Today's Coffee - The Lone Ranger Rides Again

(Stocks in article: NYSE: GS, NYSE: LEH, NYSE: MER, NYSE: MS, NYSE: BSC, NASDAQ: SEIC, NASDAQ: LEND, NYSE: MHP, NASDAQ: DELL, NYSE: HPQ, NASDAQ: OPSW, NASDAQ: CPWM, NASDAQ: ADPI, NYSE: DD)

Just as Black Bart (played by William Poole in our off-Wall Street show) has scared all the town folk to lock their doors and shutter up their credit windows, and when the Federal Marshall (played by Bernanke) is nowhere to be found and the Calvary (played by the Democrat-controlled Congress) is on vacation, The Lone Ranger (George Bush) comes to the rescue to save the day with the words, "Hi-yo Silver, away!"

Do not get us wrong here, we liked what we heard from the Fed Chief in his Jackson Hole speech today. In fact, it's almost like he's reading The Greek. He covered all the bases and addressed all of our concerns in his timely speech on the topics of housing, housing finance and monetary policy. Most importantly though, he indicated that while bailing out financial market participants is not the Fed's concern, maintaining the economy is. We think that this clearly implies that he will cut the Fed funds target rate in due time. Wall Street Greek continues to foresee a 50 basis point reduction. While we can see that the Fed chief is not one to be mindful of appearances, at least not on the surface of things, a fifty point cut has a greater psychological impact than the standard quarter point trend. At the same time, it follows the Fed boss' measured nature.

We held back today's article in order to cover the President's address, and his plan to help a portion of the nation's troubled borrowers survive today's tough times. Our discussion that follows is based on the speech and our study of The White House's official document on the topic. The President outlined a plan to help homeowners who are having difficulty paying their mortgages, and to help ensure that the problems now disrupting the housing market do not recur.

In his Rose Garden speech, the President painted a picture of a healthy economy that has a localized ailment. He used the recently adjusted higher Q2 GDP growth to help support his argument. He then compassionately attempted to avoid alienating troubled borrowers by saying that while the problems of housing are modest in the overall frame of things, they are of utmost importance to those facing foreclosure.

Bush then outlined his three faceted plan:

1. He called on Congress to pass "Federal Housing Administration (FHA) Modernization Legislation." An earlier version of this legislation was passed by the House in April 2006 by 400 votes. He's pushing Congress now to act quickly in passing a clean bill. The President's proposal lowers FHA downpayment requirements, and allows for the insurance of bigger loans, while giving the FHA more pricing flexibility. At the same time, the administration is launching FHA-Secure, a program to help people with otherwise good credit, who have missed mortgage payments because of adjusted variable rates and payments. These individuals will be allowed to refinance into more manageable loans.


2. The President is asking Congress to change a key provision to the Federal Tax Code. As it stands now, the tax code counts canceled mortgage debt on primary residences as taxable income. So, if the value of a home declines, which is now the norm, and a portion of a mortgage is forgiven, that portion is considered taxable income. The President seeks to temporarily forgive that taxable income and perhaps mitigate a future burden on consumer spending in the process, as we see it. This will only apply to the primary residence. This bi-partisan legislation is already in Congress, so we do not think George should take credit here.


3. The last of the three keys to the President's plan echoes ideas we have already heard from him and others. The President is launching a new "Foreclosure Avoidance Initiative" to help identify, locate and notify borrowers who could fall victim to foreclosure, and help them refinance their loans or otherwise mitigate future problems.

Every little bit helps, and we believe the actions of the President and Congress do most for the market by showing a will to help, and thus providing confidence that if need be, more action could be taken. The same goes for the Federal Reserve. So, coming into the week following the holiday, we anticipate further market rally. We especially like the innocent victims of the recent adjustment, and though the best place to find innocence of late is probably not within the Financial Sector, we would now go to a neutral view on the huge group. In doing so, we would begin looking to handpick stock specific names for long opportunity. We would still steer clear of the I-banks like Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Bear Stearns (NYSE: BSC), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS), as there remains risk of significant near-term losses.

One name we like is SEI Investments (NASDAQ: SEIC), despite its ties to capital market gains and losses. SEIC has shown to be a stubborn performer over the years, and holds an S&P Quality Ranking of A+ as a result. It's shares have been beaten down of late, but we suspect that's only helped add value to the company's share repurchase program.

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Nerve Gas Vials Found At UN

Vials of a deadly nerve gas were discovered in one of the United Nations buildings in Manhattan. Initial reports indicated that these were nerve agents found in Iraq, meant for destruction, but somehow they fell through the loop and were sitting around for ten years. This appears NOT to be a threatening situation now that the vials have been removed.

Workers were evacuated from a building when the deadly agent, phosgene was discovered in weapons inspectors' files that had been sealed since 1996. The deadly nerve agent was first discovered in the al-Muthanna chemical weapons plant north of Baghdad. Officials are easing concerns, stating that there is no imminent danger. Apparently, the vials were discovered nearly a week ago, but the FBI evacuated the building as it removed the agents.

Phosgene is a major industrial chemical used to make plastics and pesticides. At room temperature (70 degrees Fahrenheit) phosgene is a poisonous gas. The agent can be stored as a liquid, but when a vial is broken, the gas is dispersed quickly, staying close to the ground and spreading rapidly. The gas may appear colorless or as a white or off-white cloud. At low concentration, the gas' odor may smell pleasant, like newly mown hay.

The gas' military designation is "CG," and it was used extensively during World War II as a choking agent. Personal risk depends on how close you are to the agent when exposed. Upon exposure to phosgene, the following symptoms may develop immediately:

• Coughing
• Burning of the eyes and throat
• Blurred vision
• Breathing difficulty or shortness of breath
• Nausea and vomiting
• Skin contact can result in lesions
• Fluid build up in the lungs
• Low blood pressure
• Heart failure

What you can do after exposure:

• Leave the area as soon as possible. Getting to fresh air quickly can significantly improve your chances of survival. If outdoors, head upwind and to high ground, as the gas is heavier than air. If indoors, leave the building.
• Remove your clothing and rapidly wash your body with soap and water, and get medical care quickly. Cut clothing off, do not pull shirts over your head.
• If your eyes are burning, rinse them with water for 10 to 15 minutes. Wash glasses and dispose of contact lenses.
• If ingested, do not induce vomiting or drink fluids. Call 911 and seek immediate medical attention.
• Regional Poison Control Center: 1-800-222-1222
• CDC: 1-800-CDC-INFO

Today's Key Market News - A Communist Retirement

(Stocks in article: NYSE: HRB, NYSE: NBG, NASDAQ: YHOO, NASDAQ: SHLD, NYSE: FRE, NYSE: TIF, NYSE: DLM)

American equities have opened broadly lower this morning, mainly due to a news report from the Wall Street Journal that proposes Ben Bernanke seeks to break the market's trust that the Fed will always be there in times of distress. Come on guys! Are President Bush and Senator Dodd going to allow that? Independent agency my arse! We all know how things work. The country is just a big corporate box, and Ben feels the heat from above as much as any corporate puppet does.

Wall Street Greek, which clearly defies the corporate mold, is absolutely sure Ben will break, even if he holds the view that the Journal depicts. The guy's voice cracks when he testifies to Congress. He's never looked confident, but that doesn't mean he will not mature into a strong Fed chief. We are willing to go through some growing pains with Ben (as long as doesn't kill us in the process), and we are absolutely certain he's going to learn a lesson from the current credit market mayhem. Most importantly, we are sure he will cut the target rate, and we are looking for a 50 basis point cut in September, or sooner, if chaos draws Ben into it.

The most important news of the day is that weekly initial unemployment claims rose 9,000, to 334,000, and out of a range we viewed as stable. In our weekly report, we wrote, "it's about time this data starts to show signs of a weakening employment environment. We expect the later September report of the Employment Situation will show new hiring sharply lower, excluding seasonal effects." The labor market should now show the signs of consumer stress we have been expecting.

