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From Briefing.com: 5:38 pm Weekly Wrap

The stock market got back on track this week. The profit-taking from the prior week ended, and good fundamentals gave an added boost to the recent bullish sentiment.

The week was dominated by macro-economic issues. The economy, inflation, and oil prices were the key factors. Corporate news was limited.

On Monday, Saint Louis Fed President Poole said the economy "is not really fragile, it's robust." A key concern for the stock market in recent weeks has been that economic growth might be slowing dramatically. That would cut into earnings growth. Poole's comments served as a reminder that in fact most economic series have showed continued strength. There has been significant weakness in housing, but even there recent weekly data have shown a pick-up in mortgage applications. There is no crash.

The August retail sales data on Thursday reflected the resilience in the economy. Sales were up just 0.2%, but that followed a strong 1.4% jump in July. Data on new claims for unemployment for the week ended September 9, also released on Thursday, dropped to just 308,000. This provided evidence that the labor market is not experiencing serious weakness.

On Friday, August industrial production was reported to have dropped 0.1%, but that was due to a drop in utility output of 0.8% that will probably be aberrant. The September NY Empire State index of manufacturing picked up a bit to 13.8 from 11.0 in August. There is no evidence that manufacturing will experience a sharp downturn.

Friday also saw the report of a pick-up in consumer sentiment for September. This reflected the recent sharp drop in gasoline prices. Oil prices on the global market fell this week to $63 a barrel from $66 a barrel last week. Further declines at the pump are coming.

The concerns about a sharp slowdown in economic growth eased this past week.

There was also good news on the inflation front. The August core CPI was up 0.2%. That was in line with expectations, but still marks the second straight month of a modest increase at that level after four straight months of a 0.3% increase. The lack of an uptrend in core inflation was a great relief to the stock market. The total CPI was also up only 0.2%. There is even an excellent chance of a drop in total CPI next month, as the recent drop in gasoline prices could pare 0.5% off the index.

The inflation news further convinced the financial markets that the Fed will not raise rates at the policy meeting on Wednesday. Fed funds futures incorporate only a 19% chance of any further rate hike this year, and then assume a rate cut in the first half of next year.

The macro-fundamentals all supported the underlying bullish tone. Economic growth is clearly slowing, but there is no evidence of a severe slowdown. The inflation data are steady, but that is good enough as it is expected that inflationary pressures will ease in the months ahead in reaction to slower economic growth. Oil prices are down. The Fed is not expected to raise rates again.

It is therefore not surprising that the S&P was up four out of five days this past week.

The corporate news included good earnings reports from brokers Lehman Brothers, Goldman Sachs, and Bear Stearns. Best Buy and Adobe also posted good numbers. There were no major earnings warnings.

Board room maneuvers made the news as Bristol-Myers and Hewlett-Packard dealt with CEO departures. Merck faced more negative studies on Vioxx. And Ford announced yet more major cuts as they strive to improve margins.

The next two weeks bring the risk of an increased level of earnings warnings. Companies that are going to miss Wall Street estimates typically announce such near the end of the calendar quarter. But the underlying tone in the stock market is moderately bullish, supported by good fundamentals.

 
 Index      Started Week Ended Week Change % Change YTD  
 DJIA         11392.11    11560.77  168.66    1.5 % 7.9 %  
 Nasdaq        2165.79     2235.59   69.80    3.2 % 1.4 %  
 S&P 500       1298.92     1319.87   20.95    1.6 % 5.7 %  
 Russell 2000   708.54      729.35   20.81    2.9 % 8.3 %

5:15PM Semtech receives additional Nasdaq deficiency as anticipated (SMTC) 13.32 -0.11 :

4:20 pm : With inflation still the key variable in the stock market outlook, another tame reading at the consumer level lent further support for the Fed's much-desired soft landing and helped the major averages close modestly higher Friday.

Before the bell, the Labor Dept. showed that consumer prices rose just 0.2% in August, half the previous month's pace, as gasoline and home ownership costs rose at a slower rate. Providing even more relief on the inflation front and further proof the Fed may again forgo a rate hike at next Wednesday's FOMC meeting, though, was moderation in the more closely watched core rate. Excluding volatile food and energy costs, core CPI rose just 0.2% for a second straight month. That confirmed a moderation from the recent uptrend and assuaged the worst of inflation fears. In turn, it set a positive tone for stocks from start to finish.

