NBR Transcripts: 03-30-2006
Thursday, March 30, 2006The Rising Interest Rate Sparks Stock Sell Off
Street today. The Dow fell 65 points, but the NASDAQ edged up three points. Stocks sold off as investors grew concerned that inflation pressures will force the Federal Reserve to keep raising rates. Suzanne Pratt takes a look at the correlation between interest rates and stock prices.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Conventional Wall Street wisdom says rising interest rates are often bad news for stocks. That`s because higher yields make bonds an attractive alternative and borrowing costs get more expensive for corporate America. But in the most recent tightening cycle, U.S. stocks have behaved surprisingly well. Since the Federal Reserve began raising rates in June 2004, the Dow, S&P 500 and NASDAQ have all posted solid gains. Experts say that`s partly because the Fed began raising rates when the Federal funds rate was at its lowest level in more than half a century.
ART HOGAN, CHIEF MARKET ANALYST, JEFFERIES & CO.: Starting from a very low base, it`s not unusual to see the economy continue to do better, earnings continue to do better for corporate America. And the market has not necessarily sold off as we`ve seen interest rates rise up.
PRATT On top of that, the Fed has recently been more open with financial markets. So the past 15 rate increases were not a surprise. Nevertheless, most stock investors are counting on the Fed to stop raising rates soon. They`re betting the central bank will bring the Fed funds rate to 5 percent at its May meeting and then take a break. But what happens to stocks if the Fed keeps going? Some experts say it won`t be good.
KEVIN BANNON, CHIEF INVESTMENT OFFICER, THE BANK OF NEW YORK: I think if people perceive that the Fed is going to go much higher, they`re going to start marking down their growth forecasts, because it clearly suggests that the Fed is much more concerned about inflation than they are about growth and willing to risk a potential slowdown or even recession. So anything north of five would be a negative for the stock market.
PRATT: Others believe the stock market can handle a Fed funds rate up to 5.25 percent. But they`re worried about what happens if the Fed keeps raising rates through the summer.
HOGAN: If we have anything with a 6 handle on it by year end on the Fed funds rate, I certainly think that will act as a major deterrent in this economy. I think that will act as a major deterrent in corporate earnings. And I certainly think that will act as a major draw for what otherwise would be equity investments into the bond market.
PRATT: It may be worth noting that the yield on the 10-year Treasury rose today to its highest level in nearly two years, close to 5 percent. Experts say many bond investors believe the Fed is nowhere near done raising rates. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One On One With Bill Gross, Founder of Pimco Total Return Fund
GHARIB: As we just reported, bond prices tumbled today, pushing yields to their highest level in almost two years. Joining us now with more analysis of today`s bond sell off and the outlook, Bill Gross, founder and chief investment officer of Pimco Total Return Fund, the world`s biggest bond fund. Hi, Bill, how are you doing?
BILL GROSS, FOUNDER & CHIEF INVESTMENT STRATEGIST, PIMCO: Hi, it is nice to be here.
GHARIB: So as you know, the bonds sold off today on concerns, new concerns about rising inflation. In your view, are those concerns warranted?
GROSS: I don`t think so. I think despite the ambiguity in the recent Fed statement, that the Fed stops at 5 percent. I don`t think anything has changed. I think the economy ultimately slows down as housing slows down, inflation remains benign and the Fed is going to be well-justified in stopping at 5 percent. So I think the sell off was for other reasons.
GHARIB: Why are you so convinced that it is 5 percent and that that`s it, especially given today`s economic reports and other data that we`ve been seeing recently.
GROSS: It`s been a long cycle. They started at one and now they`re close to 5 and so 4 percent or 400 basis points as we call it is a long stretch in terms of a tightening cycle and also in terms of the length of the cycle, over 18 months, that`s historically long in terms of its duration. So those two factors should ultimately slow down this economy. To my way of thinking there`s no doubt and I think to Bernanke and the Fed, there is no question either. It is just a question of how much it slows down. I suspect by the second half of the year that housing will have slowed down this economy to 2 percent and that 5 percent is the cap.
GHARIB: So Bill, have you changed your investing strategy at all since the Fed meeting on Tuesday?
GROSS: No, we haven`t. Obviously, we have been cognizant of what`s happened in the past day or two. It hasn`t been pretty. But it has been due to other factors. To tell you the truth, we`re not watching the central bank here in the United States. We`re watching the central bank in Japan. The Bank of Japan holds the power now and holds the cards in terms of global interest rates and to the extent that they raise rates, not the Fed, then that will affect our markets.
