NBR Transcripts - February 22, 2005
Tuesday, February 22, 2005SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: The Dow is done in by double trouble. Rising oil prices and a falling dollar push the blue chips to their biggest one-day point drop in 21 months, a loss of almost 175 points. We'll get some analysis on why crude is now over $51 a barrel and the dollar is dropping fast.
JEFF YASTINE, NIGHTLY BUSINESS REPORT ANCHOR: Not helping the Dow either, Home Depot (HD) shares get hammered despite profits at the retailer jumping 9.5 percent. While that's good, that's not good enough for Wall Street.
GHARIB: He's back and brighter than ever. Hasbro rolls out a new, interactive version of its hugely popular Furby toy. We asked Hasbro's (HAS) CEO about the sales potential of the cute creature and what else is in Hasbro's toy chest.
YASTINE: Then, what would George Washington do when it comes to the government running up huge budget deficits?
GHARIB: I'm Susie Gharib.
YASTINE: And I'm Jeff Yastine. Paul Kangas is off tonight. This is NIGHTLY BUSINESS REPORT for Tuesday, February 22.
GHARIB: Good evening, everyone. Oil prices spiked up to $51 today and stock prices on Wall Street fell sharply. The Dow plunged 174 points or more than 1.5 percent, and is now in negative territory for the year. The NASDAQ lost 28 points. Investors sold off stocks as crude prices surged to their highest level in three months. Light sweet crude for April delivery rose $2.41 to $51.42. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The price of crude oil futures soared well above $50 a barrel in New York trading today, with traders reacting to weather forecasts calling for colder temperatures in the northeastern United States later this week as well as predictions of colder weather in Europe. Crude oil prices have been rising for several weeks. Contracts for heating oil are also rising. Also driving up prices: fears that the OPEC oil cartel will cut production when it meets next month.
IRA ECKSTEIN, ENERGY TRADER, AREA INTERNATIONAL TRADING: It is pretty significant. The Saudis came out and they're not ruling out a cut in the March 15 meeting. They're saying that crude oil supply is 20 million above last year's. So even though we might see a $50 a barrel crude, they're still not ruling out a cut at these levels.
GURVEY: In addition to the weather related issues, support for higher oil prices comes from a sharp decline in the dollar, now at a five-week low against the euro. The unexpected shutdown of a pipeline running from Iraq to Turkey and forecasts of continuing demand growth from developing nations, particularly China and India. The rapid expansion of those nation's domestic economies is putting significant pressure on production capacity, which, the experts say, show no sign of abating.
JACK AYDIN, OIL ANALYST, KEYBANC CAPITAL MARKETS: There is not enough capacity that's coming on fast enough to create a surplus, excess production capacity to make you feel comfortable. And as long as the economies of the world continue to grow, U.S., Europe, Southeast Asia, and demand continues to grow around between 1.8 to 2 percent, you need a little bit of cushion and that cushion does it. $50 oil might be here temporarily for a while, but, you know, do we think now... do you think that crude prices in this kind of environment, could you see it below $30, probably the answer is no.
GURVEY: Tomorrow, market watchers will be looking carefully at a new report on the CPI to see if there are any signs of inflation at the consumer level caused by higher energy prices. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
YASTINE: Well, as Scott mentioned, the U.S. dollar fell against most major currencies today as South Korea's central bank said it plans to diversify its dollar-based foreign exchange reserves into other currencies. The greenback lost ground to the euro and the pound on those comments. South Korea holds over $200 billion in its currency, U.S. dollars in its currency reserves, making it the fourth largest holder of the dollar. It joins other nations looking to diversify their holdings as the U.S. current account deficit grows. Foreign exchange analysts say it's just the market's balancing mechanisms at work.
JASON BONANCA, CURRENCY STRATEGIST, CREDIT SUISSE FIRST BOSTON: So what's being talked about now is not really fleeing U.S. assets, not selling the assets that they have, but simply not keeping new accumulation of dollars in dollars, just taking those dollars and putting them somewhere else. The idea is not so much to kind of shave what dollar risk they currently have, it's to keep it from getting even bigger.
