy profits. "The outlook remains strong for our major markets," which include defense, chemicals and energy, noted Patrick Hassey, the company's chairman, president, and CEO, in a June 6 slide show presentation.

On May 11, Allegheny hit a 52-week high of $87.50 as metals producers soared. Prices have since cooled, to $68.71 on July 6, but not enough to displace the stock as the S&P 500's first-half leader. "We've had good operational execution, and we continue to invest for growth," says Dan Greenfield, a company spokesperson.

Continued client demand has enabled the metal producer to keep raising prices. On Apr. 22, Allegheny reported 68% higher first-quarter profit. Its key growth markets—aerospace and defense, the chemical process industry, oil and gas, electrical energy, and medicine—accounted for 62% of a company-record $1 billion in sales, Hassey said in a prepared statement. Allegheny typically posts second-quarter earnings in late July.

Growth initiatives have also propelled Allegheny's stock, and could provide further upside. On June 26, the company announced its latest expansion, a $325 million titanium sponge plant in Utah. With no demand slowdown in sight, this and other recent additions should increase Allegheny's capacity without leading to overbuilding, analysts say.

SOMEWHAT SHIELDED.  "We continue to favor [Allegheny] as 'quality on sale,'" Citigroup analyst John Hill wrote in a June 26 report. Hill has a buy recommendation on the stock. (Citigroup has an investment-banking relationship with and a significant financial interest in both Allegheny and KB. Citigroup also makes a market in the companies' securities.)

As a specialty metals producer, the company is shielded to an extent from the recent speculative frenzy in exchange-traded base metals, Hill says. Meanwhile, the markets Allegheny serves, such as the defense sector, are typically considered less susceptible to broad economic downturns.

The stock also has exposure to the red-hot ethanol market. Corrosion-resistant materials such as stainless steel are essential to ethanol production, and Allegheny received orders related to constructing about 20 ethanol facilities in the first quarter, Bear Stearns analyst Anthony Rizzuto pointed out in a June 22 report.

Rizzuto has an outperform recommendation on the stock and a year-end price target of $80, which he deems "conservative." (Bear Stearns has a non-investment-banking relationship with Allegheny and is affiliated with the specialist that makes a market in the company's common stock.)

KB Homes
Headquartered in Los Angeles, KB is the fifth-largest company in its industry, focusing on homes for first-time and move-up buyers. KB wasn't the only homebuilding stock hammered in a tough six months for the housing sector. Smaller rivals like Hovnanian (HOV ) and Ryland (RYL ) posted modestly bigger percentage losses, though they aren't S&P 500 members. But KB still has its fans. "KB Homes is one of the best-managed home builders, if not the best," says S&P equity analyst William Mack.

The first half of 2006 was a trying time for KB stockholders, as data releases indicated a gradual slowdown in the housing market (see BusinessWeek.com, 6/21/06, "Housing's Steady Foundation"). On June 13, shares in the homebuilder scraped a 52-week low of $41.95, before recovering to $46.05 on Jul. 6. The drop came after Morgan Stanley analyst Robert Stevenson downgraded his industry view from attractive to cautious.

Declining home demand and rising cancellation rates hampered KB's first-half performance, said Bruce Karatz, the company's chairman and CEO, in a June 16 conference call. "While it is difficult to predict, we do believe that the cancellation rates will begin to subside," he added. A company spokesperson said executives were unavailable to comment further prior to deadline.

BACKLOG BOOST.  Despite housing-market softness, KB's second-quarter earnings report June 15 still beat Wall Street expectations, though the company also trimmed its full-year guidance. An increase in average order prices should keep margins strong, and the stock is trading well below its average price-to-earnings multiple, according to UBS analyst Margaret Whelan, who rates the stock a buy. (UBS has an investment banking relationship with KB and makes a market in the company's securities.)

A higher-than-expected backlog in the second quarter should help boost revenues in the second half of the year, observes Citigroup analyst Stephen Kim, who also has a buy rating on the stock. "As a result of their ability to better navigate supply constraints, the public builders are rapidly growing their share of a highly fragmented market, fueling double-digit long-term revenue growth potential," Kim wrote in a June 19 report. The homebuilder also recently knitted a potentially lucrative branding alliance with Martha Stewart Omnimedia (MSO ).

Nevertheless, it's anybody's guess when the housing market will hit bottom. Credit Suisse analyst Ivy Zelman made this point in a June 19 report lowering the 12-month price target for KB from $55 to $49, also citing the company's high exposure in California and Nevada. Credit Suisse has an underperform recommendation on the stock. (Credit Suisse has an investment banking relationship with KB and makes a market in the company's securities.)

Metals and housing may not remain the big stories in the second half. Still, Allegheny's fundamentals suggest the metals producer could continue its rise. And if KB can weather a cooling market and rising interest rates—a big if, admittedly—the homebuilder might just position itself for a rebound.

News Article
BusinessWeek.com
July 6, 2006
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Stocks Edge Higher Before Jobs Data

A tobacco-industry victory buoyed the Dow, as investors anticipated Friday's employment report

Stocks finished modestly higher Thursday, as investors traded cautiously ahead of Friday's closely-watched June employment report. Tame economic data drove down Treasury yields and countered speculation that the jobs number Friday could stoke inflation worries, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 73.48 points, or 0.66%, to 11,225.3. The broader Standard & Poor's 500 index edged up 1.75 points, or 0.08%, to 1,274.07. The tech-heavy Nasdaq composite improved 3.16 points, or 0.25%, to 2,155.09.

Volume was low. NYSE breadth was positive, with 21 issues advancing for every 13 declining, while NASDAQ breadth was 16-14 positive.

A fresh batch of economic data helped ease interest-rate fears. "The market was fueled by some weaker economic data and the fact that we didn't have any real follow-through in energy prices on the upside due to a less bullish oil inventory build-up," says Peter Cardillo, chief market analyst at SW Bach. "The market is now basically struggling to keep its head above water as we enter the major report of the month."