In the news we handpicked for you below and within our sidebar section of the same name, there's a report that the Bank of England lent some money as the lender of last resort to an unnamed borrower. It was a lot money, and just another bit of evidence that we are still right smack in the middle of this liquidity crisis. H&R Block (NYSE: HRB) reported a distressed situation related to its mortgage unit, as we expected it would in our weekly article "The Greek's Week Ahead - Wall Street Summer Wind." We wrote, "H&R Block (NYSE: HRB) has some mortgage market exposure that might come to light and hurt the shares on Thursday." In case you think we only deliver doldrums, we also had something nice to say about the National Bank of Greece (NYSE: NBG). NBG was scheduled to report earnings at 10:00 a.m. this morning, but appears to be running on Greek time. Give it another fifteen minutes...

In some notable news missed by major media, China replaced five Cabinet Ministers today, including its Finance Minister. In trying to avoid reading into this, we are hoping there's some personal scandal or criminal blunder behind it, and not a serious failure within China's financial markets structure. Many of the ministers were just plain too old and responsible for nonfinancial matters, like spying for instance. One even died in office (we hope of old age), so we would not read Stalinist paranoia into the moves. Jin Renqing, the Finance Minister, is 63. He's claiming personal reasons for his departure. Given his age, there would probably be a 50% chance that he's really got personal reasons, maybe health related, except for one simple giveaway. Jin is apparently accepting a new job, and it's quite a few steps down the ladder. He will now be deputy director of the Development Research Center of the State Council. Also, in communism, nobody retires early!

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VCA Antech, an Analyst's Fond Memories

When cyclical shares and even healthcare peers find ruff going, WOOF perseveres.

(Stocks in this article: NASDAQ: WOOF, NASDAQ: POOL, NYSE: HD, NYSE: WMT, NASDAQ: GTRC, NASDAQ: SEIC, NASDAQ: ISRG, NASDAQ: TSCO, NASDAQ: MATK, NASDAQ: PFCB, NASDAQ: QUIX, NASDAQ: JKHY, NASDAQ: COHR, NYSE: PLT, NYSE: PPD, NASDAQ: NTRS, NYSE: WL)

As I scanned over my watch list in the midst of the market chaos of August, like most of you I stared at a sea of red. However, in the middle of the bloody mess, a green light shone through like a ray of hope. It was my old friend VCA Antech (NASDAQ: WOOF), a company I discovered while working as an analyst at Standard & Poor's.

At S&P, I was charged with a special role as an idea generator. I had to go out there and find great new ideas for our handful of institutional clients. There were times when I held responsibility for 10% of our 100 or so “strong buy” ideas, and I typically returned well for management. In fact, I was ranked internally as the best strong buy stock selector over four years, and second over the five years I was free to do so through 2004. My average annual return on those strong buy ideas was 23% over the five years through 2004, compared to a negative 3.8% average annual loss for the S&P 500 Index over that same period.

Anyway, to the point…
I came into my coverage in the first half of 2000, not the best time to take over a group of stocks filled with my predecessor’s favorite tech and telecom ideas, most of which flailed into nothingness in the years that followed. On one ill-fated morning just after inheriting the group, it became plainly obvious to me that an overhaul was necessary. One of the tech names with no earnings had dropped 20% on a disappointing quarterly report, and the Technology Group Head was on the phone screaming at me to do something. Well, I did in fact.

I remade that group and filled it with quality names, companies with real earnings that were modestly valued in comparison to their growth. These value stocks fit the GARP (Growth at a Reasonable Price) profile that I thought was appropriate for the time. But there was more to it than that. These were companies operating businesses I considered so viable and opportune I would own outright if I could. VCA Antech (NASDAQ: WOOF) was one of the names I added to coverage during my time driving performance at the firm. It’s really a special little company in my view.

VCA Antech has a distinct advantage over health care rivals, and also exhibits near operational immunity to economic troughs. During my time on Wall Street, I came across some great names, and as I left my old firm in July 2005, my favorite was WOOF. The stock was more than an isolated winner though, rather, it represented just the latest example of a proven business model I sought out. I will outline that model for you at a later date, in one of the books I'm planning to write.

VCA Antech operates the largest veterinary business in the country, while at the same time providing the most comprehensive laboratory services for the pet health care industry. The company’s over 435 animal hospitals in 38 states represent the broadest coverage within the industry. WOOF employs more than 1,600 veterinarians and more than 130 board-certified specialists. Through Antech Diagnostics, the company offers a complementary nationwide network of laboratories to serve the growing diagnostic needs of vets and pet owners alike.

I learned from Peter Lynch that companies that compete in fragmented markets against mom and pop shops, tend to gain advantages from economies of scale. How do you think Home Depot (NYSE: HD) went from a penny stock (adjusted for splits) into a behemoth of American retail. What do you think made WalMart (NYSE: WMT) the giant it is today? Now, WOOF’s market is nowhere near as large, but it has a nice little niche to grow into still. Some $18 billion was spent on animal health care services in 2004. Sure, and why not, some 63% of American households own at least one pet. And even though WOOF operates as the industry leader in veterinary hospitals with its 435 locations, it operates in a fragmented market comprised of over 22,000 hospitals nationwide. So, there’s plenty of room to grow.

And grow it does, with a goal to add 20-25 hospitals per year, mostly through acquisition, adding revenues of $35 to $40 million a year. However, every once in a while, Bob Antin, WOOF’s charismatic CEO gets antsy and grabs a larger organization. For instance, in June WOOF closed on its $153 million acquisition of Healthy Pet Corp. The operator of 44 vet hospitals was generating revenue of about $80 million on its own.

I say Bob is charismatic, because I got a chance to meet the man during a trip to California. If I recall correctly, he was wearing shorts, and I remember for sure that there was a basketball hoop, with hardwood floor, right smack in the middle of the cubicle filled corporate office. I admire a guy who keeps it real, while also rewarding shareholders with value-added growth. WOOF typically takes acquired inefficient operations and fits them into their own operating plan. In the process, the management team squeezes more juice out of the same orange, or asset.

In its most recent quarter, WOOF posted 17.7% revenue growth on a 17.4% increase in lab revenue and 17.5% animal hospital segment growth. Acquisitions aided hospital growth significantly, but same-store hospitals still grew revenue an impressive 6.6%. Margins expanded thanks to continued operating leverage, and the company earned $0.42 a share, $0.02 ahead of expectations. Management also took the opportunity to raise guidance for the full year, hiking the revenue outlook to a range of $1.14-$1.15 billion, from $1.08-$1.09 billion. Earnings expectations were raised as well, to $1.35-$1.37 a share, from $1.31-$1.35.

Like we said before, as WOOF grows against mom and pop rivals, it gains economies of scale. For instance, think about your neighborhood veterinary hospital. Consider how you know about its location. It’s probably from haphazardly driving by it on your way home one day. That hospital’s customer base is probably made up of people just like you. Thus, it draws customers from a limited geographical area. But, a larger company like VCA Antech has the ability to leverage capital to advertise, and draw customers from a greater distance. It can also build brand appeal, and win clients via reputation. That’s an economy of scale. Another example is the ability to purchase supplies in bulk at discount. Mom and pops just can’t compete against that.

WOOF trades at a P/E of 30.2X its trailing 12 months’ EPS. Since we are right smack in the middle of the year, we can fabricate a make shift forward 12-month consensus estimate, without actually having the quarterly figures. This is something I use to do as analyst for companies I did not follow, and thus didn't have earnings models for. It can, however, err in estimation if there are seasonal variances in earnings. Averaging WOOF’s $1.40 ’07 estimate with its $1.62 estimate for ’08, gives us a make-shift figure for the 12-months through June of ’08 of $1.51, and WOOF trades at 26X this estimate. The company’s earnings have grown at a 26.9% average annual pace over the past five years, but analysts have forecast a 16.5% pace for the next five. A downshift in speed makes sense, because of the logical difficulty to move a larger ship. In other words, growth usually slows as companies get larger. But, we bet that if you looked at the growth estimate five years ago, it was probably also significantly lower than the 26.9% WOOF actually achieved.