YASTINE: And that falling dollar was the last thing investors wanted today. So at the open, the Dow dropped about 60 points, also due to Home Depot announcing disappointing results. A brief comeback rally sputtered about half an hour later despite new data showing a decline in consumer confidence last month. That gave investors another opportunity to sell and things went downhill fast from there. The Dow tumbling almost 175 points to 10,611.13, its biggest one-day point drop in 21 months. The NASDAQ falling 28 1/3 points to 2,030.32 and the S&P 500 ending off 17.5 at 1184.16. And no flight to safety buying in bonds, as that dollar diversification news from South Korea depressed the market. The 10-year note falling 7/32 to 97 21/32, putting the yield up to 4.29 percent.
A warning tonight from the Internal Revenue Service to America's business executives -- fess up or pay up. The IRS wants companies and executives that set up trusts to avoid paying taxes on stock options to come forward now. So far, the IRS has pinpointed 42 companies that used this strategy to avoid the tax man. Although those companies' names are confidential, Stephanie Woods looks at how the tax scheme works.
STEPHANIE WOODS, NIGHTLY BUSINESS CORRESPONDENT: The IRS says some executives who received a collective $700 million in stock options didn't pay their share in taxes. In the late ‘90s and early 2000, auditing firms and financial institutions aggressively promoted tax avoidance transactions.
MARK EVERSON, IRS COMMISSIONER: It was in some cases an instance where products were being brought to these companies, these executives, by the same accounting firms that were not just doing the tax advice, but also auditing the company, so there was a conflict here.
WOODS: The tax avoidance scheme worked like this. An executive would transfer stock options to a family controlled partnership or trust, with an agreement to defer payment to the executive. Then, the trust exercises the options and sells the stock, usually within days. The proceeds stay in the trust. The executive claims no tax is owed until the date of the deferred payment, typically 15 to 30 years later.
EVERSON: What we've done is we've said these transactions, they don't hold water and we're asking the companies and the individuals to turn the page, to set things straight. And now, in this post-Sarbanes Oxley environment, I think these transactions probably wouldn't be entered into at all.
WOODS: Under the terms of the settlement, executives must report 100 percent of the compensation, pay interest and a 10 percent penalty, half the penalty that could be applied. Settling the cases will also keep the information confidential.
DON ALEXANDER, FORMER IRS COMMISSIONER: If you settle, you get it out of the way, behind you. You don't have litigation costs and you don't have litigation publicity that a lot of the executives would not want.
WOODS: Companies and executives have until May 23 to join this settlement. The IRS says those that don't settle will be prosecuted. Stephanie Woods, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: Here at the New York Stock Exchange this morning, Hasbro created a playful atmosphere. Mr. Monopoly stepped off boardwalk and onto Wall Street to ring the opening bell with the top management of the nation's second largest toy company. Hasbro's been in New York for toy fair and put on display its many famous brands, like GI Joe, Play-Doh and Mr. Potato Head, as well as a whole batch of new hi-tech toys. Earlier today, I talked with Hasbro CEO Al Verrechia and asked him what's the company's hottest toy right now?
ALFRED VERRECCHIA, PRESIDENT & CEO, HASBRO: The one we're excited about is Furby. Furby is coming back this year. It was a great product a number of years ago and we're excited about it this year.
GHARIB: Mr. Verrechia, it seems like there is a trend in the toy business to take classic old toys and spruce them up like a Furby. How successful is that strategy?
VERRECCHIA: I think it's been successful, not only for us, but a lot of companies. One of the things you have to remember is every few years we get a whole new group of consumers that come in. So those three, four and five-year-olds become six, seven, eight, nine-year-olds and they haven't seen Furby. They've talked about it. They might have seen their brother or sister, so now we'll have a new Furby, more technology, better things, but so that change in the consumer group that we're dealing with, that gives us the opportunity to bring back product.
GHARIB: What are your expectations for the new "Star Wars" lineup?
VERRECCHIA: We're excited about it. "Star Wars" had a very good year in ‘04. The movie comes in May of ‘05. There's a lot of enthusiasm around the movie, this being the final movie. When you have a movie like that and you have a great product line, it brings people out, gives them a reason to go shopping. So if you get them into the store shopping, they're going to buy lots of other toys, as well.
GHARIB: There used to be a time that you could buy a toy for under $20 and now prices are $100 or more for some toys and there is a race to add as many bells and whistles on toys. What's the risk to sales as you move out of an affordable price category?