Friday's employment report is the main event this week. Nonfarm payrolls are expected to rebound 230,000 in June after two months of lackluster growth, says Action Economics. Wednesday's solid ADP job-market report caused some analysts to raise their estimates.

Investors were digesting mild weekly unemployment data Thursday. Jobless claims dropped 2,000 to 313,000 in the week ended July 1, from an upwardly revised 315,000. In related news, ADP National Employment rejected rumors that it planned to restate yesterday's surprisingly strong job-market reading.

Separately, the Institute for Supply Management's index of non-manufacturing business activity slipped to 57.0 in June from 60.1 in May, weaker than expected. The pending homes sales index climbed 1.3% to 113.4 in April, according to the National Association of Realtors, ending a streak of three consecutive monthly declines.

In corporate news, a court decision sent shares in Altria ("MO" ) up nearly 6%. The Florida Supreme Court overturned a $145 billion punitive damage award against tobacco companies, deeming it "excessive."

Tepid retail sales reports were also in focus. Wal-Mart ("WMT" ), Costco ("COST" ), Pier One ("PIR" ), Gap ("GPS" ) and Limited Brands ("LTD" ) were among retailers reporting June same-stores sales that fell below Street forecasts. On the positive side, Bebe ("BEBE" ), JC Penney ("JCP" ) and AnnTaylor ("ANN" ) turned in higher-than-expected results.

Elsewhere, Intel ("INTC") was higher after the chipmaker unveiled plans to invest $600 million in wireless broadband provider Clearwire (see BusinessWeek.com, 7/6/06, Intel's $600 Million WiMax Bet).

Aerospace company Boeing ("BA" ) was higher after the Canadian government said it will likely order at least 16 CH-47 Chinook helicopters and four C-17 Globemaster transport airplanes.

Satellite radio outfit XM Satellite Radio ("XMSR" ) reported slower subscriber growth in the second quarter, while competitor Sirius Satellite Radio ("SIRI" ) posted subscriber increases that exceeded analyst expectations.

Semiconductor maker Microchip Technology ("MCHP" ) was higher after Citigroup raised its price target for the shares by 7% to $46.

In the energy markets Thursday, August West Texas Intermediate crude oil futures closed down 5 cents at $75.14 a barrel despite a weekly inventory report showing an unexpectedly large decline in crude supplies. A surprising increase in gasoline stocks weighed on crude prices, says Action Economics.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 63.3 points, or 1.09%, to 5,890. Germany's DAX index bounced 69.84 points, or 1.24%, to 5,695.47. In Paris, the CAC 40 index was up 45.15 points, or 0.92%, to 4,966.45.

Asian markets finished mixed. Japan's Nikkei 225 index fell 202.54 points, or 1.3%, to 15,321.4. In Hong Kong, the Hang Seng index rebounded 173.81 points, or 1.07%, to 16,440.99. Korea's Kospi index declined 15.89 points, or 1.24%, to 1,263.96.

Treasury Market

Treasury yields dropped after the mild economic data. The 10-year note rose in price to 99-18/32 for a yield of 5.18%, while the 30-year bond climbed to 89-03/32 for a yield of 5.23%. Short-covering ahead of Friday's jobs report contributed to rising Treasury prices, says Action Economics.

News Article
BusinessWeek.com
July 5, 2006
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Stocks Fall on North Korea News

Investors also considered strong employment data. Crude futures jumped above $75, touching an all-time high

Stocks finished sharply lower Wednesday, as missile tests by North Korea weighed on sentiment amid record-high oil prices. Profit-taking after recent gains probably exacerbated stock weakness, while a solid report on the labor market fanned concerns about inflation and further interest-rate hikes, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 76.2 points, or 0.68%, to 11,151.82, led downward by Intel (INTC ) after UBS lowered its earnings forecast for the chipmaker. The broader Standard & Poor's 500 index shed 9.28 points, or 0.72%, to 1,270.91. The tech-heavy Nasdaq composite tumbled 37.1 points, or 1.69%, to 2,153.34.

NYSE breadth was decidedly negative, with 24 issues declining for every 9 advancing, while NASDAQ breadth was 21-10 negative.

However, strong corporate profits could help buoy stocks in the weeks and months ahead, some analysts say. "It is my belief that the rally we've seen over the last few days is the beginning of something that has more legs," notes Ed Keon, senior vice president and director of quantititative research with Prudential. "I expect earnings to be terrific, up 13%-15%. I think stocks are going to do well between now and the end of the year and think that the people who think we are going to sit in the doldrums over the summer are going to be mistaken."

The economy may have reached a key turning point, others say. "The outlook for the U.S. economy and interest rates is now at a crucial juncture," says Mark Miller, an economist at HBOS Treasury Services. "Growth appears to be slowing under the weight of higher energy prices and prior policy tightening."

Traders returned from the July 4 holiday to find geopolitical concerns back in the spotlight Wednesday. North Korea reportedly launched seven missiles early Wednesday, among them a long-range Taepodong-2 considered capable of reaching U.S. soil. 

nvestors were also sifting through surprisingly strong jobs data. The ADP national employment report showed a net gain of 368,000 jobs in June, much higher than expected, after a 122,000 rise in May. The figures are fanning speculation about a similar jump in Friday's closely watched payrolls report, says S&P Equity Research.

Another labor report showed a different picture. The Hudson employment index was little changed at 102.4 in June, after a reading of 102.3 in May.

Also on the economic docket, U.S. factory orders rose 0.7% in May, slightly above expectations, following a revised 2.0% decline in April.

The economic calendar is busy again Thursday. Interest-rate decisions are due from the Bank of Japan and the European Central Bank. Data releases include weekly unemployment claims and a June reading of the Institute for Supply Management's index of non-manufacturing business activity.

On the company side Wednesday, AT&T (T ) was little changed after Bank of America upgraded the phone giant from neutral to buy, citing valuation.

Shares in MasterCard (MA ) rose modestly after Citigroup initiated coverage of the credit-card company with a buy recommendation.

