Complete NBR Transcript: 05-12-06
Friday, May 12, 2006Interest Rates & Inflation Put The Brakes On The Wall Street Rally
LINDA O'BRYON: Another big sell off on Wall Street. Continued concerns about inflation and interest rates sent the Dow tumbling nearly 120 points and the NASDAQ falling 29. That brings the two-day loss for the Dow to 261 points. As Suzanne Pratt reports, it also leaves investors asking whether the rally has hit a major impasse or just a small speed bump.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In just two days, the Dow has gone from the brink of an all-time high to a point in which that goal feels very far away. Still, the blue chip index is only about 350 points shy of its record and some traders say attaining it is just a matter of patience.
ARTHUR CASHIN: There`s a rather inelegant slogan down here that it`s often the second mouse that gets the cheese. The first one doesn`t fair very well. So brokers are reluctant to climb on board the bandwagon the first time it`s around.
PRATT: Experts blame the market`s sudden reversal on the Federal Reserve and rising worries that policymakers will have to keep hiking rates to fight inflation. On Wednesday, the Fed said depending on incoming economic data more rate hikes could be needed. The surge in energy and other commodity prices has stoked those fears in the last few days. Still, many market pros think the stock market`s rally is simply on hiatus.
BEN PACE: This is a correction. But, it`s definitely been led by concern about inflation, particularly with crude oil prices going up, energy prices continuing to go up. So, I think that`s been the major impetus of what we think is going to be more of a temporary correction as opposed to the beginning of any kind of bear market.
PRATT: Experts predict oil prices will be the biggest headache for investors this summer. And, while most expect stocks will resume the rally again, some believe that may not happen for a few months.
JAMES AWAD: I think when it`s all said and done the market will go higher. But, you are not going to have the conditions for that to happen for a few months. So, it`s likely for now that we`ve peaked as we work our way through the data points to the next Fed meeting.
PRATT: Many experts predict the Dow will reach its all time high later this year and even trade beyond 12,000. They say it will be solid corporate profits that ultimately power stocks higher. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Big Steel Finds Strength In Consolidation
PAUL KANGAS: The world`s largest steel maker, Mittal Steel, today reported a 35 percent decline in quarterly profits, as it struggled with lower selling prices for finished steel and higher prices for iron ore. Mittal is also in the middle of a takeover battle for another rival, Arcelor Steel, which also reported a profit drop today. As Jeff Yastine reports, consolidation in the steel industry is just one of the changes it is undergoing.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Times are good for steelmakers. Last year, about 1.1 billion tons of steel were produced worldwide, fueling an ongoing boom in the U.S. and fast-growing economies like China and India. No wonder steelmakers feel confident that, despite rising costs for iron ore and energy, there`s a global balance in steel demand and steel supply coming out of the mills. That has left the industry`s largest players to consolidate a jumble of large and small global players.
LOUIS SCHORSCH, CEO MITTAL STEEL USA: Our parent company Mittal Steel, which is the largest steel producer, is bidding for number two, Arcelor. We`re very pleased that that`s about to go to the shareholders of Arcelor for them to decide that issue. But even if that deal goes through, that largest company would be only about 10 percent of world steel production. In the aluminum industry, the largest players are more than 20, iron ore the top three account for almost 80 percent of trade.
YASTINE: And there are other mergers being considered. Russia`s Everaz is talking with British-Dutch steelmaker Corus. This year, Everaz bought U.S. based Stratcor, a producer of vanadium, a key component in stainless steel. Analysts say they`re seeing another trend in the steel industry, vertical integration, where one company controls not just the steel-making, but also the mining of its key component, iron ore.
SCOTT BURNS, MORNINGSTAR: I think as the world industrialized over the past, over the later part of the 20th century there, the need to have that captive resource became a lot less. Now we`ve got an economy or several economies that are ramping up much like the U.S. was at the turn of the century and again it`s becoming more important to have that captive resource in order to control your supply chain and kind of cut out the middleman essentially.
YASTINE: Analysts expect China to encourage consolidation among its 800 steelmaking companies, a huge capacity that concerns the U.S. steel industry.