What we’re saying here is that the estimates are probably conservative. The consensus is looking for just 15.7% growth in ’08, and that’s coming off this year’s 20.7% estimate and is despite the large acquisition WOOF has undertaken. Heck, with only one month’s contribution from the acquired 44 hospitals of Healthy Pet, WOOF managed 20% EPS growth. As an analyst, I would apply a 20% growth forecast here to the forward P/E estimate of 26X, and consider that conservative. That gives us a PEG of 1.3, which is reasonable to pay for the quality and reliability of earnings WOOF offers in today’s environment.

Over the past four years, WOOF has traded at an average P/E of 28.9, below it’s current 30.2X. If it can achieve that same average P/E over the next 12 months, thus we would apply it to our $1.51 estimate, then the stock should be worth about $43.64 a year from now. The thing is, my discounted cash flow model would always forecast a higher value than this back of the envelope stuff, and I trusted my DCF model. I would typically average out the values generated by my various models or assign probabilities to them to generate one target estimate. I would assign probabilities when I viewed the importance of specific models different. However, cost of capital and required rate of return are in flux nowadays, so I’m not sure the DCF model would provide a much higher estimate now. If we go with the conservative figure based on WOOF's average P/E, that’s still 11% above the intraday price I'm seeing on my screen on August 29th. I would take that return in a market like today's.

In case your interested in some of the other names I liked as an analyst, they included SCP Pool (NASDAQ: POOL), Guitar Center (NASDAQ: GTRC), SEI Investments (NASDAQ: SEIC), Tractor Supply (NASDAQ: TSCO), Intuitive Surgical (NASDAQ: ISRG), Martek Biosciences (NASDAQ: MATK), Evergreen Resources (since acquired), P.F. Chang's China Bistro (NASDAQ: PFCB), Quixote (NASDAQ: QUIX), Jack Henry (NASDAQ: JKHY), Coherent Inc. (NASDAQ: COHR), Helix Technology (since acquired), Plantronics (NYSE: PLT), PrePaid Legal Services (NYSE: PPD), Northern Trust (NASDAQ: NTRS), Wilmington Trust (NYSE: WL) and a bunch more. Remember, those were different times, and after a fresh review, I might not like the same names now.

This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. Receive Wall Street Greek FREE via email by subscribing here. (disclosure)

Today's Key Market News - The Fed's View

(Stocks in article: Ford (NYSE: F), Nissan (NASDAQ: NSANY), Caterpillar (NYSE: CAT), State Street (NYSE: STT), Angiotech (NASDAQ: ANPI), Cyberonics (NASDAQ: CYBX), Henry Schein (NASDAQ: HSIC), Double Hull Tankers (NYSE: DHT))

U.S. markets have opened higher this morning, on a bounce back after yesterday's sharp decline on light volume. The S&P 500 Index tested last week's low, but held. Much is weighing on Ben Bernanke's scheduled podium presence in Jackson Hole on Friday. Traders are hoping he will express a different current Fed view than that expressed by the rearview mirror in yesterday's FOMC meeting minutes release. The minutes were taken from the regular August 7th meeting of the Federal Open Market Committee. The information sharing ignored new data that is available but remained shelved, that being of the Fed's August 16 emergency conference call. Recall, that's when the Fed acted to help liquidity, by cutting the discount rate 50 basis points. Traders expect a somewhat different message to show up in those minutes, but unfortunately, the robotic Fed saw no need to change its schedule and present information reflective of the current situation and supportive to the markets.

CNBC today raised an issue that we feel very strongly about here at Wall Street Greek. The question was raised, "should the Fed act based on forecasts or based on the situation presented by current data?" Bernanke's critics, and we are certainly one, label him as an academic and believe that he is behind the eight ball now in his comprehension of the gravity of the real world situation. Whether he's an academic or not plays no role here. What matters is if the man is a strong enough leader, and intelligent enough to see through the cloud of chaos, to make a levelheaded decision and take effective action decisively. The market needs to be confident in the Fed chief and his group of governors, and at the moment, it is certainly less than so.

Of course the Fed should act based on forecasts, and if the Fed is not qualified enough to do so, then we better get a new Fed. If you sit around and wait for fire to take hold before you believe it exists, you stand much less chance of putting that fire out! Today's market is dynamic, and we need a leader who can comprehend the dramatic changes that are taking place, some of which we've seen before and some of which are unique to this age.

Market-Moving News

• CNN Money: U.S. Woes Slam Asian Stocks


• Financial Times: German Consumer Confidence Slides


• CNN Money: Europe Turns Higher


• Bloomberg: Cheyne Capital May Liquidity Commercial Paper Unit


• Mortgage Bankers Association: Weekly Mortgage Applications Drop


• CNBC: Oil Rises on Trader Expectation for Draw


• CNN Money: State Street (NYSE: STT) Sinks on Credit Turmoil


• Bloomberg: Fed Underestimated Gravity of Situation


• CNBC: Pricey Home Market Gets Tighter


• Yahoo! Earnings Calendar


• AP/Yahoo!: Daimler/Chrysler Reports 14% Profit Decline


• AP/Yahoo!: Angiotech Pharmaceuticals (NASDAQ: ANPI) Gets FDA Nod


• AP/Yahoo!: Cyberonics (NASDAQ: CYBX) Q1 Loss Narrows


• AP/Yahoo!: Henry Schein (NASDAQ: HSIC) Buys U.K. Vet Supplier


• AP/Yahoo!: Double Hull Tankers (NYSE: DHT) Earnings Rise


• AP/Yahoo!: Nissan (NASDAQ: NSANY) to Make Trucks in India


• AP/Yahoo!: Ford (NYSE: F) Investing in Spanish Plant


• AP/Yahoo!: Caterpillar (NYSE: CAT) Plans Engine Plant in China


• BBC: Greek PM Pledges Speedy Aid


• CNN: Ferry and/or Cruise Ship Threat


• BBC: Bhutto, She Just Won't Go Away


• Breitbart: Bush Says Iranian Nukes Means Second Holocaust


• Economist: The Geopolitical Week Ahead


• Iran Daily: Tales from the Dark Side




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Federal Reserve's FOMC Meeting Minutes

We thought you might be interested in the minutes of the FOMC meeting of August 7, 2007, which were released today at 2:00 p.m. We are currently working on a separate value-added article, and plan to review the minutes and comment later.

Minutes of the Federal Open Market Committee

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Today's Key Market News - Railroading the Stock Market

(Stocks in article: NYSE: BCS, NYSE: BSC, NYSE: MER, NYSE: LEH, NYSE: C, NYSE: MHS, NASDAQ: PLMD, NYSE: BNI, NYSE: NSC, NYSE: UNP, NASDAQ: XOMA, NYSE: PFE, NASDAQ: COCO, NYSE: CKR, NYSE: BRK-A, NYSE: MCO, NYSE: IMB, NYSE: WM)

Stocks are opening with a slump this morning, after Asia and Europe both moved lower. Europe has counter drivers playing roles today, kind of. Barclay's Capital (NYSE: BCS) is reportedly facing hundreds of millions of dollars of exposure to failed debt vehicles created by its investment banking arm. On the other side of the tug of rope German business confidence came in better than expected, but dropped to a 10-month low. Not a very strong positive driver...

In the news we handpicked for you below and in our sidebar section of the same name, bargain seeking, long-term investing Berkshire Hathaway (NYSE: BRK-B) has reportedly increased its railroad stake. Meanwhile, Merrill Lynch (NYSE: MER) downgraded the shares of its peers, Lehman Brothers (NYSE: LEH), Citigroup (NYSE: C) and Bear Stearns (NYSE: BSC), sending the financial sector into a bit of a spin. Moody's (NYSE: MCO) has not helped the situation, as it placed IndyMac (NYSE: IMB) under review while affirming the rating on Washington Mutual (NYSE: WM). Wall Street Greek and Senator Dodd alike would like to see more foresight from the rating agencies. We agree with the Senator that a deep review should be undertaken to inspect the level of due diligence being employed at these firms. We suggest readers see our value-added weekly market-moving event planner, "The Greek's Week Ahead - Wall Street's Summer Wind."

