Savvy Negotiations for Your Future

News Analysis
BusinessWeek.com
August 14, 2006
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Savvy Negotiations for Your Future

Not sure how to go toe-to-toe with car dealers, landlords, and real estate brokers? Here are some tips from the pros

By Marc Hogan

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Childhood means never having to haggle. From diapers to college tuition, the purchases of a kid's life come with nonnegotiable price tags. When young adults reach financial independence, however, they're faced with a host of intimidating new transactions—ones they probably weren't prepared for in school.

Whether they are buying a house, renting an apartment, or securing a starting salary, young people find themselves suddenly needing to negotiate. For each of these important financial milestones, knowing how to make a deal can help you end up with the right price.

There's no single perfect negotiating style, corporate dealmakers say. Both confrontational and mild-mannered approaches have risks, but either can be effective, notes investment banker Jeff Williams at Jeff Williams & Co. "The style you work with should be one you're comfortable with," Williams says.

Still, following a few tips can help first-time negotiators avoid getting swindled. This Five for the Money looks at ways to navigate your watershed financial moments successfully, including some advice from the professionals.

1. Do your homework.
The most important part of any negotiation should take place well in advance. After all, it's hard to know whether you're getting a fair deal unless you already know what's fair. "Someone who has the best understanding of all the facts is best-equipped to come out with what they're looking for," says Jill Greenthal, a senior managing director in the investment banking business at the Blackstone Group.

As in college, research can start on the Web, but stick to credible sources. Sites like ConsumerReports.org offer cost and reliability data on cars, for example, but you'll need to pay for a subscription. Whatever purchase you're considering, crunch your own numbers first to be sure you can afford it. "Don't rely on the car company or a bank to decide this for you," says Elaine Scoggins, president of Tampa (Fla.) financial-planning firm Scoggins Financial. (She and other financial planners quoted here are members of the National Assn of Personal Financial Advisors.)

Also, determine how important a certain item is to you. A unique house or apartment might be worth paying more than market value. If you need a place with special features, such as a separate entrance for a live-in mother-in-law, then you might want to plan against haggling over an extra 10%.

2. Be willing to walk away.
It's all too easy to get caught up in the moment and make a poor negotiating decision. John O'Neill, leader of Ernst & Young's private equity practice, has a name for this phenomenon: deal heat. "You get so enamored with the transaction that you're gong to do it no matter whether it's the right deal or not," he says. Letting yourself fall in love with that ideal home or hot new car can cloud your judgment.

Instead of melting under "deal heat," remember that the power is in your hands. "Don't be afraid to say no," says Columbia (S.C.) financial advisor Charles Flowers. No matter how much time you've spent with a real estate agent or a car dealer, you can always walk away.

Sending a message to the seller that you could just as easily buy from someone else can be a powerful bargaining tool. "You can't negotiate if the other side perceives that you're not willing to walk away from the table," explains Ken Marlin, managing partner at Marlin & Associates, a boutique investment bank focusing on technology and media. From time to time, this strategy might require actually walking the walk.

3. Don't be shy.
Everyone has a different perception of what represents a reasonable value. Don't be afraid to ask for something the other person might consider overly aggressive, because you just might get it. "I'm constantly amazed," Blackstone's Greenthal says. "You never know what somebody will give you."

Still, it's important to stay realistic. Keep a range in mind rather than getting bogged down by a single "magic number," says McLean (Va.) financial advisor Glen Buco. "The essence of negotiation is learning to compromise," Buco explains.

In hiring situations, avoid giving out salary information until you've received an offer, financial planners say. To get a higher starting salary, politely ask for more until someone tells you no, says Dalibor Nenadov, a Franklin (Mich.) financial advisor. "Ask, 'Is this the best you can do?'" Nenadov suggests.

4. If you must bring friends, keep them quiet.
Unlike corporate dealmakers, young people frequently bring a best friend or a significant other along with them when they're making a big purchase. This poses a potential problem: One person's unrestrained enthusiasm could offset the other's savvy negotiating.

Agreeing on a designated negotiator can avoid arguments later. "You really should decide who's going to negotiate, and the other person should shut up," Marlin says. "Even better than shutting up, they should go away. You can't have two people negotiate."

At the same time, make sure you're actually negotiating with the right person, advises Ross Emmerman, a partner at Chicago law firm Neal, Gerber & Eisenberg who focuses on complex business transactions. The first salesperson you meet at a used-car dealership may not be the one with the authority to make a deal, so you could wind up wasting your verbal firepower before the real negotiating begins. "It's never inappropriate to ask, 'Are you the person who's in a position to make decisions?'" Emmerman says.

5. Never burn a bridge.
There are two kinds of negotiating situations, notes Ned Hooper, vice-president of corporate business development at Cisco Systems (CSCO). Some are one-time transactions, but most negotiations result in a relationship that's going to have to last. In other words, don't behave in any way during the negotiation that might come back to haunt you.

"If you do anything that could be perceived negatively, then you jeopardize your ability to gain value out of that relationship over time," Hooper says. "In my business, we're negotiating to buy companies. Once that transaction is complete, the people who we're negotiating with come to Cisco."

Be wary, too, of over-negotiating. Novice negotiators try to keep haggling even after they've gotten a fair deal, possibly because they haven't prepared enough to know what's fair, the pros observe. Says Marlin: "When you get to a fair deal, take it."

News Analysis
BusinessWeek.com
August 10, 2006
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The Post-Pause Portfolio

Though the Fed took a break from interest-rate hikes, its future moves are unclear. Investors may want to check out these strategies

Now what? On Aug. 8, the Federal Reserve finally gave Wall Street a long-awaited pause from interest-rate hikes, but so far, the markets haven't known what to make of it (see BusinessWeek.com, 8/8/06, "The Pause that Perplexes"). Did the Fed hike one too many times, endangering growth? Is it being foolhardy in the face of rising inflation? Either way, investors can take a few steps to protect their portfolios, as experts debate the meaning of the Fed's latest move.

One thing, at least, is certain: The interest-rate outlook is still uncertain. Some economists, including Jan Hatzius of Goldman Sachs (GS ), argue that the Fed is done tightening and will begin to cut interest rates early next year. Meanwhile, Bear Stearns (BSC ) economists and others maintain that the pause is just that: a pause. Another rate hike, they say, could come as early as October.

Even if the pause proves lasting, investors probably shouldn't break out the champagne quite yet. More often than not, market-watchers say, major indexes tend to decline in the six to eight months between the end of a tightening cycle and the arrival of rate cuts. "We think pauses are overrated," says David Rosenberg, North American economist at Merrill Lynch (MER ) in an Aug. 8 report.

While economists debate the topic, the rest of us have to decide what to do, if anything, about our investments. This week's Five for the Money looks at five strategies investors can use to keep their portfolios afloat in the current post-pause environment.

1. Stay defensive.
If uncertainty is what the market likes least, expect plenty of glum faces on Wall Street. With serious question marks still hovering over economic growth and inflation expectations, few asset classes stand poised for significant gains, some analysts say, so investors should remain cautious. "The era of muted returns is likely to continue," notes Richard Bernstein, Merrill's chief investment strategist, in another Aug. 8 dispatch.

The Fed maintained in its latest policy statement that inflation pressures will probably die down (see BusinessWeek.com, 8/8/06, "The Fed Shows Its Dovish Side"). However, policymakers could be wrong, so investors will be awaiting fresh inflation readings Aug. 15 and 16 for confirmation, according to Alec Young, equity market strategist at Standard & Poor's (MHP ). "We would continue to stay with our defensive outlook," Young says. "There are enough headwinds out there to keep [stocks] in a choppy [trading] range."

Meanwhile, the U.S. economy is cooling, according to the Fed and most economists. It's unclear how this slowdown will be felt in corporate earnings, but it seems likely that the S&P 500's unprecedented 17-quarter streak of double-digit earnings growth will eventually grind to a halt. "There's going to be much more of a focus on earnings," says Brian Gendreau, investment strategist at ING Investment Management (ING ).

2. Get an energy boost.
One group that shouldn't lose much steam is the energy sector. Big oil producers like Exxon Mobil (XOM ) and Chevron (CVX ) were posting big gains before the Fed pause, and there's no reason for that to change amid ongoing Mideast tensions and the recent Prudhoe Bay pipeline closure, analysts say (see BusinessWeek.com, 7/17/06, "The Bunker Portfolio"). September West Texas Intermediate crude oil futures settled at $76.35 on Aug. 9, after flirting with $77 and all-time closing highs.

