News Article
BusinessWeek.com
September 15, 2006
Link

Stocks Rise after Mild Inflation Data

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Treasury Market

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

News Article
BusinessWeek.com
September 14, 2006
Link

Stocks End Mixed as Oil Falls

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Treasury Market

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

News Analysis
BusinessWeek.com
September 14, 2006
Link

CEOs in the Sweet Spot

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

September 11's Lessons for Investors

News Analysis
BusinessWeek.com
September 11, 2006
Link

September 11's Lesson for Investors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

News Analysis
BusinessWeek.com
September 7, 2006
Link

CEOs in the Hot Seat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

News Article
BusinessWeek.com
September 7, 2006
Link

Stocks Drop amid Housing News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Treasury Market

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

News Article
BusinessWeek.com
September 1, 2006
Link

Stocks Rise after Mild Jobs Data

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Treasury Market

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

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

News Article
BusinessWeek.com
August 31, 2006
Link

Stocks Slip after Bernanke, Mild Data

The Fed chairman said productivity should keep growing at a solid clip. July personal income rose, while the Fed's favored inflation gauge was relatively stable

Major stock indexes finished modestly lower Thursday, but gained for the month, as Federal Reserve Chairman Ben Bernanke said productivity will probably grow for some time. Earlier, a closely watched inflation gauge held relatively steady, while other economic reports bucked fears of a sharp slowdown.

The Dow Jones industrial average edged down 1.76 points, or 0.02%, to 11,381.15, a gain of 1.7% for August. The broader Standard & Poor's 500 slipped 0.46 points, or 0.04%, to 1,303.81, a 2.1% monthly increase. The tech-heavy Nasdaq composite lost 1.98 points, or 0.09%, to 2,183.75, jumping 4.4% on the month.

Trading was moderate ahead of the holiday weekend. NYSE breadth was positive, with 20 issues advancing for every 13 declining, while Nasdaq breadth was 16-14 positive.

A set of economic data Thursday suggested the economy still has some strength. Personal income rose 0.5% in July, in line with expectations. A gauge of personal consumption expenditures excluding food and energy, the core PCE deflator, rose 0.1% after a 0.2% increase in June. The core PCE deflator is the Fed's preferred measure of inflation.

The numbers suggest the Fed should not raise interest rates further, some analysts say. "With savings so low, higher interest rates, especially mortgage rates, could cause an abrupt change in consumer behavior," says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. "A sharp increase in savings could throw the economy into recession."

However, others expect inflation to continue its rise. "Monthly core PCE inflation was below its recent trend due to the impact of lower apparel prices, which we expect to reverse," says John Ryding, chief U.S. economist at Bear Stearns. "We see core inflation moving above the forecast range for 2006 in the coming months."

Meanwhile, jobless claims dropped 2,000 to 316,000 in the week ended Aug. 26, from an upwardly revised 318,000 the week before. The Chicago purchasing managers index of regional business activity fell to 57.1 in August from 57.9 in July. Factory orders dipped 0.6% in July after increasing 1.5% in June.

Fed Chairman Bernanke, speaking in Greenville (S.C.), said productivity growth is likely to continue its healthy post-1995 trend, but did not comment specifically on interest rates or inflation. Elsewhere, the European Central Bank kept its key interest rate unchanged at 3%, but policymakers indicated they would consider a rate hike in October to combat inflation pressures.

Friday's calendar holds a key report on August payrolls. Other data releases are set to include vehicle sales, construction spending, and the Institute for Supply Management's index of manufacturing activity.

On the company side, many retailers reported solid August sales. Wal-Mart (WMT ), Federated (FD ) and Limited Brands (LTD ) were among store chains topping analyst estimates. Disappointments included Target (TGT ), J.C. Penney (JCP ) and Gap (GPS ).

Among other stocks in focus, Ford (F) said it has begun exploring strategic options for its Aston Martin luxury brand, including a potential sale of all or part of the business.

Chemical maker Dow Chemical (DOW ) said it would shut down three plants around the world as a measure to cut annual operating costs by $160 million.

Shares of Clorox (CLX ) dipped after the consumer products maker tapped the president of Coca-Cola's (KO ) North American unit, Donald Knauss, as its new chief executive.

