NBR Complete Transcripts: 07-07-2006
Friday, July 07, 2006The Latest Labor Report Sparks A Sell Off
JEFF YASTINE: Mixed news about employment sent stocks tumbling on Wall Street today. The Dow fell 134 points and the NASDAQ lost 25. The sell-off was triggered by the government`s June employment report, which indicated that although job growth remained sluggish last month, wages rose. That renewed concern about inflation as well as the impact on interest rates. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Job creation was a little weaker in June than most forecasters had expected. But the gains were across the board with both the goods-producing and service-providing sectors showing increases. The slower pace of hiring was encouraging for those looking to see the economy move from a rapid rate of expansion to something considered more manageable. But there was concern over an $0.08 jump in average hourly wages. That is a five-year high for this key measure of wage inflation. Employers added 121,000 jobs to their non-farm payrolls in June, and the job creation number for May was revised upward. 325,000 jobs were added in the second quarter. The unemployment rate held steady at 4.6 percent.
NEAL SOSS, CHIEF ECONOMIST, CREDIT SUISSE: Labor markets are just tight enough so that employers have to keep their workers working a longer work week, have to pay higher wages, not to attract new workers, but to keep the ones they`ve got. And all that suggests that in a very normal, cyclical way, the growth of profit two and three and four times as fast as the economy lately is probably slowing down to be no faster than the growth of the economy overall.
GURVEY: For investors, that indicates a slowdown in the rate of earnings progression, a bearish sign. But it might also incline the Federal Reserve to pause its string of interest rate hikes, something the markets would love to see. There is no clear consensus forecast for the Fed`s next move.
JOHN RYDING, CHIEF US ECONOMIST, BEAR STEARNS: There`s two takeaways. Firstly, that economic growth may be slowing towards trend, which would tend to favor the Fed holding rates steady. On the other hand, labor market pressures from the unemployment rate and from the wage side putting upward pressure on inflation, so the Fed could look at the report and go either way.
GURVEY: The Fed has said it is closely watching the data and it will get a lot of data before it meets next on August 8, in particular second quarter GDP and the employment report for July. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
JEFF YASTINE: President Bush says the June employment report is good news, marking the nation`s 34th straight month of job growth. For more on the administration`s reaction to that report, Washington bureau chief Darren Gersh sat down with Al Hubbard, director of the National Economic Council. Darren began by asking Hubbard if Wall Street overreacted to the June job numbers.
ALLAN HUBBARD, DIRECTOR, NATIONAL ECONOMIC COUNCIL: I`m the last person that can tell you why the stock market goes up or down on any given day. What we worry about here in the White House is the economy, economic growth, jobs, wages, compensation, productivity growth and on, every one of those factors. This economy is doing very well and the president is very pleased. And he believes we`re very much on a sustainable path.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If we look at the numbers, the Wall Street economists, some of them have said that you had kind of the worst of both worlds. You had what looks like a slowing economy, but you also have some wage inflation. Is that cause for concern?
HUBBARD: Actually, we delighted by the increase in wages. Wages were up by five tenths of a percent nominally in June. That is very good news. The American worker deserves higher wages. We`ve had great productivity growth since the president has been in office. Compensation always follows productivity growth, but it is a lagging indicator. It always catches up once the unemployment rate gets lower, like it is now, below 5 percent, 4.6 percent. We`re delighted to see wages start growing more rapidly. It won`t be inflationary and it is very much a positive for the American economy and the American people.
GERSH: Explain that, why won`t it be inflationary?
HUBBARD: Because you have productivity growth. Productivity growth since the president has been in office has been at 3.5 percent a year, which, by the way, is at a record level for this extended period of time. When you have that kind of productivity growth, that enables you to have compensation growth on a non-inflationary basis. So if productivity growth is growing at 3.5 percent, that means your compensation can grow at 3.5 percent and it is non-inflationary. The compensation has been lagging productivity growth, so now we`re at a catch-up phase.
GERSH: We also did see though that retail employment was off about 86,000 since March. Starbucks was saying that they are going to come in at the low end of analysts` expectations for earnings. Are we starting to see the consumer finally maybe throw in the towel?
HUBBARD: Oh, the consumer is still doing quite well out there. The consumer is important, as you well know and as your listeners know and the viewers. Consumers represent 70 percent of the economy. Consumer spending continues to be quite strong and the good news is the investment spending is very, very strong and certainly all the indicators are that businesses are going to continue to invest very aggressively and that will lead to sustained economic growth.
