NBRTranscripts January 5 2005
Wednesday, January 05, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: Delta flies in the face of the rest of the airline industry. The carrier dramatically slashes its prices and sets the stage for a price war in the skies. It also sets off a rush for the exits today for investors in airline stocks.
LINDA O'BRYON, NIGHTLY BUSINESS REPORT ANCHOR: Customers weren't rushing to the entrance of Circuit City last month. The electronics retailer says sales fell dramatically during the holiday season on many of its product lines. The stock falls dramatically as a result.
KANGAS: When in Rome, you might want to do some investing. We'll get some insight on why experts say investing in Europe may reap big rewards this year.
O'BRYON: And this Maryland doctor is tacking on an extra fee to his usual payments, asking his patients to help pick up the cost of his malpractice insurance. We'll tell you why he's not alone in looking for financial help.
KANGAS: I'm Paul Kangas.
O'BRYON: And I'm Linda O'Bryon. Susie Gharib is off tonight. This is NIGHTLY BUSINESS REPORT for Wednesday, January 5. Good evening, everyone. A bumpy ride for the stocks of most of the nation's airlines today, especially Delta Airlines. The Atlanta-based carrier cut its fares by up to 50 percent and that may touch off a fare war among its competitors. Delta is capping one-way domestic economy fares at $499, first class at $599. The company admits the move will hurt earnings in the short term but says overtime, the effects of making its fares simpler and lower will be offset by traffic increases. So far, U.S. Airways has matched some of Delta's fares. But experts say it's just a matter of time until others have to. Today Merrill Lynch cut its investment ratings for Delta, American parent AMR, Northwest and AirTran, saying if the industry adopts Delta's fare structure, annual revenues could drop by $2 to $3 billion. Joining me now for more insight on the airline industry is Ray Neidl, Calyon Securities. Ray, Wall Street did not exactly react positively to this news and a number of airline stocks were down, including Delta, off about 7 percent for the day. What is your view of the company's move and the likely impact?
RAY NEIDL, ANALYST, CALYON SECURITIES: Well, the move was not unexpected. They were experimenting in Cincinnati. They said it was going well there and they said they might expand it to the rest of the system, which they are doing today. The market might have reacted, overreacted a bit to this news because it will be revenue negative in the short-term. But I think this move is more strategic rather than tactical. And it shows that Delta management has faith that they can redo their model, get their cost structure down to support this new simple pricing structure.
O'BRYON: And as we've seen, U.S. Airways has matched some of Delta's fares. Will other carriers follow suit?
NEIDL: I think other carriers will move in that direction. They are looking at simplified fares. American right now is experimenting in Miami and they probably won't leap before they look. But everybody is experimenting with that because the traveling public wants a simplified fare structure, not the hundreds of buckets that currently exist.
O'BRYON: And if these airlines do move into that simplified air structure, what do you see as the overall financial impact for the industry?
NEIDL: Well, it's going to mean continuing lower prices for consumers which means that the carriers, particularly the legacy carriers, have to continue to aggressively cut costs.
O'BRYON: Why do you think Delta opted for a cap on domestic economy and first class flights, rather than the cheaper fares on the most traveled routes? Won't this be costly for the airline, especially in those smaller cities and remote areas?
NEIDL: It does and it hurts them very badly going through the hub, but I think they really want to simplify the process and make the customer feel like they were getting the best bargain they could for their dollar.
O'BRYON: In a way, does this move undercut what Delta is trying to achieve with its Song line that offers discounted fares to begin with?
NEIDL: No, they were experimenting with that at Song and they had said that one of the reasons why were operating Song was they could learn from operating a low cost carrier and apply it to the rest of their domestic system, which I think is what they're doing at this point.
O'BRYON: Do you think though the large carriers like Delta can operate with the low cost mentality considering their costs are so high?
NEIDL: That's a good question. Costs are high. They really do have to come down sharply, but even more importantly or just as importantly, is the mentality of the workers and the management has to think more like a low cost carrier.
O'BRYON: There are several airlines of course operating in bankruptcy at the moment. Will we be seeing more bankruptcy announcement in the coming year?