In earnings news, telecom equipment maker JDS Uniphase (JDSU ) was down sharply after the company said it expects its fiscal first-quarter revenue to fall below analyst expectations.

On the deal front, Vancouver-based miner Goldcorp (GG ) offered $8.6 billion in stock for fellow Canadian miner Glamis Gold (GLG ).

In the energy markets, October West Texas Intermediate crude oil futures closed up 23 cents at $70.26 a barrel, a decline of 7% for the month, ahead of an expected showdown between the U.N. and Iran over Tehran's nuclear plans.

European markets finished modestly lower. In London, the Financial Times-Stock Exchange 100 index lost 23.2 points, or 0.39%, to 5,906.1. Germany's DAX index slipped 7.96 points, or 0.14%, to 5,859.57. In Paris, the CAC 40 index was down 17.75 points, or 0.34%, to 5,165.04.

Asian markets ended higher. Japan's Nikkei 225 index rebounded 268.74 points, or 1.69%, to 16,140.76. In Hong Kong, the Hang Seng index gained 107.56 points, or 0.62%, to 17,392.27. Korea's Kospi index advanced 11.39 points, or 0.85%, to 1,352.74

Treasury Market

Treasury yields remained near five-month lows after the relatively tame core PCE reading, says Action Economics. The 10-year note rose modestly in price to 101-04/32 for a yield of 4.73%, while the 30-year gained to 94-04/32 for a yield of 4.88%.

The Economy's Fear Factor

News Analysis
BusinessWeek.com
August 29, 2006
Link

 

The Economy's Fear Factor

Will Republicans' focus on the threat of terrorism heighten voter pessimism about the economy ahead of the November elections?

Sex sells, but what about fear? It's been evident for months that terrorism and the war in Iraq would be central to Republicans' bid to hold Congress through November's midterm elections. Indeed, the specter of a terrorist attack looms large in the minds of economists, a new survey shows, highlighting a possible contradiction in the GOP strategy.

The biggest short-term problem facing the U.S. economy continues to be terrorism, say 34% of economists polled in August by the National Association for Business Economics (NABE). Among other leading economic trouble spots were energy prices, cited by 29% of economists, followed by inflation. The portion of economists listing terrorism as the biggest threat jumped from 26% in March.

While the latest survey coincided with the outbreak of war in Lebanon, economists' heightened concerns about terrorism are real, analysts say. Recent headlines about alleged plots against airliners have only underscored the anxiety. "Everybody is worried that the next terrorist attack is going to cause problems—both for oil prices and for consumer confidence—that could create a recap of the kind of recession we saw back in 2001," says David Wyss, chief economist at Standard & Poor's.

BACKFIRE RISK.  Economists aren't the only ones expressing concern about terrorism and the economy (see BusinessWeek.com, 8/21/06, "That Sinking Feeling"). Nearly two-thirds, or 64%, of Americans think it is at least somewhat likely that there will be another terrorist attack in the U.S. within the next few months, according to a recent CBS News poll, up from 53% in January.

As for the economy, American voters have offered dismal forecasts in public opinion polls for months, while Republicans are burnishing their antiterrorism bona fides. The new survey results raise an interesting question: Could an electoral strategy focused on stoking voters' terrorism fears backfire by increasing their economic pessimism?

The latest view from economists comes as conservative columnists such as George Will and Fred Barnes have been wondering why voters give President George W. Bush so little credit on the economy. In the most recent Wall Street Journal–NBC poll, only 14% of respondents say they believe the economy will get better in the next 12 months, down from 16% in June and 17% in April.

STRONG EARNINGS.  Center-left pundits have raised similar questions. The economic news is "absolutely good," ABC News political commentator Cokie Roberts said Dec. 4, 2005, on This Week, but "voters don't seem to be feeling it." On July 12, Hardball host Chris Matthews asked: "If it's that great out there, why isn't [Bush] getting credit for it?"

By some measures, the economy is indeed strong (see BusinessWeek.com, 9/4/06, "Housing: The Roof Won't Collapse on the U.S. Economy"). S&P 500 companies have posted 17 consecutive quarters of double-digit earnings growth. The advance reading for second-quarter gross domestic product, however, showed a 2.5% rise, down from 5.6% in the first quarter. Investors will get another reading on second-quarter GDP on Aug. 30, ahead of Sept. 1's payrolls report.