SCHORSCH: This is still an industry that`s largely government owned and most of the decisions about investment are made with zero interest loans by regional governments that are more concerned with employment or economic just development if you will. We have a lot of concern that there`s already more capacity in that country than they`re going to need and that capacity`s continuing to grow.
YASTINE: Analysts say that for now, China`s economy continues to consume most of the steel produced there. But if its economic boom slows down, it could put tons of cheap Chinese steel back on U.S. and world markets. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
China's Blooming New Flower Industry Takes Root
LINDA O`BRYON: A new industry is booming or we should say blooming in China and it promises to supply western markets in the coming years. In the southwest province of Yunan, the area of land being cultivated for flowers has increased a thousand fold since the 1990`s. Nick Mackie reports.
NICK MACKIE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lu Ronghua was one of only half a dozen farmers in rural Dounan that grew flowers instead of vegetables 18 years ago. His 800 square yard plot produced 30,000 stems annually. And every day, he`d gather up a bundle and cycle the 10 mile long dirt track into the big city.
LU RONGHUA, FLOWER GROWER (THROUGH TRANSLATOR): When I started growing flowers, there was no market here so I had to take all our flowers into (INAUDIBLE) to sell.
MACKIE: Now with 80,000 square yards under cultivation and a workforce of 50, he supplies wholesalers with up to eight million flowers every year. Dounan now has a thriving market, where 10,000 growers and traders gather early each morning. Since the mid 1990s, 1,200 households in this town alone have seen their incomes rise more than tenfold after switching from growing food, which used to generate less than $50 annually. Yunan province has 62 square miles of cut flowers under cultivation, a thousand fold increase in 10 years.
In 2005, it produced 3.6 billion stems. Ninety percent was sold to other regions in China as well as 28 markets abroad and this generated $500 million to the local economy. It was once a cottage industry that served wealthy city folk nearby. Now more than half of China`s flower vases are filled with stems from Yunan. In just over a decade, growing flowers has helped lift 20,000 families out of rural poverty. Now the province has a real industry that is competing globally. Yunan established this industry on seeds imported from Europe - for these roses and carnations aren`t native to China.
But for years, many local growers have used seeds germinated by local producers. These can be 20 times cheaper if they flout intellectual property rights. But only those who respect IP get access to foreign markets, like through this auction house. The government wants growers to go for quality, even if it means buying the latest foreign seeds as they deliver better yields and the varieties that lucrative consumers demand.
DENG CONGJUN (THROUGH TRANSLATOR): We need to increase our cultivated area. Meanwhile, most important, we have to raise the overall share that meets best quality so that more flowers reach the export standard and so increase the profitability of our industry.
MACKIE: Another export issue is transport. Direct flights abroad from Kunming are limited and as yet, there is no carrier with refrigerated holds. Yunan is confident that both logistics and piracy are solvable issues. It`s pressing ahead with plans to double last year`s cut flower production by 2010, to provide another Chinese product for the western markets. Nick Mackie, NIGHTLY BUSINESS REPORT, Yunan province, China.
Market Monitor- Douglas Jimerson, editor and publisher of "National Trendlines"
PAUL KANGAS: My guest market monitor this week is Douglas Jimerson, editor and publisher of "National Trendlines." Welcome back to NIGHTLY BUSINESS REPORT, Doug.
DOUGLAS JIMERSON, "NATIONAL TRENDLINES": Thank you, Paul, back with a vengeance.
KANGAS: Well, you`ve been a vengeance, you`ve had a vengeance for bearish thought. Is the reason for that for so long is that the kind of sell offs we`ve seen the last two days, you figured this was going to happen?
JIMERSON: Yes, I hate to say I told you so. You know, I have felt that there was danger in this market. The NASDAQ 100 topped back in early January. When I was here in November, I said be in a short NASDAQ 100 index fund.
KANGAS: well, it`s led the way down, there`s no question about that.
JIMERSON: Yes indeed.
KANGAS: What`s behind the selling?
JIMERSON: Well, I think the main problem is that the Fed has been hiking rates and we finally got to the point of breaking. We`ve got the discount rate reaching 6 percent for the eighth time in history of the Federal Reserve and each time they have reached 6 percent or higher, we`ve had a major top in the market. KANGAS: Are we going to go higher still on Fed funds short-term rates?