GERSH: Well, this is an election year and if the economy is so good, why are the polls showing that 60 percent of the American people right now don`t like the president`s handling of the economy?
HUBBARD: There are a number of reasons for that. And obviously that frustrates us because the economy is good. I don`t think anyone would doubt that, 4.6 percent unemployment, much lower than it was on average in the `70s, the `80s or `90s. But a lot of people are anxious out there. High gasoline prices certainly contribute to that significantly. Obviously, the Iraq war situation creates a lot of angst and those are two major factors that create this economic uncertainty. The good news is people, when they`re reporting to polls, indicate that they`re concerned, but their own individual behavior suggests that they`re very much comfortable with the economy and believe in the economy or otherwise they wouldn`t be spending the way they`re spending.
GERSH: Let me ask you about (ph) not necessarily related to today`s news, but the administration put a lot of effort into Social Security and didn`t get very far with its large reform package. Are you going to try again on Social Security? Will maybe we see a smaller package, smaller ideas for Social Security reform?
HUBBARD: The president and all of us have been very, very disappointed with the Democrats with respect to Social Security. It is a huge problem facing the country. The longer we wait, the more difficult it is going to be to solve it. The Democrats decided not to come to the table and not to try to solve it. This president will never give up on Social Security reform.
GERSH: Al Hubbard, director of the National Economic Council. Thank you for your time.
HUBBARD: Delighted to be here. Thanks for the kind invitation.
Small Businesses May Be In A Position To Do Some Big Hiring
JEFF YASTINE: America`s small businesses are looking towards a hopeful future. Historically, they have been big generators of jobs, but over the last few months, high energy costs and economic uncertainty have curtailed employment at many small firms. Now, as Diane Eastabrook reports, experts say it looks like small businesses could be getting ready to hire in a big way.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At McCormack- Shryber, the hunt is on for a new recruiter. The small recruitment firm specializes in finding lawyers for corporations and law firms. The company has hung out the help-wanted sign because business has been blossoming for months.
AMY MCCORMACK, CO-FOUNDER, MCCORMACK SCHREIBER: I have seen no indication that there is a slowdown in sight and, as a matter of fact, I have never seen a summer as busy as this summer is.
EASTABROOK: Economists say small businesses have become the driver of job growth in the U.S. The Small Business Administration says companies with fewer than 500 employees have accounted for up to 80 percent of the new jobs created in the U.S. over the past decade. But in recent months, many small businesses have been hit harder by rising raw material costs than large companies. Some experts think that is one reason many have been reluctant to expand. Surepayroll tracks hiring trends among small businesses. The company says in the first part of the year, the 16,000 small firms it polled weren`t optimistic about hiring. But Sure says its most recent survey shows things are beginning to turnaround.
MICHAEL ALTER, PRESIDENT, SUREPAYROLL: We`ve seen a trend in optimism change just in the last month or so as folks started to believe that the Fed was going to freeze on their interest rates. We surveyed our customers and the Surepayroll customer base. We saw an increase in optimism by 10 percentage points in terms of people`s view of the economy.
EASTABROOK: Still some economists point to the low unemployment rate and rising wages as continued obstacles for small firms hoping to hire.
CARL TANNENBAUM, CHIEF ECONOMIST, LASALLE BANK: That certainly signifies that not only is the labor market tight, but also that workers are maybe getting that extra little bit of leverage with their employers because of that.
EASTABROOK: Economists think businesses large and small will continue to feel wage pressures over the next few months, something the Federal Reserve is likely to monitor very carefully. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Market Monitor"- Robert Drach, Publisher of the "Drach Weekly Research Report"
PAUL KANGAS: My guest market monitor this week is Robert Drach, publisher of the "Drach Weekly Research Report" based in Tallahassee, Florida. Bob, welcome back to NIGHTLY BUSINESS REPORT.
ROBERT DRACH, PUBLISHER, "DRACH WEEKLY RESEARCH REPORT": Hello Paul.
KANGAS: Good to see you again. The stock market of course has been a study in frustration. One day the Dow gains 70 or 80 points. The next day it gives it all back. It just seems to be running in place. How do you explain this?