Market-Moving News

• CNN Money: Asia Weakens


• CNN Money: Europe Dips Too


• Financial Times: Concerns for Barclays (NYSE: BCS)


• CNBC: Betting on the Bear


• Bloomberg: S&P/Case-Shiller Reports Q2 Home Prices Fell 3.2%


• Pending 10:00 AM - Conference Board Reports Consumer Confidence (Consensus 105)


• Bloomberg: Merrill (NYSE: MER) Analyst Downgrades Lehman (NYSE: LEH), Bear Stearns (NYSE: BSC), Citigroup (NYSE: C)


• ICSC-UBS Same-Store Sales +0.3% W/W, +2.5% Y/Y


• CNN Money: Credit Card Defaults Rising


• Yahoo! Earnings Calendar


• AP/Yahoo!: MedcoHealth (NYSE: MHS) Buys PolyMedica (NASDAQ: PLMD)


• AP/Yahoo!: Berkshire (NYSE: BRK-A) Increases Railroad Stake (NYSE: BNI, NYSE: NSC, NYSE: UNP)


• AP/Yahoo!: Xoma (NASDAQ: XOMA) Signs Licensing Deal with Pfizer (NYSE: PFE)


• AP/Yahoo!: Corinthian Colleges (NASDAQ: COCO) Swings to Loss


• AP/Yahoo!: CKE (NYSE: CKR) Sells 34 Hardee's Spots


• Newsweek: al-Qaeda's Active Plot


• Economist: Putin's Russia, The Making a Neo-KGB State


• BBC: Fires Rage in Greece but Fight Strengthens


• Economist: The Geopolitical Week Ahead


• Iran Daily: Tales from the Dark Side


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The Greek's Week Ahead - Wall Street's Summer Wind

The last week of August and the week that includes Labor Day are favorites for Wall Street types to take some vacation time. That likelihood only increased for a great deal of institutional players who needed to postpone their vacation plans of the two weeks just passed. I could just hear them explaining to their dearests, "You don't get it sweetheart, if I don't go to the office, there may not be a vacation next year." Still, we don't care how powerful you are, you can only hold the wife off for so long. We anticipate a barren scene (excuse the pun) on Wall Street over the next two weeks, depending on the number and degree of finance fires that need to be put out. However, today's virtual world caters to the investment banker, and if need be, he can always just hop on a helicopter or seaplane and return from the Hamptons early.

Still, the fun in the sun did not stop the retail crowd from withdrawing $6.8 billion from mutual funds last week, excluding ETF activity. In fact, it probably offered most some free time to do so. We expect more of the same in the near-term, as retail dough typically lags the smart money, which, according to Barron's, was bargain hunting.

Your favorite Greek fondly recalls the summer commute in New York. If I wasn't on a beach in Greece, I was enjoying a significantly shorter cab share line on the Upper East Side and half empty Mario Van Shuttles or subway car rides home in the evenings. It almost made the soupy humidity bearable. The point here is that trading should be significantly lighter this week, and maybe next week as well, depending on when school starts and if papa is going to grant junior a reprieve so his old man can finally get some rest. Now, lighter volume does not imply less volatility. It just means you can't read too much into market and security movements, and you should not let the downticks panic you. That said, the week ahead is information heavy, setting up a quite ominous scenario in such precarious times.

Monday kicks off the week with an opportunity for the housing market to provide verification or refutation of last week's stronger than expected new home sales for the month of July. You see, the existing home sales market is much more important (read bigger) than that for new abodes, and July's used market results are due out at 10:00 a.m. on Monday morning. According to Bloomberg's consensus of economists, we should look for an annual sales pace of 5.7 million. That's down from June's 5.75 million.

In other news, we should note that markets in the U.K. will be closed for the day. In the U.S., Monday's earnings report schedule is light and includes Harmony Gold Mining (NYSE: HMY), Sinopec Shanghai Petrochemical Company (NYSE: SHI), Streamline Health Solutions (NASDAQ: STRM), Winn-Dixie (NASDAQ: WINN) and a few others.

Tuesday ushers in the possibility of a blood red close, due to some important news from the Federal Reserve. At 2:00 p.m., the Fed will release the minutes from its August Federal Open Market Committee meeting, and Barron's speculates it may also release the minutes from its August 16 conference call that preceded the group's decision to cut the discount rate by 50 basis points. Wall Street Greek certainly hopes that if the August meeting notes carry a hawkish tone, the Fed will consider the consequences of such a message, and also issue the notes from its emergency conference call. If it does so, our concerns will be doubly pacified by the fact that William Poole was busy at a prior arrangement that day and was reportedly not present for the call or the vote to cut the discount rate. Therefore, we will likely be spared any of his discussion of calamitous consequence.

The first bit of news out on Tuesday will be the regular weekly ICSC-UBS same-store sales data, providing some further insight into the state of the retail environment. Last week's report showed a week-to-week increase of 0.2% and year-over-year rise of 2.7%. While still growing, retail expansion is running at a much more moderate pace of late. Wall Street Greek continues to advise of our expectation that retail sales will weaken on consumer softness, in light of the many often discussed pressures on the center column of our economy.

At 10:00, the Conference Board is scheduled to report consumer confidence. Bloomberg's consensus of experts sees confidence slipping in August, to 105, from 112.6 in July. We will not insult your intelligence here by explaining why... The S&P/Case Shiller home price index for June is also due for release on Tuesday, and we expect it to post another decline. If not, we are fairly certain that July's results will show a dramatic decline in prices, as implied by the pickup in new home sales during the relative month.

Tuesday marks the end of the extension for Accredited Home Lenders (NASDAQ: LEND) and it's savior to consummate their agreement. We believe LEND's earlier threat of lawsuit led to the extension and was meant to nudge the deal's closing. However, we also believe last week's announcement that LEND's CFO would resign at the end of the month could imply another result. LEND also laid off some 1,600 employees last week and stopped taking U.S. mortgage applications. We do not believe you stop doing business if you expect to close a deal that is suppose to keep you in business. Thus, we view the potential for a bankruptcy filing in the near-term more likely than LEND's deal closure.

Tuesday's earnings reports include Anaren Incorporated (NASDAQ: ANEN), Applied Signal Technology (NASDAQ: APSG), Aruba Networks (NASDAQ: ARUN), Bank of Montreal (NYSE: BMO), Bank of Nova Scotia (NYSE: BNS), Borders Group (NYSE: BGP), China Medical Technologies (NASDAQ: CMED), Converium Holding AG (NYSE: CHR), Corinthian Colleges (NASDAQ: COCO), CPI Corporation (NYSE: CPY), CRH plc (NYSE: CRH), Culp Inc. (NYSE: CFI), Dycom Industries (NYSE: DY), Micros Systems (NASDAQ: MCRS), Pacific Internet (NASDAQ: PCNTF), Perceptron (NASDAQ: PRCP), Pike Electric (NYSE: PEC), RG Barry Corp. (AMEX: DFZ), Sanderson Farms (NASDAQ: SAFM), Semtech (NASDAQ: SMTC), Shanda Interactive Entertainment (NASDAQ: SNDA), SourceForge (NASDAQ: LNUX), Tuesday Morning Corp. (NASDAQ: TUES), Versant (NASDAQ: VSNT) and several other international firms.

Wednesday brings the weekly Purchase Applications Index report from the Mortgage Bankers' Association, and because it's much more current than the housing news from last week and Monday, it's more important in our view. Wednesday also sheds more light on the state of the oil market, as the Energy Information Administration issues its weekly Petroleum Status Report.

In other news, Latin America and the world are anticipating a possible general strike in Chile. We are sure Venezuela's Chavez, who recently offered a large chunk of aid to Latin America, will have some more to say on the subject Wednesday. Chavez looks to build up regional support and fuel his own fire against the United States. Situations like the one developing in Chile offer him opportunity to do so. We seek to bring attention to the risk that Mr. Chavez may move from a comical opportunity for the Saturday Night Live cast, to a serious threat to the United States if he is successful in drumming up broader support for his movement.

