NBRTranscripts - January 4, 2005
Tuesday, January 04, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: The Dow takes a dive late in the day as fears of inflation run rampant on Wall Street. The blue chips fall almost 100 points after the Federal Reserve says interest rates might be too low to keep inflation in check.
LINDA O'BRYON, NIGHTLY BUSINESS REPORT ANCHOR: Shares of Krispy Kreme crumble today. Investors dump the stock of the donut maker after it takes the wraps off a laundry list of serious accounting problems.
KANGAS: But shares of Rayovac get charged up as the battery maker announces an acquisition that will greatly expand its product line. We'll hear from Rayovac's chairman about his plans for the company's future.
O'BRYON: And if there's a bug in your future, you may want to consider buying this one. It comes with all of Volkswagen's usual equipment, plus one very unusual extra.
KANGAS: I'm Paul Kangas.
O'BRYON: And I'm Linda O'Bryon. Susie Gharib is off tonight. This is NIGHTLY BUSINESS REPORT for Tuesday, January 4.
Good evening, everyone. Wall Street gets walloped for the second straight session of the New Year today, spurred on by growing concerns about inflation. The Dow closed, lost more than 98 points and the NASDAQ slid 44. Stocks hit the skids in mid-afternoon, after the Federal Reserve released the minutes of its last meeting. And as Darren Gersh reports, investors didn't like what the Fed said.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The minutes from the December meeting of the Federal Reserve's interest rate setting open market committee were slightly more hawkish on inflation than financial markets had expected. Former Fed Governor Laurence Meyer says that tone may translate into an extra half a percentage point on the benchmark Federal funds rate this year.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: The market has believed that there was going to be fairly modest sort of Fed tightening this year and these minutes are consistent with a somewhat consistent pace of tightening. We are expecting the funds rate to be 3 3/4 at the end of the year. The market expected something closer to 3 1/4.
GERSH: Overall, the Fed minutes show Greenspan and company were upbeat last month, describing the economic expansion as quote, firmly established and had proven quite resilient in the face of rising oil prices. Although the Fed still predicts core inflation will remain stable this year, the minutes show a number of Fed members expressed concern that a slumping dollar, high energy prices and a drop in productivity could push prices higher.
MEYER: So it seems to me that we are possibly in a situation where the forecast is for relatively stable inflation, but there is a sense that the committee is becoming a little bit more worried that inflation might be higher as opposed to lower over time.
GERSH: This is the first time the Fed has released minutes from a meeting ahead of its next meeting, in this case on February first and second. The new disclosure is part of a decade long drive to help markets and investors understand how the Federal Reserve works.
LYLE GRAMLEY, SR. ECONOMIC ADVISOR, STANFORD WASHINGTON RESEARCH GROUP: And there is good reason for this. The Fed realizes that if it communicates accurately to markets what its intentions are with regard to monetary policy, its expectations of what monetary policy should do, markets will respond in a way that helps the Fed achieve its objectives more quickly.
GERSH: One example in the December minutes, some Fed members expressed concern about excessive risk taking in this low interest rate environment. A small warning to investors that the Fed is watching markets closely for signs of speculative activity. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
KANGAS: New details tonight about how President Bush could be planning to overhaul the Social Security system. An administration official says the Bush plan would probably let workers invest up to 4 percent of their payroll taxes in private accounts with a cap of up to $1300 each year and the administration is also considering making a major change in how Social Security benefits are calculated. The idea would be to tie benefits to inflation rates instead of increases in wages. That change could slash benefits by almost 50 percent for some younger workers but the White House tells NIGHTLY BUSINESS REPORT the president hasn't made any decisions yet on the issue.
