Business Highlights

SAN JOSE — Cisco Systems Inc. posted lower fiscal first-quarter earnings but higher sales Wednesday after the network equipment maker was required to take into account the expense of employee stock options for the first time.

San Jose-based Cisco, which with other Silicon Valley companies lost a multiyear fight against expensing options, said its profits would have grown over last year without the $228 million charge that was required by a Financial Standards Accounting Board decision.

For the three months ended Oct. 29, Cisco earned $1.26 billion, or 20 cents per share, compared with $1.4 billion, or 21 cents per share, in the first quarter of 2005. Sales jumped 10 percent, to $6.55 billion from $5.97 billion.

If the stock-option expensing rule had been in effect last year, the company said it would have posted earnings of $1.12 billion, or 17 cents per share, in that period.

Excluding one-time items, Cisco earned $1.6 billion, or 25 cents per share, compared with $1.5 billion, or 21 cents per share for the first quarter of fiscal 2005.

Analysts were expecting Cisco to earn 24 cents per share on sales of $6.58 billion, according to a survey by Thomson Financial.

John Chambers, Cisco’s chief executive, said the quarter was strong despite the stock-options expense. He credited strong demand by customers who are not only buying traditional routers and switches but coupling them with more advanced technologies such as Internet telephones and wireless devices.

"Cisco’s long-term product architecture strategy is taking hold,” he said.

Chambers also said the company experienced "balanced execution” across most geographies, market segments and product categories.

"We are especially pleased with the improving business momentum in the U.S. and Asia Pacific, the strength of our product families and the accelerated growth of the commercial marketplace,” he said.

Investment product hedges against

home price drops

CHICAGO — Worried that the value of your home may fall?

Go ahead, bet on it. Or if you don’t, maybe your mortgage holder will.

The Chicago Mercantile Exchange, a financial marketplace dealing in the value of everything from interest rates to foreign currencies to pork bellies, has committed to offer trading next year in a category many consumers take personally: sky-high U.S. home prices.

Housing-price futures, based on the median home price in each of 10 U.S. cities, aren’t being tailored specifically for individual homeowners. But they may provide some protection for mortgage companies, home builders and anyone else with a large stake in residential real estate if housing values slide — while giving other investors a way into a lucrative market.

The novel investment product is set to debut in April 2006, based on a final go-ahead given by the Merc earlier this fall after months of exploratory work.

"There really is no way (now) for anyone to hedge home prices,” said CEO Sam Masucci of Macro Securities Research, the Morristown, N.J.-based financial research firm that’s developing the contracts with the exchange. "Or for institutional investors to gain exposure to the market without going out and buying homes.

"Housing is one of the largest asset classes in the world (and) we thought it made a lot of sense to give people access to it,” he said.

While unusual, it won’t be the most exotic contract offered by the world’s largest futures exchange. That distinction has been held for six years by weather futures, which are based on regional temperature indexes and enable utilities and others with a lot riding on the weather to hedge their risk.

The concept of real-estate futures has been discussed since the early 1990s, but it took a boom in housing prices to propel it to reality.

Home values appreciated 65 percent nationwide from 2000-04 and more than doubled in some areas, according to the National Association of Realtors. U.S. residential real estate was valued at $18.6 trillion at the end of last year — more than the amount in equities.

The price run-up has meant a huge increase in wealth. A negative sales forecast from home builder Toll Brothers Inc. Tuesday sent stocks falling by fueling fears of an economic slowdown. Such recent evidence of cooling may have only fueled interest in protecting the market.

"One never knows when you launch something like this, whether it’s going to be successful or bomb,” Masucci said. "But all the elements are there for it to be successful.”

Investors will be able to trade contracts electronically based on median home prices in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco or Washington D.C. — or a composite index of the ten cities. The indexes were developed by the real estate research firm Fiserv Case Shiller Weiss Inc.

Those who are optimistic that prices will continue their double-digit rise can simply buy contracts, making a profit if the increase exceeds their costs by the expiration date.