VERRECCHIA: I think you're looking at just a few of those toys that are over at that high price range. We still sell the vast majority of our toys for under $20 at retail. And I think you find that throughout the industry. There's certainly a market for higher-priced toys as long as they deliver value to the consumers. The important thing is to provide the consumer with a value proposition, whatever the price may be.
GHARIB: Hasbro has been very successful with your long-term brands like GI Joe and Mr. Potato Head and Play-Doh, but you're also getting a lot of competition from video games.
VERRECCHIA: Yes.
GHARIB: Do you feel a need to go and acquire a company in that area?
VERRECCHIA: We don't have to acquire a company in every category in order to participate in that category. So we will license people. For example, we'll do the Monopoly board game. We may do the Monopoly DVD game. But if people want to play pop Monopoly on their PDA or their cell phone, we'll license someone else who is better at adopting our properties into that format.
GHARIB: Now that Toys "R" Us (TOY) has scaled back on the number of stores it has selling toys, do you think that that means people are going to be buying less toys?
VERRECCHIA: No, I don't think so. I think people will have plenty of doors in which to find their toys so I don't see the toy industry shrinking purely because a given customer will scale back.
GHARIB: But given that Toys "R" Us is going through this restructuring and also that a lots of toys now can be purchased in electronics stores, what impact is this having on your business?
VERRECCHIA: Well, I think the viability of the toy industry is sound. I don't think toys are going to go away and if you look over the years, we've gone through a lot of changes in terms of the different formats. There was a time when department stores sold all the toys. Then we went to free-standing toy outlets and now the mass merchants. So the industry is very adaptable and the mass merchants look at the toy category as a category that they can make money in. It drives traffic to the store. So I don't see that as being a negative on the industry at all.
GHARIB: Let's talk a little bit about Hasbro stock. It's been stuck for a little while. How are you going to get it to move beyond $20 a share?
VERRECCHIA: We've done a good job on the bottom line. We've managed our cash flow well and I think the Street has reward us for that. But I think we have to grow the business. People want to see growth. And I think to some degree, we and some of the other toy companies are suffering from a slow year in the industry and what's really happening. And I think we've gone through these cycles before. We'll probably go through them again. But I'm very confident you'll see growth in our stock in the rest of the industry, as well.
GHARIB: Mr. Verrecchia, thank you very much.
VERRECCHIA: Thank you, nice to be here.
GHARIB: The brutal battle of the supermarkets of the Southeast has a casualty tonight, Winn-Dixie (WIN). The company has filed for bankruptcy. The 80-year-old chain has been struggling to compete against Wal-Mart (WMT), Target (TGT) and other grocers in one of the most hotly contested food retailing areas of the country. Nine hundred twenty of its stores in eight southeastern states and the Bahamas will stay open, but the company is selling all its remaining manufacturing operations and shutting two warehouses. The filing comes less than two weeks after Winn-Dixie reported a loss in its fiscal second quarter.
And Jeff, Winn-Dixie's stock has plummeted over the past three years, when it was trading at almost $20.
YASTINE: The NYSE suspended trading in the stock today, Susie, at $1.47. Now let's take a look at the rest of our stocks making news tonight.
And topping our list, Pfizer (PFE) down $0.21.
And Merck & Company (MRK) off $1.40. Both stocks giving back a little of their gains from Friday, when an FDA panel gave limited approval to using Celebrex and putting Vioxx back on the market.
ExxonMobil (XOM) finished down $1.16 despite higher oil prices today.
Lucent Technology (LU) off a nickel.
And General Electric (GE) dropped $0.53.
NorTel Networks (NT) falling $0.11 for the day.
Citigroup (C) down $0.62, higher interest rates putting a crimp on a lot of the financials today,
Time Warner (TWX) down $0.24.
J.P. Morgan Chase (JPM) off $0.58.
Texas Instruments (TXN) still bucking the trend, up a quarter.
Shares in Home Depot (HD) falling $1.74. The home improvement retailer met but did not exceed analyst estimates with a 9 1/2 percent jump in fourth quarter earnings. Lehman Brothers points out this was its weakest quarter of Home Depot's fiscal year as traffic declined and margins were showing pockets of weakness.