Surging oil prices aside, some energy stocks actually look cheap from a valuation point of view, according to David Chalupnik, head of equities at First American Funds. He points particularly to Exxon and Apache (APA ). "For a lot of these companies, oil would have to move down to $45 a barrel for them to be fairly valued today," Chalupnik says.

Exchange-traded funds, or ETFs, that invest in energy companies can provide simple, inexpensive exposure to the sector. For the year through afternoon trading Aug. 9, State Street Global Advisors' Energy Select Sector SPDR (XLE ) was up 16.8%, adjusting for dividends. This fund seeks to track the performance of the energy sector of the S&P 500 index and carries a low 0.25% expense ratio. Still, investors should bear in mind that this sector is volatile and could be risky.

3. Take a dose of health care.
As oil prices swing up and down, investors might want to consider a more traditional defensive play: the health-care sector. On July 31, Wachovia Securities upgraded health-care stocks from neutral to overweight, citing positive technical factors and historically cheap valuation. This sector "should insulate investors from oil's vicissitudes," adds Jack Ablin, chief investment officer at Harris Bank (BMO ).

In fact, health-care stocks have seen a sudden shift in their fortunes after languishing the first few months of the year. The Health Care Select Sector SPDR (XLV ), which tracks the S&P 500 health-care sector index, gained 5.2% in July despite flattish performance overall year-to-date.

Eric Barden, co-portfolio-manager of Texas Capital Growth & Value Fund (TCVGX ), especially likes the managed-care industry, including Coventry Healthcare (CVH ) and UnitedHealth Group (UNH ). "Their stock prices are typically dependent on whether these companies can raise premiums faster than medical costs are going up," Barden says. "With the exception of the Aetna (AET ) stumble earlier this quarter, most have demonstrated an ability to keep their pricing ahead of their costs."

4. Put some money in bank stocks.
As the economy slows, the financial sector tends to outperform the rest of the market. Some analysts expect the same to occur following this Fed pause, as a projected rally in government bonds causes the value of banks' bond portfolios to swell. The Philadelphia Banking Sector Index (BKX ) was up 6.2% for the year as of afternoon trading Aug. 9.

Those gains have come despite worries over a global uptrend in interest rates and a flattened yield curve, where there is little difference between long- and short-term rates. Financial stocks' performance has been helped in part by share-repurchase programs funded by the corporate bond market, according to Brian Reynolds, chief market strategist at M.S. Howells & Co. "If the banks can break out, then they will likely drag the rest of the stock market up with them," Reynolds says.

The Vanguard Financials ETF (VFH) offers exposure to roughly 540 stocks in the sector for a modest 0.26% expense ratio. Launched in 2004, the fund has posted one-year returns of 11.9%, compared to 5.38% for the S&P 500. A larger financials ETF, Financial Select SPDR (XLF ), has a longer track record but is limited to holdings from the S&P 500.

< strong>5. Use discretion with consumer names.
When the economy is slow, consumers usually buy only what they really need, such as food and clothing. Market-watchers are relatively mixed on companies that provide these consumer staples, but they're sounding a consistent note on sellers of consumer discretionary, or nonessential, items. At least in the near term, that message is: Avoid them.

Previous economic slowdowns don't bode well for the consumer discretionary sector, which includes companies such as Home Depot (HD ) and Disney (DIS). During the 10 periods since 1980 when the Institute for Supply Management's index of manufacturing activity has slowed, consumer discretionaries outperformed the S&P 500 only once, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup (C ).

The cooling housing market may be another bad option for discretionary buying (see BusinessWeek.com, 8/4/06, "A Damper Housing Market"). An estimated $81 billion was cashed out of home equity through first-lien refinancing during the second quarter, according to Freddie Mac (FRE ), up from $74 billion in the first quarter. "As house-price appreciation continues to slow, this mechanism for sustaining consumer spending will diminish," says S&P Equity Research.

In fact, technology and consumer discretionary are the only two sectors down so far this year, according to Henry McVey, chief U.S. investment strategist at Morgan Stanley (MS ). "If you had merely stayed out of these two sectors, you would have made money" in the market, he notes.

Of course, that knowledge might have been more useful for investors seven months ago. While no one has a crystal ball as to what Fed policymakers will do next, following a few cautious investment strategies may help portfolios weather the market's post-pause uncertainty.

News Article
BusinessWeek.com
August 9, 2006
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Stocks Fall Despite Cisco, Disney News

The tech company and the Dow member each beat analyst estimates, but economic worries lingered after the Fed's rate-hike pause

Stocks finished lower Wednesday, giving up early gains as uncertainty about economic growth and inflation offset upbeat earnings news. The Federal Reserve's decision Tuesday to leave the federal funds rate target unchanged at 5.25% has sparked confusion in the markets, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 97.41 points, or 0.87%, to 11,076.18, led downward by Caterpillar (CAT ). The broader Standard & Poor's 500 index dropped 5.54 points, or 0.44%, to 1,265.94. The tech-heavy Nasdaq composite edged down 0.57 points, or 0.03%, to 2,060.28.

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

The Fed's pause may only be temporary, some analysts say. "We expect core inflation to continue rising, a lagged response to dollar weakness," says David Malpass, chief global economist at Bear Stearns. "We remain concerned that the Fed is leaving itself behind the curve in dealing with the inflation/weak dollar problem, and we expect the Fed will have to start hiking rates again later this year."

However, others predict rate cuts on the horizon. "Although a risk of further tightening remains, in several respects the committee's statement suggests that the hurdle for such a move is fairly high," notes Jan Hatzius, chief U.S. economist at Goldman Sachs. "Accordingly, we expect the next move by the FOMC to be a rate cut, though probably not until the spring of 2007."

In the wake of the Fed decision, investors eyed another set of economic data Wednesday. Wholesale sales rose 1.4% in June, much higher than expected, while inventories increased 0.8%. Thursday's calendar holds releases on weekly jobless claims, the June trade deficit, and the July Treasury budget.

On the company side Wednesday, Disney (DIS ) was modestly lower despite posting a 39% higher profit for its fiscal third-quarter, beating analyst estimates.

Homebuilder shares also declined after Toll Brothers (TOL ) lowered its fiscal fourth-quarter delivery guidance.

In tech, Cisco (CSCO) was sharply higher after the networking equipment maker forecast full-year revenue will increase 15% to 20% in the year ending July, 2007.

Shares of Digene (DIGE) surged after the biotechnology company said it expects to report revenue of about $192 million in fiscal 2007, topping the average analyst estimate of $188.5 million.

Companies due to report quarterly results after the close Wednesday included American International Group (AIG ), General Electric (GE ), and Viacom (VIA ). Among companies reporting Thursday are retailers J.C. Penney (JCP ), Kohl's (KSS ), and Target (TGT ).

M&A activity continued Wednesday after a flurry of deals the previous session. Morgan Stanley (MS ) was lower after the investment bank agreed to buy residential mortgage company Saxon Capital (SAX ) for $706 million, or $14.10 per share in cash.

In the energy markets, September West Texas Intermediate crude oil futures closed up 4 cents at $76.35, after flirting with an all-time closing high following a weekly inventory report that showed an unexpectedly large decline in crude supplies.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index gained 42.4 points, or 0.73%, to 5,860.5. Germany's DAX index moved higher 50.89 points, or 0.9%, to 5,702.81. In Paris, the CAC 40 index was up 57.2 points, or 1.15%, to 5,025.15.

Asian markets finished higher. Japan's Nikkei 225 index advanced 191.93 points, or 1.24%, to 15,656.59. In Hong Kong, the Hang Seng index climbed 298.38 points, or 1.75%, to 17,346.58. Korea's Kospi index added 3.83 points, or 0.29%, to 1,314.93.

Treasury Market

Treasury yields ticked higher after the wholesale sales figures. The 10-year notes slipped in price to 101-14/32 for a yield of 4.94%, while the 30-year bond dropped to 91-22/32 for a yield of 5.05%.