GHARIB: And then what will you do differently if you see that happening?
GROSS: You know, if we saw the Bank of Japan moving aggressively to tighten interest rates and they have just begun their cycle, then that would automatically suggest that there is a competitive investment out there. That would mean that Japanese bonds are more competitive relative to U.S. bonds and cause some type of arbitrage selling. So we`re watching Tokyo just as intently as we`re watching Washington.
GHARIB: Now I understand that your investment column for this week, you had a special guest, Alan Greenspan. Is there anything that he told your group that you came away with some in sights, whether it was about inflation or interest rates?
GROSS: Sure, I think so. He didn`t comment on monetary policy. He wants to give Ben Bernanke a free rein there and I think that is certainly justified and admirable. What he did talk about was the potential at some point for a saturation level in terms of foreign holders of U.S. treasuries, I`m talking about central banks, I`m talking about other private participants. And while he didn`t know when that might occur or where that might occur in terms of a saturation level, he suggested that there is a point where foreign investors will have had enough and will begin to diminish their purchases of U.S. Treasuries. So, not a forecast from his standpoint, but certainly something to look out for in terms of that point where foreign central banks stop buying U.S. Treasuries.
GHARIB: So can we get some investment advice from you on what should investors who own bonds, what should they do at this point?
GROSS: Well, you know, short-term rates are attractive, 4 3/4 percent and perhaps soon to be 5. You know, the short end of the high quality curve at 5 percent plus is very attractive. And so while we wait out this uncertainty with the Bank of Japan, and with the participation rate and saturation level of foreign buyers as Greenspan has suggested, there is no pain in terms of a 5 percent short-term rate, so that is where I would park money.
GHARIB: Bill, thank you very much. We appreciate you coming on the program.
GROSS: You`re welcome. My pleasure.
GHARIB: My guest tonight, Bill Gross, chief investment officer of Pimco.
US/China Trade Tensions Thicken Over Auto Parts
YASTINE: The United States is raising the pressure on China, filing a new trade complaint over China`s treatment of auto part imports. In its complaint to the World Trade Organization, the U.S. argues China is discriminating against foreign companies in an effort to boost home grown Chinese competitors. As Darren Gersh reports, a $600 million market for U.S. exports is at stake.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: China slaps tariffs of up to 14 percent on imported auto parts, but doubles that for imports of new cars. The problem is how China enforces those tariffs when it comes to foreign auto makers assembling cars in China.
ROB PORTMAN, U.S. TRADE REPRESENTATIVE: What the Chinese have done is they have said once a car is assembled, if the value of the car includes more than 60 percent of imported auto parts, they will go back retroactively and apply a tariff to the auto parts that is the car tariff - - in other words, more than doubling in some cases the tariff. That`s simply unfair.
GERSH: The U.S. charges China is breaking World Trade Organization rules with what amounts to a local content policy, forcing foreign auto makers to use Chinese-made parts. That`s why the European Union joined the U.S. in filing the WTO case. U.S. manufacturers hope the joint action will send a message to China.
PATRICIA MEARS, NATIONAL ASSOCIATION OF MANUFACTURERS: We don`t want to see this kind of thing spread through various sectors, so we support this kind of case being brought.
GERSH: Under WTO rules, the U.S. and China will begin a 60-day consultation period to try to hammer out a solution. High-level talks are scheduled in a few weeks, but the timing of today`s announcement reduces expectations for Chinese President Hu Jintao`s visit to Washington later in April.
JOHN MAGNUS, PRESIDENT, TRADEWINS: They had hoped that they would have some serious accomplishments to announce by the time of the Hu visit, and now it does not look like there will be very much for them to announce -- less than they would have hoped for, less than I would have hoped for.
GERSH: This is only the second time the Bush administration has taken a trade complaint against China to the WTO. Other cases are now possible with intellectual property violations and domestic subsidies for Chinese industries topping the complaint list. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Time For Thailand To Head To The Polls
SUSIE GHARIB: Thailand is heading to the polls on this Sunday, following a snap election called by the country`s embattled prime minister. But with the opposition boycotting the vote, the election might not bring an end to the months of political turmoil. Despite the uncertainty, analysts are still bullish about Thailand`s stock market, one of the best performers in the region last year. Rian Maelzer reports.