NEIDL: No, I think the economy is going to be strong this year. Airlines are cutting their costs. I'm not looking for any other major airline bankruptcy filings unless we have an economic or fuel price event.
O'BRYON: And Delta's chief marketing officer said today that Delta views JetBlue, Southwest and AirTran as its principal competitors. So how will this fare reduction affect those carriers?
NEIDL: Yes. Those are their principal competitors up and down the east coast and it will have an affect on them. They've had the simple pricing structure to themselves. Now they've got one more competitor. Though remember, they've been competing with Song for the past year already.
O'BRYON: Thank you very much.
NEIDL: Thank you.
O'BRYON: We've been speaking with Ray Neidl, airline analyst for Calyon Securities.
KANGAS: Although that Delta news sent the airline group lower, stocks in general opened higher on bargain hunting after two days of sizable losses. The Dow rose 40 points at the outset of trading, while the NASDAQ gained five points. A weak tech sector cut the blue chips' gains by midday and then they rallied briefly just afternoon only to fall back on a late wave of selling. So the Dow Industrial Average lost almost 33 points, closing at 10,597.83. The NASDAQ Composite ended down 16.62 at 2091.24. Standard & Poor's 500 Index down 4.31 points, ending at 1183.74. In the bond market, the 10-year note rose 2/32 to 99 22/32, putting the yield at 4.29 percent.
O'BRYON: The U.S. stock market is expected to score only modest gains this year, but the picture could be brighter for European stocks. Some global strategists say American investors would be wise to send some of their money packing. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you're hoping for big returns in U.S. stocks this year, experts say you'll probably be disappointed. Most market strategists are predicting returns in the mid single-digits for the Dow and the S&P 500. But experts say gains in European stocks could be well into the double digits. A key reason, strong profit growth. European companies have undergone radical transformations the past few years to become leaner and meaner.
STUART SCHWEITZER, GLOBAL INVESTMENT STRATEGIST, JP MORGAN INVESTMENT MGMT. European companies are doing things they never though they would consider doing and they are cutting their costs right and left, and that's really a very big positive for European stocks.
MILLER: In particular, European firms have made serious inroads in trimming wage gains for workers. Economists say hourly labor costs in European Union countries grew only 2 percent in the third quarter of 2004, the lowest since 1998. Experts say another big appeal of European stocks is attractive valuations.
SCHWEITZER: The price-earnings ratio on European equities on average is around 12 times the expected earnings for this year. In the U.S., the price-to-earnings ratio for this year's expected earnings 17 times. Europe's a lot cheaper.
MILLER: On top of that, analysts say European stocks offer dividends that are roughly double the average of American companies. Nevertheless, some experts do see one major potential headwind for European stocks this year: the euro. While it's true that a strong euro can help attract foreign investors to European securities, it also hurts European multinationals that make a big chunk of their profits in the U.S.
ARNIM HOLZER, SR. INVESTMENT STRATEGIST, DEUTSCHE ASSET MGMT.: On a shorter term basis -- let's say three to six months -- I think there are some concerns, particularly around a stronger euro versus a weaker dollar, that have made it difficult for some companies to compete from a volume effect point of view.
MILLER: But the weakening dollar could be a boon for American investors who send their money abroad. That's because the money they earn gets an automatic boost in currency conversion. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
KANGAS: President Bush headed to Illinois today to offer his diagnosis for what he calls frivolous lawsuits against doctors. Madison County is just across the Mississippi from St Louis. Mr. Bush says trial lawyers have used it as their favorite location to file class-action lawsuits because of its reputation for big malpractice awards. The president wants Congress to correct the problem, by capping non-economic damages in malpractice cases.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: What's happening all across this country is that lawyers are filing baseless suits against hospitals and doctors. That's just a plain fact. And they are doing it for a simple reason. They know that the medical liability system is tilted in their favor.
