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Friday, September 29, 2006

Through The Fly's Eyes: A Quick Look Ahead


Highlights for Next Week

Monday October 2

* Merrill Lynch, Bear Stearns and Bank of America are all hosting Healthcare Industry conferences
* Blue Coat Systems (BCSI) is updating its guidance at 5pm
* Maverick Tube Corp (MVK) is holding a special shareholder meeting to vote on a proposed merger with Tenaris (TS)

Tuesday October 3

* PDUFA date for Idenix (IDIX)/Novartis (NVS) drug Telbivudine
* The FCC is holding a Media Ownership public hearing in Los Angeles at 4pm

Wednesday October 4

* WatchGuard (WGRD) is hosting a special stockholder meeting in Seattle
* CDO Investors Conference in NY sponsored by the Bond Market Association

Thursday October 5

* Wyeth (WYE) is holding an analyst day to provide a pipeline overview on Desvenlafaxine, which is under FDA review

Friday October 6

* PDUFA date for New River Pharmaceuticals (NRPH)/Shire (SHPGY) NRP-104 for attention deficit hyperactivity disorder for pediatric use

Through TheFLY's Eyes: Lilly


FDA Requests Additional Study For Lilly’s Diabetic Drug

The outlook on Lilly (LLY) shifted to a less-robust stance Friday after the U.S. Food and Drug Administration requested an additional 3-year Phase III clinical trial for Arxxant. Lilly had hoped the request could be satisfied from ongoing clinical trials, but the FDA has requested a new study. Lilly shares were down 26c to $57.08 in mid-day trading Friday.

Arxxant would become the first oral medication to treat diabetic retinopathy, the leading cause of blindness in working-age adults

The FDA decision is seen as a setback for Lilly because analysts had projected the drug’s peak annual revenue at $250M-$1B. And to paraphrase former U.S. Sen. Everett Dirksen, “A $100M here, a $100M there, and pretty soon you’re talking about real money.”

About 21 million people, or 7% of the U.S. population, have diabetes, which can lead to a number of complications in the body, including vision loss, according to the American Diabetes Association.

Lilly is weighing whether to go ahead with a new trail, seek partners for the trial, shift production to a lower-cost source, or cease development, Lilly officials indicated Friday.

Through The Fly's Eyes: MySpace


Henry Blodget Suggests MySpace Could Be Worth $15 Billion

Remember famed Internet analyst Henry Blodget of the good-old days? Where is he now? He has his own blog titled the Internet Outsider. Yesteday Henry blogged about another Internet analyst's comments on MySpace's potential valuation.

The analyst is Jordan Rohan of RBC Capital and he is saying the MySpace's valuation could be $10 to $20 billion in a few years. Rohan has been very media friendly, not too dissimilar to Blodget during the 1990s. However, there might be some merit to Rohan's thinking.

These are Henry's comments on why MySpace could be worth that and more: "In little more than two years, MySpace has come out of nowhere to become the 7th biggest site in the U.S. Per NetRatings, it now has 50 million monthly users--closing in on half of Yahoo!'s domestic user base--and it is still growing at a fantastic rate (a reported 250,000 sign-ups a day). MySpace recently signed a $900 million multi-year search deal with Google, showing that the revenue is starting to follow. Etc. Given all this, the theory that, in a few years, MySpace could be worth less than half of what Yahoo is worth with its now-battered valuation seems eminently reasonable. On its current trajectory, in fact, MySpace could end up being worth a lot more."

There is little that is bubble-like in tech land today. Both Blodget and Rohan properly have it right, this company is a massive new entertainment platform. Remember, New Corp (NWS) owns MySpace and you can own it too by buying News Corp's stock.

Thursday, September 28, 2006

Through TheFLY's Eyes: ImClone


Ichan Seeks To Remove 6 From ImClone’s Board

One week after he became a boardmember, billionaire investor Carl Icahn is recommending that shareholders remove half the board of directors [six directors] from drugmaker ImClone's (IMCL) board.

Icahn is urging shareholders to remove Chairman David Kies, whom Icahn unsuccessfully attempted to remove at last week’s ImClone shareholders’ meeting.

Icahn, who owns about 14% of ImClone, was elected to ImClone’s board along with three associates. In addition to board service, Icahn is pursuing a seat on a committee in charge of hiring a new CEO.

Manyt analysts see Icahn’s election to ImClone’s board as a positive for shareholders. Icahn is seeking to install a new CEO with considerable biotech experience to address ImClone’s operational concerns. Those include a strong competitive challenge to Erbitux from rival drugmaker Amgen (AMGN) and a disappointing pipeline: ImClone has only 1 product, the aforementioned Erbitux, while experiencing four CEOs in four years.

ImClone shares were up 25c to $29.00 in mid-day trading Thursday.

Through The Fly's Eyes: Saudi Arabia


The Saudi's Continue to Move Upstream

Huntsman, a US-based chemicals company, has signed an agreement to sell its European based chemicals and polymers business to the Saudi Arabian Basic Industries Corporation.

Despite high oil prices, this deal signifies Saudi Arabia's desire to continue to move up the petroleum food chain. Saudi Arabia supposedly has two huge refineries coming on-line in the next few years. In addition, there has been a lot of speculation that the Saudis have clearly communicated to Iran and Venezuela that it has no desire to keep oil prices high. Higher prices lead to greater use of alternative fuels which could risk world demand for Saudi oil.

No demand for oil, no Saudi Arabia. Look for Saudi Arabia to continue moving upstream and aligning their interest with stable oil prices. What is good for Saudi Arabia, is good for the world economy.

Through The Fly's Eyes: Intel Corporation


Is Intel Back?

Intel's (INTC) stock has been behaving pretty well in the recent rally. Is Intel's stock doing well due to the stock market rally or is it doing well because the market place is anticipating some good things?

Supposedly, Intel's engineers are engineering a turnaround. At Intel's recently held developers' conferences, the company talked in detail about its new Quad Core processors for servers and desktops. Supposedly product will ship in November, six months before AMD.

In addition, Intel clearly laid out the roadmap for 45 nanometer production, indicating that it would have three 45 nm fabs by early 2008. New technology on a low cost manufacturing platform could bring Intel back.