JIMERSON: I think we could go higher on short-term rates. I think the long-term rates have reached a near-term peak.
KANGAS: How about oil? Has that reached a peak?
JIMERSON: Oil reached a psychological level of $75 a barrel. I think that`s probably topping out.
KANGAS: Well, how low can the stock market go on this correction that you`re calling for?
JIMERSON: Well, it`s hard to say. It`s an intermediate term correction that should last into the fall, 15 percent or more and we`ll just have to see how it unfolds.
KANGAS: Well, gold is telling us inflation is in our future. Do you believe that?
JIMERSON: Well, I think that gold has been running up on concerns about the dollar and other uncertainties. I don`t see inflation as a problem but gold I think also may be topping out having surpassed that $700 psychological level.
KANGAS: The last time you were with us in early November, you recommended buying two funds that deal in Japanese stocks. Let`s see how those funds have done since then. Rydex a very nice move, 26.5 percent to the good and Fidelity Japan fund up nearly 24 percent. Congratulations on two great calls there. Are you still with them? Would you buy them here?
JIMERSON: I would. You know, there`s going to be a correction there but again, the Japan market is recovering after that prolonged sleep, slumber and, you know, I think the icons on Wall Street have some gall to be so bullish on U.S. stocks. This is probably not the place to be investing.
KANGAS: So you`re staying with the Japanese stock market?
JIMERSON: Yes.
KANGAS: How about some new recommendations, Doug?
JIMERSON: Well, I think we can also look in Asia at the China market through the Fidelity China Fund. And this, of course, has been moving up. KANGAS: We can see that.
JIMERSON: There will be a correction of some sort, but I think the longer picture looks good for this.
KANGAS: Boy, that`s had a very strong chart, no question about it.
JIMERSON: No question.
KANGAS: How about another recommendation?
JIMERSON: And I think that the U.S. Treasuries are an important buy here and so I would recommend the American Century Target 2020 fund.
KANGAS: What does that have in its portfolio?.
JIMERSON: It has U.S. Treasury strips with a target maturity of 2020. So they`re long term.
KANGAS: Long-term bonds basically but this specific fund deals only in that.
JIMERSON: Right. So it`s skidded for quite a while now and this is a buy point.
KANGAS: You think this is the turning point?
JIMERSON: I think this is the turning point.
KANGAS: OK.
JIMERSON: And for the dollar, you know, a lot of these markets are in a turning point and here`s another one. We look at the NASDAQ, where actually the NASDAQ 100 peaked the first week of January, but this is a good buying point for the short Profunds ITC short.
KANGAS: So this is a bearish fund? So you`re expecting the NASDAQ 100 to go lower and that way you profit.
JIMERSON: Correct.
KANGAS: OK. So you`re staying with the NASDAQ bearish.
JIMERSON: Yes, that`s right. I recommended that in November and now we`re really seeing the opportunity.
KANGAS: OK. Any of these securities you`ve mentioned, do you own them personally?
JIMERSON: No, but our clients do have these funds and the other position we have is money markets which are now yielding 4.65 percent, hard to beat that.
KANGAS: OK. Doug, thanks very much for your input. We appreciate it.
JIMERSON: Thank you.
KANGAS: My guest, Doug Jimerson of "National Trendlines."
Last Word: In the Pink
LINDA O'BRYON: Finally tonight, it takes a big man to swing a pink bat and this Mothers` Day some of major league baseball`s biggest sluggers will be doing just that. Several players including Derek Jeter and Ken Griffey Jr. will use these specially-made pink Louisville Sluggers as they go to bat against breast cancer. Pink is not an approved bat color. But major league baseball has given special permission to players who want to swing the pink bats to raise money for the Susan G. Komen Breast Cancer Foundation. The bats will be autographed by the players and auctioned off to benefit breast cancer research and awareness Paul.
KANGAS: Let`s s hope the auction goes well so everybody feels in the pink.