Bonds also rallied on the news, initially pushing yields across the curve to multi-month lows. However, when Kansas City Fed President Thomas Hoenig chimed in, as the afternoon session got underway, with an acknowledgment that today's inflation numbers are "good news" but that lower energy prices may support consumer spending and sustain economic growth, nervousness returned to Treasuries and removed some of the optimism tied to a potential rate cut early next year to close bonds relatively unchanged for the day.

The rate-sensitive Financials sector maintained decent momentum inspired by early declines in borrowing costs to pace the day higher among the nine sectors posting gains.

Also providing notable leadership was the Industrials sector, which got a boost from United Technologies (UTX 64.67 +1.67), which raised its share buyback program to $2 bln from $1.5 bln and reaffirmed its full-year EPS outlook. Technology was also in focus after Adobe Systems (ADBE 37.00 +3.35) topped analysts' expectations and offered reassuring guidance. Strong follow-through in Microsoft (MSFT 26.85 +0.52) provided additional sector support that helped investors look past a 12% drubbing in Ford Motor (F 8.02 -1.07).

The auto maker announced its accelerated "Way Forward" restructuring plan, which included the suspension of its dividend and an announcement that the North American unit will not become profitable before 2009. Merrill Lynch subsequently downgrading the stock to sell exacerbated the selling pressure which left it as the day's worst performing S&P 500 constituent.

Telecom (-0.5%) was the only sector failing to take part in today's advance. Aside from the temptation to lock in profits from this year's best performing sector (+21%), an analyst downgrade on Citizens Communications (CZN 13.55 -0.26) led to today's disinterest for Integrated Telecoms -- one of today's worst performing areas.DJ30 +33.38 NASDAQ +6.86 SP500 +3.59 NASDAQ Dec/Adv/Vol 1439/1539/2.5 bln NYSE Dec/Adv/Vol 1343/1929/1.9 bln

4:35PM Freescale Semi Reaches Agreement with Private Equity Consortium in $17.6 Billion Transaction; Freescale Stockholders Offered $40 per Share in Cash (FSL) 37.16 -0.41 : Co announced today that it has entered into a definitive merger agreement to be acquired by a private equity consortium in a transaction with a total equity value of $17.6 billion. The consortium is led by The Blackstone Group, and includes The Carlyle Group, Permira Funds and Texas Pacific Group. Under the terms of the merger agreement, the consortium will acquire all of the outstanding Class A and Class B shares of Freescale for $40 per share in cash, representing a premium of approximately 36% over Freescale's average closing share price during the 30 trading days ended September 8, 2006. The company first acknowledged it was in discussions with third parties regarding a possible transaction on September 11, 2006. The board of directors of Freescale has unanimously approved the merger agreement and resolved to recommend that Freescale's stockholders adopt the agreement. There is no financing condition to the obligations of the private equity consortium to consummate the transaction, and equity and debt commitments for the full amount of the merger consideration have been received. It is currently anticipated that substantially all of the company's outstanding Notes will either be tendered for or repaid.

8:45AM Micron: Toshiba and Micron confirm agreement to settle all pending Lexar litigation (MU) 17.77 : Toshiba and MU confirm they have entered into agreements where Toshiba will purchase certain of MU's semiconductor technology patents and license patents previously owned by Lexar Media in exchange for payments totaling $288 mln. The agreements settle all outstanding NAND flash memory-related litigation between Toshiba, its subsidiaries and Lexar Media, which MU acquired in June.

11:21 am Daimler-Chrysler (DCX)

49.00 -3.90: Daimler-Chrysler CEO Dieter Zetsche has been seen a lot lately thanks to a national advertising campaign from the auto maker that is built around the slogan "Ask Dr. Z." The intention is to use Dr. Z's presence to highlight the benefits of owning Chrysler products. At this stage, though, that campaign doesn't seem to be working as Daimler-Chrysler announced today that it is widening its third quarter operating loss estimate for its Chrysler Group to $1.5 billion from $0.6 billion. For the full-year the Chrysler Group is expected to lose $1.2 billion from operations.