Other stocks in focus include Nissan (NSANY ) after the automaker's board approved proceeding with exploratory discussions related to a potential alliance with U.S. rival General Motors (GM ).

In technology, Google (GOOG) was slightly lower even after Merrill Lynch raised its estimates for the Internet search company's second-quarter earnings and revenue.

Shares in Apple (AAPL) fell after the computer maker announced a new model of its iMac computer for the education market. The machine will sell for $899 to customers that qualify for Apple's educational discount, compared to $1,299 for the cheapest iMac without the special pricing.

On the M&A front, Univision (UVN ) was lower after media company Televisa (TV), which owns an 11.4% stake in the Spanish-language broadcaster, declined to participate in Univision's merger with a consortium of investors.

Meanwhile, Oracle (ORCL ) was lower following a report the software maker plans to buy Asian companies to win market share.

Elsewhere, Maxim Integrated Products (MXIM) was lower on reports the circuit maker has received a subpoena from the U.S. Attorney's office as part of an investigation into stock-options practices.

A figure in an earlier market scandal also returned to the news. Convicted Enron founder Ken Lay reportedly died of a heart attack Tuesday night in Aspen, Colo. His sentencing for fraud and conspiracy related to the energy company's collapse had been scheduled for Oct. 23.

In the energy markets Wednesday, August West Texas Intermediate crude oil futures closed up $1.26 to $75.19 a barrel, after touching an all-time high of $75.40. Iran postponed talks with the European Union over the Mideast nation's nuclear program, helping drive the energy complex higher.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index dropped 56.8 points, or 0.97%, to 5,826.7. Germany's DAX index skidded 103.38 points, or 1.8%, to 5,625.63. In Paris, the CAC 40 index was down 62.58 points, or 1.26%, to 4,921.3.

Asian markets finished lower amid worries about North Korea's missile launches. Japan's Nikkei 225 index fell 114.56 points, or 0.73%, to 15,523.94. In Hong Kong, the Hang Seng index lost 101.8 points, or 0.62%, to 16,326.66. Korea's Kospi index declined 6.07 points, or 0.47%, to 1,279.85.

Treasury Market

Treasury yields pushed higher on the strong ADP job-market report. The 10-year note fell in price to 99-07/32 for a yield of 5.22%, while the 30-year bond dropped to 88-17/32 for a yield of 5.27%.

 

News Article
BusinessWeek.com
June 27, 2006
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Stocks Fall as Fed Meeting Looms

Worries about a larger rate hike pushed the indexes down. Also in focus: reports on June consumer confidence and May existing home sales

Stocks finished sharply lower Tuesday, giving back the previous session's gains as investors grew skittish ahead of the Thursday's Federal Reserve decision on interest rates. The perceived risk of a larger-than-expected hike fanned concerns, and declines in Treasury yields from multi-year highs failed to aid equities, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 120.54 points, or 1.09%, to 10,924.74, despite a 1% gain by Exxon Mobil (XOM ). The broader Standard & Poor's 500 index shed 11.37 points, or 0.91%, to 1,239.19. The tech-heavy Nasdaq composite declined 33.42 points, or 1.57%, to 2,100.25.

NYSE breadth was decidedly negative, with 24 issues declining for every 9 advancing, while Nasdaq breadth was 23-8 negative.

High bond yields could limit stock gains in 2006, some analysts say. "Based on past historical relationships, a 10-year yield at 4.4%, where we started the year, would be associated with a target for the S&P 500 of 1,500," says Henry McVey, chief U.S. investment strategist at Morgan Stanley. "A 10-year yield of 5.25% would lower the target to 1,380, and a yield of 5.5% would bring it down to 1,340. In addition to this source of valuation pressure, we are somewhat less optimistic on the outlook for growth in the second half."

Investors were weighing modestly better than anticipated economic data Tuesday. Consumer confidence rose unexpectedly to 105.7 in June. Separately, existing home sales declined 1.2% to 6.67 million in May, in line with a gradually cooling housing market, says Action Economics.

The economic docket is quiet Wednesday. The Fed will kick off its meeting, but central bankers aren't set to unveil their next interest-rate move until Thursday. The Fed is widely expected to raise rates 25 basis points, though there has been speculation of a 50-basis-point hike (see BusinessWeek.com, 6/27/06, "Is a Fed Surprise on Tap?").

On the company side, M&A activity remained in focus Tuesday. Spanish-language broadcaster Univision (UVN ) was higher after the company's board agreed to a $12.3 billion ($36.25 cash per share) takeover bid from a consortium of investors.

In technology, Intel (INTC ) was lower after the semiconductor company sold its communications-chips unit to Marvell Technology Group (MRVL ), which has made chips for the BlackBerry (RIMM ) and Treo (PALM ) handheld devices. Shares in Marvell fell sharply.

Among other stocks in the news, General Motors (GM) was lower after the automaker said it was reviving its zero-percent financing sales incentive. Earlier, shares rose on reports that about 47,600 workers have decided to leave the automaker and auto-parts supplier Delphi through buyouts or early retirement.

Fellow Dow member DuPont (DD ) was lower after Vivendi sold its entire stake in the chemical company for $671 million.

Elsewhere, Goodyear Tire & Rubber (GT) was down following a report that Tokyo-based rival Bridgestone guided its earnings lower by 35% and said its annual profit may fall for the first year in five.

Shares in Nortel Networks (NT ) dipped on news the telecommunications equipment maker will cut 1,100 and change pension programs to reduce costs.

In earnings news, shoe giant Nike (NKE ) is set to report quarterly results after the close.

In the energy markets, August West Texas Intermediate crude oil futures closed up 12 cents at $71.92 a barrel ahead of a weekly inventory report Wednesday.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 28.9 points, or 0.51%, to 5,652.3. Germany's DAX index dropped 55.48 points, or 1.01%, to 5,459.15. In Paris, the CAC 40 index was down 30.25 points, or 0.63%, to 4,771.24.