O'BRYON: Shares of Krispy Kreme donuts got creamed today as a slew of negative news soured investors on the company. Krispy Kreme's stock fell almost 15 percent after word the donut maker will have to re-work its books for fiscal 2004 and it may be about to default on its main credit facility. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Krispy Kreme donuts says it will restate earnings for the last three quarters of fiscal 2004, as well as for the entire year to correct errors made in accounting for acquisitions. The company says the adjustment will reduce pre-tax income for this period by as much as $8.1 million, net income by as much as $4.9 million and earnings per share by as much as $0.08. For years, Krispy Kreme seemed like a dream stock, the company's ovens churning out both hot donuts and good earnings reports. Now there are shareholder lawsuits charging the company routinely padded sales by doubling reports of donut shipments at the end of fiscal quarters. And the company has confirmed there is a Securities and Exchange Commission investigation into its accounting practices.
CARL SIBILSKI, ANALYST, MORNINGSTAR: It's significant in the sense that, you know they're admitting to certain things, certain questionable activities and at least as far as aggressive accounting and showing that they are changing their ways. I think there's probably more to come in this story but from a standpoint of the business obviously it's transferring earnings from one period to another period, the cash in the bank hasn't changed, so from that standpoint, I don't think there's a big risk to the business.
GURVEY: The once high flying stock price has dropped sharply since questions about its accounting practices surfaced last year.
SIBILSKI: The question is, you know, having confidence in the numbers that we're looking at to produce the growth projections for that company. And the numbers that we were looking at previously indicated that the stock was worth maybe $23. The problem is that when we don't have numbers and financial statements to really rely on, it's hard to have an opinion so we've taken our rating off the stock.
GURVEY: Krispy Kreme said today it may be late in filing its next set of paperwork with the SEC and that could put it in default of a $150 million credit facility next week. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
KANGAS: Stocks opened a bit higher in a rebound from yesterday's sell off. Adding to the upside, a better than expected 1.2 percent rise in November factory orders. So the Dow gained 25 points early on while the NASDAQ Composite was up 2 points. But the market reversed course as oil prices rose and then a steep sell off followed the release of those December Fed minutes which as we said, showed more concern about inflation than generally thought. So the Dow Industrial Average tumbled to a 98 2/3 point closing loss at 10,630.78.
The NASDAQ Composite fell 44 1/4 points, ending at 2107.86. Standard & Poor's 500 Index lost 14 points, ending at 1188.05. Over in the bond market, the 10-year note fell 19/32 to 99 22/32 lifting the yield to 4.29 percent.
O'BRYON: It looks like December was more ho-hum than ho-ho-ho for the nation's biggest automakers. General Motors says its December sales fell 6 percent to 437,000 vehicles. But even with that sales decline, GM plans to keep to its first quarter production schedule. Ford Motor's December sales edged slightly higher, rising almost 1 percent to 294,000 cars and trucks. Especially strong, Ford's newly revamped Mustang. Daimler Chrysler's Chrysler group posted a 5 percent sales gain last month, thanks to the popularity of its new models like the Chrysler 300 and the Chrysler Pacifica.
KANGAS: German automaker Volkswagen launched a new volley today in the vehicle incentive war. The company rolled out a pre-paid insurance plan in two states that could be offered nationally if it's successful. But as Diane Eastabrook reports, there are concerns that free insurance is just another fad that could further damage the auto industry.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Volkswagen's Beetle and Golf appeal to younger buyers, a group that has a tougher time buying auto insurance than other drivers. So, the German auto company thinks offering prepaid insurance for a year on both vehicles could be more enticing to those customers than low cost financing or cash rebates.
NARCIS AGIC, SALESMAN, AUTOBARN OF EVANSTON: By having prepaid insurance, people are more concentrated on enjoying the car in the first year and of course establishing some history with a respectable insurance company. At that point it will be easier to get insurance to continue with the same company or to go somewhere else.
EASTABROOK: Volkswagen launched its "in the car" program today in Wisconsin and Illinois. The insurance policies are underwritten by the Nationwide insurance company and exceed the minimum coverage requirements in both states. For instance, Illinois requires liability coverage of $20,000 per person and $40,000 per accident. Volkswagen's plan is well above both. Volkswagen says prepaid auto insurance really isn't a novel idea. Similar programs have been offered in Europe for more than a decade and they've been very successful. In the U.S., 0 percent financing and cash rebates of up to $5,000 have kept consumers buying cars and light trucks over the past few years. But industry watchers say the deals have diluted brands and have hurt the residual value on vehicles. While marketing experts think offering insurance is a unique idea, they fear it could also cheapen the Volkswagen brand and confuse consumers.