However, Intel has made plenty of these promises in the past and has not lived up to expectations. In the past, if Intel blew a product cycle, it had little-to-no competition. Today, if it blows it, AMD is right there.

Investors need to look at Intel's margins to see if they are having any success with new products. If they have new products on a low cost platform, Intel's stock will be off to the races again.

Wednesday, September 27, 2006

Through The Fly's Eyes: Renmimbi Rallying


Post Paulson’s Visit To China, The Renminbi is Rallying

The Nikkei, along with most Asian markets, is up big this morning. Why? Part of the reason is due to the US stock market rally. Another reason could be that the RMB, China's currency, is rallying. The chart shows that it takes less RMBs to purchase one US dollar, ergo, the RMB is getting stronger.

This RMB rally could lessen the dramatic labor cost advantage the China possess and take the intense pressure off of employers and employees around the world. This should also increase China's purchasing power to buy more imports.

It appears that Treasury Secretary Paulson got his point across to Chinese officials.

Through The Fly's Eyes: Yahoo! & Housing


Could Yahoo!'s Weak Guidiance Be Correlated With A Weak Housing Market?

In a piece by Eric Savitz of Barron's Tech Trader Daily, Savitz refers to a report by Jordan Rohan, an Internet analyst with RBC Capital--"as housing softens, fewer consumers are in the market for a mortgage, reducing valuable mortgage clicks and page-views," according to Rohan.

Rohan estimates a weaker mortgage market may impact online ad revenue by $50 to $75 million. "Buyers of mortgage-related ads and leads cut ad spending over the last 6-9 months. The full impact has been felt recently on the online media properties that supply ads and leads, which could take months to diagnose."

Yahoo! (YHOO) appears unable to get out of its own way during the past twelve months. It is hard for investors to figure out what the company's organic growth rate is due to the number of acquisitions the company has made. In addition, it is going through a massive shift to a new advertising platform that does not appear to be gaining traction. Now Yahoo! is being impacted by the downturn in housing.

While the stock market has rallied 3.8% since mid-summer, Yahoo! stock is down 8%. That is awful. That is telling investors that something is wrong with Yahoo!.

Tuesday, September 26, 2006

Through The Fly's Eyes: The Federal Reserve


The Fed Vs. Oil

Yesterday, Ethan Allen (ETH) warned again that revenue for the quarter is going to be weak. There are suggestions by leaders in the furniture industry that Crate & Barrel (which is privately held) and Williams-Sonoma's (WSM) Pottery Barn (whose results the company does not breakout) are also deteriorating.

Furniture company results are weakening as energy prices are dropping nicely. Ironically, earlier in the decade, housing prices were skyrocketing as oil prices were on a steady incline.

What does this tell you as investors? That the Fed is king. Seventeen interest rate increases have killed the housing bubble and caused the consumer to slow down. There is little evidence that oil has done any of that.

Through TheFLY's Eyes: Sharper Image


A Change At The Top For Sharper Image

On Tuesday Sharper Image Corp (SHRP) ousted founder and CEO Richard Thalheimer and replaced him with Jerry Levin, who will become interim CEO. Levin has experience in branded consumer products, having served as CEO of Revlon, American Household (the former Sunbeam), and Coleman.

However, even given Levin’s experience, SHRP faces a difficult road ahead. The company has been hurt by a substantive change in consumer tastes from “techy/gee whiz” gadgets to more-practical gadgets: in other words, from ionic air purifiers to portable road/map navigation devices etc. And SHRP’s revenue provide evidence of the above: the company recently posted a nearly 30% decline in same store sales – a very poor performance.

Sharper Image shares moved higher Tuesday on the news, up 50c to $9.87 in afternoon trading.

The consensus on Wall Street appears to be that Circuit City (CC) and Best Buy (BBY), and to a lesser extent Target (TGT) and Costco (COST), have displaced the Sharper Image: SHRP will have to redefine its role in the market to return to sustainable revenue growth.

Through The Fly's Eyes: UAL Corporation


UAL Corp Hires Goldman To Explore Strategic Alternatives

We blogged a few weeks ago, when the stock was at $24, how cheap UAL Corp is. Today the stock is at $28.45. Here's is a reminder of how cheap this stock is:

* Market Cap is $3.5 billion

* $5.1 billion in cash

* Operating cash flow of $700 million in the most recent quarter

* Grew revenue 16%

* Has $8.0 of debt post bankruptcy

* And is profitable

This stock has a long way to go. It is still on the runway ready to take off.

Monday, September 25, 2006

Through TheFLY's Eyes: Altria


Judge Allows Class-Action Suit Against Altria

Altria (MO), the former Philip Morris, faces tough-sledding after a U.S. District Court judge Monday ruled a lawsuit accusing tobacco companies of defrauding smoking into thinking “light” cigarettes were safer than regular brands can proceed as a class action.

The decision surprised some on Wall Street, and shares of MO fell sharply on the news, down $3.36 to $78.97 in afternoon trading Monday.

Altria said Monday it believes the judge’s ruling runs counter to the overwhelming weight of evidence in federal and state case law regarding class actions in smokers’ litigation and must be reversed.

Further, despite Monday’s ruling and litigation, JP Morgan remained upbeat on Altria, arguing that the pull-back in MO shares creates “a very attractive buying opportunity.”

Friday, September 22, 2006

Through The Fly's Eyes: Amazon and eBay


A Technical View

Amazon (AMZN) and eBay (EBAY) have been amongst the poorest performers in the NDX 100 and the Internet sector. Both stocks have taken a hit on the pre-announcement by Yahoo! (YHOO) concerning contracting ad sales in certain categories. Although neither Amazon nor eBay are as strongly tied to advertising they have been acting poorly since the news broke earlier this week. Both have broken their very short-term uptrend lines.

What is interesting is that this is not an isolated instance of the two stocks moving together. By overlaying the charts we can see that starting in early 2005 the stocks have moved [although with some variation] in virtual lock-step. Why would this be?

One possibility is that the stocks have been pairs traded against the strongest names in the sector, notably Google (GOOG) [that is, sold short against long positions in Google]. Another is that traders have been focused on the negatives of direct Internet retail and have switched preference, again, to the stronger names.