Asian markets finished mixed. Japan's Nikkei 225 index rose 19.41 points, or 0.13%, to 15,171.81. In Hong Kong, the Hang Seng index slipped 30.11 points, or 0.19%, to 15,774.7. Korea's Kospi index added 9.49 points, or 0.77%, to 1,247.54.

Treasury Market

Treasury yields declined after the dip in existing home sales. The 10-year note rose in price to 99-11/32 for a yield of 5.21%, while the 30-year bond climbed to 88-30/32 for a yield of 5.24%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 3 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.

News Analysis
BusinessWeek.com
June 26, 2006
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Will Earnings Boost Stocks?

Companies in the S&P 500 should report decent results for the second quarter. That might not be enough to prevent a summer slump

In the next few weeks, investors may get some relief from second-quarter earnings reports. But given the high anxiety about higher interest rates and a slowing economy, analysts say another quarter of solid earnings might not be enough to calm a choppy stock market.

The current quarter could test the Standard & Poor's 500 index's streak of 16 consecutive quarters with double-digit percentage earnings growth. S&P projects that second-quarter earnings will increase 9.1% from the same period a year earlier. Declining consumer spending and higher energy costs are among factors contributing to slower earnings growth, according to Howard Silverblatt, senior index analyst at S&P. "While that will still be record earnings, it's going to be somewhat of a disappointment to a lot of investors because it's single digits," he says.

Slower earnings growth is not the only problem. Worries about inflation and a global uptrend in interest rates are likely to keep the market on its current unsteady course, some analysts say. "Solid real growth and the return of a little bit of pricing power will extend the already-record string of double-digit earnings for S&P 500 companies," wrote Steven Ricchiuto, chief U.S. economist at ABN AMRO (ABN ), in a June 26 report. "Upbeat earnings, however, will not provide much support for stocks."

GREAT EXPECTATIONS.  So far, second-quarter earnings releases have been promising. Big investment banks Bear Stearns (BSC ), Goldman Sachs (GS ), Lehman Brothers (LEH ), and Morgan Stanley (MS ) reported surging profits (see BusinessWeek.com, 6/22/06, "Boom Times for the Powerhouse Banks"). Results from tech bellwether Oracle (ORCL ) and transportation company FedEx (FDX ) also topped analyst estimates.

Coming next will be a report from aluminum giant Alcoa (AA ) on July 10. Then the season gets into full swing the week of July 17, with releases from closely watched companies such as Citigroup (C ), Johnson & Johnson (JNJ ), Yahoo (YHOO ), Apple Computer (AAPL ), Intel (INTC ), and Microsoft (MSFT ).

A lack of negative guidance bodes well for the companies yet to report, notes David Chalupnik, head of equities at First American Funds. "Typically, if corporations were running into trouble relative to expectations, you would see a lot more companies coming out and reducing expectations," says Chalpunik, who expects 11.5% earnings growth. "We've seen very few of those."

OVERCOMING OBSTACLES.  Investors can expect a few positive surprises, some analysts say. Earnings have beaten sell-side analysts' predictions for 10 consecutive quarters, and there's a chance they could do so again, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup. "Many investors remain worried about margin pressures and a sense that all good things must come to an end," he wrote in a June 22 report.

The energy and financial sectors will probably post the biggest profits gains, according to Joe Battipaglia, chief investment officer of Ryan Beck. He expects additional strength from the industrial sector, and to a lesser extent, technology companies. (S&P forecasts a 1.9% second-quarter profit decline for the technology sector.)

"This is going to be a better-than-expected earnings season," Battipaglia says. "The message from the companies will be that despite obstacles, they're still hitting their profit targets."

LIMITED GAINS.  As was demonstrated last week, any market bounce from second-quarter earnings surprises will likely be similarly short-lived, some analysts say. Jeff Kleintop, chief investment strategist at PNC Wealth Management, forecasts another quarter of double-digit earnings growth as low labor costs keep profit margins wide.

However, he believes that midterm elections, hurricane season, and the housing slowdown will limit gains in stocks. "There's probably not a whole lot more downside to this market, but I think we'll need to get used to these 100-point daily moves," Kleintop says.

Indeed, a quarter of solid but slower earnings growth may already be priced into the markets, says Art Hogan, chief market strategist at Jefferies & Co. He projects an increase in second-quarter profit of 8.5% to 10%. "Are equity prices already reflecting what is the inevitable earnings growth deceleration, or are they just reflecting concerns that the Fed is going to raise interest rates too much?" Hogan asks. "It's certainly a combination of both."

PERKING UP.  Market players will be keeping a close eye on companies' earnings guidance. Eventually, rising interest rates worldwide are going to dampen economic growth, notes Quincy Krosby, chief investment strategist at The Hartford (HIG ). "That is going to have an effect on earnings," she says. "The key for us is, how much of an impact."

Actually, later in the year, corporate profits are expected to perk up again. S&P forecasts earnings growth of 13% for the third quarter and 11% for the fourth quarter, for a full-year gain of 12.1% from 2005. "We believe consumer spending is going to come back," Silverblatt says.

One thing investors should remember: Not all earnings growth is created equal. A flurry of share buybacks has made earnings-per-share increases at companies like ExxonMobil (XOM ) look even more dramatic, inflating price-to-earnings ratios, says S&P's Silverblatt (see BusinessWeek.com, 5/5/06, "Second-Quarter Preview"). And with jitters already haunting investors, any slipup could keep the markets on edge.

News Analysis
BusinessWeek
June 22, 2006
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Spread Your Bets in ETFs

Newfangled exchange-traded funds are hitting the market. But you may want to stick with a handful of simple, smart standbys for a diversified portfolio

It's a confusing time for investors. Wall Street has been twisting and turning, with the Dow Jones industrial average hitting a six-year high as recently as May 10, only to tumble 8% through June 13. Since then, the blue chip average has stubbornly rebounded 3.5%. Bulls and bears come and go, but exchanged-traded funds (ETFs) can provide a smart path to long-term diversification for buy-and-hold investors.

