NBR Transcripts - February 18, 2005
Friday, February 18, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: A shot in the arm for shares of Merck as an FDA panel recommends its painkilling drug Vioxx be allowed to return to the U.S. market. But there are some strings attached. We'll have the story.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: The rising cost of cigarettes lights a fire under producer prices in January. In fact, the cost of everything but food and energy jumped by the largest amount in more than six years. And that's raising the specter of the I-word, inflation, among economists.
KANGAS: The end of late fees has become the beginning of a court battle for Blockbuster. We'll tell you why the state of New Jersey is suing the video rental chain, saying it's breaking the Garden State's consumer protection laws.
GHARIB: And tonight's Market Monitor guest says the bull market still lives, but you might want to think about building a defensive portfolio. He's James Stack, president of InvesTech Research.
KANGAS: I'm Paul Kangas.
GHARIB: And I'm Susie Gharib. This is NIGHTLY BUSINESS REPORT for Friday, February 18.
Good evening, everyone. Vioxx could soon be back on drug store shelves. Late today a Food and Drug Administration advisory panel recommended that Merck's controversial painkiller drug is safe enough to be sold once again. The panel also voted to keep Pfizer's rival painkillers, Celebrex and Bextra, on the market. Regulators recommended that all three drugs carry warning labels of the risks of using the painkillers. Merck voluntarily yanked Vioxx from distribution last September because of concerns over elevated risks of heart problems. The FDA is not required to follow recommendations from advisory committees, but it usually does just that. Investors are counting on a green light: Merck stock surged more than 13 percent on the news. Analysts say the panel's decision will help Merck's defense of Vioxx in liability lawsuits and help rebuild revenues at the drug maker.
TOM D'AMORE, PHARMACEUTICAL ANALYST, MORNINGSTAR: The company is in great need of revenue enhancement and any additional revenue is very welcome at Merck right now. We think that a reduction in the legal liability equates to about an additional $2 in fair value on the share price as of the close today. And we think additional revenues in the future would be worth about an additional dollar of fair value.
GHARIB: Merck issued a statement today saying it quote has appreciated the opportunity to present data at the advisory committee meeting. We look forward to discussions with the FDA end quote. But Merck also told us that as of tonight, it has no specific time frame about those future discussions with the agency.
KANGAS: Wall Street got a nasty surprise on the inflation front today. Core producer prices rose in January at their fastest rate in six years. The big question is whether that will force the Fed to step up the pace of interest rate hikes. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Economists thought today's report on producer prices would quell inflation fears. Instead, it fanned them. Wall Street looked beyond the headline reading on wholesale prices, which showed a mild 0.3 percent rise in January. Instead, it was alarmed by an 0.8 percent increase in core prices. Because they exclude volatile food and energy, they are considered a more reliable measure of inflation. Another red flag was the widespread nature of the price increases, from tobacco, to alcohol, to cars.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: The report was bad. And you can't just take a couple items and pull them out and say everything was fine except for this or that. OK? There clearly were special problems with car prices, truck prices, the cessation of rebates. There was a big increase in tobacco prices, but even apart from that, there were widespread increases in inflation (INAUDIBLE).
MILLER: Economists were also dismayed by an unexpected drop in the Michigan consumer sentiment index. It came in at 94.2 in February, down from 95.5 in January. Some economists predict today's inflation report will prompt an important change at the Federal Reserve's next policy meeting March 22. They expect the central bank to hint that future rate hikes may be more aggressive than its recent quarter point moves.
BRUSCA: I do think that this is something that will give the Fed the excuse that I think it wants to get that phrase about moderation out of the Federal Reserve statement.
MILLER: But others argue the Fed won't risk rattling the markets until inflation becomes more of a problem at the retail level.
WILLIAM DUDLEY, CHIEF US ECONOMIST, GOLDMAN SACHS: Getting higher producer prices maybe makes you a little bit more nervous about higher consumer prices, but until you actually see those higher consumer prices, you're not going to react.