The explanation for the downward revision sounded all too familiar with the company citing a difficult market environment in the U.S. that was linked to excess inventory, non-competitive legacy costs for employees and retirees, continuing high fuel prices, higher interest rates, and a stronger shift in demand toward smaller vehicles. To no one's surprise either Daimler-Chrysler also pointed to the significant price concessions - particularly on light trucks - that have been made by its competitors.

Fortunately, Daimler-Chrysler's other units are holding up well. As a result, the auto maker anticipates earning 5 billion euros, or $6.4 billion, from operations in 2006. That is down, however, from a prior view of more than 6 billion euros.

Despite the tough showing for Chrysler in the third quarter, the auto maker is expecting the unit to achieve positive results in the fourth quarter with the help of production cuts and the introduction of eight new vehicles in the second half of the year, many of which are in the growing small vehicle segment.

The key variable behind its relatively upbeat assessment is demand, as plenty of demand was pulled forward with the auto industry's 0.00% financing and employee pricing offers. By the same token, General Motors (GM) and Ford (F) have been willful participants in the auto industry's zero-sum game. On the brighter side, it now appears that the Big 3 understand the importance of right-sizing their operations and cutting inventory so they can get back to rational pricing and financing activity that will ensure sustained profitability. As we heard from Ford today, that won't be something that is achieved easily overnight. Hopefully for Daimler-Chrysler shareholders, though, Dr. Z will prove to have the right answers to quickly turn the tide at Chrysler.

--Patrick J. O'Hare, Briefing.com

09:54 am Adobe Systems (ADBE)

37.40 +3.82: Shares in graphic software maker Adobe Systems Inc. were up after the company said late Thursday that it saw third quarter earnings of $0.29 per share, excluding non-recurring items, $0.03 better than the Reuters Estimates consensus of $0.26. Revenues rose 23.7% year over year to $602.2 million versus the $594 million consensus.

The company, which has a market cap of about $19.49 billion, also reported expectations for fourth quarter operating margin of 34.4% versus 34% Street expectations. The company issued in-line guidance for the fourth quarter, seeing earnings per share of $0.32 to $0.34 versus $0.32 consensus. The company also sees fourth quarter revenues of $655 million to $685 million versus $670.44 million consensus. The company also saw fourth quarter gross margins of 37% to 38% versus 37% Street expectations.

The solid financial release this week supports our positive outlook on the stock, with Adobe's upcoming product cycle upgrade and the continued integration of Macromedia (acquired in December 2005). At 35.8x trailing 12-month earnings, the stock is trading at a slight premium to its competitor Apple Computer Inc. (AAPL).

Adobe, which plans to offer its next version of Acrobat software in all major languages late this quarter, will provide a regular fourth quarter update press release on Oct. 31.

--Christine Marie Nielsen, Briefing.com

09:37 am Microsoft (MSFT)

26.33: In the worst kept secret in tech land, Microsoft finally unveiled its answer to Apple's (AAPL) iPod - the Zune. The new 30-gigabyte digital media player is arriving just in time for the holidays, even though Microsoft's bread-and-butter Vista, aimed at challenging Apple's dominance, is not. However, it will take more than a flashy three inch color display for the Zune to dethrone the iPod, which has nearly 80% share of the market.

As we stated in July, while the move by Microsoft doesn't make financial sense as a stand-alone product, it makes enormous business sense as an xBox extension and a way to integrate MSN Music, thus creating a pure MSFT end-to-end solution in the digital home. The first gadget under the Zune name offers built-in wireless technology, 30 gigs of storage, and an FM radio tuner - features not currently available on the iPod.

Microsoft said it designed the Zune around the idea that users want to use and share entertainment files with each other. It also launched an online web site, called Zune Marketplace, where customers can purchase songs individually or buy subscriptions offering an unlimited number of songs for a flat fee. Pricing and availability details are expected within weeks.