Paul Kangas' Stocks In The News
PAUL KANGAS: Wall Street headed broadly lower this morning for the second straight day with the tech sector leading the way. An unexpected drop in the U.S. March trade deficit had little positive impact because of a rise in import prices raised inflation fears. At mid-session the Dow was off 88 points and the NASDAQ down 25. A weaker dollar and pre-weekend caution sent stocks even lower this afternoon. The Dow Industrial Average closed off 119 3/4 points at 11,380.99 today. This week, it rose three times, fell twice, but had a net loss of 196 3/4 points exactly. The NASDAQ Composite tumbled 28.92 to 2243.78 today. It fell four times and rose just once this week, losing 98.79 points overall. Standard & Poor`s 500 down 14 2/3 points today, closing at 1291.24. In the bond market, the 10-year note lost 13/32 to 99 14/32, putting the yield up to 5.20 percent.
Most active issue on the big board, trading 23.6 million shares, Lucent Technology (LU) down $0.07.
Nortel Networks (NT) moved up $0.09.
Time Warner (TWX) a $0.19 gain. The company is buying Liberty Media`s 50 percent stake in a Court TV cable channel. Price, $375 million. That gives Time Warner sole ownership.
MOTOROLA (MOT) was up $0.18.
But Pfizer (PFE) dropped $0.31 even though the FDA approved the company`s new smoking cessation product called Chantix. Pfizer fifth in volume on the big board.
GE (GE) fell $0.23.
JPMorgan Chase (JPM) down $0.83.
ExxonMobil (XOM) lost $1.22.
Ford Motor (F) dropped a penny.
And Citigroup (C) tenth in volume, $0.49 loss there.
General Motors (GM) bucked the trend with a $0.24 gain. Keybanc brokerage upgraded it from "hold" to "buy" in the belief that a strike by the UAW at Delphi Corp. is unlikely.
Toyota Motors (TM) down $4.97 after Bank America downgraded it from "buy" to just a "neutral" rating.
Jackson Hewitt Tax Service (JTX) up $2.57. The company did 3.66 million tax returns in fiscal 2006. That`s up 10 percent from the previous year. As a result, the company boosted its full year outlook from earnings of about $1.54 up to $1.58 a share.
Analog Devices (ADI) up $1.35. Second quarter earnings higher, $0.39, up from $0.31 last year, $0.03 above the Street estimate. Revenues up 7 percent. The company boosted its quarterly dividend by 16 percent.
Best Buy (BBY) losing $1.22. The company will acquire the majority interest in Jiansu five star appliances, China`s fourth largest appliance retailer. The price, $180 million.
Wendy`s International (WEN) losing $1.04. The company said falling sales has cut the number of new stores it plans to open this year from the 185 level all the way down to 145.
Then we see Barr Pharmaceuticals (BRL) losing $2.66. U.S. Patent Office issued a preliminary rejection on the company`s renewal request for a key patent for its oral contraceptive called Seasonale.
And then the oil refining company Holly Corp. (HOC) up $0.33. It set a two for one stock split.
Over on NASDAQ, we see Google (GOOG) plunging $12.87, although Nokia will add Google`s talk service to its handsets. Nokia (NOK) was down $0.39. Microsoft (MSFT) a $0.05 drop. The Justice Department says it wants to extend oversight on some of the software maker`s business practices through 2009, specifically its licensing documentation. Microsoft has agreed. The judge in Microsoft landmark antitrust case still must sign off on the extension.
Apple Computer (APPL) down $0.45.
Cisco Systems (CSCO) bucked the trend with a $0.29 gain.
Intel (INTC) down $0.32, fifth in volume.
Broadcom (BRCM) fell $0.31.
$0.41 drop in Qualcom (QCOM).
Amgen (AMGN) gaining $0.83.
Nvidia (NVDA) down $2.14.
Hansen Natural (HANS) which has been volatile all week, down $11.29 on some more profit taking.
New issue today, Basin Water (BWTR). The company builds systems to treat contaminated groundwater. Six million shares offered to the public at 12, opened at $15.70. The high of the day $16.99, so it had a good debut.
Threshold Pharmaceutical (THLD) terrible day, losing 75 percent of its value. The FDA halted clinical trials for the company`s prostate drug because of possible liver toxicity. Morgan Stanley downgraded it from "overweight" to "equal weight."
Those are the stocks in the news tonight.