MILLER: And for now, economists do not expect Wednesday's report on consumer prices to show an alarming increase. They say many retailers are hesitant to raise prices for fear of losing business. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
KANGAS: Wall Street opened narrowly mixed with many investors viewing that jump in the core producer price index as an aberration. At the outset, the Dow fell single digits and the NASDAQ rose single digits. As interest sensitive stocks like thrifts and homebuilders weakened however, the Dow fell to a 16 point loss at noon with the NASDAQ off four points. Then solid gains in Dow components Merck and Pfizer gave the blue chips a late day lift so the Dow Industrial average closed up nearly 31 points at 10,785.22. It rose twice and fell three times this week, losing 10 3/4 points overall. T he NASDAQ Composite was down 2 3/4 points today at 2058.62. It also rose twice and fell three times this week, had a net loss of 18 points. Standard & Poor's 500 gained a fraction to 1201.59 today. Treasuries were very weak across the board. The 10-year note fell 21/32 to 97 28/32 putting the yield at 4.27 percent.
President Bush today signed into law a bill designed to curb multi- million dollar class action lawsuits. It was the first bill signing ceremony of his second term. And as Stephanie Woods reports, the president used the occasion as a platform to push Congress for more laws to reform the legal system.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Bush hailed the class action fairness act as a critical step in ending what he calls the lawsuit culture in our country.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Class action reform will help keep America the best place in the world to do business, will help ensure justice for our citizens and I'm confident that this bill will be the first of many bipartisan achievements in the year 2005.
WOODS: The new law makes it easier for defendants to move class action lawsuits from state to Federal courts, where judges are less friendly to class action cases. The bill would also limit lawyers' fees in settlements where plaintiffs get discounts or rebates. The bill was long sought by the business community. The U.S. Chamber of Commerce has spent $168 million in the last five years campaigning for legal reform and business leaders promise to keep the pressure on to pass broader measures.
STAN ANDERSON, CHIEF LEGAL OFFICER, U.S. CHAMBER OF COMMERCE: We're going to make that effort. I think the president is showing great leadership here and I think he's been able to use the influence of his office to really bring the problems down to a practical level. That's really what happened on class actions. People understood the abuses that were going on out there.
WOODS: Next up in the Senate will be a bill that makes it harder for individuals to file for bankruptcy protection, a high priority for credit card companies. Bills to limit asbestos liability and medical malpractice reform are also making their way though Congress. Consumer groups who have already fought a losing battle on the class action act say the broader efforts will be harder to pass.
JOAN CLAYBROOK, PRESIDENT, PUBLIC CITIZEN: My hope is that when we get into bills that are less technical and archaic, such as the class action bill, that medical malpractice, for example, people really understand that, 100,000 people a year are killed either from medical malpractice or hospital mistakes. The stories are incredible.
WOODS: Armed with a victory on class action, business groups are now considering expanding their legal reform goals to include changes in the securities laws. Stephanie Woods, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: Big changes are in the works for the leadership of the big board. The New York Stock Exchange says Chairman John Reed and former U.S. Secretary of State Madeline Albright will not run for re-election to its board of directors. The NYSE meets April 7 to choose directors, who then serve one-year terms. Seven current directors are standing for re-election. The three new candidates are former Maryland Securities Commissioner Ellyn Brown, former Pepsi CFO Karl von der Hayden and former Federal Reserve Vice Chair Alice Rivlin.
The state of New Jersey is taking Blockbuster to court over the movie chain's new policy on late fees. Last month, Blockbuster eliminated late fees on games and movies, but started forcing customers to buy the items if the were returned more than a week late. New Jersey's attorney general says that violates the state's consumer protection laws, because Blockbuster didn't disclose that overdue rentals are automatically converted to sales. So the state is suing, Paul, claiming the company's ads touting no more late fees are fraudulent and deceptive.
KANGAS: Well, Blockbuster says it has worked hard to let its customers know how the new program works, Susie, including putting brochures in its stores, spelling out the details. Now let's take a look at our stocks in the news tonight.
And the big board leaders topped there by Pfizer (NYSE:PFE) on 62.3 million shares, up $1.74. And Merck & Company (NYSE:MRK) up $3.76. Those two gains combined helped the Dow by almost 40 points today.
ExxonMobil (NYSE:XOM) moved up $1.28 and surpassed General Electric in total market capitalization as of today, first time that's happened.
And then General Electric (NYSE:GE) itself down $0.15.
Qwest Communications (NYSE:Q) an $0.11 gain, number five in volume.
J.P. Morgan Chase (NYSE:JPM) down $0.27. Company wants to dissolve a student joint venture with Sallie Mae and Sallie Mae stock fell $1.76.
Citigroup (NYSE:C) down $0.23.
EMC Corp. (NYSE:EMC) $0.25 loss.