Here's a look at Newmont Gold (NEM) which perked up over $2 thanks to weakness in the dollar. New York gold climbed over $7 to $435.80 an ounce today.
And shares in Kerr-McGee (KMG) surged over $3. A group led by billionaire Carl Icahn announced late Friday they'll buy up to $1 billion worth of stock in the oil and gas producer.
Arch Coal (ACI) tacking on $1.30 after Morgan Stanley upgraded the stock and raised its price target. They're expecting higher coal prices for the next two years.
And shares Acuity Brands (AYI) sliding more than $3. The lighting products company taking a $17 million restructuring charge and cutting 1,100 jobs.
StarTek (SRT) nose diving over $6. The company's president and CEO resigned on Friday. Analysts think this could be a prelude to more bad news, perhaps a profit warning or a shortfall.
And Perot Systems (PER) off 2 1/4. One of its clients, Harvard Pilgrim Health Care, will not renew its outsourcing contract which ends next year and Harvard Pilgrim accounts for 5 1/2 percent of Perot's revenues.
Shares in ChoicePoint (CPS) tumbling over $4. The company's in hot water over that break in of the company's database, which led to personal information about the 145,000 people being stolen. There are concerns that number could be higher. Analysts note the cost for security and for liability could be staggering.
Over on the NASDAQ, shares in Google (GOOG) dropping more than $6 on the day and a lot of red signs here.
Microsoft (MSFT) down a quarter.
Intel (INTC) down by about the same amount.
Apple Computer (AAPL) off $1.52.
And Cisco Systems (CSCO) up just a fraction.
Here's a look at Dell (DELL), which dropped $0.24. Dell was named as "Fortune" magazine's most admired company.
eBay (EBAY) dropped $1.36.
Qualcomm (QCOM) off a dime.
Applied Materials (AMAT) up a fraction.
And Oracle (ORCL) losing $0.28.
Here's a look at Eon Labs (ELAB) climbing 2 1/2. Novartis (NVS) is buying Eon in a $7.4 billion all cash deal. That works out to $31 a share for Eon.
And SINA.com (SINA) rising nearly $3. Shanda Interactive (SNDA) is acquiring nearly 20 percent of SINA stock, spurring talk of consolidation among those Chinese Internet portals.
Dynamic Materials (BOOM) jumping nearly $2. It earned $0.41 a share versus a loss of $0.02 last year.
And finally Engineered Support Systems (EASI) tumbling more than 6. The defense contractor warning that full year results will likely be $0.05 to $0.10 below current estimates.
And those are our "Stocks in the News" tonight.
GHARIB: And Jeff, American (AMR) and Continental Airlines (CAL) are spreading their wings and their routes. The carriers won a tentative OK today from the Transportation Department to start service to China. Continental's flights could begin as early as the middle of next month from Newark to Beijing, a route the company calls easy and convenient for travelers. American's flights are slated to start in the spring of next year from Chicago to Shanghai. American is calling the decision a big breakthrough in the Asian market.
YASTINE: And speaking of China, as we reported earlier in the program, one reason the price of oil is going up is growing demand for it there. Demand is growing in China for all kinds of raw materials, as its economy becomes more industrialized. Cathy Robinson reports.
CATHY ROBINSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: China's economy is now growing more than twice as fast as America's, sparking a voracious appetite for raw materials.
PAUL CAVEY, ECONOMIST INTELLIGENCE UNIT, HONG KONG: And the fact is that China's demand has just overwhelmed it. I mean it was all right when China was quite a small economy in the 1980s, but now, China is one of the largest economies in the world.
ROBINSON: In just a decade, China's share of global energy consumption has jumped from 9 to 12 percent, making it the world's second largest consumer of energy behind the United States. Fuelling that growth, a growing middle class. China is already on the fast track to a car culture with 25 million automobiles on the road today. That number is expected to double in five years and so follows China's thirst for fuel. A decade ago it was self-sufficient; now it relies on imports.
CAVEY: Oil has attracted a lot of attention this year because the oil prices are so high. Demand in China has been growing very strongly. It's become one of the world's largest importers of oil.
ROBINSON: That surge in consumption stretched world capacity and helped drive world oil prices to record highs last year. As China becomes more industrialized and as more people move into the city in search of a better life, a construction boom is on full-tilt. China now consumes 40 percent of all the world's cement and requires one-third of the world's steel. And there are some commodities where China now consumes more than the U.S., like copper and aluminum. It has also become a major importer of iron ore, pushing global prices higher with no slowdown in sight.