It is worth continuing to watch Amazon and eBay charts over the coming months to see if they can reverse their bearish postures. It is likely that both will turn together when the moment comes.

Chart created with Equis MetaStock

Through TheFLY's Eyes: Starbucks


Starbucks: Approaching Cultural Icon Status

Q: How can you tell when a company is well-positioned in a market?

A: When you can increase a price, with little or no negative consequences.

Starbucks (SBUX) appears to be in that sweet spot, pun intended (if you take sugar with that latte). The nation’s signature coffee chain announced a 5c per cup price increase, and the response on Wall Street was generally favorable. Starbucks also announced a 50c per lb. increase for whole bean coffee purchases.

Friedman Billings said Friday it expects Starbucks’ price increase to, counter-intuitively, have a positive impact: Friedman expects the hike to improve margins, with little impact on same store sales. Friedman expects SBUX to post EPS of 73c in 2006 and 89c in 2007.

Generally, a price increase in a sluggish economy leads to lower revenue/sales. Not so with Starbucks, which has built an enviable brand based on high-quality, fresh coffee and as a preferred gathering place for friends and business colleagues alike. To be sure, few companies, even the strongest defensive stocks, can maintain robust revenue gains amid a sluggish economy, but Starbucks has shown remarkable resiliency amid signs that consumers have cut back their discretionary purchases elsewhere. That suggests that Starbucks has not only found its place in the market, but also become a lifestyle or cultural icon.

And when a company reaches that level of brand acceptance, Wall Street knows that the company’s profits will be brewing for a long time.

Through The Fly's Eyes: Tribune Company


Old Economy Losing To New Economy

This is the headline: "Tribune Restructuring Two Complex Partnerships With Chandler Family, Its Largest Shareholder" Does that sound like an enticing investment to you?

As the headline suggests, the largest shareholder in the Tribune Company (TRB) is the Chandler family and they are definitely not going to the poor house. But what the deal symbolizes is that the newspaper and broadcast television businesses are old media.

Why won' t investors buy old media stocks? Because they have either no revenue growth, declining revenue growth or revenue growth below the rate of inflation. If a company has either of those three, the stock market classifies you as old economy. This is the second massive restructuring within one year for Tribune.

There are opportunities to make money in old economy stocks, they are often very profitable companies and have the potential for large stock buy backs or Dutch auctions. But for the most part, the market forces you to look for new, higher risk ideas to make money. That is the American way.

The newspaper and local TV broadcast businesses continue losing out to the Internet.

Thursday, September 21, 2006

Through TheFLY's Eyes: Wal-Mart


Wal-Mart Sets Its Sights On The Generic Drug Market

Analysts Thursday at mid-day were still trying to assess the long-term implications of Wal-Mart’s (WMT) announced plan to offer nearly 300 generic drugs for $4 per prescription.

Wal-Mart has promoted the plan as a way to make health care more affordable. WMT will test the plan at its Tampa Bay-area pharmacies, then expand the program throughout the rest of Florida in January 2007, followed by country-wide expansion during 2007. Analysts believe WMT should see an up-tick in traffic - attracting consumers who never shopped at WMT before - although it’s difficult at this early juncture to predict the program’s long-term traffic implications.

Short term, the plan’s trading impact on prescription benefit managers was negative: WMT’s announcement sent several key prescription benefit managers tumbling in early afternoon trading Thursday, on margin pressure fears, among other concerns. Trading volume was above-average, across the segment.

Medical Health Solutions (MHS) plunged $2.25 to $60.64, as did Caremark (CMX), which slid $2.98 to $56.13 and Express Scripts (ESRX), which dove $3.39 to $80.56. Drug wholesalers AmerisourceBergen (ABC), down $2.17 to $44.04, and McKesson (MCK), down $1.09 to $52.87, and Cardinal Health (CAH), down $2.41 to $66.28, were also hit hard.

Meanwhile, WMT slid 41c to $48.48.

Through The Fly's Eyes: Agilent Technologies


The Outlook For Tech Gets Better & Better

Agilent (A) announced last night that it is buying $2.0 billion of its stock back. This raises its total buyback to $6.5 billion. Agilent's market cap is about $13 billion, so it essentially will repurchase half of its value with stock repurchases.

In addition, this spring Agilent took Verigy, a semiconductor test business, public and will spin the rest off to shareholders. Verigy came public just above $14 and is now over $18. Not too bad!

Agilent is another tech company that is doing well. Private equity is buying Freescale (FSL), Oracle (ORCL) and Cisco (CSCO) knocked the ball out of the park, and Motorola (MOT) went after Symbol (SBL) this week. The activity is just picking up in tech land. The cash generation by tech companies is enormous and a meaningful upswing in tech spending is only just beginning.

Through The Fly's Eyes: Time Warner Inc.


More Reasons To Look At Time Warner's news feed service referred to a Barron's Online piece suggesting to get back into Time Warner (TWX). The piece cited Time Warner's underperformance relative to all their big media peers: Rupert Murdoch's News Corp. (NWS) is up 20.2%, while Disney (DIS) and CBS (CBS) are each up 30.8% and 8.6%, respectively in the same time period.

According to this Fly, to see what will drive Time Warner's stock look at Comcast (CMCSA). Comcast supposedly past 1 million VOIP users in August, adding over 300,000 new voice customers in the quarter. Actually, a lot of the cable companies are having VOIP success and there is no reason why Time Warner will not.

Another factor to consider is that the cross over point for AOL is approaching. Where advertising and other revenue versus subscription revenue will be measurable by the investment community. This visibility should take selling pressure off of this stock.

Add to this the always impatient Carl Icahn banging on Dick Parson's door and you have a confluence of factors that can drive this stock higher.

Wednesday, September 20, 2006

Through TheFLY's Eyes: Boeing


Boeing Secures Border Protection / Monitoring Work

Boeing (BA) registered a modest victory Wednesday with word that the company had been selected by the U.S. Department of Homeland Security to lead a technology-intensive effort to secure the U.S.’s borders.