TIM CALKINS, MARKETING PROFESSOR, NORTHWESTERN UNIVERSITY: To me, automakers are all about making, producing, servicing automobiles and trucks and cars, things like that. They're not really about insurance. And I think going into that market seems like a real stretch I think for these brands under the brand names. EASTABROOK: But Volkswagen thinks in the car will drive more traffic to participating showrooms. And this dealership says today alone the program has already prompted about a dozen phone calls from interested buyers.
AGIC: 23 percent of the buyers consider insurance costs as major factors when it comes to making a decision about buying a vehicle. So, it helps Volkswagen and it helps the consumer.
EASTABROOK: In the car will run through the end of March. If it's successful, it could be expanded to other states. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Evanston, Illinois.
O'BRYON: Battery maker Rayovac is moving into the lawn and garden business. The company is buying privately held United Industries which makes Cutter insect repellant and Stay-Green fertilizer. The price tag: $476 million in cash and stock, plus the assumption of nearly $900 million in debt. The deal is Rayovac's latest effort to convert itself into a diversified consumer products company. Last year it expanded into the electric shaver business by buying Remington products. And Rayovac's CEO says the company's transformation is far from over.
DAVID JONES, CHAIRMAN & CEO, RAYOVAC: The Rayovac of the future will be much larger. It will be much larger than $2.5 billion and will represent many more product categories than just seven. Seven feels good right now but we really think we've got the structure in place to be able to manage a much bigger business model.
O'BRYON: And once the deal closes, sales of batteries will account for just 40 percent of Rayovac's revenues.
KANGAS: That news made gave Rayovac's stock a nice boost Linda and we'll see it in just as moment as we take a look at our stocks in the news tonight. Topping the most active list on the New York exchange, Lucent Technologies (LU) trading 29.6 million shares down $0.06. Lehman Brothers however did keep an "over weight" rating on Lucent stock on the belief a 3 to 5 percent rise in industrial capitalization expenditures will help telecom equipment companies this year.
Pfizer (PFE), second in volume, no change today.
Then Nortel Networks (NT) down $0.20.
Sprint FON Group (FON) lost $0.80.
Advanced Micro Devices (AMD) down $1.20. There was a block of 1 1/2 million shares of AMD that traded at $20.45 a share.
General Electric (GE) fell $0.44.
EMC (EMC) down $.42.
And then Citigroup (C) $0.41.
Time Warner (TWX) down $0.31.
And ExxonMobil (XOM) despite higher oil prices was down $0.34 and that was tenth in big board volume.
Continental Airlines (CAL) losing $1.76 or over 12 1/2 percent of its value. The company said its December passenger revenue per available seat miles fell 4 to 5 percent. That did not sit well with the airline group and neither did the higher oil prices.
Let's have a look at some other oil - I mean airline stocks. AMR (AMR) down over $1.
Delta Air Lines (DAL) down a quarter.
And more than $1 losses in JetBlue Airways (JBLU) and Northwest Airlines (NWAC).
Another group that was weak, the defense group, Lockheed Martin (LMT) down $0.92 on the close but it traded as low as $52.54. The "Wall Street Journal" today reported the company and Northrop Grumman will take the biggest hits from a $30 billion Pentagon budget cut. Incidentally, Northrop stock fell $1.15 to close at 52 1/2.
Then we see Rayovac (ROV) doing very well, lit by $5.09. As you heard it's going to acquire that privately held lawn and garden company maker United Industries for $1.2 billion.
Reader's Digest (RDA) had a good day, up $1.28. Yesterday the company said it paid down $200 million in debt in its fiscal 2005 second quarter which ended in December.
