Afternoon Review

Recommended Reading

• This Bloomberg article summarizes the arguments made during Paulson’s visit to Capitol Hill.
• Morningstar Advisor magazine compiled data on the historical market reaction to financial crises. Check out these charts for an all-stock portfolio and a 60/40 portfolio.
• This article provides a quick and simple explanation of how TIPS offer an explicit hedge against investors’ number one enemy: inflation.

Dow Jones Industrial Average versus S&P 500
Today is a perfect example why the Dow is not a fair representation of the market, despite being the more popularly quoted index. The Dow advanced 1.83 percent to the S&P 500’s gain of 0.98 percent.

Hewlett-Packard (HPQ) +14.49%
HPQ announced solid preliminary results for its fiscal 4Q, which ended October 31. Revenue increased 19 percent from the same period a year ago, boosted by the recent acquisition of EDS and favorable currency exchange rates. Excluding benefits from the acquisition and currency, revenue only increased 2%, which is a significant deceleration from the mid- to high-single-digit growth enjoyed over the past few years.

HPQ led personal computer shipments in the most recent quarter with 18 percent of the market (DELL had 14 percent). The preliminary results suggest that despite worries about an economic slowdown, HPQ can still grow earnings.

Medtronic (MDT) -13.23%
MDT reported disappointing quarterly results and a downwardly revised outlook. Litigation costs was a big part of the poor quarterly numbers, but CEO William Hawkins also noted difficulties in the spinal care division, which suffered setbacks from FDA safety warnings, investigations of marketing practices and difficulties integrating Kyphon Inc.

Each major business segment posted strong revenue growth. The largest segment, cardiac rhythm disease management, saw revenue increase 8 percent year-over-year. The spinal segment increased 26 percent than from a year ago and the cardio unit increased revenues by 22 percent. These three groups accounted for 75 percent of revenue.

Yahoo (YHOO) +8.65%
YHOO soared on news that CEO Jerry Yang is stepping down from his post, raising speculation that Microsoft (MSFT) may show renewed interest. It is highly unlikely that MSFT would make a full acquisition of YHOO at this point in time since a souring economy and an expected change in the ranks of antitrust officials with the new presidential administration next year could affect the timing of any MSFT actions.

Most believe that MSFT should stay away from YHOO and continue to increase shareholder value through massive buybacks and raising the dividend. However, a deal between $10 and $13 (down from $33 per share offer Yahoo rejected) might make more sense for MSFT. Goldman Sachs Group said YHOO “might be worth $21” a share to an acquirer. Expect MSFT to get crushed if it purchases all of YHOO for such a price.

Another scenario is a deal involving a MSFT acquisition of YHOO’s search engine, which MSFT CEO Steve Ballmer acknowledged could make sense last month.

With ridiculous cash levels, MSFT is likely to take advantage of market conditions by making some sort of acquisition. For example, SAP (enterprise software) or Research in Motion (mobile platform development) could be potential targets that would enhance MSFT’s business.

Exxon Mobil (XOM) +4.02%; Chevron (CVX) +3.70%
XOM and CVX rose as crude oil for December delivery rose as much a 1.9 percent to $55.98 on speculation the hijacking of a Saudi Arabian supertanker off the east coast of Africa may cause shippers to divert vessels from the area, delaying deliveries to Europe and the U.S.

Citigroup (C) -5.96%
C continued to fall after the company announced yesterday plans to cut 52,000 jobs and may post a loss of 30 cents a share next year, compared with a previous estimate of $1.50 profit.

Jacobs Engineering Group (JEC) +2.82%
JEC gained on news that the company received a $70 million contract to provide design services for a 3-mile section of U.S. Route 301 in New Castle County, Delaware.

Anheuser-Busch (BUD) takeover completed
InBev NV completed its $52 billion purchase of Anheuser-Busch, creating the world’s largest beer manufacturer. The combined brewer is named Anheuser-Busch InBev and will trade starting November 20 as ABI on the Euronext Brussels stock exchange. The transaction will be financed with $45 billion in debt and a $9.8 billion bridge loan to be paid back with proceeds from a future stock sale.

--

Peter Lazaroff, Junior Analyst