DRACH: You can expect to see more of the same because it`s almost impossible for the market to get anything sustainable, especially on the upside against the Federal Reserve. So you ain`t seen nothing yet until they get done. You`re going to have the same choppy patterns.
KANGAS: When do you think they`ll pause? Is it in the near future, intermediate or it`s going to go into the months and months and months.
DRACH: Well, they should now because it is important to keep in mind that the lag time, what you see now is when Fed funds were 4.25 percent, not 5.25 they just raised to. So this has to work its way through the pipeline. So they`re playing a very dangerous territory here because they`re already getting deceleration of the economy, housing and other areas.
KANGAS: Understood. When they do pause, do you think it will trigger a major rally in stocks?
DRACH: Yeah. Usually you`ll get a sharp rally, maybe 400 or 500 points, and then typically it will fall back down to where the Fed began because they start seeing the effects of the pipeline at the higher rates and there is still economic problems.
KANGAS: Uh-huh.
DRACH: You get a rally, get a pullback and then a more sustainable rally later.
KANGAS: So if you want to participate in the first rally, you better be nimble and get out on time before you get into the second one.
DRACH: Yeah and you want to be there in advance because it will spark pretty rapidly.
KANGAS: Understood. On your last visit with us in early January, you recommended the purchase of four stocks that you felt were unduly depressed, all top quality issues. Let`s have a look how they fared. And as far as GE is concerned, not too well.
DRACH: Well, they`re more depressed now.
KANGAS: That`s right. If you liked then, you`ve got to love it now. Same is true for Home Depot, I suppose.
DRACH: Down the list of anything that`s higher quality, I would think that in this kind of environment, it is very rough on higher quality stocks.
KANGAS: Right and the other two you recommended, Applebee`s, and MDC Holdings are own considerably but you`d stay with all four of those.
DRACH: I would stay with any quality that is depressed.
KANGAS: OK, now as the manager of NIGHTLY BUSINESS REPORT`s model portfolio, let`s see how you`ve done for this year-to-date.
DRACH: Well, we`ll be trailing S&P and the Dow and ahead of NASDAQ. But, again, that`s a function of higher quality stocks and (INAUDIBLE). I don`t see any change in that until we get some relief from the Fed.
KANGAS: OK, now let`s have a look at how the NIGHTLY BUSINESS REPORT model portfolio has done since its inception. That`s a little different picture.
DRACH: We`re about four to 5,000 points ahead of the Dow, but I don`t think we`re going to gain any advantage, again until they get past this Fed stuff. And it`s really a major obstacle to the stock market.
KANGAS: Bob, do you have any new recommendations in this market environment?
DRACH: You still have depressed high quality issues, getting more depressed with some of them, I might add.
KANGAS: OK. Who do you like?
DRACH: Dollar General will be the first one.
KANGAS: You think that is really unduly depressed.
DRACH: You can see by the charts. They`re beat up.
KANGAS: OK. Let`s move right along. DRACH: McCormick, that won`t look as bad on your charts, but it is fundamentally depressed.
KANGAS: That is adding a little spice to the portfolio isn`t it?
DRACH: We need all the spice we can get. United Health Group, bad press, again, relatively depressed. And if you want a fourth one, I would say Wrigley.
KANGAS: That has been around a long time, that company.
DRACH: Yeah, and it is relatively depressed from its historical ranges. You can`t find anything wrong with chewing gum. You can find a lot wrong with the Federal Reserve.
KANGAS: Do you personally own any of the stocks you`ve recommended here?
DRACH: No, those are basically on the website for educational purposes. It is not an actively traded portfolio.
KANGAS: I`m afraid we`ve run out of time, Bob, but I thank you again for your insight.
DRACH: Thank you Paul, always good to be with you.
KANGAS: My guest Robert Drach of "Drach Weekly Research Report."
Last Word: Cutting Cars
JEFF YASTINE: And finally tonight, two dozen residents of Portland, Oregon, are taking part in the city`s first-ever low-car diet. That`s low car as in dropping their car keys into a lock box, using public transportation, biking and walking to get around town. The city is giving the dieters a monthly transit pass, a gift certificate to a local bike store, and access to what`s called a flex car that lets Portlanders share cars when they need them without the cost and hassle of ownership. And Portland officials say while living without a car is good for your wallet, Paul, it`s also good for the environment and speaking from prior experience at least, also good for the waistline.
