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Which Retailers Will Santa Visit?


A tale of two discounters could say a lot about the Christmas outlook. On Nov. 14 investor darling Target (TGT) deflated Wall Street's holiday spirits when it said it would probably miss its November forecast of a 4%-to-6% sales increase at stores open at least a year. Meanwhile, Wal-Mart (WMT) said it was on track to meet its forecast of a 3%-to-5% gain and expected a dandy Christmas. November will mark the first time in a year and half that trendy Target hasn't trounced its downscale rival.

To Marshal Cohen, chief analyst at researcher NPD Group, the role reversal spotlights a key trend. Crunched by energy costs, credit-card debt, and the psychological impact of softening home prices, consumers will be more inclined to trade down this season. Emporiums that could feel the pain include Target, Abercrombie & Fitch (ANF), Coach (COH), Tiffany (TIF), and Nordstrom (JWN). Much-maligned Wal-Mart, Cohen argues, "will be in the sweet spot."

Charles Koch is a CEO who likes to run his family business the old-fashioned way -- secretively. That may be a little harder from now on. Koch Industries, which Koch took over from his father and company founder, Fred, 38 years ago, agreed on Nov. 14 to fork over $21 billion in cash and assumed debt for paper giant Georgia-Pacific (GP). The deal vaults the Wichita conglomerate past Cargill to become the biggest privately held outfit in the U.S., with sales of roughly $80 billion. But taking on the debt will put Koch more under the microscope of lenders and ratings houses. The deal offers yet another example of the pleasures of going private these days.

See "Koch: Very Private and a Lot Bigger"

Remember all those predictions last winter that the greenback was certain to be crushed in 2005 under massive U.S. trade deficits? Oops! The dollar has levitated about 15% against both the euro and the yen this year, though the fearsome deficits turned out even bigger than expected. On Nov. 16 the dollar reached a 27-month high against the yen and a 24-month high against the euro. Dollar bear Warren Buffett said on Nov. 4 that his firm, Berkshire Hathaway (BRK), had lost about $900 million through September on currency bets. Behind the dollar's allure: Investors love the higher inflation-adjusted yields on U.S. securities. "Real" rates on 10-year government bonds are around 2% in the U.S., vs. 1.5% in Europe and 1% in Japan.

New entrants are crowding the video-on-demand swimfest. Diving in on Nov. 14 was Time Warner's (TWX) AOL unit, which will offer such oldies as Welcome Back, Kotter and Chico and the Man. And Viacom (VIA) says Nickelodeon will sell SpongeBob SquarePants and other kiddie fare for $2.99 on Hasbro's (HAS) iPod-like VuGo portable player. Lots of splashing, but no clear lane to profits: AOL will show ads, as will CBS, which last week said it would offer some hot shows like Survivor for 99 cents on Comcast (CMCSA) cable systems. Apple is charging $1.99 for iPod users to see ad-free ABC (DIS) shows such as Desperate Housewives. Industry sources say Fox (NWS) will soon offer its own Internet site, with shows like 24 and The Simpsons, but no word on prices as yet. Why all the different strokes? Because no one has a clue how many users will sign up.

See "Behind Those Video-on-Demand Deals"

This room just keeps getting tidier. On Nov. 14, Starwood Hotels & Resorts (HOT), the parent of such names as Sheraton, Westin, and W, struck a deal to offload 38 properties to real estate giant Host Marriott (HMT) for $4.1 billion in stock and cash. Starwood will still manage the hotels for as long as 40 years. Besides cutting Starwood's net debt from $3.1 billion to $1.5 billion, which may bring a ratings upgrade, the agreement speeds its transformation into what CEO Steve Heyer likes to call a "consumer lifestyle company." Translation: more managing for reliable fees, less playing in the volatile property market. As for the buyer, the inns round out its portfolio nicely, and the new brands will lead it to drop the Marriott name and become Host Hotels & Resorts.

When your largest shareholder and two other biggies tell you the jig is up, it behooves you to pay attention. On Nov. 14, Knight Ridder (KRI), the San Jose (Calif.) publisher of 32 newspapers, did just that, asking Goldman Sachs (GS) to explore "strategic alternatives" -- read, look for a buyer. That's what Bruce Sherman, head of Naples (Fla.) investment house Private Capital Management, had demanded on Nov. 1. Sherman's firm owns 19% of the stock and was displeased with its performance. Now the question is who'll want this grab bag of large-to-small-market dailies when readership is declining and ads are migrating to the Web. Knight Ridder could well be carved up among rival publishers and private equity outfits.