KANGAS: But President Bush didn't have to go as far as Illinois to find doctors with malpractice premium horror stories. The problem is acute in several states, including one closer to the White House: Maryland. As Stephanie Woods reports, some doctors facing huge malpractice insurance bills are writing their own prescription to solve the problem.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Obstetrician Dr. Mark Seigel has felt the pain of a 250 percent increase in his malpractice premiums in the last three years to over $100,000 this year. To help cover the cost, he's charging patients a $9 administrative fee, even though doing so puts him in violation of his contract with his insurance plan.
DR. MARK SEIGEL, OB-GYN: Any other profession you can think of, if their cost goes up, they charge more. But when our costs go up, we're supposed to absorb it. And it just, it's at a point where we can't absorb it anymore.
WOODS: Other doctors have resorted to asking patients for donations, to live up to the letter, if not the spirit of their contracts. There are no statistics on how many doctors are asking patients to pay the cost of malpractice. The American Medical Association neither endorses nor condones it. Karen Ignani, who represents health insurance plans, says doctors shouldn't be piling fees on patients who already pay high premiums.
KAREN IGNANI, CEO, AMERICA'S HEALTH INSURANCE PLANS: All of the funds come from employers and employees, and the reality is it's from employees, so now the question is should citizens, should employees subsidize the profligate habits of trial lawyers?
WOODS: But other advocates say it's not the lawyers, but the insurance companies that are sticking it to doctors, and they say doctors shouldn't force patients to foot the bill.
JOANNE DOROSHOW, EXECUTIVE DIRECTOR, CENTER FOR JUSTICE AND DEMOCRACY: I don't think it's appropriate for them to be taking this out on their own patients by charging them money. They need to be focusing on their insurance companies and demanding that the rates be reduced.
WOODS: Dr. Seigel says he would drop the fees if Maryland lawmakers enact medical liability reform, but the governor has threatened a veto. If the state doesn't change the law, Seigel's hoping Federal lawmakers will provide relief before it no longer pays for him to deliver babies. Stephanie Woods, NIGHTLY BUSINESS REPORT, Gaithersburg, Maryland.
O'BRYON: Jury selection got under way today in Birmingham, Alabama, in the Federal fraud trial of former HealthSouth CEO Richard Scrushy. Prospective jurors are being asked to fill out questionnaires on how much they know about Scrushy and the charges he faces. About 300 people are expected to be screened by Friday, and opening statements are scheduled in two weeks. Scrushy is charged with masterminding a conspiracy to overstate HealthSouth's earnings by more than $2.5 billion. The indictment against him runs to almost 60 counts and he has pleaded innocent to all of them. And, of course as we recall, more than a dozen former HealthSouth executives have already pleaded guilty in this case Paul.
KANGAS: And Linda, the trial is expected to last up to three months. Now let's take a look at how our stocks in the news fared today. New York exchange volume leader Lucent Technologies (LU) trading 22.7 million shares, stock losing $0.08.
Followed by Pfizer (PFE) with an $0.18 loss.
Citigroup (C) bucked the trend with a $0.60 gain.
General Electric (GE) down $0.22.
Advanced Micro Devices (AMD) lost $0.46, fifth in big board volume.
Merck & Company (MRK) moved up $0.21.
Time Warner (TWX) a $0.19 loss.
Texas Instruments (TXN) down $0.71.
Sprint FON Group (FON) moved up $0.11.
And then tenth in volume, United Microelectronics (UMC) losing $0.08 a share.
Then came the airlines, AMR (AMR) down about 9 1/2 percent with that $0.96 loss and it traded as low as $8.76 and of course as you can see, it was downgraded by Merrill Lynch from "buy" to "neutral."
Let's look at some other airline stocks affected by the news that we just heard about. AirTran Holdings (AAI) down $0.45.
Continental Airlines (CAL) off nearly $1. Delta Air Lines (DAL) down $0.51. Merrill downgraded Delta from "neutral" to an outright "sell."
Northwest Airlines (NWAC) down $1.04. "Buy" to "neutral" was the Merrill Lynch downgrade on that one.
OK now let's have a look at some of the other problems here that we have. I guess we have a graphics problem. No charts at all. So I'll go onto American International Group (AIG) which was $1.10. The company's boosting its quarterly dividend by a nickel from $0.75 to $0.125 a share and the company says all of its businesses are showing significant growth.