Investors who want to soften the potential blow of a steep decline, on the other hand, can buy versions of the contracts called put options that will pay them money if the price drops, ensuring that they recoup some of their lost house profits.

That strategy is akin to taking a short position in a stock, according to Felix Carabello, Merc associate director for alternative investments. But "instead of shorting IBM, you’re shorting your house,” he said.

For example, a Los Angeles homeowner looking to hedge the value of his $1 million house could buy "puts” linked to that city’s housing index, at a cost of several thousand dollars. If Los Angeles housing prices are higher by the time the quarterly contract expires, the puts have no value and the investor is out the costs. If prices go down, the puts enable the investor to sell the contracts for a gain.

While there has never been a nationwide decline in housing prices, there are precedents for sharp declines in regional housing values. Los Angeles home prices fell 41 percent in real terms from 1989-97, and Boston’s dropped 29 percent from 1987-94.

Outside experts have mixed opinions about the extent of demand for housing futures.

Anthony Sanders, a professor of real estate finance at Ohio State University and former investment banker, called them long overdue.

"There’s a huge demand out there on behalf of financial institutions to hedge their housing exposure, so this should be able to take off,” he said.

Robert Hartwig, chief economist at the Insurance Information Institute, a trade group, was more skeptical. He said insurance companies are unlikely to get involved in anything as speculative as housing futures or develop home price depreciation insurance based on them, as has been suggested. The overheated housing market could make the product too expensive anyway, he said.

"While I think that theoretically it’s a good idea, I’m not sure how much the market is going to materialize,” Hartwig said. "It’s like offering to insure stock prices in early 2000. Real estate prices are super-inflated right now.”

Individuals already have the chance to invest in housing prices through a retail product offered since May by HedgeStreet, a government-regulated online derivatives exchange based in San Mateo, Calif. Its housing Hedgelets cost $10 or less and allow investors to effectively place bets on whether the government’s housing price index for Chicago, Los Angeles, Miami, New York, San Diego and San Francisco will be in a certain range within three months.

But total volume for the housing Hedgelets was just $46,716 in October, two-thirds of it in San Francisco contracts. Russell Andersson, HedgeStreet vice president and co-founder, said demand should increase as new products are introduced to attract additional investors.

The Mercantile Exchange’s planned offering, he said, is "further confirmation of market demand.”

Carabello said the Merc continues to receive e-mail inquiries from home builders, hedge funds, pension funds, construction suppliers, mortgage insurers that demonstrate their intent to participate.

"If anything, the cooling of the housing market increases interest,” he said.

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On the Net:

Chicago Mercantile Exchange: www.cme.com

Microsoft CEO says products, not stocks, a barometer of success

BELLEVUE, Wash. — Microsoft Corp. Chief Executive Steve Ballmer told shareholders Wednesday that the software behemoth measures its success by its products, not its share price.

"We have never really used the stock market itself as a barometer of our success,” Ballmer said at the Redmond company’s annual shareholder meeting in Bellevue, a Seattle suburb.

Microsoft shares have been trading at about the same level for several years.

In the past 52 weeks, shares have traded between $23.82 and $30.20. Shares were up 4 cents at $27.09 in midday trading Wednesday on the Nasdaq Stock Market.

At the meeting Wednesday, however, Ballmer sought to draw attention instead to a slew of new products that are due in the coming year or so. The lineup includes the Xbox 360 videogame console and new versions of the Windows operating system and Office business software suite.

Ballmer also touted the company’s recent push toward offering more Internet-based software and services, to better compete with companies such as Mountain View, Calif.-based Google Inc., Sunnyvale, Calif.-based Yahoo Inc. and San Francisco-based Salesforce.com.

He called the new focus, which will include more Web-based offerings designed to complement desktop software such as Windows and Office, a "major strategy shift to keep up with the times.”

Analysts say the concern is that the increasing number of Internet-based offerings, especially those that are free and ad-supported, will make people less likely to buy new versions of Windows and Office, Microsoft’s cash cows.<