Boeing has been awarded an $80M contract to install or supervise the installation of sensors, cameras, fences, vehicle barricades, and small unmanned aerial vehicles, starting along the Arizona / Mexico border.

Boeing traded up $1.34 to $76.21 on the news in Wednesday afternoon trading.

The project is called the Secure Border Initiative. Analysts have placed the project’s total outlays at $2B for a six-year span. Further, given the project’s size and the federal government’s spending pattern under previous projects, it’s not a stretch to point to additional work for Boeing under the initiative, although no other tasks/dollar amounts were announced at the time of Wednesday’s contract award.

Wednesday’s award was a welcomed announcement of good news for Boeing, which has seen its stock slide from $89 in the spring to about $76, due to Wall Street’s concerns about slowing aircraft demand in a slowing global economy. Most analysts conclude that Boeing is well-positioned in the commercial airline sector, given the positive reception for its next-generation airliner, the 787, which has amassed significant orders from national airlines globally. Nevertheless, plane orders can be reduced due to changing economic conditions, which only underscores the importance of the Secure Border Initiative contract win.

Through The Fly's Eyes: Oracle Corporation


Larry Ellison Goes For The Kill

Bye Bye SAP. Larry did not hold back last night bashing SAP in it earnings conference call. Larry Ellison's confidence has been building the last few quarters. But last night he let loose, essentially saying that SAP is in big trouble.

The key to Oracle's (ORCL) success has been focusing on developing an open standards middleware based on Java. SAP is sticking to its proprietary software. Ellison said that Oracle's middleware supports more SAP software than SAP's middleware does. This allows Oracle to sell many of its best of breed software that it has acquired the past few years to SAP customers.

What is SAP's response? According the Ellison, they are two years behind Oracle. Ellison cited that SAP growth rate in the most recent quarter was 8%, while Oracle's was 80%. Ellison implied that SAP will lose market share for the next two years.

The master Samurai appears to be back on top.

Through The Fly's Eyes: Cafe Lattes In China


Starbucks Coffee Should Be The Determiner Of Exchange Rates

John Rutledge, often a guest on Kudlow & Co, might have found the true way to measure what the exchange rate between China and the US should be. In an excellent piece titled Forget the Renminbi, Revalue the Latte Rutledge compares the price of coffee at a Starbucks in China with one in the US.

Rutledge concludes that one unit of cappuccino in Beijing is 50% more expensive than in the US. "Instead of revaluing the RMB by 25% as the US government wants, my research indicates that China should actually devalue the RMB by 50% to restore Cappuccino Purchasing Power Parity (CPPP) and correct global imbalances."

Rutledge poking fun at Treasury Secretary Paulson's visit to China has a more serious side to it. Having politicians attempting to find ideal exchange rates is a dangerous game. Often theory does not match up with reality. Why would a country with such a lower per capital GDP pay so much for coffee? Another question: Even if one assumes that the RMB is allowed to float, how do we know that it would appreciate in value? Who is going to guarantee that that is going to happen?

These are serious questions. Hopefully Mr. Paulson has given them some serious thought.

Tuesday, September 19, 2006

Through TheFLY's Eyes: Service Corp.


Evaluating Service Corp.’s Performance

Service Corp. International (SCI) appeared to give light revenue guidance at a Bank of America conference late in the day Monday. However, use any price weakness to buy into this stock. On Tuesday, SCI’s were virtually unchanged at $8.88 in early afternoon trading.

Service Corp was a funeral parlor roll-up in the 1990s. The stock had a huge run and sold for a very high valuation. Why not? As baby boomers got older they were going to die and require more of Service Corp.'s services. It made sense.

Guess what happened? People stopped dying. That's right! The death rate slowed, which meant that revenue growth slowed. Also, Service Corp found fewer funeral parlors to purchase, so growth by acquisition faulted. In addition, Costco (COST) got into selling coffins - a high-margin business for funeral parlors. A virtuous cycle turned into a vicious one.

It appears the worst is behind this company. Service Corp. has a few good years of results and should be looked at by investors. While it might not have the high growth profile of the 1990s, it is a steady grower with excellent cash generation. For investors looking for solid returns year-in and year-out, look at Service Corp. International.

Through TheFLY's Eyes: Freescale Semiconductor


Who’s Next?

Kohlberg Kravis Roberts, Apax Partners, Bain Capital, and Silver Lake backed out of the Freescale (FSL) bidding process yesterday, leaving the Blackstone Group as the apparent winner.

Freescale follows Phillips' semiconductor business which was purchased by private equity. What's next? Last week we blogged about potential candidates. With Silver Lake and fellow partners having cash to attempt to purchase Freescale for $17 billion, what else is available in the semi space? National Semi (NSM) has about an $8.5 billion market cap. and Analog Devices (ADI) has a market cap. of $11 billion.

You could argue that both of these companies have better products than Freescale. If private equity was willing to purchase Freescale, they should be more than willing to purchase National Semi or Analog Devices.

Monday, September 18, 2006

Through TheFLY's Eyes: Intel


Intel, U. California-Santa Barbara Claim Chip Breakthrough

Intel (INTC) and University of California-Santa Barbara Monday claimed they achieved a breakthrough in creating lasers on computer chips by building the world’s first electrically-powered hybrid silicon laser using standard silicon manufacturer processes – a breakthrough that could substantially lower the cost of data communications.

The researchers were able to combine the light-emitting properties of Indium Phosphide with the light-routing capabilities of silicon into a single hybrid chip. When voltage is applied, light generated in the Indium Phosphide enters the silicon waveguide to create a continuous laser beam that can be used to drive other silicon photonic devices. A laser based on silicon could drive wider use of photonics in computers because the cost can be greatly reduced by using high-volume silicon manufacturing techniques.

Shares of Intel were up 18c to $19.69 on the news in early Monday afternoon trading.

Currently, a common method used to transmit lasers is a fiber optic network. However, fiber optic networks are expensive. Silicon-based laser transmission would improve performance while also substantially decreasing data communication costs.

Commercial deployment of the silicon-based technology is still several years off, but Intel believes that one day dozens, perhaps hundreds of hybrid silicon lasers could be integrated with other silicon photonic components onto a single silicon chip.