News Article
BusinessWeek.com
August 7, 2006
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Surging Oil Prices Send Stocks Lower

Crude futures neared $77 after the closure of a major BP oil field in Alaska. Investors were awaiting Tuesday's Fed meeting

Stocks finished modestly lower Monday, though off their worst levels, as oil prices surged after a pipeline leak prompted the shutdown of an Alaskan oil field. The news came amid caution ahead of the Federal Reserve meeting on Tuesday, when central bankers are widely expected to pause after 17 consecutive interest-rate hikes, says Standard & Poor's Equity Research.

The Dow Jones industrial average lost 20.97 points, or 0.19%, to 11,219.38, led downward by Disney (DIS ). The broader Standard & Poor's 500 index slipped 3.59 points, or 0.28%, to 1,275.77. The tech-heavy Nasdaq composite shed 12.55 points, or 0.6%, to 2,072.5.

NYSE breadth was negative, with 20 issues declining for every 13 advancing. Nasdaq breadth was 20-11 negative amid moderate volume.

The economic calendar was relatively quiet Monday, with all eyes on the upcoming session's Fed meeting. Tuesday's docket also includes data on second-quarter productivity, with releases on July retail sales and June international trade due later in the week.

The Fed faces a tough decision as it considers whether to raise interest rates, some analysts say. "Market participants seem to be focusing more on slower growth data than on the signs of higher inflation, pricing in less than a 20% probability of a Fed hike at tomorrow's meeting," says William Dudley, chief U.S. economist at Goldman Sachs. "We think the Fed's rate decision is a much closer call."

If the Fed pauses, don't count on a rally, others say. "The stock market has been champing at the bit for its opportunity to break and run free of the interest rate tether for some time now, but we would not be chasing stocks after the bounce up from the June/July lows," says Thomas McManus, chief investment strategist at Bank of America. "Another 'Fed's done!' rally would be a good time to raise cash for those who have not yet shifted their portfolios to a more defensive mode."

On the company side, Exxon Mobil (XOM ) and Chevron (CVX ) were modestly higher on the closure of BP's (BP ) Prudhoe Bay oil field in Alaska.

Stock-options accounting troubles remained in the news. Apple (AAPL) lower following a report that the computer maker made options grants to top executives more than once before jumps in its stock price between 1997 and 2001. The company also unveiled a new Mac Pro computer and said it would update its operating system by spring 2007.

Meanwhile, shares of Affiliated Computer Services (ACS) dipped after the information-technology outsourcer announced that an internal investigation surrounding stock options should be complete in September.

Internet search giant Google (GOOG ) was higher after announcing a deal to distribute video clips from Viacom's (VIA ) MTV.

In analyst calls, Occidental Petroleum (OXY ) was higher despite J.P. Morgan cutting its recommendation on the stock from overweight to neutral.

M&A action also helped kick off the week. Kindred Healthcare (KND ) and AmerisourceBergen (ABC ) were higher after the companies agreed to combine their institutional pharmacy units to create a new, publicy-traded company.

Companies set to report earnings Tuesday include Cisco (CSCO ), Clear Channel (CCU ), and News Corp. (NWS ).

In the energy markets Monday, September West Texas Intermediate crude oil futures closed up $2.22 at $76.98 a barrel on the Prudhoe Bay closure, close to an all-time closing high.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 60.6 points, or 1.03%, to 5,828.8. Germany's DAX index lost 96.36 points, or 1.68%, to 5,626.67. In Paris, the CAC 40 index was down 84.61 points, or 1.68%, to 4,956.34.

Asian markets finished mixed. Japan's Nikkei 225 index tumbled 345.12 points, or 2.23%, to 15,154.06. In Hong Kong, the Hang Seng index advanced 65.75 points, or 0.39%, to 16,953.55. Korea's Kospi index declined 14.97 points, or 1.15%, to 1,289.54.

Treasury Market

Treasury yields ticked higher after a $21 billion three-year note auction. The 10-year note fell modestly in price to 101-18/32 for a yield of 4.92%, while the 30-year bond eased to 92-10/32 for a yield of 5%.

News Analysis
BusinessWeek.com
August 7, 2006
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A Mile in Bernanke's Shoes

If you ran the Fed, how would you steer the economy through slowing growth and rising inflation? Here's what five experts say

Does slowing jobs growth mean the Federal Reserve's inflation-fighting job is near its end? Investors certainly seemed to think so on Aug. 4. After a mild employment report, futures markets were pricing in just a 20% chance that the Fed will pursue an 18th consecutive interest-rate increase at its Aug. 8 policy meeting.

Monthly employment data may have been the death knell for rate hikes (see BusinessWeek.com, 8/4/06, "July Jobs: Pretext for a Fed Pause?"). Nonfarm payrolls increased 113,000 in July, according to the Labor Dept., below economists' forecasts of 140,000, while unemployment rose from 4.6% to 4.8%. "The employment report seals the deal on a pause in the Fed's interest-rate hikes, and a continuation of the trend would spell the end of hikes for the current cycle," notes Tony Crescenzi, chief bond market strategist at Miller Tabak.

Nevertheless, the outlook for inflation, economic growth, and interest rates remains uncertain. Complicating the jobs report was a lack of government hiring in July and a 0.4% increase in average hourly wages, ruffling the feathers of inflation hawks. On Aug. 4, an opening rally on Wall Street fizzled as the Dow industrial average finished nearly flat.

TRICKY CURRENTS.  After Aug. 8, the Fed is slated for three more meetings before the end of the year. A pause now could signal the end of the tightening cycle, or it might just be a breather before another hike later in 2006. Futures markets on Aug. 4 were showing a roughly 50% chance of a hike to 5.5% by late October.

Fed Chairman Ben Bernanke will have to navigate some tricky currents as he tries to steer the economy between inflation and recession. We surveyed five market-watchers to find out what they would do for the rest of 2006 if they were in the same boat as the Fed honcho. Their prescriptions range from zero to two quarter-point rate hikes. But they all agree that the economy is in the middle of a transition to slower growth.

Jack Ablin, Harris Bank
The Fed has most likely vanquished the inflation threat, according to Jack Ablin, chief investment officer at Chicago-based Harris Bank. With that in mind, an Ablin-led Fed would keep rates steady for the rest of the year. "The economy responds more quickly than inflation to Fed tightening," he says. "We're in that zone right now where the economy is rolling over but inflation still looks strong."

Ablin's caveat: It depends where the buck stops. The dollar fell to a two-month low against the euro in afternoon trading following the Aug. 4 employment report. A weaker dollar acts in effect like inflation, by raising the price consumers must pay for imported goods.

"If they have to defend the dollar, then that would get the Fed back into tightening mode," Ablin says. "But everything I see right now suggests that the Fed is done."

Keith Hembre, First American Funds
In a few months, inflation may no longer be the Fed's biggest concern. Slowing economic growth could spur the Fed to begin easing rates in early 2007, according to Keith Hembre, chief economist at Minneapolis-based First American Funds (USB ). "I would expect a little more weakness in terms of housing and underlying consumer spending by the end of the year and the first part of next year," Hembre says.

Still, a Fed led by Hembre would monitor a couple of economic trends before unleashing rate cuts. Hembre would look for data to confirm that demand has slowed sufficiently and that a cooling housing market will keep it from picking up again. He'd also be checking for downward pressure on inflation following the last four months of below-potential job growth. "Policy changes would only reflect deviations from that road map," he explains.

Peter Kretzmer, Bank of America
What if inflation isn't defeated? Recent inflation readings have been consistently above the Fed's comfort zone, points out Peter Kretzmer, senior economist at Charlotte (N.C.)-based Bank of America (BAC ). Kretzmer forecasts two more 25 basis-point hikes, which would lift the federal funds rate to 5.75% by the end of the year.

In fact, if Kretzmer had been in Bernanke's shoes previously, the markets would probably not be so primed for an Aug. 8 pause. "We've been consistently surprised at his optimism that it was just a matter of the economy slowing, and then inflation would head back downward," Kretzmer says.

Rising energy prices are the culprit behind continued high levels of inflation, according to Kretzmer. Front-month West Texas Intermediate crude oil futures settled at $74.70 on Aug. 4, up 22.4% for the year. A Kretzmer Fed would monitor not only core inflation figures, which exclude food and energy, but also inflation with those prices included.

"Focusing on the core when the headline and the core have been departing for so long has become a part of the problem," Kretzmer says. "Energy prices are an important part of the equation as well."