The news is slightly positive for Microsoft, whose shares have reversed strongly off recent lows as it aims to take on Apple's dominance, which has gone virtually unchallenged for five years. But we wouldn't expect Steve Jobs to take the move into "his" territory lightly. Despite the substantial investment MSFT has made, the Zune has the look and feel of the iPod, which only further illustrates Apple's ability to bring truly innovative, cutting-edge technology to the market first. But with the growing number of music vendors, Apple won't be MSFT's only competition. Despite the investment in other areas, MSFT's near-term future rests on the upcoming Vista launch as a catalyst for top line growth and price appreciation.

--Kimberly DuBord, Briefing.com

09:06 am Exelon Corp. (EXC)

57.77: Shares in Exelon Corp. rose late Thursday after the Chicago-based company said it would cancel its $17.7 billion takeover of Public Service Enterprise Group Inc. (PEG) after it was unable to reach an agreement with New Jersey regulators.

Industry watchers say the price tag on the deal - which would have represented the largest utility merger in U.S. history - was perceived as being on the high side. Exelon's shares rose because Exelon now won't be exposed to cash flow dilution from the deal.

Public Service Enterprise Chief Executive James Ferland was quoted in media reports as saying his company's prospects remain strong as a stand alone due to favorable pricing in energy markets and improvements to its nuclear plants.

At 42x trailing 12-month earnings, the stock is trading at over twice the industry average. However, the company's strong performance supports our positive view on the stock. On July 31, Exelon reaffirmed its full-year earnings forecast of $3 to $3.30 per share. Analysts are looking for a profit of $3.27 per share, according to Reuters Estimates. The shares boast a trailing annual dividend yield of 2.8%.

--Christine Marie Nielsen, Briefing.com

08:25 am Ford Motor Co. (F)

9.09 Ford is shifting its "Way Forward" program into high gear. The flailing automaker, besieged by high structural costs and lackluster product lines, released an accelerated restructuring plan that it hopes will deliver faster results through 2008. The plan is aggressive in renewing its product portfolio by 2008, but the question remains if its targeted cost savings are enough to improve profitability over the next couple of years. Ford is expected to lose almost $6 bln in its automotive business in 2006, which some insiders believe to be more like $9 bln, and therefore its cost savings of $5 bln may not be enough to restore profitability given the industry's challenging price and mix trends.

Ford plans to reduce its white-collared workforce by a third or the equivalent of 14,000 positions. Blue-collar positions will be slashed by 40%, as Ford announced it has reached buyout agreement offers for all of its UAW employees. Plus it will accelerate its goal of reducing 25-30k NA employees by 2008 - four years ahead of schedule. Further manufacturing capacity reductions are also planned. On the product front, 70% of Ford, Lincoln and Mercury products by volume will be new or significantly upgraded between now and the end of 2008 - well ahead of schedule. It plans major investments in new gasolines, flexible-fuel, diesel, hydrogen, and hybrid powertrains, in addition to putting E-85 ethanol powered and hybrid vehicles on the road by 2008.

Ford also provided a revised financial outlook. It does not anticipate automotive profitability in North America before 2009. And while South America and Europe are still expected to be profitable this year, it now anticipates operating losses in Asia Pacific, Africa, and the Premier Automotive Group. It expects to end the year with gross cash at about $20 bln. Nonetheless, the board has agreed to suspend payment of its quarterly dividend on its common and Class B stock beginning in the fourth quarter.

Newly appointed CEO Alan Mulally echoed statements made by Bill Ford in the press release, saying these measures are critical to turning around Ford's largest and most important NA market. Mulally stated, "Turnarounds of this magnitude succeed when capacity and costs are aligned with a realistic expectation of demand." Ford's future rests on its ability to drive automotive sales, and while the cost reduction part of the equation still may not be enough, Ford is addressing the product side by aggressively pulling forward new products and creating new markets.

--Kimberly DuBord, Briefing.com

09:46 am Multimedia Games: Merriman Curhan Ford downgrades Buy to Neutral. Merriman downgrades MGAM to Neutral from Buy saying recently concluded several outside channel checks involving each of Multimedia's current markets yielded indications of risks in the co's gaming markets that were more significant than previously thought. Given this, the firm believes the co's current equity multiple may remain suppressed until stabilization in some of those markets is demonstrated and they can garner increasing confidence in the co's primary growth vehicles.