Renewed fears of terrorism might be one key reason for Americans' pessimism toward the economy. Indeed, views on the economy surged 13 percentage points after U.S. forces killed Al Qaeda affiliate Abu Musab al Zarqawi in Iraq, according to Ed Lazear, chairman of the White House Council of Economic Advisers. "Of course, that had almost no effect on the economy to speak of, and yet people's opinion of it went way up," Lazear said in an Aug. 18 press briefing.

NO THANK-YOU CARDS.  Top Republicans have kept the threat of terrorism front and center in recent weeks. "People will focus on that issue," Senator John Thune (R-S.D.) told a Lincoln (Neb.) newspaper in the wake of the foiled London airplane bombings. On Aug. 9, Vice-President Dick Cheney said the Connecticut primary victory of antiwar Democratic Senate nominee Ned Lamont may encourage "the Al Qaeda types."

Americans tend to vote based on their pocketbooks, but the White House isn't doing enough to highlight economic issues right now, according to Grover Norquist, president of the conservative Americans for Tax Reform. "They're wrapped up in foreign policy, but just because you're interested in something doesn't mean most voters are," Norquist says. "What matters for voters is: What are you going to do for them next? Don't expect a lot of thank-you cards for an O.K. economy."

That may be an acceptable risk to the Republicans, who are keen to retain their edge in Congress. The GOP may be willing to take a short-term hit on economic issues to draw attention to terrorism, where Republicans have traditionally outpolled their Democratic rivals. "The Republicans have put all their political eggs in the war-on-terror basket," says Peter Rundlet, vice-president for national security at the liberal Center for American Progress. (Representatives from the Republican and Democratic parties did not return calls prior to publication of this article.)

MISPLACED JITTERS?  Like economists, ordinary Americans probably see terrorism as only one of a rogue's gallery of threats to the economy, with inflation and a softening housing market also causing some agita. Some liberal pundits charge that Americans are unhappy because double-digit corporate profits and solid economic growth have yet to trickle down to typical workers. "It's hard to convince people that the economy is booming when they themselves have yet to see any benefits from the supposed boom," wrote New York Times columnist Paul Krugman on Dec. 5, 2005.

Meanwhile, Wall Street's terrorism jitters could be misplaced, economists say. While a terrorist attack would likely send oil prices higher and dampen travel spending, it wouldn't necessarily derail the economy, notes S&P's Wyss. Terrorism "changes what people spend money on, but it doesn't change them spending money," he says.

When asked to name longer-term threats to the economy, economists named a number of other daunting challenges. One-fifth of respondents point to the federal deficit as their biggest long-term concern, according to the NABE poll, while another fifth cite an inadequate educational system. Separately, only 38% of respondents believe that any combination of policies can eliminate U.S. dependence on foreign oil.

DEFICIT CONCERN.  The survey results also indicate uncertainty from a Fed policy standpoint. While 29% of economists polled want further interest-rate hikes, another 17% prefer cuts, and 53% favor keeping rates steady. Still, 71% say current monetary policy is about right, and just 57% expect the Fed to raise rates, down from 89% six months ago. In fiscal policy, 75% of respondents want budget deficits to drop, but only 17% expect them to do so.

In a market environment fraught with question marks, terrorism remains one of the biggest uncertainties—for economists and voters alike. But the complex feelings the issue evokes leave no clear indication as to how voters will respond in November—perhaps making the GOP a little nervous as to whether its trump card will ensure victory.

Click here for the slide show.

News Analysis
BusinessWeek.com
August 28, 2006
Link

Buyback Binge: Bane or Boon?

S&P 500 companies snapped up their own stock at record levels in the second quarter. What does the repurchase rush mean for investors?

Buybacks are back with a bang on Wall Street. According to Standard & Poor's, companies in the S&P 500 index repurchased a record $115 billion of their own shares in the second quarter, up 43% from 2005 and 175% from 2004. The wave of stock buybacks could boost per-share earnings at a time when corporate profits are hard-pressed to keep up their recent double-digit gains.