Bob Ried, Ried Thunberg
Energy costs also worry Bob Ried, president of New Jersey research group Ried Thunberg. Ried projects high inflation readings to continue amid rising oil prices, a weakening dollar, and limited slack in the economy, so his Fed would pause now only to hike rates again in November. "The risks are still just on the upside on inflation," he says.

A pause on Aug. 8 wouldn't leave policymakers much time before their next meeting, set for Sept. 20. However, inflation indicators could prompt a rate hike on Oct. 24, Ried says, with a pause likely again in December, when trading is seasonally slow.

For now, the spotlight will be on the actual text of the Fed's Aug. 8 policy statement. "Do they make a statement that this is indeed a pause, and not necessarily a harbinger of eas[ing]?" Ried asks.

Quincy Krosby, The Hartford
Quincy Krosby, chief investment strategist at The Hartford (HIG), would say yes. Krosby continues to focus on rising prices and wages as well as the risk of a hard landing in the housing market. "If the Fed pauses, I believe there will be a hawkish statement that will tell the markets, 'We are vigilant,'" she says.

From there, a Krosby Fed might take a more data-dependent tack. "When all is said and done, we are close to the end," Krosby says. "The Fed is slowing down the economy, so prices will come down accordingly and, ultimately, so will wages. But this period has data that are conflicting, and that's always the way it is."

As our survey of Fed-watchers suggests, whether or not the central bank's rate-hiking duties are complete, Bernanke and company still have a big—and tricky—job ahead.

News Article
BusinessWeek.com
August 3, 2006
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Stocks Rise Ahead of Jobs Report

Ford said its second-quarter loss was wider than previously reported. Weekly jobless claims rose prior to Friday's key payrolls report

Stocks finished higher Thursday, rebounding from early losses as hopes for a Mideast peace resolution overcame disappointing corporate earnings. A closely watched employment report out Friday could add to confusion over whether the Federal Reserve will hike rates at its Aug. 8 meeting, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 42.66 points, or 0.38%, to 11,242.59, paced by Caterpillar (CAT ). The broader Standard & Poor's 500 index added 1.72 points, or 0.13%, to 1,280.27. The tech-heavy Nasdaq composite climbed 13.53 points, or 0.65%, to 2,092.34.

NYSE breadth was positive, with 20 issues advancing for every 13 declining, while Nasdaq breadth was 17-12 positive.

The market's volatility may continue for the rest of the summer, some analysts say. "Various factors may be coming together, supporting a late-year rally, but summer choppiness most likely will persist," says Tobias Levkovich, chief U.S. equity strategist at Citigroup.

Optimism grew for a Mideast ceasefire Thursday. U.K. Prime Minister Tony Blair said he was hopeful a United Nations resolution could be reached "within the next few days." A U.S. State Department official indicated a goal of Friday to halt the fighting between Israel and Hezbollah.

Friday's payrolls report and the Fed's Aug. 8 meeting also loomed. Jobless claims rose 14,000 to 315,000 in the week ended July 29, slightly more than expected. The Institute for Supply Management's non-manufacturing index of business activity unexpectedly fell to 54.8 in July from 57.0 in June. Factory goods orders increased 1.2% in June.

In earnings news, Ford (F) was lower after the automaker said its second-quarter loss was more than double what it previously announced, due to unexpectedly high pension costs.

Meanwhile, Tyco (TYC) was also lower after the conglomerate reported a 17% drop in quarterly earnings on higher copper prices and stock option expenses.

Coffee retailer Starbucks (SBUX ) was down after the company said July sales rose 4%, below expectations for 7% sales growth.

Shares of Medtronic (MDT ) tumbled after the medical device maker posted fiscal first-quarter results that fell below Street forecasts.

Wireless carrier Sprint Nextel (S ) was sharply lower following a 38% drop in second-quarter profit.

Companies reporting quarterly results Friday include Goodyear Tire & Rubber (GT ), Occidental Petroleum (OXY ), and Peoples Energy (PGL ).

Also in focus Thursday, retailers turned in firm July sales figures. Stores beating analyst expectations included Wal-Mart (WMT ), Costco (COST ), Limited Brands (LTD ), and Nordstrom (JWN ), while Gap (GPS ) and Target (TGT ) were among companies lagging.

In the energy markets, September West Texas Intermediate crude oil futures closed down 35 cents at $75.46 a barrel as hurricane worries subsided.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index dipped 93.7 points, or 1.58%, to 5,838.4. Germany's DAX index lost 40.79 points, or 0.72%, to 5,640.03. In Paris, the CAC 40 index was down 42.57 points, or 0.85%, to 4,983.68.

Asian markets finished narrowly mixed. Japan's Nikkei 225 index nudged up 6.08 points, or 0.04%, to 15,470.37. In Hong Kong, the Hang Seng index advanced 15.67 points, or 0.09%, to 17,048.42. Korea's Kospi index slipped 3.06 points, or 0.24%, to 1,292.05.

Treasury Market

Treasury yields ticked lower in the wake of the mixed economic data, after rising initially following interest-rate hikes by the Bank of England and the European Central Bank. The 10-year note edged up in price to 101-10/32 for a yield of 4.95%, while the 30-year bond rose to 91-25/32 for a yield of 5.04%.

News Analysis
BusinessWeek.com
August 2, 2006
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Heavy Debt, Big Worries?

Clorox and Weight Watchers are among companies with surprisingly high leverage. As the economy slows, should investors be concerned?

There's increasing worry about Americans' debt burdens, yet what about its corporate citizens? Companies, like individuals, have to be mindful of their balance sheets. In fact, with the economy cooling and interest rates still on the rise, it might be a good time for investors to reevaluate stocks of highly leveraged companies, which may be at risk in the event of a downturn.

A company's leverage can be measured in various ways, but the concept is essentially the ratio of debt to assets. "It's similar to you and I owning a home," says Stephen Biggar, director of North American equity research at Standard & Poor's. When a person buys a home, the mortgage is the debt and the down payment represents the assets. The homeowner becomes financially leveraged.

Not all leverage is created equal. The typical amount of leverage varies from industry to industry, with certain groups like industrial or financial stocks likelier than others to have high debt ratios. For the Standard & Poor's 500-stock index, the equal-weighted average percentage of long-term debt to invested capital is 33.2%. The market-cap weighted average is 34.2%.

A highly leveraged company runs the risk of defaulting on its debts. But, as with buying a home, going into debt may turn out to be a smart investment in the long run (see BusinessWeek.com, 9/12/05, "Bring on the Battered Debt"). But, of course, keeping debt at the right level is everything. This week's Five for the Money looks at five relatively highly leveraged companies and whether their debt levels should give investors pause.

1. Clorox
Where did Clorox's (CLX ) sparkle go? The Oakland (Calif.) cleaning products maker faces rising commodity prices and increased competition, analysts say. The company has also been beset with other misfortunes: Chief Executive Jerry Johnston resigned earlier this year after a heart attack, and Clorox has not yet named a replacement. A Clorox spokesperson did not return calls prior to deadline.

The name synonymous with bleach is the most highly leveraged company in the household-products group by long-term debt to capitalization, according to S&P. Clorox's long-term debt was 128.5% of its capitalization in 2005, up from 21.7% in 2004. On June 16, Fitch Ratings maintained the company's A- debt rating but lowered its outlook from stable to negative.

In late 2004, Clorox agreed to buy back German conglomerate Henkel's 29% stake in the company. The $2.8 billion deal is the source of much of Clorox's increased debt load, which it should be able to pay back, analysts say. "With earnings before interest and taxes at 10 times interest expense, we believe its financial leverage is manageable," notes Morningstar analyst Lauren DeSanto in a July 18 report. DeSanto gives the stock a three-star rating out of five.

Still, others suggest the company is in no hurry to get out of debt. Clorox "does not plan to return to its pre-Henkel underlevered capital structure," wrote Goldman Sachs analyst Amy Low Chasen in a May 10 note. The cleaning products maker instead plans to entice investors with a combination of share buybacks and increased dividends, according to Chasen, who has a neutral recommendation on the stock. (Goldman has an investment banking relationship with Clorox.)

Clorox stock closed at $59.52 on July 26, down 8.5% after hitting a 52-week high on Apr. 27. Clorox's prospects look good despite the increasing threat from private-label brands, but its stock price may not, analysts say. "We like the story, just not at current valuation," Deutsche Bank analyst Bill Schmitz observed in a June 13 report. Schmitz has a hold recommendation on the stock. (Deutsche seeks to do business with companies covered in its research reports.)