Despite the market's ups and downs, investors continue to pour money into ETFs, baskets of securities that trade throughout the day like stocks. Investors poured $14.9 billion into ETFs during the first four months of the year, according to the latest data from mutual-fund industry group Investment Company Institute. Over the same period, total ETF assets climbed 11.6%, from $296 billion to $334.9 billion.

MANY NEW OFFERINGS.  Lately, ETFs are getting more complicated. Once known as an easy, low-cost way to achieve broad diversification, ETFs are becoming increasingly focused, allowing institutional investors and other experts to gain exposure to ever-narrower sectors (see BusinessWeek.com, 05/05/06, "ETFs: Sliced, Diced and Razor-Thin"). Fund companies have rolled out 45 new ETFs so far this year, according to Boston-based Financial Research Corp.

More are on the way. On June 22, State Street Global Advisors will launch six new ETFs. The new portfolios are: SPDR Metals and Mining (XME ), SPDR Retail (XRT ), SPDR Pharmaceuticals (XPH ), SPDR Oil & Gas Equipment & Services (XES ), SPDR Oil & Gas Exploration & Drilling (XOP ) and streetTRACKS KBW Regional Banking (KRE ). Each will carry an expense ratio of 0.35%. "What we're providing is pure exposure to each one of these industries," says Greg Ehret, senior managing director at State Street.

Meanwhile, ProFunds introduced eight ProShares ETFs on June 21. Four will seek to double the market’s performance while the others will aim for the inverse of market returns. On June 26, Rydex Investments will unveil a set of six currency ETFs, called CurrencyShares: Australian Dollar Trust (FXA), British Pound Sterling Trust (FXB), Canadian Dollar Trust (FXC), Mexican Peso Trust (FXM), Swedish Krona Trust (FXS), and Swiss Franc Trust (FXF).

"PASSIVE STRATEGY."  While such funds could have many uses, some of the more exotic ones don't make sense for average investors, financial advisers say. "ETFs in my mind are a great structure for very prudent, long-term investing, as opposed to what some people use them for, which is short-term speculation," says John Gay, an adviser at Frisco Financial Planning in Frisco, Texas.

With more ETF choices than ever, which ones do most investors really need? "Somebody who is buying an ETF has accepted a passive strategy," says Alec Young, equity market strategist at Standard & Poor's Equity Research Services. "They're not trying to beat the market." This Five for the Money looks at five ETFs that give simple, smart diversification no matter which way the market swings.

1. Vanguard Total Stock Market VIPERs (VTI )
When it comes to U.S. stock exposure, Vanguard Total Stock Market VIPERs run the gamut. With more than 3,700 securities, this $71.7 billion portfolio invests in companies of all sizes, across a wide variety of sectors. Its biggest holdings include ExxonMobil (XOM ), General Electric (GE ), and Microsoft (MSFT ).

Simplicity is the main draw here, but Vanguard Total Stock Market's low cost enhances its appeal. The fund carries an expense ratio of 0.07%, compared to a category average of 0.21%, according to Chicago-based fund tracker Morningstar (MORN ). "That's a relatively low hurdle to jump to beat its peers over the long term," says Morningstar ETF analyst Dan Culloton.

This ETF also wears many caps. That is, it spans across companies of different market capitalizations. That's good, analysts say, because funds focusing exclusively on small-cap or large-cap stocks will have to sell holdings when a company reaches a certain size, incurring transaction costs. "If you buy a broader index, you avoid those commissions," says Rick Miller, CEO of Sensible Financial Planning in Cambridge, Mass.

2. iShares MSCI EAFE Index (EFA )
With the U.S. stock market covered, it's time to look overseas. iShares MSCI EAFE Index tracks the leading benchmark for foreign developed-market stocks, offering exposure to companies in Europe, Australia, and Asia. Rather than invest in each of the thousands of issues in the index, the fund holds about 800 stocks, including BP (BP ) and Toyota Motor (TM ).

The $28.5 billion fund has performed solidly tracking an index that few of its actively managed peers have been able to beat. iShares MSCI EAFE Index boasts an average annualized return of 24.67% over the past three years, slightly better than its style peers, according to S&P. The stocks represented by this fund make up about 46% of global market capitalization, notes S&P's Young.

However, with a price tag of 0.36%, this fund isn't the cheapest option among foreign large-blend ETFs. Investors could also cobble together the Vanguard European Stock VIPERs (VGK ) and the Vanguard Pacific Stock Vipers (VPL ) for similar exposure and an expense ratio of 0.18% on each. "But that requires a lot more work," says Culloton. Investors would have to maintain a proper allocation between the two ETFs, which along with the extra hassle might tack on additional trading costs.

3. iShares Vanguard Emerging Markets Stocks Vipers (VWO )
Don't be wary of emerging markets after the recent declines, which many market watchers consider a natural break from their strong run. Investors with a long time horizon should view these markets an important part of a well-diversified portfolio. The Vanguard Emerging Markets Stocks Vipers holds nearly 700 stocks, including Taiwan Semiconductor (TSM ), in this infamously volatile asset class.

Again, Vanguard's fund has a cost advantage over its competitors. The portfolio's 0.3% expense ratio is below the category average of 0.53%, according to Morningstar. The $9.6 billion ETF has only been available since March, 2005, but its corresponding traditional mutual fund, Vanguard Emerging Markets Stock Index (VEIEX ), has posted an average annualized return of 19.9% over the last five years, in line with its style peers.

Why invest in emerging markets now? "It still makes sense to have exposure to all portions of the global economy in your portfolio," says Morningstar's Culloton. Just be aware that emerging-market stocks tend to swing dramatically.

4. iShares Lehman Aggregate Bond (AGG )
Fixed-income ETFs are still relatively few and far between, so it's best to keep things simple. The iShares Lehman Aggregate Bond is the only ETF tracking the Lehman Aggregate, a commonly used benchmark for bond funds. It wouldn't be cost-effective to follow the entire index, so the ETF owns about 100 issues, including U.S. Treasuries.