KANGAS: That`s right, interesting, experiment, though.
Paul Kangas' Stocks In The News
PAUL KANGAS: Wall Street opened with steep losses amid concerns that excessive rate hikes by the Fed caused that weak jobs report. Not helping things either, the strong wage component in the report raised inflation fears. An earnings warning from 3M was another negative. So the Dow fell 95 points at the outset of trading. NASDAQ lost 15. The convergence of all these worries and normal pre-weekend caution sent the markets steadily lower the rest of the day. The Dow Industrial Average closed off 134.63 points at 11,090.67. In this four-day trading week, it rose twice, fell twice, had a net loss of 59.55 points. The NASDAQ Composite tumbled 25.03 to 2130.06 today. It also rose twice and fell twice this week for an overall loss of 42.03 points. Standard & Poor`s 500 Index dropped 8.60 to 1265.48 today. In the bond market, the 10-year note rose 13/32 to 99 30/32, putting the yield at 5.13 percent. Most active big board issue on 15 1/2 million shares, EMC Corp (EMC) moving up $0.11.
Then Advanced Micro Devices (AMD) down $0.27. AMD says its second quarter sales will be about 9 percent below the first quarter level. Nevertheless, Goldman Sachs brokerage still repeated a "strong buy" on ADM (sic).
3M (MMM), the major casualty of the day, down $7.29 and that loss accounted for almost 58 points of the Dow`s loss. The company said higher start up costs for its optical film`s business and lower sales of LCDs will hurt second quarter earnings. Standard & Poor`s cut its 2006 earnings estimate by $0.10 a share, down to $4.55 a share and also cut its price target for 3M from $90 down to $83 a share.
Radioshack (RSH) on the other hand moving up $3.20. The company had named turnaround specialist Julian Day as chairman and CEO. Day was with Kmart and helped that turnaround. Raymond James incidentally, upgraded Radioshack from "market perform" to "out perform."
Altria Group (MO) up another $0.04 after a big gain yesterday on a positive court ruling. Lucent Tech (LU) lost $0.02.
$0.29 drop in Motorola (MOT).
ExxonMobil (XOM) losing $0.65.
Corning (GLW) off $1.09. That`s in sympathy with 3M and lower than expected LCD sales.
General Electric (GE) down $0.20, tenth in volume.
Hewlett-Packard (HPQ) down $0.25 although the company plans to shrink its real estate portfolio in order to cut workplace service costs.
Then we see Lowe Companies (LOW) down $1.32. Keep in mind that this is the two for one split stock. That split effective June 30th. AG Edwards today downgraded the stock though from "buy" to "hold" on concerns about slower housing activity.
Then Amerus Group (AMH) was up $4.39. It`s an insurance holding company. It confirmed it is in talks to be acquired by the British firm Aviva.
Labranche & Co (LAB) down $3.02, huge percentage drop. The company`s forecasting a second quarter net loss of about $23 million due to a drop in principle trading revenue. It`ll drop from $47 million a year ago to only $20 million in this year`s second quarter.
Parker-Hannifin (PH) a $0.71 gain. Citigroup upgraded "hold" to "buy" on the belief the company will beat fourth quarter Wall Street earnings estimates.
And Qwest Communications (Q) down $0.38. Goldman Sachs downgraded it from "neutral" to a "sell."
Google (GOOG) topped the NASDAQ actives, down $2.74.
Apple Computer (AAPL) a $0.37 loss.
Microsoft (MSFT) off $0.18.
Intel (INTC) $0.29 drop there.
Oracle (ORCL) finally a gainer, bucking the trend, up $0.28, fifth in volume. Ebay (EBAY) was down $0.23.
Hansen Natural (HANS) a $0.13 gain.
Cisco Systems (CSCO) $0.24 loss.
Broadcom (BRCM) fell $1.38.
And Starbucks (SBUX) down $1.84. After the close yesterday, the company reported June same store sales were up 6 percent. Wall Street was expecting at least 7 percent. And today UBS securities downgraded it from "buy" to "neutral."
PMC-Sierra (PMCS) down $1.17. CFO leaving and that was a negative.
And finally on the American exchange, Radiologix (RGX) up $0.87, big percentage gain. It`s going to be acquired by Primedex for $1.84 in cash plus one share on Primedex stock. The deal worth $3.71 a share.
Those are the stocks in the news tonight.