2. Cablevision Systems
When it comes to Cablevision Systems (CVC), debt-conscious investors may want to consider changing the channel. The Bethpage (N.Y.) media, entertainment, and telecom giant's long-term debt was 136.9% of capital in 2005, its highest level since 1999. While analyst opinion is mixed, some worry about the company's balance sheet, which is highly leveraged, even for the capital-intensive cable industry.

In a written statement, the Long Island cable operator's chief financial officer, Michael Huseby, attributes the company's leverage to a recent $3 billion special dividend and "the substantial investment we have already made in our core cable business." The company exceeded $5 billion in revenue over the past year and recently surpassed 1 million voice service customers, he notes.

Still, Cablevision has a habit of taking on debt for unrelated ventures, including consumer-electronics stores and a movie-theater chain, points out Morningstar analyst Kane Burns, who gives the stock a one-star rating. "We continue to have concerns about the firm's poor profitability, heavy debt load, and corporate governance," Burns said in a June 24 report.

Others still see upside. In early May, Cablevision moved its 2006 financial targets higher. The company's bundled digital-phone and high-speed Internet promotion also looks promising, according to Standard & Poor's analyst Tuna Amobi, who has a buy recommendation on the stock. Shares finished at $21.36 on July 26, up 18.7% from their 52-week low on Apr. 25.

Nevertheless, fierce competition from rival Verizon (VZ) might limit Cablevision's expansion, some analysts say. "It is probably unrealistic to expect Cablevision's positive basic subscriber growth to continue much beyond this year," Credit Suisse analyst Bryan Kraft wrote in a May 9 report. Kraft has a neutral recommendation on Cablevision. (Credit Suisse has an investment banking relationship with Cablevision and owns 1% or more of a class of its securities.)

3. Weight Watchers
Weight Watchers (WTW) may help dieters cut out the fat, but its balance sheet is relatively debt-heavy. The New York company led the personal services group in 2005 with long-term debt weighing in at 112.2% of capital, up from 70.3% a year earlier. Still, as the low-carb craze fades, Weight Watchers stock could keep getting in shape, some analysts say. A company spokesperson declined to comment due to a quiet period.

Despite the high leverage, Weight Watchers' financial health is "decent," according to Morningstar analyst Kristan Rowland, who rates the stock four stars. "We think the company should have no problem paying down its debt, as free cash flow is healthy” at 24.2% of revenue in 2005, Rowland notes. (Editor's Note: This story has been updated to include more recent free cash flow data for Weight Watchers.)

Weight Watchers' strong brand and doctor-recommended methods should help its business grow while the latest diet fad goes out of fashion, others say. Of all major weight-loss programs, Weight Watchers' classroom-based approach is the only one with empirical evidence of its success, points out Bank of America analyst Scott Mushkin, who has a buy recommendation on the stock. (Bank of America has an investment banking relationship with Weight Watchers and owns 1% or more of a class of its securities.)

Still, the shares have taken off weight and kept it off, ending at $40 on July 26, an increase of roughly 1% since hitting a 52-week low July 21.

4. Reader's Digest Assn.
The condensed version of this story could read something like this: Heavy debt load, economic slowdown, declining profits. Reader's Digest Assn. (RDA ), which publishes dentists' office mainstay Reader's Digest, had long-term debt of 60.4% of its capitalization in 2005. That compares with 36.5% for Scholastic (SCHL ), the next most highly leveraged stock in the large publisher group, according to S—P.

Richard Clark, senior vice-president of investor relations at Reader's Digest, points out that the company's leverage is much lower than that of fellow publisher Primedia (PRM ), which belongs to a different S&P stock group. Reader's Digest has lowered its debt from around four times earnings before interest, taxation, depreciation, and amortization (EBITDA) in 2002 to about three times EBITDA in 2006, Clark says.

The Pleasantville (N.Y.) company agreed in 2002 to buy magazine publisher Reiman Publications for $760 million in cash. At the time, the deal was the largest in the industry in four years, and it required Reader's Digest to take on extra leverage. Analysts, though, are also relatively sanguine about the company's debt load.

Reader's Digest has successfully turned around its QSP youth fund-raising division and could have similar success as it expands operations internationally, according to S&P analyst James Peters, who has a buy recommendation on the stock. In a May 18 report, Peters also points to expected revenue growth from new products and new business ventures, such as recently launched party planning business Taste of Home Entertaining.

Shares finished at $13.81 on July 26, up 5.2% from a 52-week low touched on June 13. Still, some analysts spot few factors likely to improve the stock price further, particularly as Reader's Digest's full-year earnings tend to be weighed toward December-quarter results. "We do not see a catalyst for [the] shares near term, given its seasonality and general economic concerns," Merrill Lynch analyst Karl Choi wrote in a July 10 report. Choi has a neutral recommendation on the stock. (Merrill owns 1% or more of Reader's Digest stock and makes a market in the securities.)

5. Red Hat
Tech is typically among the less leveraged sectors. Open-source software maker Red Hat (RHAT), on the other hand, had long-term debt representing 54.4% of capital in 2005, compared to 0% for most other small systems-software companies. Debt is only one risk to consider when looking at the Raleigh (N.C.) company, but some analysts say its share price probably won't fall much further.

Red Hat raised $600 million with a bond issuance in January, 2004, which accounts for some of its debt. The bond was for general corporate purposes as well as acquisitions and expansion, and it's on track to be repaid, a company spokesperson says. "In order to give ourselves a head start, we issued that bond, and it's really allowed us to grow the company," the spokesperson says.

Shares closed at $23.77 on July 26, a 26.8% drop from a 52-week high touched on May 8. In late June, the stock lost 6.4% in a single day after the company reported an 11% increase in quarterly profit. Red Hat executives also warned that the company's JBoss acquisition might not boost the bottom line as soon as expected (see BusinessWeek.com, 4/11/06, "Red Hat's Red-Hot Deal").

Potential competition from Oracle (ORCL ) or Microsoft's (MSFT ) Vista represents another risk to Red Hat's stock price, according to S&P analyst Clyde Montevirgen, who has a hold rating on the shares.

On the bullish side, an Oracle version of Red Hat's flagship Linux software would be more difficult than it sounds, maintains Citigroup analyst Brent Thill, who has a buy recommendation on the stock. Red Hat stands to maintain its 80% Linux market share in the next several years while expanding operating margins, Thill wrote July 13. (Citigroup has an investment banking relationship with Red Hat and makes a market in its securities.)

Just because leverage is high doesn't mean a shareholder should drop the stock. But a high debt-to-capital ratio can be worth keeping in mind for investors leery of a downturn.

News Analysis
BusinessWeek.com
August 2, 2006
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Back-to-School Stocks: BW's Honor Roll

As summer ends, school looms, and kids—and parents—get ready to restock, Apple and Gap are among the companies poised to benefit

School's out for summer, as Alice Cooper once sang, but the golf-loving metalmeister got the "out forever" part wrong. In fact, the U.S. Education Dept. projects pre-kindergarten through 12th-grade enrollment to increase to 16.5 million in 2006, up 17% from a decade ago. With the student body expanding, a few stocks stand ready to enjoy seasonal back-to-school trends.

First, though, some of these companies must pass the test of declining consumer spending. Shoppers have tightened their wallets amid soaring gasoline prices and a cooling housing market (see BusinessWeek.com, 7/31/06, (see BusinessWeek.com, 07/31/06, "The Economy's Pop-Tart Problem"). If current trends worsen, it could be difficult for retailers and others to get to the head of this year's back-to-school class.

CALENDAR QUIRKS.  The quirks of the calendar could further complicate year-to-year sales comparisons this year, some analysts say. Last year the two biggest weeks for back-to-school spending both fell in August, but in 2006 they'll be spread across different months, according to Dan Genter, president and chief executive officer of Los Angeles-based investment firm RNC Genter. "August is probably going to look a little bit weaker compared to last year, all things being equal," Genter says. "But then it's going to make September look a little bit better."

Nonetheless, certain well-positioned outfits stand ready to overcome the negative trends. This week's Five for the Money looks at five smart stocks that might benefit from the annual autumn return of reading, writing, and arithmetic.