Then Monsanto (MON) a loser today, down $1.34. The company did slash its first quarter loss to only $0.15 a share from $0.37 a share on the losing side last year. But if we saw a chart, we could see that they had a big run up late last year, so profit taking after a sharp run up.
Then we saw Circuit City (CC) stores down $1.25 today. December same store sales fell 5.8 percent on disappointing electronic sales.
JW Nordstrom (JWN) was up $1.44. Its December same store sales rose 9.3 percent, a good showing there and Standard & Poor's boosted earnings estimates for 2005 on Nordstrom by a nickel a share up to $2.77.
Then the apparel retailer, Too Inc. (TOO) was up $3.48. Company sees fourth quarter earnings of at least $0.63 a share. That's well above last year's $0.51. Also the Web Bush (ph) Morgan brokerage repeated a "buy" on Too Incorporated stock.
Input/Output (IO) was a down, a big downer, down $1.41, a good percentage there. The company sees fourth quarter earnings significantly below the $0.08 it was forecasting a while back and the Street estimate is $0.10. The company cited two high margin product sales that were not completed as expected.
Regis Corporation (RGIS) down $4.10. It's in the hair care salon business and had lower than expected second quarter earnings, $0.56 versus $0.60 last year. The previous estimate from the company was up to $0.68.
And finally let's have a look at some of the stocks in the - we see the NASDAQ 100 (QQQQ) now we're back with a chart or not a chart, but at least a graph, $0.24 loss in the Qs.
Microsoft (MSFT) $0.06 loss.
$0.22 drop in Intel (INTC).
Google (GOOG) fell nearly $1.
And Cisco Systems (CSCO) managed to edge up $0.01.
Then our second board of actives, eBay (EBAY) down $0.41.
Sirius Satellite Radio (SIRI) a $0.13 gain. The company's teaming up with Microsoft to provide children's programming on mobile TV of all things.
Apple Computer (AAPL) $0.56 gain.
Symantec (SYMC) down $0.37.
And Yahoo! (YHOO) was down $0.45, tenth in NASDAQ dollar volume. And those are the stocks in the news tonight. Linda.
O'BRYON: Thanks Paul. Well multinational companies operating in China have come under fire in recent months for not letting labor unions set up branches within operations there. The labor union picture in China is quite different than that of the U.S. because China's unions are state-run. But experts are questioning the timing and the motives of China's official trade union's call for workers at foreign firms to organize. In the second part of our look at labor in China, Hope Ngo reports.
HOPE NGO, NIGHTLY BUSINESS REPORT CORRESPONDENT: The all China Federation of Trade Unions is the only body sanctioned by Beijing to represent workers' interests thanks to the supporting role it played in the communist party's rise to power in 1949. Of the estimated 35 million workers in China's urban areas, observers believe about 10 percent employed in foreign funded enterprises have ties to the ACFTU. That percentage needs to rise the ACFTU is to play a significant role in the development of China's economy.
BILL TAYLOR, CITY UNIVERSITY OF HONG KONG: If very few people are members of the official trade union, what voice does it have? In the communist era, it represented all industrial workers; therefore, it is very important and had a significant voice, political voice within the party, the party state. Now, most people do not... Most people who work do not belong to a trade union. So therefore what is the trade union to do? It needs members.
NGO: One quick fix says Hong Kong lawmaker and general secretary of Hong Kong's Confederation of Trade Unions Lee Cheuk-Yan is to establish itself in China's MNCs or multinational companies.
LEE CHEUK-YAN, LAWMAKER & GENERAL SECRETARY, HK CONFEDERATION OF TRADE UNIONS: I think for the official union also is the CMNC (ph) of course as an entry point for them themselves. And I think firstly they are after the union dues, 2 percent of the wage package as union dues for the ACFTU is an attraction for sure because they're losing members in the state-owned enterprise. So they need the money. They need the financial resources.
NGO: But the ACFTU's recent push to attract new members by tapping China's foreign funded companies isn't just meant to boost its numbers. Observers believe it is another way of curing favor with Beijing.