09:45 am Noven Pharma: Jefferies & Co downgrades Buy to Hold. Target $24 to $25. Jefferies downgrades NOVN to Hold from Buy, but raises their tgt to $25 from $24. Firm says the stock has appreciated nearly 60% since mid-Feb when the co submitted its full response letter on Daytrana, and is now pricing in an optimistic outlook for Daytrana and giving healthy value to an undisclosed pipeline.

09:43 am Cogent: Miller Johnson initiates Outperform. Target $18. Miller Johnson initiates COGT with an Outperform and an $18tgt saying the A.F.I.S market is estimated to grow from under $400 mln today to roughly $1.0 bln in 2011. The fingerprint sensor market is expected to grow from under $300 mln today to roughly $1.5 bln in 2011. The firm believes Cogent represents roughly 25-30% of the A.F.I.S market today and essentially no share of the verification market. However, they expect Cogent to gain share in both markets over time.

09:43 am Microsemi: Jefferies & Co initiates Buy. Target $32. Jefferies initiates MSCC with a Buy and a $32 tgt saying they believe MSCC is almost finished with a major transformation into a very profitable High Performance Analog company. The firm says its expertise lies in power management and Power/Interface control of the real world into the digital domain.

09:43 am Public Service: Banc of America Sec reiterates Neutral. Target $71 to $60. BofA cuts their tgt on PEG to $60 from $71 after deal with Excelon (EXC) terminated. Firm says PEG's cash flows remain healthy and that PEG could still be a takeout target and firm's $60 target does not include a takeout premium (it's 7.5x EV/EBITDA of regulated utility and 5x to its Energy Holdings). Firm would expect PEG to trade at a slight premium on the basis that it still might be viewed as a take-out candidate. Firm says EXC was the wrong partner due to market power issues. Firm says another partner might be more palatable.

09:42 am Gen Growth Prop: Banc of America Sec downgrades Buy to Neutral. Target $47. BofA downgraded GGP to Neutral from Buy with a $47 tgt based on valuation. Also the firm says, risk to earnings from the land business could hold back the stock. They note the housing market conditions in Las Vegas (where most of GGP's land business is) continue to worsen and further house price erosion is likely as inventories continue to rise.

09:39 am JDA Software: ICAP downgrades Buy to Neutral. Target $18 to $12. ICAP downgraded JDAS to Neutral from Buy and cuts their tgt to $12 from $18 after channel checks showed some disturbing developments at JDA Software. The firm says with earnings coming next month, the risks of trouble appear to be increasing. The firm says the merger with Manugistics may not be going so well.

09:38 am Kroger: UBS reiterates Reduce . Target $24 to $22. UBS cuts their tgt on KR to $22 from $24 saying upon review and after talking to the co in detail about its guidance for the next year the firm thinks current expectations are too high. The firm says consensus for FY07 is $1.59 a figure 6% above the high end of next year's guidance as the firm has derived as ranging of $1.45-$1.50.

09:37 am VeriSign: RBC Capital Mkts upgrades Sector Perform to Outperform. Target $24 to $25. RBC upgrades VRSN to Outperform from Sector Perform and raises their tgt to $25 from $24 noting on Sept 12, 2006, VRSN sold 51% of its Jamba/Jamster business to News Corp (NWS), which removes an often hard to predict revenue and earnings stream. The firm says when investors begin to understand the "apples to apples" comparison of VeriSign excluding Jamba, they will envision a more stable co with margin expansion potential and a more stable growth rate.

09:36 am First Marblehead: Friedman Billings upgrades Underperform to Mkt Perform. Target $36 to $55. Friedman Billings upgrades FMD to Market Perform from Underperform and raised their tgt to $55 from $36 saying with First Marblehead's upcoming securitization significantly larger than expected and more importantly, the co now being able to monetize a portion of its noncash residuals into cash, they believe this helps address much of the near-term risk to the story. The firm says although, their concerns regarding customer concentration, pricing pressure, and the impact of higher borrowing levels from the competing federal loan program all remain, they believe the fact the co is able to establish a secondary market for its residuals is meaningful.