1. Apple Computer
Apple (AAPL), which traditionally has had a solid presence in the education market, is looking to tighten its grip. Earlier this year, the computer maker unveiled a new low-end PC that sells for $899 to schools, students, and teachers. In Europe, it's even seeking to build education technology around the iPod (see BusinessWeek, 3/23/06, "Apple Loves France, Sometimes").

While Apple isn't the biggest-selling PC maker in the education segment, its presence there has been a boon for its PC business. In 2005, the Cupertino (Calif.) computer giant grabbed a 15% share, by units, of the $6.1 billion U.S. education market, far behind Dell (DELL ) but ahead of Hewlett-Packard (HPQ ). While the overall school market grew by 9.6%, Apple saw its units-sold increase by 14.9%, helped by Apple's ongoing focus on the K-12 market, according to IDC analyst David Daoud. Those may not be iPod numbers, but the education space is crucial to Apple's efforts to build brand loyalty "straight from the get-go," Daoud says.

But Apple isn't earning better marks only in education. Following 13 straight quarters of upside earnings surprises, the company stands to turn in more gains thanks to iPod growth, the shift to Intel (INTC ) processors, and potential new product launches, observes Bear Stearns analyst Andrew Neff.

"Unlike a year ago when Apple's growth was dependent on one 'hit' product, we see Apple with multiple growth drivers," Neff wrote in a July 19 report. He has an outperform recommendation on the stock. (Bear Stearns has a non-investment-banking relationship with Apple and makes a market in the company's securities.)

Apple shares are still down from their 52-week high of $86.40, touched Jan. 12. In afternoon trading Aug. 2, Apple shares bounced to $68.02.

2. Staples
Would a new school year really be complete without new pencils, pens, and notebooks? When it comes to office supplies, Staples (SPLS ) is the analysts' current pet, with a better average recommendation than smaller rival Office Depot (ODP ). The Framingham (Mass.)-based retailer offers a positive long-term story despite rising paper costs, analysts say.

Chalk up some of the appeal to strong revenues. After softening in May, Staples' same-store sales likely accelerated into July, boosted by targeted advertising and better merchandising, says Citigroup analyst Bill Sims, who rates the stock a buy. "Staples continues to see strength in key categories such as office supplies, copy center, digital imaging, and accessories," he wrote in a July 30 report. (Citigroup has a significant financial interest in and an investment banking relationship with Staples, and also makes a market in the company's securities.)

Solid demand seen in Office Depot's recent earnings report also bodes well for Staples, which posts its quarterly results Aug. 15, according to Bear Stearns analyst Christopher Horvers, who has an outperform recommendation on the stock. Shares were $21.53 in afternoon trading Aug. 2, down 22.3% from a 52-week high touched on May 11. (Bear Stearns has a non-investment-banking relationship with Staples and makes a market in the company's securities.)

A company spokesperson says Staples expects "terrific" back-to-school sales this year, though she declined to go into specific numbers. "Staples has pumped up the color and fun in our back-to-school assortment," the spokesperson says. "We think it's really going to resonate with teens and students of all ages."

3. Gap
The dawn of the new school year brings the chance for a fresh start for students and teachers. Venerable clothing retailer Gap (GPS) could use one of those this fall, following a dismal 2005 for its Gap, Old Navy, and Banana Republic stores. Adjusted for dividends, shares of the San Francisco-based company have fallen 2.6% since the start of 2006, to $17.03 in afternoon trading Aug. 2.

So far, apparel watchers are keen on Gap's back-to-school merchandise. The stores' new denim, sportswear, and active wear are nicely in line with current styles, according to Jane Hali, vice-president and director of retail consulting at Coleman Research Group. "This is the first month of good product," Hali says.

Gap may be at a turning point, analysts say. "It is too soon to write this company off," notes Morningstar analyst Joseph Beaulieu, who gives the stock a four-star rating out of five. While Gap is coming off seven straight quarters of slowing sales growth, Beaulieu points out that Abercrombie & Fitch (ANF ) once recovered from nearly four years of negative comparisons.

A big question mark for the company is the loss of Jenny Ming, president of the Old Navy division, whose upcoming departure was announced July 11. Amid general macroeconomic uncertainty, Gap's ongoing turnaround story is fraught with risks. In keeping with the back-to-school spirit, investors should do their homework.

4. Centex Corp.
Retail companies aren't the only ones poised to earn from a growing population of young scholars. Centex Corp. (CTX), with about $200 million in revenues from education construction, could be one residential builder that can weather the cooling real estate market (see BusinessWeek.com, 7/23/06, "Five Ways to Play the Housing Slump"). Shares edged up to $47.80 in afternoon trading Aug. 2, down 33% for the year, adjusted for dividends.

Standard & Poor's equity analyst William Mack says the Dallas-based construction company is his only buy recommendation among builders. Centex's business lines and geographic markets are more diverse than those of its competitors, according to Mack. "We think the company is prepared to weather this cyclical downturn better than its peers by aggressively reducing its share count and cautiously managing its land holdings," he wrote in a June 21 report.

However, opinions on Centex are decidedly mixed. Despite some modest positives from a recent earnings call, the company's outlook for the rest of the fiscal year is dubious, according to J.P. Morgan analyst Michael Rehaut, who has an underweight recommendation on the stock. (J.P. Morgan has an investment banking relationship with Centex and has acted as manager in a public offering of the company's securities.)

S&P's Mack forecasts traditional homebuilding revenues to account for roughly 85% of Centex revenue, a smaller share than for the other homebuilders. Meanwhile, Centex is in the midst of a massive share repurchase program, which will boost earnings per share. Even a casual student of the economy knows the housing market is slowing, but despite real risks, Centex may reward patient investors. A Centex spokesperson was unable to comment immediately on the company's school-building prospects.

5. Laidlaw International
The wheels on the bus go round and round, but the stock of school transportation outfit Laidlaw International (LI) has been on a straight climb this year. Laidlaw derives half of its revenue from Laidlaw Education Services, a student transportation provider with a fleet of more than 40,000 buses. While the stock is only sparsely covered, at least one analyst hails the outfit's shares, which were trading at $26.90 late Aug. 2, up 17.2% for the year when adjusted for dividends.

Best known for its Greyhound Lines inter-city buses, Naperville (Ill.)-based Laidlaw emerged from bankruptcy in 2003. Amid solid results from Greyhound and Education Services, Laidlaw could reach a one-year target of $33 based on an estimated 2007 price-to-earnings ratio of 14.8%, according to RBC Capital Markets analyst Nick Morton, who has an outperform recommendation on the stock. The company also recently announced a $380 million share buyback program.

However, others are more cautious on the stock. Oppenheimer & Co. analyst Ian Zaffino, using a slightly lower p-e estimate, has a neutral recommendation on Laidlaw shares. On July 7, Laidlaw announced quarterly earnings that fell below analyst estimates, due to higher-than-expected tax costs from a Canadian subsidiary.

A sharp increase in energy prices or a severe downturn in consumer spending could cause these back-to-school stocks to be left back. In the meantime, though, these companies might remind investors that learning can be not only fun, but profitable, too.

News Article
BusinessWeek.com
August 2, 2006
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Stocks Rise on Time Warner, P&G Profits

Time Warner and Procter & Gamble each posted upbeat quarterly results. Oil prices climbed near $76

Stocks finished higher Wednesday, extending the previous session's late buying as strong earnings reports offset a jump in oil prices. Traders were also assessing employment numbers before the jobs report due Friday, which should stoke further debate over the Federal Reserve's interest-rate plans, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 74.2 points, or 0.67%, to 11,199.93. The broader Standard & Poor's 500 added 7.63 points, or 0.6%, to 1,278.55. The tech-heavy Nasdaq composite climbed 16.82 points, or 0.82%, to 2,078.81.

Trading was moderate ahead of the payrolls report. NYSE breadth was decidedly positive, with 23 issued advancing for every 10 declining, while NASDAQ breadth was 19-11 positive.

The Fed faces a difficult decision on whether to continue raising interest rates at its Aug. 8 meeting, some analysts say. "Many now assume that slower U.S. growth, or something worse, is here to stay and that it will quickly cap the cyclical rise in inflation," notes Richard Berner, chief U.S. economist at Morgan Stanley. "I'm far less sure."