William Lyon Homes (WLS) down $2.65. The company's new home orders for the three months ending in December of this past year fell 35 percent. As you might guess, the sector was down on that news.
Let's have a look at some other home builders, Beazer Homes (BZH) down over $8.50. Centex (CTX) down over $3.
Hovnanian Enterprises (HOV) off $2.58.
And KB Home (KBH) fell 4 3/4 or nearly so.
Eastman Chemical (EMN) fell to $5.11. The company sees fourth quarter earnings at the low end of its previous guidance which was $0.42 to $0.63 a share.
Finally we get a winner and that was Guess? (GES) up $1.36. Piper Jaffray brokerage upgraded it from "market perform" to "out perform" on optimism about the company's new denim clothing line.
Volume leader on NASDAQ as usually, the NASDAQ 100 (QQQQ) down $0.72.
Microsoft (MSFT) managed to gain $0.10.
And then Google (GOOG) giving back over $8 of yesterday's $9.50 rise.
Intel (INTC) $0.46 drop.
Cisco Systems (CSCO), fifth in volume, on a dollar basis, was down $0.76.
Apple Computer (AAPL) managed to edge up $0.65. JPMorgan boosted earnings and revenue estimates for Apple, mainly due to the success of its iPod product.
eBay (EBAY) down $2.80.
Oracle (ORCL) $0.35 loss.
Yahoo! (YHOO) down $1.60.
Amazon.com (AMZN) fell $2.38. Smith Barney downgraded Amazon from "hold" to "sell" on concern about increasing competition.
Dell (DELL) down $1.27 or 3 percent today. The Raymond James financial brokerage downgraded it from "strong buy" to "out perform." And then Intrusion (INTZ) moving up $1.58 or 56 percent. The company makes network security systems and the U.S. Army placed an $800,000 order for one of them.
And finally StemCells (STEM) up $1.86. The company filed for permission to start trials losing brain cells to treat Batten disease victims, mostly children.
And those are the stocks in the news tonight, Linda.
O'BRYON: Paul, American companies operating in China have come under fire in recent months for not letting state-run labor unions set up branches in their Chinese operations. So, some of them have begun doing just that, including Wal-Mart. But many have not. The All China Federation of Unions bid to set up shop within foreign-funded companies comes at a time when there is not only tension between Chinese workers and their foreign employers, but also between Chinese workers and the state run-union seeking to represent them. Tonight, we begin a two-part series looking at this issue. Hope Ngo reports.
HOPE NGO, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Hong Kong-based China labor bulletin is one of a handful of websites devoted to monitoring labor rights on the mainland. Its founder, dissident Han Dongfang was arrested in 1989 in the wake of the crackdown on pro-democracy activists in Tiananmen Square. Han was detained for nearly two years for organizing an independent union, a move that is outlawed by China's labor code. In the years since Han's detainment, China's economic environment has experienced dramatic changes and with it has come a sharp increase in labor unrest. Government figures for 1992 show there were 8,150 cases involving labor disputes. The "China Labour Bulletin" reports that figure jumped to 300,000 in 2003.
HAN DONGFANG, CHINA LABOUR BULLETIN: The Chinese trade union movement in the background is changing and it's because the economic development and also the same time while the economy developing and the workers rights being ignored.
NGO: A large number of laborers today are routinely exposed to poor working conditions that cause injury and in some cases even death. Many receive pay packets that are below minimum wage. Others don't receive wages for several months at a time.
LEE CHEUK-YAN, LAWMAKER & GENERAL SECRETARY, HK CONFEDERATION OF TRADE UNIONS: A statistic, $80 billion U.S. dollar is being owed every year to the workers and some of this is state-owned enterprise. Some of it is foreign enterprise.
NGO: Even if companies are mandated by law to organize branches of the official All China Federation of Trade Unions within their operations, Han says ACFTU does little to support the same group it is mean to represent.
DONGFANG: The reality is the company managers or bosses, they appointed those people they trust to be the union hat and basically now the union becomes the kind of you know organ for the manager in a company level to control the workers rather than helping and protecting the workers' rights.