Through TheFLY's Eyes: Symbol Technologies


A Play On RFID

Symbol Technologies (SBL) is supposedly putting itself up on the block according to news sources this morning. Symbol makes a lot of the wireless handheld equipment used in retailers to keep track of inventory.

Symbol has received a lot of attention from hedge funds and other more active investors seeking to play the potential boom in RFID, radio frequency identification. However, Symbol has become more of a trading vehicle for investors rather than a boom stock, trading between $10 and about $15 per share.

This morning Motorola (MOT) is speculated as a buyer. From this Fly's perspective it's worth the spec. The company is reasonably well run and there are merits to the RFID business. A large company may be able to bring a lot more to the table with Symbol's products and pay a much higher price than the $12.71 stock price the company closed at on Friday.

Through TheFLY's Eyes: Oracle Corp.


The Huge Database Company Reports Tomorrow Night

Oracle (ORCL) reports results tomorrow night. The street is looking for $.016 versus $0.14 last year. Oracle has been on an acquisitions spree, with one of the higher profile deals being completed Siebel Systems. Soon after completing the deal, Siebel started reporting pretty good results for Oracle.

The big silicon valley powerhouses have all reported solid results recently--Cisco (CSCO), Oracle and even Sun (SUNW) showed signs of life in its latest release.

If Oracle's results are strong, it is another important data point that Silicon Valley is beginning a creditable upswing that investors should stay focused on.

Friday, September 15, 2006

Through The Fly's Eyes: Dynegy Inc.


Massive Deal

The merchant power production business went through a similar boom-bust cycle as the tech-telecom sector did during the 1990s. Many companies that built power generation to participate in the deregulation of the electricity business went belly up.

However, most of the industry has restructured and consolidation is beginning. Dynegy's (DYN) announcement this morning that it is merging with LS Power, a privately held power generation producer, is a big part of the consolidation process. Dynegy will be the surviving company consisting of more than 20,000 megawatts of generating capacity concentrated in the Midwest, Northeast and Western U.S---that is huge.

Bruce Williamson, Dynegy's head, will run the new company. Williamson has not been bashful about saying he wants to head an industry consolidation. This is a big first step in an important industry that investors must start looking at.

Through The Fly's Eyes: Deal Speculation


Schering-Plough Eyes Bristol-Myers Squibb

Speculation has been running wild since Fred Hassan, Schering (SGP) Plough's CEO, took charge of the once-troubled pharma company. Investors assumed he would fix it up and then put it up for sale.

However, there is speculation this morning in a New Jersey newspaper that Schering might be doing the buying, not the selling.

Bristol-Myers Squibb (BMY) has been one big basket case of a company. Once again, Bristol's top management is failing to turn this company around. Schering's Hassan is in the middle of his second successful pharma turnaround.

If Schering does buy Bristol there most likely will not be much of a premium paid, but you would want to own the combined company. Bristol has been a disaster of a company that needs new leadership. Cost savings alone could lead to investors making some big money.

Thursday, September 14, 2006

Through TheFLY's Eyes: Bear Stearns


Bear Stearns Makes It 3-For-3 For Wall Street

Wall Street dented the “sluggish growth” thesis slightly Thursday when Bear Stearns (BSC) became the third 'Big Gun' Wall Street firm - after Goldman Sachs (GS) and Lehman Brothers (LEH) - to meet or exceed the consensus EPS estimate.

Bear Thursday reported Q3 EPS of $3.02 versus the Reuters consensus estimate of $2.87. Further, Q3 revenue rose to $2.1B compared to the Reuters consensus estimate of $2.05B. Bear registered solid revenue growth in equity sales and trading, up 31%; investment banking fees, up 23%; and fixed-income revenue (which includes bond trading), up 19%.

Bear’s shares rose 84c on the news to $137.06 in early Thursday afternoon trading.

Bear is in a bit of a race to catch-up with it peers in investment banking, with the best tactics being better performance and appropriate acquisitions. Some analysts argued that the performance dimension would be an upstream swim near-term, given projections for a slowing global economy. However, Bear’s Q3 report underscores that the swim is going just fine, so far.

Through The Fly's Eyes: Time Warner Telecom Inc.


Announces Two Shareholders Want To Sell Stake

Time Warner Telecom (TWTC) announced this morning that two large shareholders, Time Warner Inc. (TWX) and Advance Telecom Holdings Corp, want to monetize their equity holding in this company.

Is this a sign to sell Time Warner Telecom? No. Dick Parsons, Time Warner Inc.'s head, has been saying since taking over the company that he wants to simplify what the company owns. This is another step in this process.

Regarding Advance Telecom Holdings, they made some good money and most likely want to move on to other investment opportunities.

While TWTC's stock has had a big run, and investors mostly do not want to chase the stock up here, this is still a good long-term hold and not a stock to be dumped. Industry consolidation in the fiber-to-the-premises space for businesses is just beginning and there is plenty of money to be made.

Through The Fly's Eyes: Crude Oil


A Technical View

Crude has been the prominent theme for commodity hawks and stock bulls.
Both believe that a reversal of the bullish environment for commodities is underway while the stock bulls believe that falling commodity prices are net bullish for stocks.

What complicates both viewpoints is that on the one hand, prices are a very long way from violating the long-term trend lines as we shall see on the chart. Secondly, it is not always the case that falling commodity prices are bullish. While it is true that falling gasoline prices for example or home heating cost reductions would allow consumers to spend, it would not in general be bullish for the economy if falling prices are a result of weakening demand.

Our focus here is on the price chart for Light Sweet Crude (which is in a seasonally weak cycle following the close of summer in the US when demand is high). The chart shows clearly that several of the shorter-term uptrend lines have indeed been violated. However the primary uptrend line in more than 10% away from current price.

Further we can see that each time there have been sharp peaks and troughs in the past, much higher prices have followed. This despite a loud chorus of "crude is dead" each time.

The key now is to follow the primary uptrend line as well as the shorter-term lines to see how crude reacts. There is as always a risk that higher prices may not continue. So far though the trend is intact.

Sometimes the sharpest corrections in price, which can give the appearance of a collapse, occur in the context of the most bullish moves.