See "Where Ridder Went Wrong", and "Knight Ridder Makes It Official"

In the end, they buried the scalpel. On Nov. 15, Johnson & Johnson (JNJ) and Guidant (GDT) agreed that J&J would pay $21.5 billion for the Indianapolis medical-device maker, down $4 billion from the deal struck last December. J&J had balked after Guidant was forced to recall pacemakers and defibrillators. Guidant, in turn, sued J&J to fulfill the original deal. It makes sense that the two decided they'd rather heal than fight: Guidant faces lawsuits over the recalls, which have maimed its market share, while J&J needs to expand its device business now that its pharma unit is showing stunted growth. Grafting on Guidant may be tricky for J&J, since it's unlikely to let its ailing partner run autonomously.

See "J&J and Guidant: Buyer Beware"

Too bad there's no pill to cure confusion. Nov. 15 was the day seniors could start signing up for a new prescription drug benefit -- perhaps President George W. Bush's signal domestic accomplishment. Alas, the program seems calculated to induce dizziness, and most seniors have no idea which plan suits them best. Faced with dozens of choices -- in some states, more than 40 -- many may freeze and do nothing. Medicare is scrambling to help the elderly and their families find their way. They have until May.

See "Medicare Makes Its Move"

He came, he saw, he bought. Now, J?rgen Schrempp's company is selling -- and ditching his vision of a globe-spanning empire. On Nov. 11, DaimlerChrysler (DCX) dumped at a discount its remaining 12.4% stake in banged-up Mitsubishi Motors to Goldman Sachs, which flipped the shares the same day to institutional investors. Schrempp, who will step down as CEO on Dec. 31 and has virtually vanished from the field, trumpeted the investment in Mitsubishi in 2000 as the vital Asian bulwark of his "World Inc." (Welt AG). Instead his moves wrecked profits and stretched management so thin that once-No. 1 Mercedes fell behind BMW in the global market for luxury cars. CEO-designate Dieter Zetsche will probably focus on jettisoning nonworking parts and turning Daimler back into a mean machine.

See "Auf Wiedersehen, Mitsubishi" and "Goldman's Fast Mitsubishi Move"

Most lawmakers on Capitol Hill want to cut taxes, but as ever, they disagree about whose. On Nov. 15, the Senate Finance Committee voted to provide millions of families another year's relief from the dreaded alternative minimum tax but refused to extend the 15% tax rate on capital gains and dividends, which is due to rise at the end of 2008. At the same time, the House Ways & Means Committee voted to keep low capital gains rates for another two years -- through 2010 -- but refused to fix the AMT. Oh, and the Finance Committee whacked more than $1 billion a year in tax breaks now enjoyed by Big Oil. It will take Congress at least a month to sort it all out.

Home buyers aren't the only ones getting antsy about the market. On Nov. 16 the National Association of Home Builders announced that the NAHB/Wells Fargo (WFC) Housing Market Index fell to 60 in November, its lowest level in 2 1/2 years. The index measures how builders see conditions. What's bugging them? Affordability is low, and mortgage rates are rising. Sellers are having a hard time facing the new reality, says George Eastment, president of Long & Foster Financial Services in Fairfax, Va., which owns brokerages in eight states: "Everyone wants to be the guy on his block who sold for the highest price."

Peter Drucker, management guru extraordinaire, died on Nov. 11.

Your average conglomerate can't get no respect these days -- and after three years at the helm, Tyco International CEO Edward Breen seems to be losing patience. Breen has cleaned up the scandal left by Tyco's now-jailed former CEO, Dennis Kozlowski, and has tripled earnings in the past two years. His thanks? The stock fell 25% from its January high. So on Nov. 16, Breen told investors he had been talking with the board about "additional options," possibly including a breakup of the $40 billion lunker, whose businesses range from home security to electronics to health care. This mix may have worked when Kozlowski was gobbling companies to goose growth, but skeptics argue that simplicity is now the True Path. Breen says he's close to selling the $2 billion plastics business. A delighted Street bumped the stock up 4%.


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