Wednesday's earnings schedule includes Big Lots (NYSE: BIG), Brown Shoe Co. (NYSE: BWS), Chico's FAS (NYSE: CHS), Citi Trends (NASDAQ: CTRN), Coldwater Creek (NASDAQ: CWTR), Concho Resources (NYSE: CXO), Cyberonics (NASDAQ: CYBX), DaimlerChrysler (NYSE: DAI), Dollar Tree Stores (NASDAQ: DLTR), Double Hull Tankers (NYSE: DHT), Energy Conversion Devices (NASDAQ: ENER), Finlay Enterprises (NASDAQ: FNLY), Fred's (NASDAQ: FRED), Greif Inc. (NYSE: GEF), HEICO Corp. (NYSE: HEI), Jo-Ann Stores (NYSE: JAS), Joy Global (NASDAQ: JOYG), Layne Christensen (NASDAQ: LAYN), Learning Tree (NASDAQ: LTRE), Net 1 Ueps Technologies (NASDAQ: UEPS), Novell (NASDAQ: NOVL), Collective Brands (NYSE: PSS), PowerShares Dynamic Software (AMEX: PSJ), Quanex (NYSE: NX), Sigma Designs (NASDAQ: SIGM), SWS Group (NYSE: SWS), Synovis Life Technologies (NASDAQ: SYNO), The9 Limited (NASDAQ: NCTY), TiVo, Inc. (NASDAQ: TIVO), United American Healthcare Corp. (NASDAQ: UAHC), Williams-Sonoma (NYSE: WSM) and more.

The first revision to Q2 GDP growth is set for release on Thursday, and Bloomberg's consensus sees Real GDP adjusted higher to 4.0%, from 3.4% initially reported. Folks, we advise not getting caught up in the old news number, despite Hank Paulson's cheerleading that is likely to follow it's release. The here and now seems to clearly indictate a slowing of economic growth or outright recession in coming months. We have been anticipating recession since we started this project almost a year ago. We continue to argue that if a softening consumer does not do it, a messy and complicated war with Iran and its allies (read both nations and terrorist organizations) will.

Weekly Initial Jobless Claims will be reported at 8:30 a.m., and it's about time this data starts to show signs of a weakening employment environment. We expect the later September report of the Employment Situation will show new hiring sharply lower, excluding seasonal affects. The Help Wanted Index, reported Thursday as well, might have proven valuable, but it focuses on print ads for jobs. As you know, there is strong migration to the online medium, and the Monster.com data is becoming more important. Still, the Help Wanted numbers remain worth checking in on.

The EIA reports natural gas inventory on Thursday, as usual. As long as the Atlantic is devoid of hurricane, or war with Iran is not imminent, we expect natural gas should continue its trend lower. You see, the most important driver of oil and nat gas is economic health. Some will argue that global demand is what matters, but remember, the natural gas market remains a somewhat localized market. While we believe natural gas is increasingly becoming a more important substitute for oil in many instances, and remains sensitive to changes in the price of oil, we also expect a softer U.S. economy to impact the economies of manufacturing nations and other trading partners. In other words, U.S. weakness should bleed into the global economy enough to impact industrial commodity prices and petrochemicals, not to mention high flying equity markets overseas.

Thursday's earnings schedule includes some specific reports worth breaking out. H&R Block (NYSE: HRB) has some mortgage market exposure that might come to light and hurt the shares on Thursday. Also, the National Bank of Greece (NYSE: NBG), a beneficiary of expansion into improving Turkish and Eastern European markets, reports earnings. So, there's one long and one short idea for you speculators.

The rest of Thursday's earnings reports include Dell Inc. (NASDAQ: DELL), Benihana (NASDAQ: BNHNA), Blyth (NYSE: BTH), Canadian Imperial Bank of Commerce (NYSE: CM), Catalyst Semiconductor (NASDAQ: CATS), Chunghwa Telecom (NYSE: CHT), Conn's Inc. (NASDAQ: CONN), Cost Plus (NASDAQ: CPWM), Credence Systems (NASDAQ: CMOS), Del Monte Foods (NYSE: DLM), dELiA*s Inc. (NASDAQ: DLIA), Edap TMS (NASDAQ: EDAP), Esterline Technologies (NYSE: ESL), FuelCell Energy (NASDAQ: FCEL), Genesco (NYSE: GCO), Gottschalks (NYSE: GOT), Hellenic Telcommunications (NYSE: OTE), Jamba Juice (NASDAQ: JMBA), Kirkland's (NASDAQ: KIRK), LTX Corporation (NASDAQ: LTXX), Omnivision Technologies (NASDAQ: OVTI), Open Text (NASDAQ: OTEX), Peerless Systems (NASDAQ: PRLS), Restoration Hardware (NASDAQ: RSTO), SeaChange International (NASDAQ: SEAC), Silicon Graphics (NASDAQ: SGIC), Standex International (NYSE: SXI), Suez (NYSE: SZE), Telvent (NASDAQ: TLVT), Veolia Environnement SA (NYSE: VE), Vimpel Communications (NYSE: VIP), Wind River Systems (NASDAQ: WIND), Zale Corporation (NYSE: ZLC), and a few more.

Just when you thought it was safe to leave work early for the three day holiday weekend, we get a busy day for economic news Friday. At 8:30 a.m., the Fed's favorite inflation gauge will be reported, the PCE deflator. If ever it was important for the figure to show inflation moderation, it is now. Personal Income is expected to show a July increase of 0.3%, while Consumption is seen increasing 0.4%. We remind you that these are rearview mirror type numbers, but July was not too far back. Wall Street Greek expects both personal income and spending to trend softer in months to come.

As far as the inflation gauge goes, we do not think the PCE figure matters as much as the Fed does. This is because of our differing view regarding food prices. We know from recent reports and conference calls of major food providers that pricing pressure is not easing for grain, feed and proteins. We know severe disease plagues China's pork market, and are well aware of China's growing need for imported food, due partly to its population growth and partly to its industrial revolution. Food prices are a secular problem, not seasonal, and the Fed must recognize this. Food prices pressure the consumer, and they will not go away any time soon, in our view.

The PCE metric focuses on the prices of consumer goods and services, and the Fed is concerned with prices excluding food and energy. If prices look elevated, the Fed may continue with its avoidance of significant rate reduction. This error, in our view, could discredit the Fed and help lead our economy into deeper recession. If confidence is lost in the Fed's ability to aid securities markets, we expect a great degree of capital could be lost to investors.

The National Association of Purchasing Management - Chicago is seen reporting its index at roughly 53 for August, versus 53.4 in July. More importantly, the University of Michigan's Consumer Sentiment reading is expected to drop to 82.5 for August, versus 90.4 in July. We agree, sentiment is on the downswing. It's generally been that way all year outside of a few monthly blips higher.

Factory orders are seen rising 3.2% for July, according to Bloomberg's count. On numerous occasions, we have outlined our view that manufacturing will not show weakness until after consumer and employment softness develop in the U.S. This is due to international demand for cheap U.S. product on dollar weakness.

Last but certainly not least important, Fed Chairman Ben Bernanke will be in Jackson Hole attempting to avoid falling into a hole of his own, as he addresses housing, housing finance and monetary policy. We think a few people might be interested in what he has to say...

Friday's earnings reporters include Aktieselskabet Dampskibsselskabet Torm (NASDAQ: TRMD), ChemGenex Pharmaceuticals (NASDAQ: CXSP), Vivendi (Paris: VIV.PA) and many other international firms. The bond market closes at 2 p.m. Enjoy the symbolic final week of summer!

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Sweet Blues at Guitar Center

With heightened concern that deal funding may be repriced or go away, shareholders and prospective investors are wondering, where does GTRC stand with its suitor?

(Stocks in article: NASDAQ: GTRC, NYSE: LVB, NYSE: ODP, NASDAQ: CWTR, NYSE: BX, NASDAQ: LEND)

Guitar Center (NASDAQ: GTRC) is the premier music store in America, based on sales of guitars, and other musical instruments and pro-audio and recording equipment. And, boy do they have some really neat stuff in their Hollywood store! As an analyst, I got to tour the Sunset Boulevard flagship location, and saw some really cool things in the secret back room, including Elvis’ blue suede shoes, the original Woodstock sign and a bunch of Kiss memorabilia.