Chart created with Equis MetaStock

Through The Fly's Eyes: Level 3 Communications, Inc.

from Signs On With Level 3 Communications

Cisco (CSCO) reported a blow out quarter in August. Why? Because its pure IP products are massively more competitive than the circuit-switched stuff from Lucent (LU) and Alcatel (ALA).

Why did YouTube sign up with Level 3 (LVLT)? Because it has the purest IP network of any of the service providers. What Cisco is to network equipment, Level 3 is to service providers. Its network was built from the ground up using IP technology.

Video, which YouTube needs to transport, requires substantially more bandwidth than voice and data. Level 3 has the most powerful price-performance network in the US. Level 3 has been quietly signing up more and more customers. Even Cramer pounded the table last night on this stock.

Wednesday, September 13, 2006

Through TheFLY's Eyes: Lehman Bros.


Another Solid Quarter For Lehman

The initial consensus regarding Lehman Brothers' (LEH) Q3 report is that it was another solid quarter for the company, despite building headwinds.

LEH posted Q3 EPS of $1.57, up from $1.47 a year ago, and 8c above the $1.49 Reuters consensus estimate. Further, Q3 revenue totaled $4.2B compared to the consensus estimate of $4.0B.

LEH’s shares moved higher on the news, up $2.10 to $70.14 in early Wednesday afternoon trading.

Equity trading, with revenue up 31% to $837M, bolstered the bottom line, offsetting investing banking revenue, which declined 11% to $726M.

Analysts generally applauded LEH for maintaining solid margins and revenue despite a more-challenging capital markets economy: LEH is finding new ways to make money – for example, packaging mortgage loans made to commercial property owners - as growth in historic revenue streams slows.

Through TheFLY's Eyes: Blog Performance


Not Too Bad For A Week's Work

The following is a review of stocks we wrote positively about last week:

Global Crossing (GLBC) +11.8%

Fairchild Semi (FCS) + 6.2%

UAL Corp (UAUA) + 4.8%

Ciena (CIEN) + 8.0%

That is pretty darn good. Market participation is broadening out. A sign of the beginning of a healthy bull market run.

Through The Fly's Eyes: Seagate Technologies


Hubris Building In Tech Land?

Seagate (STX) said yesterday that it was offering $1.25 billion senior unsecured notes and entering into new a $500 million credit facility. This is happening when flash memory penetration is becoming greater and greater.

Historically, you would be hard pressed to find anyone to say anything nice about the disk drive business. It has always been a tough business. But this is the second major event in as many days where tech companies have showed a willingness to use debt.

Yesterday, Freescale announced that it was in discussions to go private. Therefore, this semiconductor company will pile on the debt.

In the post-bubble era, tech companies have been so neglected and valuation so low that they can go private or issue debt to buy back stock. When well-run companies are issuing debt to buy back stock in tech land, investors should start paying attention. The action in technology the last few days is most likely the beginning of a pretty long-term trend. Stay with tech, stay away from commodities.

Tuesday, September 12, 2006

Through TheFLY's Eyes: Baidu


A Technical View

The stock had been trading down today on concerns expressed by Piper Jaffray's analyst concerning possible click-fraud at (BIDU). Since then the stock has bounced. Technically the stock is trading bullishly though there have been some hair-raising bouts of volatility (see gaps on chart which are one-day price changes).

Even today the stock never got close to the lower limit of its bullish price channel at $75.62 when it was trading down on the concerns noted.

At its current price as this is written ($79.81) the stock is above the midpoint of the price channel and closing in on the upper limit of the price channel at $81.31.

There is also a bullish pattern or a potential one, which is a "cup and handle". The price channel as indicated on the chart appears to be at the $86 area. Support levels to watch on any slip backs are at $78.60, $77.70, $76.50, $75.62.

Chart created with Equis MetaStock

Through TheFLY's Eyes: Apple Computer


Apple Event Today at 1pm EST

A reminder for anyone not in the Apple Computer (AAPL) loop: Steve Jobs is hosting a major Apple event this afternoon in Cupertino, California. Macrumors has a great deal of speculation on their site about what will be announced today, including an agenda claiming the company will announce a new version of iTunes, an online movie download store, and a new iPod.

Through TheFLY's Eyes: Semiconductors


Lots Of Mixed Signals

Private equity yesterday showed strong interest in Freescale (FSL), the Motorola (MOT) semiconductor spin off.

National Semiconductors (NSM) warned the other day that revenues were going to be down. However, earlier last week, Fairchild Semiconductor (FCS) said results would be up in a seasonally weak quarter.

Also, International Rectifier (IRF) was recently upgraded by a major brokerage firm, saying that the power MOSFET business was in good shape.

Intel (INTC) announced it is firing 10,000 people as it finally has a serious competitor, the first time in over 15 years as Advanced Micro Devices (AMD) is producing some excellent product.

Om Malik of GigaOM wrote an excellent piece this week summarizing Qualcomm's difficulties.

Analog Devices (ADI), one of the great stock performers during the 1990s, appears to be having growth pains.

The semiconductor industry appears to be in a state of flux. However, there is a big difference between the semiconductor industry today than in the past. With the development of Asian foundries to make chips developed and designed in the US, many semi companies are less capital intensive and throw off a ton of free cash flow. With yesterday's announcement of private equity interests in Freescale, more deals will most likely follow. Two stocks that might be ripe for the picking are National Semi and Analog Devices.

Through TheFLY's Eyes: Cisco Systems


What is Monopsony?

The wrote an excellent piece on Cisco and monopsony. What is monopsony? According to Wikipedia, it is a market form with only one buyer, called a "monopsonist"

The Stalwart was asking how Cisco can maintain such high gross margins of 65% for so long. The Stalwart pointed out that Cisco buys component parts from Finisar and Avago for about 25 bucks and then turns around and sells them for 150 to 300 bucks without adding any incremental value. Cisco adds virtually no value and makes massive profits versus that of the manufacturer.

The same could be said for the PC business. It is no secret that PC manufacturers cumulatively have lost money since the industry began. The lone exception has been Dell. But Dell has to get by with paltry margins. But look at Intel and Microsoft--Intel can have peak gross margins of 65% and Microsoft has gross margins of 90%. The two monopsonists make all the money and others just try to survive serving them.