TAYLOR: The official trade union is viewed (INAUDIBLE) organization. Its survival depends on its importance to the state. Its importance to the state is based on its ability to maintain social stability.
CHEUK-YAN: If they are inside MNC, then at least they have also a bargaining chip for them when they want to bargain for more power within the central government, so this is also really a power point.
NGO: Regardless of the official union's motives, there are those that say given the growing number of problems faced by Chinese workers, having a bad union is better than having no union at all. Hope Ngo, NIGHTLY BUSINESS REPORT, Hong Kong.
KANGAS: Tomorrow, how you do what you do: a look at the latest theory of personnel reviews for employees.
O'BRYON: It was a caffeine-fueled Christmas for Starbucks. The coffee chain said today its December same store sales rose a whopping 8 percent, with revenues up 22 percent. The reason: a slew of holiday promotions and gift offerings, including music CDs and gift cards. The news came out after the close. In the regular session, Starbucks stock gained $0.50 to $61.60.
KANGAS: X.M. Satellite radio more than doubled its subscriber base last year. X.M. now has just over three million subscribers to its nationwide pay-radio service. Of those new additions, X.M. says 700,000 were added in the last quarter of 2004, with 50,000 joining on Christmas Day. X.M. sees subscriptions growing to about 5.5 million this year. X.M. Satellite shares today were down $0.79 closing at $34.56.
O'BRYON: Here's a look at what's happening tomorrow. We'll see weekly jobless claims and December's chain store sales results. Also tomorrow, earnings from Accenture, Laidlaw International and the W.D. 40 Company. In tonight's money file, planning for retirement and expanding your options to cover it. Here's Eric Schurenberg, managing editor of "Money" magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Talk about retirement planning and what comes to mind? The task of building up a pot of money you can take into your golden years. But there's another phase to the process, in which you draw down what you've saved. There's a decent chance you'll have to keep that nest egg producing for 30 years of retirement. How to do that deserves as much thought as how to build the egg in the first place. The challenge here is uncertainty. You don't know how long you'll live once you leave work or how the markets will perform. So you have to build lots of cushion into your plan and spend a lot less of your savings each year than you might have expected. Planners recommend no more than about 4 percent of your assets a year. So a $500,000 portfolio safely yields only $20,000 a year. There is one way to get more: buy an annuity from a reputable, low-cost insurer. An annuity is like reverse life insurance. It protects you against living too long. In its most basic form, an annuity pays a monthly sum as long as you live. Recently $500,000 bought an annual income as high as $39,000. The problem is the money you spend on an annuity belongs to the insurer. You can't withdraw a big sum if you need one in an emergency, and there's nothing for your heirs. The best strategy is to divide your money between an annuity and your own nest egg. Your savings give you flexibility. The annuity gives you the assurance that no matter how long you live, your money won't run out before you do. I'm Eric Schurenberg.
KANGAS: Recapping today's market action, the bears make it three for three for stocks in 2005. The Dow falls about 33 points; NASDAQ Composite loses 16. To learn more about the stories on tonight's broadcast, go to nbr.com.
O'BRYON: Finally tonight, no one paid much attention to the tall, thin man who was among those showing up for jury duty yesterday at the courthouse in Marlborough, Massachusetts. Of course, had worn his work clothes, he might have been much more recognizable. That's because that particular juror wears black robes at work as a U.S. Supreme Court Justice. Stephen Breyer could have avoided jury service with just a phone call. But, saying it was important, he did his civic duty, showing up at the courthouse 30 miles west of Boston. By the way, Breyer wasn't chosen to sit on the jury of either case being heard yesterday.
KANGAS: Doesn't surprise me one bit because lawyers on both sides of the case wouldn't want a juror who knew more law than they did I would assume.
O'BRYON: That's a good point and also what would happen if it ended up in an appeal?
KANGAS: Good point.
O'BRYON: That's NIGHTLY BUSINESS REPORT for Wednesday, January 5. I'm Linda O'Bryon. Good night, everyone and good night to you, Paul.
KANGAS: Good night, Linda. I'm Paul Kangas, wishing all of you the best of good buys