RIAN MAELZER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Thailand or set. The monthly event is just one way Set is aiming to boost knowledge and interest in this low profile, but high growth exchange. Looking at stock prices in relation to corporate earnings, Set is the most undervalued exchange in Asia after Japan.
VICHATE TANTIWANICH, EXECUTIVE V.P., STOCK EXCHANGE OF THAILAND: The low interest right now, it`s something like 3 to 4 percent. Compared to the earning growth of the stock exchange, it`s almost 10 percent a year, plus dividend yield of 5 percent on average.
MAELZER: Given Thailand`s level of economic growth, analysts feel the market could gain a good 30 percent over the next two years. Yet currently, few Thais have any involvement in the stock market, including holding mutual funds. To try to change that, Set puts on road shows, runs a popular business library for the public and has launched its own 24-hour business TV channel. It even produces a sitcom containing lessons on investing.
SUPAVUD SAICHEUA, MANAGING DIR., PHATRA SECURITIES: They are doing all they can. I think that they have done a really good job, very imaginative, very dynamic, very forward-looking.
MAELZER: But if it`s to really take off, analysts Say set needs to attract more foreign investors.
SAICHEUA: Only maybe about 30, 40 Thai stocks are liquid enough, big enough and trade at high volumes enough for foreigners to feel comfortable owning to the extent that if they needed to sell, it would sell.
MAELZER: Recent efforts to boost the number of big public offerings have hit obstacles. Plans to list the country`s largest alcoholic drinks maker were put on hold after protests by anti-alcohol, social and religious groups. And the courts halted the planned privatization and listing of the country`s electricity-generating monopoly. It would have been Thailand`s largest public listing ever.
TANTIWANICH: This concerns us quite a lot because if we have these kinds of stocks in the stock market, it will attract foreign investors.
MAELZER: Set and investors hope the legal and political difficulties dogging the listing of the liquor company Thai beverage and electricity generator Egat (ph) can be sorted out in the months ahead. Set is counting on those listings and further big privatizations to give the Thai Stock Exchange the kind of profile it believes its performance and value have earned. Rian Maelzer, NIGHTLY BUSINESS REPORT, Bangkok.
Commentary: Taking Sides In The Line-Item Spending Veto
SUSIE GHARIB: In tonight`s commentary, making the line-item spending veto a national priority. Here`s Daniel Henninger, deputy editor of the editorial page of the "Wall Street Journal."
DANIEL HENNINGER, DEPUTY EDITOR, WALL STREET JOURNAL EDITORIAL PAGE: With a war in its third year, President Bush`s approval rating is hauling through history in the mid-30s, no surprise there. What Vince Lombardi is supposed to have said about football is no less true of a nation at war: winning isn`t everything; it is the only thing.
That said, it is not good for this country`s governance to have a president with many months left in his term at such low ebb in popular approval, including among members of his own party. Mr. Bush`s Republican problems aren`t with the war, but are almost wholly caused by the rising levels of congressional spending, a subject new White House chief of staff Josh Bolten knows well. The Bush people argue they cannot afford a big spending fight with Congress amid a major war and they have a point.
Budget bills are monstrous things making vetoes hard. Ironically, during the Vietnam war, a Democratic controlled Congress took away the ability to veto individual spending items from Richard Nixon. We now find the nation in a hard war with a president lacking real power to discipline Congress. George W. Bush has sent Congress a new line item veto bill. John Kerry says he supports the item veto. Mr. Bush and incoming chief of staff Bolten can do themselves and future president`s a big favor here. They should make bipartisan restoration of the line item spending veto a national priority. I`m Dan Henninger.
Paul Kangas' Stocks In The News
JEFF YASTINE:The jump in interest rates gave a handy excuse for some profit-taking in blue chip stocks, following yesterday`s gains. The Dow made an early stab higher and that brought out sellers, who drove the index nearly 100 points lower through the early afternoon. The NASDAQ managed to hold its own, as the Dow trimmed its losses over the remainder of the session. The Dow closing down 65 points at 11,150 and change, while the NASDAQ rose three points to 2340.82, yet another five-year high, a marginal high and the S&P 500 falling 2 2/3 points to about 1300 and change as well.
Bonds sold off as traders weighed a higher than expected reading on the Fed`s favorite inflation measure, the personal consumption expenditures portion of the GDP report. That reading led to growing fears the Fed may hike rates beyond its May meeting. So the 10-year note falling 14/32 to 97 6/32, putting the yield at 4.86 percent, its highest level in more than 20 months.