GTRC shares are currently trading at a level that presents 7.2% (17% when first authored for Motley Fool) potential gain to the $63 price the company agreed to sell to Bain Capital Partners, LLC. Yes, that’s the firm that Mitt Romney once headed up. The price variance is abnormally high, with the deal expected to close in the fourth quarter. Guitar Center is one of many companies whose shares trade well off of their deal price now. This is thanks to the market’s intensified concern that the repricing of debt and risk could cause many private equity buyers like the Blackstone Group (NYSE: BX) and Bain to back away. Look at poor Accredited Home Lenders (NASDAQ: LEND) for instance. The company is suing Lone Star Fund V LP to try to make it to stick to its agreement. The private equity player just extended the time period for its tender to August 28th in order to appease LEND, and maybe move forward if normalcy were restored to credit markets.

For this reason, hedge funds that are focused on merger arbitrage could potentially see one of their best years in recent history, as long as their capital sticks and deals don’t fall through. You see, merger-arb funds make their money by owning the shares of firms that have agreed to be acquired. The funds typically leverage up in order to improve the return on the usually small but reliable difference in price. You see, the shares of soon to be acquired firms normally trade at just a slight discount to the deal price. That discount exists only because of the time to consummation and perceived risk of it falling though. That increased risk has now enhanced appreciation potential for merger-arb players.

The merger arbitrage funds had a poor month in July, dropping 2.04% according to Hedge Fund Research, as spreads widened on deals they were already participating in. Still, we suspect that if their capital sticks, these funds will double down and benefit in the long run. We called a merger-arb manager in order to get a grip on what the difference really is in today’s market versus normal, and to see what he thought about the GTRC contract. These guys are usually tuned into what’s going on, however, he never got back to us. We called Guitar Center also, but we didn’t expect anything less than positive feedback from them. Even so, they didn’t return our call either.

So, what if the deal does fall through?
Well then, GTRC will have to be valued as it was before the announcement. On the day before, the shares traded at roughly $50, that’s 15% (9.1% when first authored) below current value. And one has to wonder if the rocking management team relaxed a little bit after signing the big deal, sort of like a superstar baseball free agent does after he signs a multi-million dollar contract. We say this because GTRC’s second quarter results were just plain out of tune, in the Greek’s view.

Excluding the $0.06 it took in takeover related charges, the company earned $0.37 a share, two cents below consensus expectations, as compiled by Thomson Financial. Ouch! That was 21% below last year’s result. We know retailers are starting to see some consumer softening, but this seems excessive. Net sales were not too shabby though, but still missed company expectations while climbing 13.3%. The company said retail softness and macroeconomic trends played a role, impacting both the company’s flagship branded stores and its direct response unit.

The Guitar Center segment saw revenue grow 9%, but it all came from new stores since same-store sales slipped 0.1%. That’s never good… Musician’s Friend, GTRC’s direct response segment, grew revenues 28%, but management said some 91.5% of that growth was due to the acquisition of Woodwind & Brasswind, which it bought in February. Finally, Music & Arts, GTRC’s segment that focuses on the sale and rental of instruments to the school band, orchestra and lesson market, rose 16.9%.

The big problem was that the acquired business impacted margins, as gross margin in the direct response segment narrowed by 140 basis points. Excluding the acquisition, the margin would have widened by 180 points.

The important question here is what’s GTRC worth if the deal falls through. Well, earnings estimates came down after the report, with consensus expectations for 2007 and 2008 now at $2.55 and $3.17, respectively, according to Thomson Financial. At roughly 18.5X (17X a week ago) 2008’s forecast, the shares trade at a discount to the 24% growth analysts foresee next year. Heck, even at 23X (21X) 2007’s number, the shares compare well to near-term growth forecasts. We analytical types usually compare the P/E to long-term growth expectations though, and applying a five-year growth consensus estimate of 16% provides a PEG ratio of 1.4 (1.3 last week).

GTRC does not compare well to music industry peer, Steinway Musical Instruments (NYSE: LVB). LVB trades at just 10.6X the consensus estimate for ’08, versus an 18% growth expectation that year. However, this is based on just one analyst’s view. Specialty store rival Office Depot (NYSE: ODP) carries a PEG of 0.9 using the same periods we applied for GTRC, and Coldwater Creek (NASDAQ: CWTR) has a PEG of 0.9 (1.08 last week). So, compared to some specialty retail peers now, GTRC isn’t cheap.

Still, we view the risk bearable, with the worst-case scenario being that the deal is called off. So, if the deal is consummated in Q4, investors receive a roughly 7% return (17% last week) from $58.75 ($54 last week) a share. If it falls through, you’re stuck with a stock valued somewhat modestly to its intrinsic growth, assuming those growth assumptions hold. In our view, GTRC will likely improve the margin situation in its direct response group. Also, we expect that sales from its school focused segment are somewhat insulated from consumer softness.

The company believes more than half of its clientele are professional or aspiring musicians. Aren’t musicians and artist typically poor anyway? So, we have to wonder how much worse it can get for them if the economy softens. I’m exaggerating! Sure, GTRC stands to lose those bonus keyboard sales around holiday season, but we still like the gamble. Worst case, you inherit a company that competes as the leader in a fragmented market. So, even if we sing the blues, the sound might be sweet.

This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. Receive Wall Street Greek FREE via email by subscribing here. (disclosure)

Today's Key Market News - Dangerous Durables Data

(Stocks in this article: NYSE: F, NYSE: HNZ, NASDAQ: WFMI, NASDAQ: OATS, NYSE: ANN, NASDAQ: BEBE, NYSE: BKC, NASDAQ: CSUN, NYSE: TRB)

July's Durable Goods Orders were reported today, and the measure was well ahead of expectations. Before you get too excited, lets consider that this data reflects business sentiment in July and may not be appropriate for current economic conditions. In fact, it may well be dangerous.

Heavy ordering can set the stage for sell-through failure, and support the turn to recession. If sell-through does not follow, retailers face price reduction, earnings shortfall and potentially business consolidation. Now, durables are supported by international demand, there's no doubt. Still, we expect much of the drivers behind the data reflect overly optimistic domestic demand expectations at just the wrong time for it. After all, what are consumers going to do with these newly ordered washing machines if they can't even afford to pay their electric bill, or if they don't have a home to place them in?

Within the "Market-Moving News" below, and in our similar sidebar section, you will find an article that shows PIMCO's Bill Gross agrees with our view on the government's role in staving off recession. Bill and I agree that weakened consumer demand, stemming from the many stresses on the poor little fellow, least of which are housing costs and loss of home equity, are likely to drive the economy into recession. If the government or its agents (read Fed) can do something to provide support here, it has broader implications to our economy on the whole.

Market-Moving News

• CNN Money: Asian Shares Fell


• CNN Money: Europe Trades Mixed After Lower Open


• Bloomberg: July Durable Goods Orders Rise Dangerously


• Bloomberg: July New Home Sales


• CNBC: Oil


• CNBC: PIMCO's Gross Agrees with The Greek


• Financial Times: Ford (NYSE: F) CEO Voices Interest Rate Hopes


• Financial Times: Russian Oil Flow Slows to Germany


• Yahoo! Earnings Calendar


• AP/Yahoo!: Burger King (NYSE: BKC) Swings Profit


• Bloomberg: Heinz (NYSE: HNZ) Profit Rises on New Products


• Forbes: Whole Foods (NASDAQ: WFMI) Wild Oats (NASDAQ: OATS) Good to Go


• AP/Yahoo!: China Sunergy (NASDAQ: CSUN) Reports Loss


• AP/Yahoo!: Tribune (NYSE: TRB) Revenue Slips


• AP/Yahoo!: Bebe (NASDAQ: BEBE) Profit Falls


• AP/Yahoo!: AnnTaylor (NYSE: ANN) Profit Falls


• BBC: Unrest in Bangladesh


• CNN: GOP Senator Calls for Iraq Pullout


• Iran Daily: Tales from the Dark Side

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Today's Key Market News - Countrywide, Always Tan and Happy Again

(Stocks in article: NYSE: BAC, NYSE: CFC, NYSE: IMH, NYSE: HD, NYSE: SFD, NASDAQ: WTSLA)

Stocks got a vote of confidence today, as Bank of America (NYSE: BAC) announced its investment of $2 billion in Countrywide Financial (NYSE: CFC). Yo Angelo! Congratulations bro! Countrywide CEO and founder, Angelo Mozilo, will be appearing at 11:00 a.m. on CNBC for an interview with Maria Bartiromo. As critical as we can sometimes be, we are generally good natured here at Wall Street Greek. We jest because we love, and because we're still waiting for the invite to the Palm Beach house Mozilo! Anybody that tan and happy has got to be okay, and probably pretty rich. We'll get an idea of how bad things were by the bronze factor of Angelo's tan this morning. After all, it is late August. If the CFC chief is a little faded, he probably spent some serious time stressing indoors over the past few weeks. Only the Greek's analysis gets that deep.