The iShares Lehman Aggregate Bond has a 0.2% expense ratio, but its track record only extends to its launch in September, 2003. The fund posted an average annualized return of -0.72 for the one-year period ended May 31, slightly below its corresponding index.

Indeed, it's difficult for the fund to hew closely to the enormous Lehman Aggregate, and that concerns some analysts. Still, others say the ETF's low cost may be enough reason to invest in it rather than a traditional bond fund. "When you buy bonds it's all about expenses," says Sensible Financial's Miller. "First of all, 0.2% is pretty low. There aren't a lot of funds around that are less than that."

5. Vanguard REIT Index VIPERs (VNQ )
If you can tune out the housing market bears, the Vanguard REIT Index VIPERs is a cheap way to get exposure to real estate. The fund invests in real estate investment trusts (REITs), tax-advantaged companies that hold a portfolio of real estate properties. After all, there's much more to real estate than just the cooling residential-housing market.

Vanguard REIT Index tracks the MCSI U.S. REIT index, a broad benchmark with geographic diversification and exposure to various types of properties, including offices, apartments, and malls. Its corresponding traditional mutual fund, Vanguard REIT Index (VGSIX ), has averaged an annualized return of 19.07% over the past five years, in line with its style peers. Sticker shock won't be a problem with this ETF. Vanguard REIT Index VIPERs' expense ratio of 0.12% is well below its 0.33% category average. The fund is also "more efficient" than its rivals, Miller says. Just like a stock, remember that commissions can cut into returns when ETFs are traded frequently. These funds are best for buy-and-hold investors, and could make your financial life a lot less confusing.

News Article
BusinessWeek.com
June 22, 2006
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Stocks Fall after Soft Economic Data

May leading indicators dropped 0.6%, meeting Street expectations. Weekly jobless claims rose as projected

Stocks finished lower Thursday following a report indicating a slowing economy. Trading was cautious ahead of next week's Federal Reserve meeting, says Standard & Poor's Equity Research. The Fed is widely expected to raise the key federal funds rate to 5.25%.

On Thursday, the Dow Jones industrial average fell 60.35 points, or 0.54%, to 11,019.11, led downward by McDonald's (MCD ) despite a 4% jump by General Motors (GM ). The broader Standard & Poor's 500 index shed 6.6 points, or 0.53%, to 1,245.6. The tech-heavy Nasdaq composite was down 18.22 points, or 0.85%, to 2,122.98.

Volume was solidly below 20-day averages. NYSE breadth was decidedly negative, with 22 issues declining for every 11 advancing. Nasdaq breadth was 18-12 negative.

Technical measures are sending mixed signals about the market's direction, some analysts say. It's unclear whether Wednesday's surge "was the summer rally" or was merely the beginning of one, says Roger Volz, chief technical analyst at Swiss American Securities.

Market players were digesting another light plate of economic data Thursday. The index of leading economic indicators fell 0.6% to 137.9 in May, as projected. Initial jobless claims rose 11,000 to 308,000 in the week ended June 17, in line with expectations. Friday's docket holds May durable goods order, expected to rise 0.5%.

In corporate news, Boston Scientific (BSX ) and Johnson & Johnson (JNJ) were lower after a report that some cardiac centers are reducing use of drug-coated stents, which both companies supply, due to concerns over blood clots. Separately, a heart device made by Boston Scientific-owned Guidant reportedly may fail about 10 times more often than forecast, according to a regulatory analysis released in a Texas lawsuit.

Among other stocks in focus, Adobe (ADBE ) was higher and Google (GOOG) was slightly lower on news the multimedia software maker agreed to distribute Google's search software with Adobe's Shockwave media player.

Home furnishings retailer Bed Bath & Beyond (BBBY ) was lower after a Jefferies & Co. analyst said the company projected earnings below Wall Street forecasts.

Shares in Jabil Circuits (JBL) fell after the computer-equipment maker lowered its third-quarter earnings forecast. The company also received a subpoena from the U.S. Attorney's office for information on stock-option grants and was notified by the SEC of an informal inquiry.

On the brokerage front, General Mills (GIS ) was higher after Merrill Lynch upgraded the packaged-food maker from neutral to buy.

M&A talk continued to swirl. Spanish-language broadcaster Univision (UVN ) was down after private equity firms Kohlberg Kravis Roberts and Blackstone Group dropped out of a planned bid for the company.

Meanwhile, department-store operator Federated (FD ) was higher after selling its Lord & Taylor unit for $1.2 billion to a property development group.

In earnings news, software bellwether Oracle (ORCL ) was set to announce quarterly results after the close.

In the energy markets Thursday, August West Texas Intermediate crude oil futures closed up 51 cents at $70.84 a barrel. Rising gasoline prices drove other energy futures higher, says Action Economics.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 19.1 points, or 0.34%, to 5,684.1. Germany's DAX index was up 30.01 points, or 0.55%, to 5,533.42. In Paris, the CAC 40 index gained 28.56 points, or 0.6%, to 4,803.29.

Asian markets finished higher. Japan's Nikkei 225 index rallied 491.43 points, or 3.36%, to 15,135.69. In Hong Kong, the Hang Seng index climbed 167.34 points, or 1.07%, to 15,826.7. Korea's Kospi index added 11.64 points, or 0.95%, to 1,238.83.

Treasury Market

Treasuries were lower amid strength in foreign stock markets, Fed policy speculation and news that Atlanta Fed President Jack Guynn is retiring. The 10-year note fell in price to 99-15/32 for a yield of 5.19%, while the 30-year bond dropped to 89-04/32 for a yield of 5.23%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 4 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.