VINCENT CHAN, CHINA STRATEGIST, CREDIT SUISSE FIRST BOSTON: China consumed over one-third of global iron ore, and is the only area in which the demand for iron ore is growing. Probably, you talk about China, it probably accounts for all the incremental demand of iron ore in the world these days.
ROBINSON: But as China continues its great leap forward, experts warn that rapid economic development could result in shortages, as well as overheat the economy. In a bid to prevent a downturn, the government has curbed credit, tightened lending to industries such as cement and steel and made it tougher to gain approval for industrial projects. It is also building an emergency stockpile of oil to keep global prices steady. Chan says local consumers could also feel the pinch.
CHAN: Look, China cannot afford to grow like this. At some point, I think China needs to boost taxation and various means to increase the cost of resources consumption such that to encourage people to consume or to grow their business resources more efficiently.
ROBINSON: In fact, inefficiency may be one of the greatest threats to China's continued growth. Unregulated capitalism and the last vestiges of communism have led to massive waste and that, analysts say, could lead to a hard landing for the world's boom economy. Cathy Robinson, NIGHTLY BUSINESS REPORT, Hong Kong.
YASTINE: Tomorrow, to index or not to index? That is the question when considering what mutual funds to buy.
GHARIB: A surprise move by General Motors (GM) today. It cut prices on many of its mid-size sport utility vehicles by as much as $2,000. Analysts say a slowdown in the sales of those models -- including the Chevrolet Trailblazer, the GMC Envoy and the Buick Rainier sparked the price cut. GM said it slashed prices after finding several comparable mid-size SUVs at lower prices than its own models.
YASTINE: Sirius Satellite Radio (SIRI) scoring a big win today. It will become the exclusive satellite broadcaster of NASCAR races and events. The contract is worth $107 million and starts with the 2007 racing season, when NASCAR's current deal with competitor XM Satellite Radio (XMSR) expires. Sirius already holds broadcast rights to the NFL, NHL and Barclays English premier league soccer. Sirius shares fell $0.31 to $5.56.
GHARIB: Here's a look now at what's happening for tomorrow. January's consumer price index comes out and the Federal Reserve releases the minutes from its last interest rate policy meeting. Also tomorrow, earnings from Kerr-McGee (KMG), Lowe's (LOW) and Martha Stewart Living Omnimedia (MSO).
Tonight's commentator takes a look into the past to get some perspective on the future. Here's Irving R. Levine, dean emeritus of international studies at Lynn University and former chief economics correspondent for NBC News.
IRVING R. LEVINE, DEAN EMERITUS, INTERNATIONAL STUDIES, LYNN UNIVERSITY: George Washington's Birthday provides an opportunity to ask, what would George Washington say? On the issue of record government borrowing to cover the deficit, Washington would likely express dismay. After all, in his farewell address in 1796, Washington urged his successors to use borrowing as sparingly as possible.
On the congressional habit of voting itself regular pay increases, Washington would speak disapprovingly since in his second term, he refused any salary at all. When such costly issues as the extension of the Bush tax cuts come before Congress, Washington might speak to the special responsibility of senators.
Washington was asked by Thomas Jefferson at breakfast one morning why the writers of the constitution had created a second chamber of Congress. Washington replied by asking Jefferson, why did you pour that coffee into your saucer? To cool it, said Jefferson. Similarly, explained Washington, we pour legislation into the senatorial saucer to cool it. Washington would likely tell senators to cool it on any legislation that heats up the deficit. By the way, this does not constitute an endorsement of Jefferson's table manners. I am Irving R. Levine.
YASTINE: Recapping today's market action, the Dow heads sharply lower on sharply higher oil prices. The blue chips fall almost 175 points. The NASDAQ loses 28. And to learn more about the stories in tonight's broadcast, go to nbr.com. And that's NIGHTLY BUSINESS REPORT for Tuesday, February 22. I'm Jeff Yastine. Goodnight, everyone. Good night to you, Susie.
GHARIB: And good night to you Jeff. I'm Susie Gharib. Hope to see all of you again tomorrow night.