Lucent Technologies (NYSE:LU) lost a nickel.
And Time Warner (NYSE:TWX) a $0.16 drop, tenth in volume.
Fannie Mae (NYSE:FNM) down $1.71. Federal Reserve Chief Greenspan says Congress should scale back the mortgage portfolios of both Fannie Mae and Freddie Mac. Freddie Mac stock was down $2.17 today on that news.
May Department Stores (NYSE:MAY) up $1.93. The "Wall Street Journal" reports takeover talks with Federated may have resumed, since they are only about $2 away on a buyout bid for May. Federated stock was down $0.65.
Union Pacific (NYSE:UNP) moving up $3.14 after Morgan Stanley upgraded it from "equal weight" to an "over weight" rating. Mentioned Last Change
Then Campbell Soup (NYSE:CPB) down $0.94. Company in with second quarter earnings $0.57 a share, the same as last year and $0.02 below the Wall Street estimate.
Temple-Inland (NYSE:TIN), the forestry products company up $2.90. The company got notice from Carl Icahn entities that they own 2 percent of the stock and plan to nominate board candidates.
And speaking of Carl Icahn, Kerr-McGee (NYSE:KMG) up $1.32. After the close, the stock went as high as $72.75 on news Carl Icahn has filed to acquire up to $1 billion in Kerr-McGee stock.
Zale Corp. (NYSE:ZLC) up $3.45. Second quarter earnings nicely higher, $1.91 versus last year's $1.83 and the Key Bank brokerage upgraded it from "under weight" to a "hold."
Salesforce.com (NYSE:CRM) moving up $1.85. Fourth quarter earnings of $0.03 versus a loss of $0.02 last year. Their earnings were a penny above the Street estimate. Sales jumped 82 percent and the company boosted its 2006 earnings guidance.
Superior Industries (NYSE:SUP) which manufactures motor vehicle parts up nicely, $2.20 gain. Fourth quarter earnings were lower $0.45 versus last year's $0.85 but a nickel above the Street estimate and the Baird brokerage upgraded the stock from "under perform" to "neutral."
On the downside, Allegheny Energy (NYSE:AYE) losing $1.18. Company had fourth quarter earnings of $0.22 versus a loss last year. That's excluding one time items, but that was $0.03 below Standard & Poor's estimate. The stock was hurt a bit.
Microsoft (NASDAQ:MSFT) topped the NASDAQ's most active down $0.17.
Followed by Apple Computer (NASDAQ:AAPL) with a $1 loss.
Then Google (NASDAQ:GOOG) in there with a nickel gain.
Intel (NASDAQ:INTC) up $0.39.
And MCI (NASDAQ:MCIP) up $1.65. Yesterday, Qwest did say it's going to make a new buyout offer, but we haven't seen details on it.
Cisco Systems (NASDAQ:CSCO) a $0.15 loss there.
Followed by eBay (NASDAQ:EBAY) $0.26 drop.
Dell (NASDAQ:DELL) was a $0.21 gainer.
And NVIDIA (NASDAQ:NVDA) moving up $2.76. After the close yesterday, the firm reported nearly a doubling in fourth quarter earnings, $0.27 versus only $0.14 a year ago.
Qualcomm (NASDAQ:QCOM), tenth in volume, down $0.71.
Akamai Technologies (NASDAQ:AKAM) up $1.45. Fourth quarter earnings out today, $0.10 versus $0.08 a year ago. Revenues up 8 percent and the company boosted its 2005 revenue guidance.
Now over on the American exchange, Bio-Rad Laboratories (AMEX:BIO.A) plunging $5.91. Fourth quarter earnings lower, $0.65 versus $0.71 last year and the Baird brokerage downgraded the stock from "outperform" to just a "neutral" rating.
And those are the stocks in the news tonight, Susie.
GHARIB: Paul, The slumping U.S. dollar is being watched closely by governments and businesses around the globe. For businesses, the dollar's drop makes the goods they sell to the U.S. much more expensive. As Nigel Cassidy of the BBC reports, an early rebound for the American dollar looks unlikely, but it would be music to the ears of British exporters.