News Article
BusinessWeek.com
June 21, 2006
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Stocks Rally on Earnings News

Higher profits at Morgan Stanley and FedEx boosted sentiment as investors hunted for bargains

Stocks rallied Wednesday, boosted by solid earnings reports. Upbeat comments about the economy from FedEx (FDX ), which posted firm quarterly results, calmed recent fears that economic growth is slowing too quickly, says Standard & Poor's Equity Research. Morgan Stanley (MS ) also announced strong numbers, lifting sentiment.

On Wednesday, the Dow Jones industrial average rose 104.62 points, or 0.95%, to 11,079.64, paced by Hewlett-Packard (HPQ ), DuPont (DD ) and Caterpillar (CAT ). The broader Standard & Poor's 500 index added 12.08 points, or 0.97%, to 1,252.2. The tech-heavy Nasdaq composite climbed 34.14 points, or 1.62%, to 2,141.2.

Trading volume was higher Wednesday. Price strength on the session likely reflected some bargain hunting, notes S&P.

Market players are keeping an eye on commodities prices, as well as corporate earnings, some analysts say. "If the sell-off in commodities continues, I think we're going to see more of a sell-off in the global markets," says Quincy Krosby, chief investment strategist at The Hartford. "Obviously, we're all getting ready for the Fed meeting, but ultimately the earnings are going to be crucial in this because if you believe that we're in the midst of a global slowdown you're going to have to expect that earnings are going to come in."

Investors had little economic news to go on Wednesday. Reports on leading indicators and durable goods are due later in the week. Neither is likely to affect the outlook for an expected interest-rate hike at the Fed's June 28-29 meeting, says Action Economics.

On the company side, Morgan Stanley was higher after the investment bank said its second-quarter net income more than doubled.

Also in earnings, FedEx was up after the express transporter reported a 27% increase in fourth-quarter profit.

Among other stocks in the news, shares in Ford (F) rose despite reports the automaker said it may fail to meet its goal of returning to profit in North America by 2008, citing falling sales of sport-utility vehicles.

Chipmaker Texas Instruments (TXN) was modestly higher following a report that Moody's raised its rating on company's long-term debt to A1 from A2, citing more predictable profitability.

In broker calls, J.P. Morgan Chase (JPM ) was higher despite an analyst downgrade. Prudential lowered the stock from overweight to neutral weight and trimmed its price target from $51 to $45.

In the energy markets Wednesday, August West Texas Intermediate crude oil futures climbed to $70.37 a barrel, contributing to bullish stock sentiment since recent weakness in crude has been taken as a sign the energy market was pricing in economic weakness.

European markets finished modestly higher. In London, the Financial Times-Stock Exchange 100 index rose 6.8 points, or 0.12%, to 5,665. Germany's DAX index was up 9.8 points, or 0.18%, to 5,503.41. In Paris, the CAC 40 index edged higher 4.31 points, or 0.09%, to 4,774.73.

Asian markets finished mixed. Japan's Nikkei 225 index edged down 4.15 points, or 4.15%, to 14,644.26. In Hong Kong, the Hang Seng index rose 50.39 points, or 0.32%, to 15,659.36. Korea's Kospi index crept higher 1.36 points, or 0.11%, to 1,227.19.

Treasury Market

Treasuries closed little changed Wednesday, keeping yields stable ahead of the FOMC meeting next week. The 10-year note was unchanged in price at 99-13/32 for a yield of 5.159%, while the 30-year bond ended flat at 89-19/32 for a yield of 5.19%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 4 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.

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BusinessWeek.com
June 20, 2006
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Stocks Finish Mixed as Rebound Fizzles

Market players remained skittish despite a greater-than-expected rise in May housing starts

Stocks finished mixed Tuesday, after an early rebound on a solid housing report fizzled amid caution ahead of next week's Federal Reserve meeting. Worries about slowing economic growth, rising inflation and a global uptrend in interest rates continue to weigh on sentiment, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 32.73 points, or 0.3%, to 10,974.84, led by Verizon (VZ ). The broader Standard & Poor's 500 index edged down 0.02 points, or less than 0.01%, to 1,240.12. The tech-heavy Nasdaq composite slipped 3.35 points, or 0.16%, to 2,107.06.

Volume was low compared with 20-day averages. NYSE breadth was slightly negative, with 18 issues advancing for every 15 declining. Nasdaq breadth was 17-13 negative.

Some analysts say they like the market where it is. "Despite all the hand-wringing, eight out of 10 S&P sectors are still up year-to-date, with small caps up 3.5% and transports up 10%," notes Henry McVey, chief U.S. investment strategist at Morgan Stanley. "This has not been a 1990, 1998, or 2002-style event. We may see a continued bounce here since the market is oversold, but for the sustained upside we look for in the second half, we would like to see a broadening of leadership, more analysts trimming estimates, and a peak in the CPI [consumer price index] later in the summer."

An upbeat housing report was in focus Tuesday. The Commerce Department said housing starts rebounded 5% to 1.96 million units in May after an upwardly revised 1.86 million in April. That's slightly stronger than expected, says Action Economics, but any market impact may be offset by a 2.1% decline in building permits.

The report suggests the housing market is slowing, but not crashing, analysts say. "We view this morning's data as further evidence the housing market is in a downturn, but that it is not headed for collapse," explains Carl Riccadonna, an economist at Deutsche Bank Securities. "Nonetheless, the housing market is an important leading indicator of the overall economy, and the fact that it is slowing tells us that both consumption and overall growth are also likely decelerating."

The pace of the expected housing cooldown may prove difficult to predict, others say. "A significant miss in the timing of the economic slowdown related to housing could alter forecasts for inflation and the Fed," observes Lehman Brothers economist Drew Matus. "These developments demand close attention be paid."

The economic docket is lean again Wednesday, highlighted by mortgage applications and oil inventories. Other upcoming releases include leading indicators Thursday and durable goods Friday. Neither is likely to affect the outlook for an expected interest-rate hike at the Fed's June 28-29 meeting, says Action Economics.

In corporate news, JetBlue Airways (JBLU) was higher after Morgan Stanley initiated coverage of the aircraft with an overweight recommendation. The broker also started coverage of American Airlines parent AMR Corp. (AMR ) and Continental Airlines (CAL ) with equal-weight ratings and Southwest Airlines (LUV ) with underweight.