Therefore if you want to find the ultimate investment: look for the monopsonist.

Monday, September 11, 2006

Through TheFLY's Eyes: September 11, 2001


Remembering And Honoring The Victims Of September 11, 2001

On this day we remember and honor the 2,993 persons whose lives were taken away from them during the terrorist attack on New York’s World Trade Center, the United States Pentagon, and on a plane that crashed in Shanksville, Pennsylvania five years ago, on September 11, 2001.

In cities, towns, and villages in the United States, and in communities across the globe that also love freedom and democracy, citizens will take time to attend services to remember all who perished. We mourn the loss of their lives, and our prayers and thoughts are with their families and friends. In the words of Mr. Lincoln, it is altogether fitting and proper that we should do this.

And let us also, re-quoting Mr. Lincoln, continue with the great struggle of our age, and in doing so each day honor those who perished. Let us vanquish every last remnant of the perpetrators of this act of intrinsic evil, and their barbaric, tyrannical cult - Islamic extremism - so that liberty can flourish and so that government of the people, by the people, for the people, reigns victorious across the Earth.

Friday, September 08, 2006

Through TheFLY's Eyes: Money Matters


Editor’s note: In our new “Money Matters” column, look for incisive commentary on this blog featuring a summary and analysis of the week’s most important issues affecting money, markets, and investing. It’s no-nonsense analysis timed to arrive when you have the time to read.

U.S. Job Growth

It’s often been said that Americans make sacrifices to secure two important economic goods: 1) earnings, [also called profits] and 2) jobs.

Or put anther way: How many investors will invest and risk their capital for little or no return on equity? Very few.

Similarly, how many citizens – particularly young citizens – would live in a nation where the job outlook is continually bleak? Very few.

That the United States’ economic system – basically, the American way of doing things, economically-speaking – rests on those two tangibles – profits and jobs – is beyond dispute. Americans in particular and the United States in general face a daily drumbeat of criticism and brickbats from critics far and near, across the Atlantic and just to our north, academic and governmental, regarding the liabilities and costs of the American system. Policy wonks and pundits opine on about “the harshness of the economic system,” its “inadequate social welfare state,” and the “costs of corporatism.”

To this, Americans and America has always had the check-mate retort:
Profits and jobs.

Talk About Roaring

The industrial age has never seen an economy as successful as the U.S. economy. For that matter, human civilization has never seen an economy as grand, as sophisticated, as innovative as the U.S. economy. The matter is beyond debate. Further, most developed nations – including the major states of Europe - can not offer a decade comparable to the 1990s (a very profitable decade) in the United States, let alone the 1920s, when, you will recall, the Dow Jones Industrial Average rose more than four hundred percent in less than ten years. Regarding profits, the United States wins, hands-down.

And it’s been the same case regarding jobs, or what economists like to call “job creation.” If one discounts the old planned economic systems of the former Soviet command economies – whose systems `employed’ adults whether there was work for them or not, the tally sheet regarding job creation has many American accomplishments, and fewer accomplishments for just about every other industrialized economy on the face of the Earth. During the 1890s – at the dawn of the twentieth century – the saying in Europe was, “If you had an idea or a dream, or if you needed a job, you went to America.” That wasn’t the most flattering reflection on our democratic friends in Europe, but it was certainly true for its time. People did not start referring to America as the land of opportunity without substantial, tangible – and personal - evidence for that statement. Starting with the 1890s and proceeding through two major immigration waves, the U.S. economy created more jobs than any other nation since the dawn of the industrial age. Save some larger European nation-states, there have been more jobs created in just one American state, just one American state – California – than in most nations in the world. In short, there has never been a job creation machine like the United States.

Brave New World?

Or, at least, up until recently. Lately, the two tangibles on which the American economic system rests have not been as firm. More specifically, earnings have held up well recently – the S & P 500 just recorded its 16th consecutive quarter of double-digit earnings growth – but job creation has not. The current U.S. economic expansion – now in its fifth year – is creating only about 35% of the jobs the economy would typically create, compared to previous economic expansions of similar length. Put another way, whereas past economic expansions would create 10 jobs, the current expansion is creating 3.5 jobs. As one might guess, that’s an enormous difference in jobs. Other stats are even more telling. From 1993-1997 [5 years] the Clinton Administration’s expansion saw 14 million jobs created. From 2001-2006 [5 years] the Bush Administration’s expansion has created about 5 million jobs. Another: the smallest 12-month period of job growth during the Clinton Administration created more jobs than largest 12-month period in the Bush Administration. By almost every measure of employment conditions, one conclusion is undeniable: the current expansion, while not a jobless recovery, is characterized by very low job creation.

And if the above were not sobering-enough stats, here’s another: from Q3 2001 to Q3 2005 the U.S. economy created 1.2M jobs. The European Union’s economy, despite being weighed-down by higher income taxes and a costlier social welfare state, created 7.9M jobs.

What’s caused the job slump? Economists are still searching for the answer. Some argue globalization – the integration of markets – is the primary cause, due to the shift of U.S. jobs to lower-cost regions of the world, but others argue globalization is only a partial cause. Some economists say the current job dearth is a consequence of investment excesses in the 1990s, and that the U.S. economy is still “working-off” excess capacity in many sectors. Another economist camp argues that the increased productivity of the U.S. economy, itself, is a job restrainer: the U.S. economy now has in place, in many sectors, processes that enable companies to increase productivity without increasing manpower. Still another economist camp says the high cost of employee benefits – particularly health insurance – is the cause: benefits are so costly that companies look for every opportunity to avoid hiring a full-time, U.S.-based employee, which has depressed job growth.

The Job Nexus

Economists will need many more data points before they can come to an informed conclusion regarding the cause(s) of the current economy’s low job growth. Even so, markets do not wait for rigorous longitudinal studies from economists: they make instantaneous judgments about current economic conditions, with an eye to the future. And right now the Dow Jones Industrial Average in Sept. 2006 is saying something about the economy, and perhaps about job growth, as well. The U.S. economy continues to grow, but the Dow has basically remained flat for the last five years, roughly paralleling the low job growth period – perhaps signaling something about the sustainability of the current recovery; perhaps not.