The economic calendar shed little light Wednesday on the Fed outlook. The ADP employment index showed an increase of 99,000 jobs in July, after a 368,000 jump in June, ahead of Friday's closely watched payrolls report. Market players will be awaiting the data for a sense of the odds that the Fed hikes rates again Aug. 8.

Investors will have more economic figures to digest Thursday. Data releases due next session include June factory goods orders, the July reading of the Institute for Supply Management's non-manufacturing index of business activity, and weekly jobless claims.

In earnings news, Time Warner (TWX) was higher after the media company said it swung to a second-quarter profit and announced it will give away free America Online services.

Dow member Procter & Gamble (PG ) was also higher after the consumer products maker reported a 36% surge in quarterly profit on 25% higher sales.

Insurer Cigna (CI ) was up sharply as a 62% decline in second-quarter profit topped Wall Street expectations.

Coffee giant Starbucks (SBUX ) was set to post earnings after the closing bell. Companies slated to report results Thursday include Gateway (GTW ), Sprint Nextel (S ), and Tyco (TYC ).

Among other stocks in focus, Ford (F) was higher on a report the automaker is hiring a former investment banker to re-evaluate the company's brands and assets, such as Jaguar.

Rival General Motors was lower as the automaker restated its second-quarter results to show a $200 million wider loss due to a tax change.

Meanwhile, Advanced Micro Devices (AMD ) was higher after IBM (IBM ) unveiled plans to expand its use of the chipmaker's processors in IBM computers.

Shares of Adobe Systems (ADBE) surged after the software maker maintained its outlook for third-quarter sales and earnings even as customers postpone purchases.

On the deal front, Pozen (POZN ) was sharply higher after AstraZeneca (AZN ) agreed to pay as much as $375 million to the company to develop a pain reliever with reduced stomach side effects.

In the energy markets Wednesday, September West Texas Intermediate crude oil futures closed up 90 cents at $75.81 a barrel after a weekly inventory report showed a wider-than-expected decline in crude supplies, amid escalating Mideast tension and prospects for an Atlantic hurricane.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 51.3 points, or 0.87%, to 5,932.1. Germany's DAX index gained 84.08 points, or 1.5%, to 5,680.82. In Paris, the CAC 40 index was up 78.02 points, or 1.58%, to 5,026.25.

Asian markets finished higher. Japan's Nikkei 225 index nudged up 23.38 points, or 0.15%, to 15,464.29. In Hong Kong, the Hang Seng index advanced 121.38 points, or 0.72%, to 17,032.75. Korea's Kospi index gained 7.75 points, or 0.6%, to 1,295.11.

Treasury Market

Treasury yields eased in the wake of the ADP employment data and reports that derivatives traders expect an increase of 152,700 jobs in July. Meanwhile, the government announced unexpectedly that it will start selling 30-year bonds on a quarterly basis next year. The 10-year note rose modestly in price to 101-10/32 for a yield of 4.97%, while the 30-year bond moved higher to 91-22/32 for a yield of 5.04%.

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BusinessWeek.com
August 1, 2006
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Stocks Fall on Interest-Rate Worries

A key inflation indicator rose, accompanied by gains in manufacturing activity and construction spending. Crude futures neared $75

Stocks finished lower Tuesday, though above their weakest levels of the session, as a set of strong economic data stoked concerns that the Federal Reserve may have to continue raising interest rates. Friday's nonfarm payrolls report could prove to be crucial, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 59.95 points, or 0.54%, to 11,125.73, led downward by General Motors (GM ). The broader Standard & Poor's 500 shed 5.74 points, or 0.45%, to 1,270.92. The tech-heavy Nasdaq composite tumbled 29.48 points, or 1.41%, to 2,061.99.

Market players were sifting through solid economic reports Tuesday, ahead of the Fed's Aug. 8 interest-rate meeting. The core PCE deflator, a closely watched inflation gauge, rose 0.2% in June, putting the year-over-year rate at 2.3%, up from the Fed's 2% comfort zone. Personal income rose 0.6% after a 0.4% rise in May. "While the rise in the core price index is no surprise, it's still not comforting as the trend has been toward higher prices," says Action Economics.

Among other data releases, the Institute for Supply Management's manufacturing index rose to 54.7 in July, from 53.8 in June. Construction spending gained 0.3% in June after a flat May reading. Pending home sales nudged higher 0.4% to 113.9 in June from 113.4 in May, snapping a three-month streak of declines.

The numbers raise doubts about whether the Fed will pause from its tightening cycle at the Aug. 8 meeting, says Action Economics. "The latest data on income and spending support our call that the economy has more upside momentum than the markets anticipate," adds Steven Ricchiuto, chief U.S. economist at ABN Amro. Wednesday's economic calendar is quiet, while Friday's employment report will be the week's big event.

Others say a cooling economy should give the Fed enough cover to avoid another rate hike. "The Fed is expecting this moderation in growth to help limit inflation pressures over time," says John Ryding, chief U.S. economist at Bear Stearns. "Given this, combined with some Fed officials' opinion that policymakers should be mindful of the possible future effects of previous rate actions, we still see the FOMC keeping rates on hold for the first time in over two years at next week's Fed meeting."

On the company side, Advanced Micro Devices (AMD ) was lower following news that Dell (DELL ) will begin selling notebook computers that use the chipmaker's processors. Dell shares declined.

Monthly vehicle sales reports began to trickle in. DaimlerChrysler (DCX ) posted sales of 16.2 million units in July, down 34% from a year earlier and weaker than expected. Ford (F ) also recorded a 34% drop in July sales, while General Motors said its sales decreased 22.5%.

In earnings news, Whole Foods (WFMI ) was sharply lower after the natural-foods retailer reported quarterly sales of $1.34 billion, below analyst expectations.

Telecom company Verizon (VZ ) was lower after it posted a 24% decline in second-quarter profit, citing labor and merger costs.

Meanwhile, Archer Daniels Midland (ADM) was slightly lower after the oilseed, corn and wheat processor said its quarterly earnings doubled, helped by strong ethanol sales.

Photography company Eastman Kodak (EK ) was down sharply after posting a wider second-quarter loss of $282 million on a 9% revenue decline.

Satellite radio operator Sirius Satellite Radio (SIRI ) was flat as it reported a wider second-quarter loss but boosted its projections for full-year subscribers and revenues.

Companies due to announce quarterly results Wednesday include Procter & Gamble (PG ), Starbucks (SBUX ), and Time Warner (TWX ).

In the energy markets Tuesday, September West Texas Intermediate crude oil futures rose 51 cents to $74.91 a barrel amid storm warnings ahead of a weekly inventory report due Wednesday.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index lost 47.5 points, or 0.8%, to 5,880.8. Germany's DAX index skidded 85.23 points, or 1.5%, to 5,596.74. In Paris, the CAC 40 index was down 61.19 points, or 1.22%, to 4,948.23.

Asian markets finished lower. Japan's Nikkei 225 index slipped 15.9 points, or 0.1%, to 15,440.91. In Hong Kong, the Hang Seng index declined 59.97 points, or 0.35%, to 16,911.37. Korea's Kospi index retreated 10.46 points, or 0.81%, to 1,287.36.

Treasury Market

Treasuries drifted in the wake of the firm economic data. The 10-year note was little changed at 101-04/32 for a yield of 4.98%, while the 30-year bond was also flat at 91-12/32 for a yield of 5.07%.

News Article
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July 31, 2006
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Stocks Inch Lower Ahead of Data

Wal-Mart posted higher same-store sales while Apple got a boost from Bank of America. Crude futures topped $74

Stocks finished modestly lower Monday amid profit taking, after rallying Friday on hopes the Federal Reserve would not raise interest rates at its Aug. 8 meeting. Ahead of a week packed with economic data, market players were facing uncertainty over the Fed's future course, says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 34.02 points, or 0.3%, to 11,185.68, led downward by Merck (MRK ) and Boeing (BA ). The broader Standard & Poor's 500 slipped 1.89 points, or 0.15%, to 1,276.66. The tech-heavy Nasdaq composite edged down 2.67 points, or 0.13%, to 2,091.47.

Volume was light. NYSE breadth was slightly negative, with 18 issues declining for every 15 advancing, while Nasdaq breadth was 16-14 negative.

Investors were turning their attention toward the Fed's Aug. 8 meeting. "Our call -- by the thinnest of margins -- is that [the Fed] will tighten one last time," says Jan Hatzius, chief U.S. economist at Goldman Sachs. "However, this could still easily change given the heavy data load due next week."