NIGEL CASSIDY, BBC: Hand made at Worthing on Sea in the south of England. For 50 years, this private business has been making and perfecting oboes. It's one of the only companies of its kind in Britain making instruments chosen by the world's top woodwind players. American customers have prized Howarth oboes, made from sustainable tropical blackwood. It takes years just to gradually bore and drill the wood. But turning a good profit on U.S. exports has proved impossible lately. The company has lost many thousands of dollars worth of business since the U.S. currency fell to its current levels. In many ways, Howarth is doing everything a model exporter should do to ride out unfavorable exchange rates. It's got a unique product. It takes six years to season the wood and make one of these oboes, and they can sell in America for around $5,000 a piece. Howarth can't simply cut its costs to make up for the currency losses. Once an oboe body is jointed and polished, 25 skilled staff painstakingly fit hundreds of different metal components, some cut by hand or soldered, pillars and rods and keys all needing minute adjustment. Now you've got another oboe almost finished here. This is a (INAUDIBLE) product, very desirable for people who play the oboe. So why does the weak dollar actually matter?
JEREMY WALLSWORTH, T.W HOWARTH & COMPANY: Well, when customers will see an advertised price, particularly on our website, by the time they go into the shop and purchase the instrument, with currency movements, they might find that they're paying rather more than they had anticipated. As far as the professional instruments are concerned, this is less of an issue because the players, they know what they want and it's less of an issue. But the student model instruments of course, if there is a large difference in price between us and the competition, then that could make the difference of losing a sale.
CASSIDY: Businesses like this would love the dollar to hit some higher notes, but in the city of London, market watchers think that there's little the United States can do now to boost its currency.
WALLSWORTH: America really can't do anything about the weaker dollar, at least not in the short term. The problem for America is that it spends more than it earns in the international economy and as a result it has to borrow in order to cover the short fall. That borrowing amounts to $1.26 million dollars every minute of every day including weekends and the price for borrowing that vast sum of money is a weaker dollar.
CASSIDY: So there's no quick fix expected from the U.S. Federal Reserve, but a higher dollar would be music to the ears of European exporters everywhere. Nigel Cassidy, BBC News.
KANGAS: Monday, our president's day holiday program looks at soaring healthcare costs and what can be done about them.
GHARIB: Boeing's former chief financial officer Michael Sears is headed for prison. A Federal judge today sentenced Sears to four months and a $250,000 fine. Sears was convicted of illegally recruiting top Air Force buyer Darleen Druyen during talks on a $20 billion government deal. Druyen is currently serving a nine-month prison sentence. Federal prosecutors won't say if charges against Boeing are possible.
KANGAS: A 12-count Federal indictment tonight for former Qwest Communications Senior Vice President Marc Weisberg. He's accused of collecting almost $3 million by secretly cashing in on investment opportunities and keeping Qwest from offering others the chance to invest in initial public offerings. Weisberg said he looks forward to clearing his name when the facts come out. He's the fifth former Qwest executive to face Federal charges.
GHARIB: Here's a look now at what's happening for next week. Our Friday "market monitor" guest is Derwood Chase, the president and chief investment officer of Chase Investment Counsel Corporation. Monday, of course, the markets are closed for the president's day holiday. On Wednesday, the January consumer price index comes out, Thursday, January's durable goods numbers, Friday, the preliminary look at fourth quarter GDP. And as for earnings next week, Federated Department stores, Home Depot, Toll Brothers, H&R Block, Gap and Staples.
KANGAS: My guest "Market Monitor" this week is James Stack, president of InvesTech Research, based in Whitefish, Montana and welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES STACK, PRES., INVESTECH RESEARCH: Thank you, Paul. It's great to be here.
KANGAS: I'm going to go back to our New Year's Day program, and you said, and I quote, 2005 will bring unpleasant surprises with higher than expected interest rates, and a topping bull market, end quote. Jim, is today's 8 /10 percent jump in the core producer price index one of the first unpleasant surprises?
STACK: I'm afraid it might be, Paul. That was the biggest increase in six years and our major concern going into 2005 has not been the falling dollar, the twin deficits or the threat of another terrorist attack. It lies in the fact that this is an aging bull market, an aging economic recovery in which imbalances at some point start to develop and that creates the inflation surprises and if we have upside surprises in inflation, we know where the surprises in interest rates will be.
KANGAS: In other words the Fed will have to become more aggressive in raising rates?
STACK: Even with six discount rate hikes so far, you have to keep in mind that inflation has been rising as fast as or faster than that increase in short term interest rates. So the Fed is playing catch up. And at some point over the next three to five months, they might have to move to that half point increase and Wall Street certainly is not expecting that.