GHARIB: The NASDAQ formally dropped its $4.2 billion bid for the London Stock Exchange today. The U.S.-based stock market said a surge in the share price of the London exchange made the deal too expensive, but NASDAQ says it reserves the right to make another offer later. The London exchange has spurned a long list of suitors, including Germany`s stock exchange and Australia`s Macquarie bank. Several market watchers now expect the newly public NYSE Group to make an offer, but the big board is not commenting. Meanwhile, Euro-Next, the big European exchange and Germany`s Deutsche Bourse confirmed today that they are in talks about a possible combination, Jeff.
YASTINE: Shares of the London Stock Exchange fell almost 7 percent in London trading today. Now let`s take a look at some of our stocks in the news tonight.
And today we have General Electric (GE) gaining $0.72. An analyst at Morgan Stanley believes shares are drastically undervalued and could rise to $65 a share over the next three years. The stocks been rallying the last six weeks or so, but it`s still off about 4 1/2 percent compared to year ago levels.
Lucent Tech (LU) gaining a nickel.
Nokia (NOK) gaining more than $1. A nice move for the stock, which is up better than 40 percent in the past 12 months. The company raised sales growth estimates and said it would buy back more shares.
Pfizer (PFE) dropping a fraction.
And Nortel Network (NT) advancing $0.14.
Then we have Texas Instruments (TXN), another cell phone supplier of parts, jumping $1.09. Many of its chips are used in Nokia`s cell phones.
And then Motorola (MOT) gaining $0.18.
Time Warner (TWX) advancing $0.06.
ExxonMobil (XOM) losing $0.16.
Bank of New York (BK) up $1.50. JPMorgan is in reported talks to acquire Bank of New York`s retail banking network in the New York metro area. That`s more than 300 branches worth an estimated $4 billion and that unit has been an under performer for Bank of New York.
Then on the shares of mining companies, which are the talk of the town on Wall Street as gold, silver and copper prices all soar to new multi-year highs. Phelps Dodge (PD) up nearly $4.50. Morgan Stanley upgrading the shares. We saw Citigroup issue a similar recommendation on the metals and the stock earlier in the week. Gold surged over $13 to $5.86 and change per ounce. Silver also set its highest price since September 1983 and some other gainers today Freeport-McMoran Copper & Gold (FCK) gaining nearly 6 percent.
Newmont Mining (NEM) climbing $1.44. Those stocks though are still off from their highs which they set back at the start of February.
Brokerage stocks another standout. AG Edwards (AGE) rising over $2. The firm posted a 58 percent jump in fourth quarter profits helped by hefty demand for fee-based asset management services.
Shares in Lamson & Sessions (LMS) gaining $2.33, a ramp up in orders from the big telecom companies helping that stock. Total sales expected to climb by nearly 40 percent from year ago levels.
Carmax (KMX) falling more than $2. The used car retailer said fiscal 2000 results will not meet analyst forecast. They did notch a 35 percent jump in earnings for this quarter, but same store sales fell by 3 percent.
And then Texas Industries (TXI) off over $4 on profit taking. It posted stronger than expected third quarter results of $0.47 a share and those shares are still up more than 24 percent for the year, for the quarter, rather, despite today`s sell off.
Google (GOOG) falling 6 1/2. In an SEC filing, Google says it`s selling an additional 5.3 million shares. The filing says the proceeds will be used for general corporate purposes, but most think it will be used to help liquidity and accommodate the indexed mutual funds as they accumulate more shares prior to the stock being added to the S&P 500 tomorrow at the close.
Apple Computer (AAPL) gaining $0.42.
Microsoft (MSFT) also up for the day.
Intel (INTC) down a fraction.
Cisco Systems (CSCO) up about $0.40.
Oracle (ORCL) gaining just a bit there.
Broadcom (BRCM) falling $0.34.
Qualcomm (QCOM) a gainer for the day.
Symantec (SYMC) up more than $1.
Level 3 Comm (LVLT) dropping $0.45.
G-III Apparel (GIII) gaining $1.18. It landed a new contract with Wal- Mart to design and produce Wal-Mart`s branded men`s sportswear line due out in the fall.
And finally, Sigmatel (SGTL) ended off $1.27. The company makes chips for handheld music players. It issued a sales warning for the current quarter, blamed the slowdown on lower chip prices, inventory build up and slack demand in Europe.
And those are our stocks in the news tonight.
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