If the economy can sustain its growth over the next six months, a recession probably isn't in the cards for next year, some analysts say. "It's showtime for the economy," notes Ed Yardeni, chief investment strategist at Oak Associates. "If it has the resilience we believe it does, then the housing recession, flattening home prices, gasoline prices over $3, heightened geopolitical risks, and one more (and last?) hike in the federal funds rate shouldn't cause a significant slowdown or a recession."

Meanwhile, Morgan Stanley was shifting 5% of its bond allocation into stocks. "Yields could go lower from here, but they will do so without us," observes Henry McVey, chief U.S. investment strategist at Morgan Stanley. "Equities seem poised to move higher if bond yields do hold at current levels."

A pair of Fed speakers did little to clarify the central bank's intentions Monday. St. Louis Fed President Bill Poole said he saw a "50-50" chance of a rate hike at the Aug. 8 meeting. San Francisco Fed President Janet Yellen said the Fed remains data-driven and that the federal funds rate is "in the vicinity" of the right level.

An economic report was similarly ambiguous. The Chicago purchasing manager's index rose unexpectedly to 57.9 in July from 56.5 in June. The underlying data were mixed and shouldn't affect Fed expectations, says Action Economics.

The main event this week is Friday's employment report. Data releases due Tuesday include June personal income and construction spending, July vehicle sales, and the July reading of the Institute for Supply Management's manufacturing index.

Earnings continued to garner attention Monday. Health insurer Humana (HUM ) was higher after reporting a 10% increase in second-quarter net income.

Meat processor Tyson Foods (TSN ) was lower after the company posted a wider-than-expected quarterly loss and trimmed its outlook for the year.

Among companies slated to announce quarterly results Tuesday are Archer Daniels Midland (ADM ), Eastman Kodak (EK ), Hilton Hotels (HLT ), Lowe's (LOW ), and Verizon (VZ ).

Elsewhere, Wal-Mart (WMT) was little changed after the retail giant reported a 2.4% increase in July same-store sales, in line with the company's projections.

Shares of Pfizer (PFE) declined slightly after the drugmaker named Jeffrey Kindler as its new CEO to replace Hank McKinnell, who will remain as chairman until February.

Investors were also digesting M&A activity. Flash memory maker SanDisk (SNDK ) was lower after the company agreed to buy Israeli rival M-Systems Flash Disk Pioneers for about $1.3 billion in stock.

In analyst calls, Apple Computer (AAPL ) was higher after Banc of America raised its recommendation on the computer maker from neutral to buy.

Copper producer Phelps Dodge (PD ) was up after Prudential upgraded the shares from underweight to overweight.

In the energy markets, September West Texas Intermediate crude oil futures closed up $1.16 at $74.40 a barrel amid ongoing Mideast tensions and reports of a Russian pipeline leak. Separately, the U.N. Security Council gave Iran one month to suspend nuclear production.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index shed 46.6 points, or 0.78%, to 5,928.3. Germany's DAX index eased 23.45 points, or 0.41%, to 5,681.97. In Paris, the CAC 40 index was down 19.09 points, or 0.38%, to 5,009.42.

Asian markets finished higher. Japan's Nikkei 225 index advanced 113.94 points, or 0.74%, to 15,456.81. In Hong Kong, the Hang Seng index inched up 16.3 points, or 0.1%, to 16,971.34. Korea's Kospi index nudged higher 0.75 points, or 0.06%, to 1,297.82.

Treasury Market

Treasuries drifted after the comments from the Fed's Poole and Yellen. The 10-year note edged up in price to 101-02/32 for a yield of 4.99%, while the 30-year bond was little changed at 91-09/32 for a yield of 5.07%.

News Article
BusinessWeek.com
July 27, 2006
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Stocks Slip Ahead of GDP Report

Microsoft weighed on tech shares amid worries over the Vista launch. Exxon Mobil and DaimlerChrysler were among companies posting strong second-quarter results

Stocks finished mostly lower Thursday, giving up early gains despite solid quarterly earnings. Reports on durable goods orders, jobless claims, and the housing market sent mixed signals about the economy ahead of Friday's data on second-quarter gross domestic product.

The Dow Jones industrial average edged down 2.08 points, or 0.02%, to 11,100.43. The broader Standard & Poor's 500 slipped 5.21 points, or 0.41%, to 1,263.19. The tech-heavy Nasdaq composite fell 15.99 points, or 0.77%, to 2,054.47.

Traders were likely being cautious before Friday's economic numbers, some analysts say. "It seems like people are waiting a little bit until they get tomorrow morning's data before they're willing to commit more capital," says Jeff Kleintop, chief investment strategist at PNC Wealth Management.

The GDP report is projected to show strong quarterly growth of roughly 3% or more, according to analysts. "It's a past piece of data, and let's face it, things looked pretty darn good through most of the second quarter," says Joe Balestrino, fixed income market strategist at Federated Investors. He expects the data to be bearish for bonds but bullish for stocks and the dollar, though a particularly robust growth reading could fan interest-rate fears in the stock market.

Investors will also be monitoring data on personal consumption expenditures, or PCE. "The Fed over the years has given more and more credit to PCE," says Dan Genter, President and CEO of Los Angeles-based investment firm RNC Genter. "If that number comes out to be a very robust number, it's likely to cause a down day. If that number is weak, then that's going to continue to be a positive trend for a market that's just looking for a breather."

Software giant Microsoft's (MSFT) analyst conference sparked some investor jitters Thursday. Shares fell on reports traders were hoping for a clearer timeline on the launch of the new Vista operating system, even as the company said there was no reason to expect delays.

In earnings news, Exxon Mobil (XOM ) was modestly lower after rising in early trading as the oil heavyweight reported a 36% jump in second-quarter profit.

Shares of DaimlerChrysler (DCX ) rose after the automaker said its second-quarter profit more than doubled.

Security software maker Symantec (SYMC ) was up sharply after the company posted 52% lower quarterly earnings, topping analyst estimates.

In pharmaceuticals, Bristol-Myers Squibb (BMY ) was lower after reporting a decline in second-quarter profit amid competition from generic drugs.

Satellite radio outfit XM Satellite Radio (XMSR) was higher after initially dipping to a 52-week low on a wider second-quarter loss and reduced full-year subscriber forecasts. Shares of rival Sirius (SIRI ) declined.

Defense contractors Northrop Grumman (NOC ) and Raytheon (RTN ) were lower after both companies turned in higher quarterly earnings.

Friday's session is set to be a quieter one for earnings. Results are due from Office Depot ODP, Coventry Health Care CHC and Waste Management WMI

Outside of earnings Thursday, Intel (INTC ) was modestly lower after the chipmaker announced plans to start shipping its new Core 2 Duo processor series in August.

In analyst calls, Disney (DIS ) was lower despite an upgrade. J.P. Morgan raised its rating on the company from neutral to overweight.

Economic reports on big-ticket orders and weekly jobless claims came in slightly stronger than expected. Durable goods orders jumped 3.1% in June, from an upwardly revised 0.3% gain in May. Jobless claims fell 7,000 to 298,000 in the week ended July 22. New home sales fell 3% to 1.13 million units in June, weaker than forecast.

Second-quarter GDP is be the main data release on Friday's calendar. Investors will also be digesting the second-quarter employment cost index and the final July reading of University of Michigan's consumer sentiment index.

In the energy markets Thursday, September West Texas Intermediate crude oil futures closed up 60 cents at $74.54 a barrel amid escalating conflict between Israel and Hezbollah.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index gained 53 points, or 0.9%, to 5,930.1. Germany's DAX index climbed 75.97 points, or 1.36%, to 5,659.07. In Paris, the CAC 40 index was up 58.21 points, or 1.18%, to 5,001.21.

Asian markets finished sharply higher. Japan's Nikkei 225 index rallied 295.71 points, or 1.99%, to 15,179.78. In Hong Kong, the Hang Seng index advanced 299.53 points, or 1.8%, to 16,916.77. Korea's Kospi index added 17.19 points, or 1.34%, to 1,296.27.

Treasury Market

Treasury yields inched higher ahead of Friday's GDP report. The 10-year note edged down in price to 100-20/32 for a yield of 5.04%, while the 30-year bond slipped to 90-24/32 for a yield of 5.11%.