KANGAS: Where would you guess they'd be at the end of the year?
STACK: I wouldn't be surprised to see short term interest rates approaching 4 percent. Again, it's not an overly dangerous level, but it's a level that's going to weigh heavily on a market where we still have fairly high valuations in many sectors.
KANGAS: How long in the tooth is this bull market?
STACK: Well, historically the median life span for all of the bull markets of the past 75 years has been 3.4 years. Now, we're in our third year, and only 37 percent of the bull markets over the past century have lived to celebrate that third birthday. So chances are we're not at the end of the bull game, but so, to speak, we're in the latter innings.
KANGAS: OK. What is your defensive investment strategy, briefly? Mentioned Last Change PH 64.97 0.55dollars or (0.83%)
STACK: Very briefly, avoid the interest rate sensitive areas. Those areas that are going to be impact by inflation or interest rates.
KANGAS: Home builders.
STACK: Home builders, real estate investment trusts, the mortgage finance companies like Fannie Mae and Freddie Mac, very high risk going forward from this point. Focus instead on sectors and particularly stocks that are more insulated from up side surprises in inflation or interest rates.
KANGAS: Back in July you gave us four recommendations on the buy side. We see Alltel moved up two percent and Apache had a nice move, almost 24 percent. And two others that were recommended by you back then, Pepsi Cola, up over 9 percent and Renal Care Group, almost a 21 percent, four recommendations and four winners, congratulations.
STACK: Thank you.
KANGAS: Do you still own them?
STACK: Yes, we do. We're looking to start taking some of the profits off the table. We still like the energy sector. I think it's still in a good defensive edge in this environment where the dollar is weak. But it's not the time to become overly aggressive.
KANGAS: Despite your caution, do you have any buy recommendations, new ones?
STACK: Yes, we do Paul. Abbott Laboratories, I think in the big pharmaceutical area.
KANGAS: It's had a good move.
STACK: Yeah, it has. But at the same time, from a valuation standpoint, it's selling at one of the lower valuations of the last 20 years, as are many of the big pharmaceuticals that have been out of favor.
KANGAS: That's ABT on the big board.
STACK: ABT on the big board.
KANGAS: OK.
STACK: Another one is Biomet, symbol BMET, manufactures orthopedic products. And again it had a good run up, but it's pulled back to what I think would be a good buying opportunity. And the targeted audience or a targeted market are those individuals who require orthopedic replacements.
KANGAS: Understood.
STACK: Those in the 50 to 75-year-old, and that population is going to double from the baby boomers aging over the next.
KANGAS: OK. We have time for one more Jim.
STACK: Another quick one would be Automatic Data Processing. That provides payroll outsourcing for many companies. And again it's an unusual situation with an $18 billion float (ph) in payroll that it actually can benefit from rising interest rates. Those are the kind of defensive stocks have you to search out today.
KANGAS: Very interesting, so very much on the defensive indeed. Do you own those stocks incidentally?
STACK: Absolutely, Paul. We wouldn't recommend them if we didn't believe in them.
KANGAS: Very good. Jim, thanks very much for being with us again.
STACK: Thank you Paul.
KANGAS: We'll look forward to your next visit.
STACK: It's always my pleasure.
KANGAS: My guest "Market Monitor," James Stack, president of InvesTech Research.
GHARIB: Recapping today's market action, the blue chips rally despite new data showing inflation may be creeping into the economy. The Dow gains almost 31 points but the NASDAQ slides by two. To learn more about the stories in tonight's broadcast, go to nbr.com.
And finally tonight, just about any college student will tell you that cold pizza for breakfast is nothing new. But how about a pizza omelet or pizza pastries? A Papa John's pizza store in Louisville, Kentucky, is test- marketing those items for breakfast. The store uses the same six-inch pizza crust usually sold at stadium concession stands, then tops them with eggs, cheese, sausage, ham and green peppers, all for breakfast and Papa John's says that if the new products sell well, they could be expanded to other outlets. And Paul, I don't know about you, but I think I'm going to pass on the pizza and just stick to my egg white omelet for breakfast.
KANGAS: I'm with you Susie. I can't look a pizza in the face until after 6 p.m.
GHARIB: That's NIGHTLY BUSINESS REPORT for Friday, February 18. I'm Susie Gharib. Have a great weekend everyone. The same to you Paul.
KANGAS: And you too Susie. I'm Paul Kangas wishing all of you the best of good buys.