NGO: While most of the labor unrest is targeted against Chinese private enterprises, the countries foreign-funded companies have not escaped unscathed. Subcontractors from major brands like Kmart have been accused of taking advantage of China's cheap and abundant labor pool.
DONGFANG: For example, in the (INAUDIBLE) factories and the private factories, the workers are forced, are working 12 hours a day, 14 hours a day, sometimes around the clock and they can make very little money.
LEE CHEUK-YANG: Multinational, though they may preach that they have better working conditions, but still we believe that basic trade union and genuine trade organization be dead (ph) in multinational.
NGO: Advocates of independent labor unions like Han and Lee Cheuk- Yang believe Chinese workers need to have access to legitimate representation, but they are suspicious that the motive behind the official union's call for foreign enterprises to allow their workers to organize has less to do with the workers and more to do with the union trying to retain its clout in a changing China. Hope Ngo, NIGHTLY BUSINESS REPORT, Hong Kong.
KANGAS: Tomorrow, we look at why China's official labor union wants to get a foothold into foreign-owned companies.
O'BRYON: Former HealthSouth chief executive Richard Scrushy goes on trial for fraud and conspiracy in a Birmingham Federal court tomorrow. He's charged with leading a scheme to overstate HealthSouth's revenues by over $2.5 billion. Scrushy's lawyers want to subpoena "60 Minutes" reporter Mike Wallace to testify about an interview he did with Scrushy that aired on the program. Wallace wants that request thrown out, citing his First Amendment rights.
KANGAS: The verdict is guilty in the trial of former Cendant executive Kirk Shelton. Late today, Shelton was convicted on 12 counts of conspiracy, mail fraud, wire fraud and securities fraud. But a mistrial was declared on charges against Cendant's former chairman Walter Forbes. The pair was accused of inflating the books at Cendant's predecessor CUC International by half a billion dollars.
O'BRYON: Here's a look at what's happening tomorrow. We get a look at the services sector as the Institute for Supply Management releases its December non-manufacturing index. On the earnings calendar, chemical giant Monsanto and restaurant chain Ruby Tuesday are scheduled to report.
Tonight's commentator says there are some interesting things you can learn from the past, even his past. Here's Lionel Barber, U.S. managing editor of the "Financial Times."
LIONEL BARBER, U.S. MANAGING EDITOR, "FINANCIAL TIMES": Twenty years ago, when I started in financial journalism, there were three institutions in the city of London which one entered on bended knee: the Bank of England, Lloyd's insurance brokers and the London Stock Exchange. Today, the Bank of England has lost its regulatory powers, though it still sets interest rates through a committee composed partly of outsiders. Lloyds, long plagued by scandal, is a shrunken hulk and now the LSE risks losing 300 years of independence to Deutsche Bourse, the Frankfurt-based exchange. So the once-hallowed London Stock Exchange looks like suffering the same fate as the city's merchant banks, all bought out by deep-pocketed foreigners. Yet reaction has been strikingly mild. No government intervention, no anti-German rants. There are three New Year lessons here. First, in an age of electronic screen technology and instant price information, geography is no longer paramount. Second, the city of London's influence rests on its reputation, its ability to innovate and its openness to all comers. Third, more stock exchange consolidation is on the way. These lessons are particularly relevant to the New York Stock Exchange, a powerful institution struggling to protect its dominant position. In the end, as London has discovered, it's tough, nay impossible, to buck the market. I'm Lionel Barber.
KANGAS: Recapping today's market action, inflation fears spook investors and they bail out of stocks. The Dow falls almost 100 points. NASDAQ Composite loses 44. To learn more about the stories in tonight's broadcast, go the nbr.com.
O'BRYON: And that's NIGHTLY BUSINESS REPORT for Tuesday, January 4. I'm Linda O'Bryon. Goodnight, everyone and good night to you too Paul.
KANGAS: Good night Linda. I'm Paul Kangas wishing all of you the best of good buys.
