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Five Things You Need to Know: Target: Deflation, "The rally has just begun", China Stock Boom, Who says you can't take it with you?, Build Your Own Car


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Target: Deflation

After Wal-Mart yesterday announced it would sell hundreds of generic prescription drugs at low cost in Florida, Target retaliated by promising to match Wal-Mart's pricing.

  • Wal-Mart announced yesterday that it will cut prescription prices on about 300 generic drugs at its Florida stores with plans to expand the program nationally next year. The generic drugs will cost $4 per one-month supply, down from between $10 and $30 for a month's supply.
  • Now Target, which operates its own pharmacies, announced they intend to match Wal-Mart's pricing strategy in Florida.
  • CVS stock fell 8.4% on the news, Walgreens stock dropped 7.3% and Rite Aid fell 5%.
  • The generic drugs in question account for about 20% of Wal-Mart's prescriptions, but 60% of Walgreen's drug sales.
  • Is this the end game for big box competition, or tip of the iceberg?
  • Consider that in the next few years, even more generic drugs will hit the market as patents expire.
  • By 2011, 70 big-selling brand name drugs will lose their patent protection, according to this morning's Detroit Free Press.
  • Bottom Line: Peel off another 2% layer of core CPI pressure.

2. "The Rally Has Just Begun"

U.S. 10-year notes are headed for the biggest gain in 17 months, and "the rally has just begun" says Akira Takei of Fuji Investment Management in Tokyo, according to Bloomberg.

  • Akira Takei, who oversees the equivalent of $1.9 billion in non-yen securities, told Bloomberg, "The Fed is not going to hike interest rates anymore and probably Bernanke is thinking about cutting.''
  • Yield on the 10-year Treasury declined 18 basis points this week, the most since the seven days ended April 15, 2005.
  • Since June 30, US Treasuries have returned 3.4%, including reinvested interest.
  • Over the same period the S&P 500 has returned 3.7%. The Dow is up 3.4%. The Russell 2000 has returned a sparse 0.34%.
  • Is the bond rally just beginning? Let's look at a longer-term charts for perspective.
  • Below is the yield of the 10-year Treasury since 1994 with slow stochastic shown underneath.
  • We're always wary of proclamations that "the rally has just begun" after such a big gain, but the chart seems to suggest the longer-term path of least resistance for 10-year yields is down, not up.

3. China Stock Boom

China's stock markets will witness "a big bang" over the next five years which will see their market value quadruple, according to a report by Credit Suisse, the Financial Times reported.

  • Vincent Chan, head of Chinese research at the investment bank and author of the report, said government financial reforms and the recent recovery in share prices would lead many large Chinese companies to list on the mainland for the first time, the FT said.
  • Mainland China stock markets in Shanghai and Shenzhen declined in value by about half between 2001 and 2005.
  • The Government launched a major reform of listed companies in 2005, converting the large overhang of non-tradable shares into tradable stock.
  • The Shanghai composite index is up 45 percent so far this year.
  • The surge in activity on the Shanghai market would result in a decline in the relative importance of Hong Kong, the article notes.
  • Sounds very exciting. How do we invest in China here? One way is The China Fund (CHN), a closed-end fund.
  • Below is a daily chart of CHN with DeMark TD-sequential technical indicator overlaid. The blue "13" is a "sell" signal. Dang.

4. Who Says You Can't Take it With You?

Cablevision Systems awarded stock options to an executive after his death in 1999, then backdated them to give the illusion they were granted when he was alive, according to Bloomberg.

  • Former Vice Chairman Marc Lustgarten was awarded the options after he died, the Wall Street Journal reported late yesterday.
  • Lustgarten had worked for the company since 1975 and had been a vice chairman since 1991.
  • It is unclear whether the estate of Mr. Lustgarten exercised the options, the Journal said.
  • Cablevision is one of about 100 companies currently under federal investigation for allegedly backdating or manipulating options grants.
  • Stock options give the recipient the right to purchase shares at a fixed exercise price, typically the market price on the day the options were granted.
  • Backdating the options grant to a date when prices were lower increases the potential value of the options.
  • Harvey Pitt, former chairman of the SEC, called the grant to the deceased executive "really bizarre" and "absolutely crazy," the Journal said.
  • Minyanville has learned that every time the opening bell on the stock market rings a Cablevision angel gets its wings.

5. Maybe Ford and GM Ain't So Bad After All

We've heard the knocks against American-built cars. Declining quality. Poor gas mileage. Shoddy engineering. Look pal, think you can build a better car? According to BusinessWeek Online, Jory Squibb says yes.

  • Tired of high gas prices, Jory Squibb decided he would build his own car using second-hand motorcycle parts.
  • After 1000 hours of work, the result was what he calls the MOONBEAM, which gets 80-85 mpg and cost a mere $2,500.
  • The "car" uses a 150cc Honda 4-stroke scooter motor.
  • Water-cooling from the motor heats the cabin in the winter.
  • Squibb converted two motor scooters to build the "car."
  • See it for yourself:

    Two questions: Where do you put the golf clubs, and
    where do you put the cooler?

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No positions in stocks mentioned.

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