In other broker calls, Applied Materials (AMAT ) was higher after Prudential upgraded the chip-equipment maker from neutral to overweight. However, chipmakers Intel (INTC ) and Advanced Micro Devices (AMD ) were down modestly.

On the earnings front, Kroger (KR ) was higher after the supermarket chain reported a 4% increase in first-quarter profit. For-profit education company Apollo Group (APOL ) was lower after posting a flat profit for its fiscal third quarter.

Elsewhere, retailer Target (TGT ) was modestly lower after the company said June sales are trending toward the upper end of its forecasts.

Aircraft maker Boeing (BA ) was little changed in choppy trading as European rival Airbus faced a possible cancellation of a $3 billion order after delays in the jets' delivery.

M&A activity continued apace. Dow member General Electric (GE ) struck a deal for Swedish medical instruments maker Biacore International. Pharmaceutical company Pfizer (PFE ) holds 41% of Biacore.

In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed down 4 cents at $68.94 in volatile trading as the July contract expired. A weekly inventory report is on tap for Wednesday.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 32.1 points, or 0.57%, to 5,658.2. Germany's DAX index climbed 54.38 points, or 1%, to 5,493.61. In Paris, the CAC 40 index was up 41.4 points, or 0.88%, to 4,770.42.

Asian markets finished lower. Japan's Nikkei 225 index retreated 211.94 points, or 1.43%, to 14,648.41. In Hong Kong, the Hang Seng index lost 159.89 points, or 1.01%, to 15,608.97. Korea's Kospi index sank 25.84 points, or 2.06%, to 1,225.83.

Treasury Market

The solid housing report drove Treasury yields higher, says Action Economics. The 10-year note slipped to 99-26/32 for a yield of 5.15%, while the 30-year bond fell to 89-19/32 for a yield of 5.19%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 4 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.

News Article
BusinessWeek.com
June 16, 2006
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Stocks Stumble after Two-Day Climb

Firm economic data, hawkish Fed comments, and the quarterly expiration of options and futures weighed on the market. Also in focus: Microsoft regime change

Stocks couldn't quite make it three in a row Friday, finishing modestly lower as investors took profits after a two-day rally. The quarterly expiration of options and futures drove volume higher and probably affected price direction, says Standard & Poor's Equity Research.

The Dow Jones industrial average edged down 0.64 point, or 0.01%, to 11,014.55, despite strength in Hewlett-Packard (HPQ ), en route to a 1.1% gain on the week. The broader Standard & Poor's 500 index dipped 4.62 points, or 0.37%, to 1,251.54, finishing the week little changed. The tech-heavy Nasdaq composite shed 14.2 points, or 0.66%, to 2,129.95, a weekly decline of 0.2%.

Worries about inflation, economic growth, and rising interest rates globally continued to loom over stocks. Bulls speculate that the market has found a near-term bottom, but they're waiting for gains on heavy volume to be sure, says S&P.

The Fed is widely expected to hike interest rates at its June 28-29 meeting. With a rate increase and slowing economic growth likely priced in, some analysts say the market is unlikely to establish a trend in either direction until the subsequent Fed meeting, which will be held Aug. 8.

"Some people are questioning whether the market's gone a little too far in pricing in slow growth," says Brian Gendreau, investment strategist at ING Investment Management. "I don't think the market's going to go much of anywhere for the next couple of months. There's an unusual amount of uncertainty."

The latest comments from Federal Reserve members reflect the murky outlook. On Friday, a pair of speeches by Fed policymakers maintained a hawkish tone on inflation. Fed Governor Donald Kohn said containing inflation could be "difficult and costly," while St. Louis Fed President Bill Poole said the data may actually understate inflation's extent.

Another set of economic figures was in focus Friday. The preliminary June reading for University of Michigan consumer sentiment rose to 82.4 from 79.1, slightly more than expected. The first quarter current account deficit came in better than forecast, moderating to $208.7 billion from the fourth quarter's downwardly revised $223.1 billion. Next week's calendar is light on economic data. Still, investors will be weighing reports on housing starts, leading indicators and durable goods. The releases shouldn't change Fed expectations, says Action Economics.

In corporate news Friday, Microsoft (MSFT) was modestly higher in choppy trading after Bill Gates announced a two-year transition period that will remove him from his day-to-day role at the company.

Also in software, Oracle (ORCL ) was higher after the company guided its fourth-quarter earnings higher.

Shares in another software maker, Adobe(ADBE ), rose after the company known for its Photoshop and Acrobat applications posted an 18% drop in earnings.

Homebuilder KB Home (KBH ) was higher after the company announced a 14% rise in profits but reduced its earnings outlook for fiscal year 2006.

Among other stocks in the news, Winnebago Industries (WGO) was higher after the maker of motor homes and recreational vehicles posted earnings for its fiscal third quarter that topped analyst estimates.

In the energy markets Friday, July West Texas Intermediate crude oil futures closed up 38 cents at $69.88 a barrel. Short-covering offset early selling pressure on relatively upbeat Iran news, says Action Economics.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index slipped 21.9 points, or 0.39%, to 5,597.4. Germany's DAX index fell 46.21 points, or 0.85%, to 5,376.01. In Paris, the CAC 40 index dropped 29.69 points, or 0.63%, to 4,694.89.

Asian markets finished solidly higher. Japan's Nikkei 225 index climbed 408.58 points, or 2.82%, to 14,879.34. In Hong Kong, the Hang Seng index was up 407.57 points, or 2.64%, to 15,842.65. Korea's Kospi index rallied 42.79 points, or 3.51%, to 1,262.19.

Treasury Market

The 10-year note fell to 100-00/32 for a yield of 5.12%, while the 30-year bond dropped to 89-29/32 for a yield of 5.17%. Bond bulls "have been few and far between since the inflation data earlier in the week," says Action Economics.

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%.