Equity futures are modestly higher, as in all seriousness, if BAC, a bank Warren Buffet owns interest in, feels comfortable with investing in the largest mortgage lender in the country, that's confidence building for the market. In other news, the Bank of Japan held rates steady and the yen fell. The carry-trade is back in fashion. Asian equities and European shares are higher today based on all this news, and some more ECB action to aid liquidity.

In U.S. news, Weekly Initial Unemployment Claims fell 2,000 from last week's level, to 322,000. Claims are running a little hotter than they were earlier in 2007, speaking from our own weekly reviews. In August, the mortgage industry has shed 25,000 jobs. We think it took so long for these jobs to go away because of the illusory paradise housing industry participants became accustomed to. When things go so well for so long, you start to believe they will always be that way. So, when you are the CEO of one of these firms, you suddenly get slapped in the face with the inability to unload loans, and you decide a day too late to consolidate your operations. That's a decent description of how we think the housing and mortgage industries have operated this year.

While we are looking for stocks to rally a little more here, led by tech and bargain stocks (read innocent victims of correction), we still expect the economy to slip into recession if the Fed does not act to support consumer spending and business investment. However, we do expect the Fed to cut rates by 50 basis points before too long. If not, we'll be looking to Congress to save us with pressure on Bernanke. We continue to expect new hiring, as reported in the Employment Situation Report, to weaken before layoffs increase. We are preparing a "Today's Coffee" article for you today to share our views in a more detailed manner.

Market-Moving News

• AP/Yahoo!: Bank of America Invests $2 Bln. in Countrywide


• CNN Money: Asia Rallies


• Financial Times: ECB Injects Capital, Lifts European Shares


• Bloomberg: Weekly Initial Jobless Claims 322K


• Daily FX: Bank of Japan Holds Rates, Yen Dives


• AP/Yahoo!: Mortgage Industry Sheds 25k Jobs in August


• AP/Yahoo!: Impac (NYSE: IMH) Cuts Jobs


• Bloomberg: Wheat Prices Top on Asian Demand


• CNBC: Home Depot (NYSE: HD) Supply Unit Sale at Risk


• CNBC: Oil Steadies with Equities, Next Hurricane?


• Yahoo! Earnings Calendar


• AP: Smithfield Foods (NYSE: SFD) Continuing Operations Strong


• AP/Yahoo!: Wet Seal (NASDAQ: WTSLA) Reports Soft Q3 Traffic


• Bloomberg: Bank of China Reports, Notes Subprime Heavy


• AP: Trade War - China Claims Tainted American Soybeans


• Financial Times: U.S. Goes Full Court Press on Iran


• BBC: Court Rules Exiled Pakistani PM Can Return


• BBC: WHO Warns My Generation Faces Disease Risk


• Iran Daily: Tales from the Dark Side

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Clean Up Time for Clorox

Clorox's new guidance disappointed investors and Fitch, but CLX is buying back its shares on the down-slide.

(Stocks in article: NYSE: CLX, NYSE: CHD, NYSE: PG, NYSE: KMB, NYSE: CL)

Clorox Company (NYSE: CLX) reported a disappointing fourth quarter, with revenues coming in flat compared to last year's quarter if you exclude the contribution of a recent acquisition. The company still managed to expand margins, but EPS came in at the low end of expectations. Adding insult to injury, CLX declared that increased anticipated charges would require it to cut its forecast for fiscal year 2008 (Jun). A few days later, Fitch Ratings cuts its credit rating on Clorox based on the company’s plan to repurchase shares, which Fitch expects would likely be funded by debt that would leave Clorox operating at a riskier debt-to-capital ratio.

Clorox, well known for its household name in bleach, sells many other familiar products including Glad plastic bags and wraps, Liquid-Plumr, Tilex, Pine-Sol, Armor All, Kingsford brand charcoal and other products. Clorox is definitely another one of those consumer staples ideas sector strategists favor in times of market peril. But, Clorox has problems of its own right now, as it described in its fourth quarter report. Competition and higher commodity input prices are limiting CLX’s prospects.

In its fiscal Q4, total net sales inched 1.9% higher, but according to management, when excluding the impact of recently acquired bleach businesses in Canada and Latin America, sales were flat. CLX has three reportable segments: its Households Group (45% of FY 06 sales); Specialty Group (41%); and International segment (14%).

Sales at Clorox’s Households segment fell 2.0% in Q4, as volume slipped due to competitive pressure and poor weather. During its conference call, management specifically noted tough competition vying against its disinfecting wipes product. The company also noted that poor weather in April hurt auto-care product sales.

Sales from CLX’s Specialty Group rose 1.0%, on strong demand for Glad products that came on the heels of heavy promotional efforts, and due to improved kitty litter sales. Still, one of the coldest Aprils in recent history apparently led to a sharp drop-off in backyard barbecuing, affecting charcoal sales.

International efforts continue to prove a logical expansion route for Clorox, as the company’s foreign focused segment experienced 21% quarterly sales growth this past quarter. However, a closer look reveals that about twelve percentage points of that growth came from newly acquired business and favorable foreign exchange rates.

Clorox impressively squeezed 50 basis points of gross margin expansion, despite the revenue softness. Ongoing cost cutting initiatives and price increases outweighed higher trade-promotion spending, increased logistics costs and higher agricultural commodity costs. Even so, things were not all that good. Even with an improved tax rate and the repurchase of one million shares, if you exclude the $0.16 of charges to last year’s quarter, Clorox actually earned a penny less than last year’s reporting period.

As if the company’s revenue disappointment was not enough, it’s guidance drove the shares 4% lower through August 21st from the day before reporting earnings. Considering its “safe haven” appeal, that’s poor performance when compared to the 1.3% correction of the S&P 500 Index from August 1st through the 21st.

Clorox had already forecast charges of about 6-8 cents per diluted share for the consolidation of its home-care manufacturing network, but the company expanded its charge expectations another 15-17 cents. Management decided to forestall certain new venture investments and to consolidate its international supply chain. Because of these moves, Clorox reduced its FY 08 (Jun) EPS guidance to a range of $3.27 to $3.46, from previous guidance for $3.44 to $3.61.

So, Clorox has some cleaning up to do in order to restore an impression of reliability to safe-haven seeking investors. As far as valuation goes, CLX compares well to its Consumer Staple peers, in the Greek’s view. On a P/E basis, it’s likely being penalized for its forecast setback and growth stall. As far as dividend yield goes, CLX offers a payout about as rich as any of its peers.

Company --------------- Ticker ---------- P/E ttm ----- Div Yld
Clorox ------------------ NYSE: CLX ---- 18.4 ---------- 2.7%
Church & Dwight ----- NYSE: CHD ---- 21.2 ---------- 0.7%
Proctor & Gamble ---- NYSE: PG ------ 21.2 ---------- 2.2%
Kimberly-Clark ------- NYSE: KMB --- 18.2 ----------- 3.0%
Colgate-Palmolive ---- NYSE: CL ------ 22 ------------ 2.2%

In our view, CLX has strong brands and grand opportunity to grow internationally. These are probably the two most important components of the formula for the company’s future success. The tragic loss of its CEO in its recent past may have played a role in the company’s recent slippage, but we anticipate management will reassess its strategy and tool-set moving forward. They have already laid out their "Centennial Strategy", which is gearing CLX to seek double-digit annual percentage growth of economic profit. Economic wha you must be asking… That’s the profit a company makes over and above the cost of assets used in earning those profits. We think this is the right mindset and strategy for this type of company (read large), and CLX’s valuation seems to offer opportunity to move toward its historical mean value (21.5X P/E over last four years). This is another occurrence we view common among companies of this type (read mature).