Oil giant Exxon Mobil (XOM) led the S&P 500 in buyback activity during the second quarter, plowing $6.6 billion into its own shares. Not far behind were Procter & Gamble (PG ) and Time Warner (TWX ). Microsoft (MSFT ) recently made headlines when it bought back $3.8 billion of its shares, and set a $20 billion tender offer to snap up even more (see BusinessWeek.com, 7/21/06, "Microsoft Buyback: Should You Bite?"). On Aug. 25, Home Depot (HD ) tooled up to make an additional $3.5 billion in stock buybacks, raising its total repurchase authorization to $17.5 billion.

For investors, the buyback boom means it's especially important to look beyond per-share earnings when evaluating a company's quarterly performance, analysts say. It might also be a reason to pay more attention to M&A prospects. However, buyback watchers don't expect companies to repeat the mistakes of the late-1990s rash of repurchases, which came back to haunt some stocks after the bull market went bust.

Share repurchases have risen as investors push for companies to put their growing cash hoards to use (see BusinessWeek, 4/17/06, "Blue-Chip Blues"). Buybacks reduce the number of shares outstanding, improving earnings per share. They also absorb excess shares created when employees exercise stock options.

NOTE TO SHAREHOLDERS.  The phenomenon probably isn't going away anytime soon, analysts say. "Buybacks are going to increase as long as the corporate bond market lets them," says Brian Reynolds, chief market strategist at MS Howells. Companies sometimes turn to the bond market to fill the tank with extra cash for repurchases.

Also, a buyback is typically safer for a company than paying a dividend in case earnings should nosedive. "A company can easily raise and lower a share repurchase program," says Jim Clark, an analyst at Sound Shore Management who acts as a sub-advisor for New Covenant Funds. "Doing so with a dividend is much more difficult."

Trouble is, the boost buybacks give to per-share earnings can be misleading. "Investors need to look at the numbers and do a bit more math than sometimes they're given," says Howard Silverblatt, S&P's senior index analyst. For instance, a share might be appropriately valued at 18 times earnings. However, the same share could be overpriced at 18 times an EPS figure inflated by reduced share count.

Lowering the number of outstanding shares through buybacks may also bump the price of stocks higher, if only in the short term, some analysts say. The reason is simple economics: As the supply of shares decreases, the demand should remain steady.

QUESTIONING PRIORITIES.  In fact, buybacks may be helping to hold up the market as consumer spending winds down, according to David Rosenberg, North American economist for Merrill Lynch (MER ). "This is where the 'baton' is being handed off—from the consumer to the shareholder," Rosenberg says in an Aug. 25 report.

Repurchased shares end up back in a company's vault as treasury shares. Many companies will eventually put this wealth to use in M&A activity, says S&P's Silverblatt. So investors should be assessing management's track record at making and executing deals. Silverblatt explains, "It's not how good you are at making widgets, but how good you are at putting companies together."

Meanwhile, the dollar amount of stock buybacks in the second quarter was about equivalent to capital expenditures, according to S&P. This trend raises questions about corporate executives' priorities, some analysts say. "If they can't find anything to do with their money, it makes me wonder what these guys are doing," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "You would think if you're that flush you would be pouring it into R&D and trying to come up with the next iPod."

Still, companies are snapping up their own stocks for different reasons than in past eras. Buybacks surged in the late 1990s, too, peaking in 2000 at $262.6 billion, according to Merrill Lynch estimates. In those days, many companies repurchased shares primarily to offset the dilution of stock created by stock options, analysts say. Other outfits announced buybacks in hopes of buoying their share prices (see BusinessWeek.com, 9/23/02, "The Buyback Boomerang").

NO LONG-TERM EFFECT.  Most companies today repurchase shares as a way of delivering increased value to shareholders, according to Charles Plohn Jr., managing director and head of Merrill Lynch's special equity transactions group, which specializes in buybacks. "It just seems to be a more rational process at this point," Plohn says. "The fact that we're seeing fewer companies than in the late '90s make the announcements indicates a shakeout from those companies who were implementing them for the wrong reasons."

Further, though buybacks may give shares a quick pick-me-up, they're unlikely to change a stock's direction over the long term. "The price is going to go up or down with or without an open-market buyback program in place," says Plohn, who has followed this area for about three decades.

The repurchase rush may not overturn the entire investing landscape, but it signals that many blue-chips are finding the most appealing place to put their profits is right back into their own shares. Increasingly, investors will want to keep buybacks in mind as they consider which stocks are worth buying—and selling—in the first place.