Nevertheless, given its status as a foundation, along with profits, of the U.S. economic system – profits and jobs are the two primary advantages of the U.S. economy – that would suggest that the U.S. economy will have to start creating more of the latter, in the years ahead.

Through TheFLY's Eyes: Hewlett-Packard


The Hewlett Scandal

It’s too soon to determine the ramifications of the widening scandal over Hewlett Packard’s (HPQ) investigation into leaks to the media by its board of directors, but initial evidence suggests that, at minimum, non-executive Chairman Patricia Dunn exercised poor leadership.

A spokesman for California Attorney General Bill Lockyer told the Wall Street Journal Thursday that state investigators now believe there was criminal activity involved in the methods used to search the phone record of members of HPQ’s board of directors. Besides HPQ directors, the company disclosed that nine reporters, including Pui-Wing Tam of The Wall Street Journal, had their phone records accessed by investigators working for HPQ.

The tactic against the board, if proven true, would amount to spying on board members - something that is antithetical to the independent oversight and review climate that is supposed to be sacrosanct for each corporate board of directors. Also, the early facts suggest an effort by HPQ to squelch speech or dissent, possibly to silence critics – again antithetical to corporate oversight. HPQ’s shares were up about 20c to $35.61 on Friday at mid-day.

Only the California Attorney General’s office can determine if hard evidence points to a violation of California state law, and to what extent etc, and if it warrants prosecution.

But as of Friday it appears that one fact is certain: the interests of HPQ’s shareholders are not being served by those in charge at HPQ.

Through TheFLY's Eyes: Film Studios


Review of Summer Blockbusters

Early this May, previewed this summer's movie line-up, and now, as the the summer winds down, we have come back to review the summer's hits and misses.

The top 10 movies of 2006, to date, are:

1) Pirates of the Caribbean: Dead Man's Chest - $407M [Disney (DIS)]
2) Cars - $240M [Disney/Pixar]
3) X-Men: The Last Stand - $234M [New's Corp's (NWS) Fox]
4) The DaVinci Code - $218M [Sony (SNE)]
5) Superman Returns - $198M [Time Warner's (TWX) Warner Bros.]
6) Ice Age: The Melt Down - $195M [Fox]
7) Over The Hedge - $155M [Dreamworks]
8) Click - $135M [Sony]
9) Mission: Impossible III - $134M [Viacom's (VIA) Paramount]
10) Talladega Nights: The Ballad of Ricky Bobby - $128M [Sony]

Box office data collected from

Although The Fly previewed and predicted the success of all of the top five movies of the summer, we underestimated the strength of animated children's movies - "Ice Age" and "Over the Hedge." Additionally, we also underestimated movies with top comedic actors - Adam Sandler in "Click" and Will Ferrell in "Talladega Nights: The Ballad of Ricky Bobby."

As far as disappointments, none can top Warner Bros. "Poseidon," which brought in less than $61M in box office receipts on an estimated budget of $160M.

Other disappoints include:

* Lady in the Water - gross: $42M, estimated budget: $75M [Warner Bros.]
* Miami Vice - gross: $62M, estimated budget: $135M [General Electric's (GE) Universal]

Interestingly, two of the top ten movies of the summer can also be considered disappointments, as they have not made back their estimated budgets. They are:

* Superman Returns - gross: $198M, estimated budget: $270M
* Mission: Impossible III - gross $134M, estimated budget: $150M

Budget data collected from

Extrapolating the data above, Disney is clearly the winner of the summer. Considering that "Pirates of the Caribbean" was the second movie in a trilogy, they look set to continue their success next summer.

Time Warner's Warner Bros. looks to be the biggest loser, with the misguided "Poseidon" and "Lady in the Water" both dragging revenues down.

But an argument can be made that this summer's biggest loser is actually Tom Cruise. Cruise was allegedly fired from his sweet contract by Viacom chief Sumner Redstone after "Mission: Impossible III" underperformed, which Redstone blamed on Cruise's off camera antics. Cruise maintains, however, that he was not fired, but moved on of his own accord.

Thursday, September 07, 2006

Through TheFLY's Eyes: Global Crossing


Looks Like The Turnaround Is Getting Traction

Yesterday, Global Crossing UK (GCUK) reported good results. Global Crossing UK is majority owned by Global Crossing LTD (GLBC), which was one of the poster child stocks of the tech-telecom bubble.

Global Crossing filed bankruptcy earlier in the decade and has emerged with little debt on its balance sheet. When buying Global Crossing stock you get two companies - the undersea fiber cable assets which is mostly owned by Global Crossing LTD and the UK and European focused business which trades under Global Crossing UK.

Global Crossing UK reported solid results yesterday. While revenue was essentially flat from the previous quarter, the quality of revenue is improving. Management indicated that demand for services is picking up and that it is working with other more pure IP-based providers to sell services, indicating a healthy operating environment is emerging.

Global Crossing LTD also reported a solid quarter during the summer. GLBC has rallied nicely during the past month, however, got hit good yesterday in the market's sell off. It cost Global Crossing LTD $5 to $6 billion to complete its network. Today, you can buy the stock of Global Crossing LTD and get all those global assets and the UK business for less than $1.0 billion just as the supply and demand for fiber bandwidth gets tighter and tighter.

All the hype from the bubble era about demand for bandwidth is proving true, yet few want to invest in it. This is your chance to get a good company for a cheap valuation in a higher growth industry.

Through TheFLY's Eyes:Fairchild Semiconductor


A Good Data Point For Technology

Fairchild Semiconductor (FCS) announced yesterday that its revenue will be up 2% for the current quarter. Historically, Fairchild's revenues have been down 2% in the September quarter.

Fairchild is a good food chain stock to focus on to see if cell phone and/or PC demand are showing any material weakness. From looking at Fairchild's mid-quarter update, business looks OK in the semiconductor business so far.

While investors have been concerned that a slowdown in housing could spill over to other industries, the first bottom of the food chain stock in technology to provide guidance suggests that things might be OK in tech land.