So, as long as the company can get a handle on commodity cost pressures and competition, we would expect safe haven capital flow and mean revision to help CLX’s performance going forward. We think its share repurchases should help it toward that end as well. So in our contrairian viewpoint, CLX has appeal.

This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. Receive Wall Street Greek FREE via email by subscribing here. (disclosure)

Today's Key Market News - Housing Hatred

(Stocks in this article: TOL, PHM, LEN, CTX, MGM, NMX)

Why you hatin on me!?! Housing is definitely not cool to anyone anywhere anymore: not the rating agencies who finally decided the business is not blazing, and today downgraded some more debt; not the equity analysts who avoid eye contact with their Directors and sweat anxiously as they swipe their magnetic ID card each morning; not the executives at Toll Brothers (NYSE: TOL) or anywhere else who continue to paint a horrid picture after broadly forecasting industry growth in January; not Countrywide's (NYSE: CFC) Angelo Mozilo whose bronze and beautiful tan is fading into the pasty white of a corpse; not anyone! Even Hank Paulson and Ben Bernanke are looking for a new bar to hang out at after hours, since their "subprime isolation" one liner doesn't work on their government bosses anymore.

Stocks opened higher this AM, as nothing blew up. Since al-Qaeda has been chased into a corner, maybe we should add the Federal Reserve and Treasury to the Terrorist Organizations List. Why not, a wide group of regulators, mortgage brokers and institutional entities have been behind more blowups than any terrorist organization of late. You know, I thought I saw William Poole wearing a black cowboy hat, a bandanna and a dynamite vest the other day, unless it was that dude from The Village People. Yo Greek, stop the hatin!

Stocks are up in Europe after inching higher in Asia, and the U.S. market seems to be losing some of its volatility sizzle. We do have the makings of a rally folks. Sellers seem somewhat exhausted here, unless those bandits strike again. We suggest cherry-picking good names in beaten down sectors and looking for industry leaders on sale in other sectors. We are planning some new stock specific ideas for you in the desert of the financial sector and maybe even housing. Just do us a favor; if we're not back in a couple days, please send a search party.

Today's market-moving news was relatively light, so we've added some color to the articles below. You'll find a Motley Fool video about Buffet and some other interesting articles. Toll Brothers reported earnings and Standard & Poor's downgraded the debt of many of TOL's peers. Oil is inching higher, despite economic concerns. It's still hurricane season folks, so even though we see the trend moving lower, we would be careful about outright shorting, and we definitely wouldn't walk away from any investment against oil for too long. Keep your eye on this dynamic market, since terrorism and weather threaten to disrupt the downtrend on a dime. Don't miss our weekly article, "The Greek's Week Ahead - Fed Half Devils."

Market-Moving News

• CNN Money: Asian Stocks Creep Higher


• Financial Times: Europe's Banks Bear Brunt of Tense Session


• CNN Money: Mortgage Applications Slip


• CNBC: Oil Flirting with the $60s


• DailyFX: Yen Carry-Back?


• Forbes: T-Bills Giving Back Some Capital


• USA Today: September Rate Cut Baked In


• Yahoo! Earnings Calendar


• AP/Yahoo!: Toll Brothers (NYSE: TOL) Q3 Cancellations


• Seeking Alpha: Affiliated Computer (NYSE: ACS) Reports


• MarketWatch: NYMEX (NYSE: NMX) Takeover Talks


• AP/Yahoo!: S&P Cuts Homebuilders (NYSE: CTX, LEN, PHM)


• Motley Fool: Video - Buffet's Buying What?


• CNBC: Dubai World Eyes MGM Mirage (NYSE: MGM) Stake


• BBC: Russia Promotes Czech for IMF


• Int'l Herald Tribune: CIA Criticises Tenet


• Iran Daily: Tales from the Dark Side


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Senator Dodd Alludes to Fed Target Cut

Senator Christopher Dodd, Chairman of the Senate Banking Committee, concluded his meeting with Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson and held a press conference this morning. Dodd said that he asked the Fed chief to "use all the tools at their disposal, here, to keep our markets working." He continued that Bernanke responded that "he intends to utilize all the tools at his disposal to act." This seems to clearly imply the Fed will cut target interest rates in the near term, or at the latest, in September.

Dodd tried to avoid giving the impression of applying pressure on the independent Federal Reserve, but we suspect that the meeting alone effectively did just that. Dodd indicated that Treasury Secretary Henry Paulson was reluctant to raise portfolio limits for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

The committee chief also noted that the rating agencies, including Moody's (NYSE: MCO) and Standard & Poor's, a subsidiary of McGraw-Hill (NYSE: MHP), need a review. He said specifically that “we need to look at credit rating agencies, in my view, as well, and what can be done to make them more transparent, so that they will not be so far off the mark in assessing the credit worthiness of financial instruments, as they have been.”

Dodd said the federal government had secured $100 million in appropriations to help troubled borrowers avoid foreclosure. Mortgage holders in trouble are encouraged to let the regulators know who they are, as they may qualify for such assistance in the future. Also, it is the intent of the government to avoid the loss of homes based on the act of entering into a bad mortgage. Wall Street Greek agrees it was the failed effort by regulatory agencies that allowed such excesses to occur in the first place, and they should now help these borrowers out of the mess. Borrowers in trouble should call: 1-888-995-HOPE.

Finally, we want to apologize to Senator Dodd for our critical commentary in this morning's Today's Key Market News - Three Stooges Reunion. We would replace him in the group now with Shemp, or William Poole.

Please take this opportunity to debate the issue of federal bailout for troubled borrowers and also to freely discuss your view on whether the Fed should cut the target rate or not. You may comment at the bottom of each article.

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Today's Key Market News - Three Stooges Reunion

(Stocks in article: TOL, HOV, SFP, BAC, TGT, SPLS, BJ, SKS)

Stocks opened undecided this morning after Asia mostly rallied and Europe drifted lower. The day is highlighted by a planned meeting in Washington between the three stooges; we mean Ben Bernanke, Henry Paulson and the Chairman of the Senate Banking Committee, Senator Christopher Dodd. Hey, we just couldn't resist the comparison opportunity, and it was meant with all due respect for Larry, Mo and Curly. Wall Street Greek fully expects the Fed target rate to be cut soon. We hope it will be sharp, and significant enough to restore all confidence in liquidity facilitating instruments and at the same time allow troubled subprime mortgage borrowers an opportunity to escape homelessness.

Regarding some of the important news to see below, Target (NYSE: TGT) reported in line with expectations. Foreclosures nearly doubled in July, versus last year's number. In related news not reported below, a Bank of America (NYSE: BAC) analyst downgraded the shares of Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV) and Standard Pacific (NYSE: SPF) on industry risks we are all well aware of by now. Please be sure to see this week's "Greek's Week Ahead - Fed Half Devils," where we cover all the important events of the current week and discuss last week's Federal Reserve actions.

Please see today's "Market-Moving News" sidebar section found also below:

• CNN Money: Asian Stocks Rise


• MarketWatch: European Markets Steady


• BBC: German Investor Confidence Falls


• CNN Money: July's Foreclosures Nearly Double


• Courant: Meeting of Bernanke, Paulson and Dodd


• Bloomberg: China Raises Interest Rates


• Bloomberg: Bank of England Acts to Ease Freeze


• CNBC: Oil Pares Losses, Hurricane Season Continues


• CNN Money: Rating Agencies Under Fire


• CNBC: ECB Allots Funds


• Barron's Online: Letters to Editor on Cramer


• Yahoo! Earnings Calendar


• AP/Yahoo!: Target (NYSE: TGT) Reports In Line


• AP/Yahoo!: BJ's (NYSE: BJ) Reports Higher Profit


• AP/Yahoo!: Staples (NASDAQ: SPLS) Profit Rises 11%


• AP/Yahoo!: Saks (NYSE: SKS) Narrows Q2 Loss


• BBC: Hurricane Dean Meets Mexico


• Economist: Turkey's Abdullah Gul


• BBC: Nigerian Nationals Riot in Greece


• Iran Daily: Tales from the Dark Side

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