NBR Complete Transcript: 07-14-2006
Friday, July 14, 2006Wall Street Is Becoming A Casualty of the Mideast Conflict
SUSIE GHARIB: Stocks sold off for the third straight day, bringing the weekly loss for the Dow to 350 points. The Dow plunged 106 points today and the NASDAQ lost 16. Investors sold stocks as Middle East tensions escalated and oil prices closed just above $77 a barrel, a new record high. Adding to the negative sentiment, news that retail sales fell unexpectedly in June. As Suzanne Pratt reports, Wall Street is now getting worried about the consumer.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: American consumers are the cornerstone of the U.S. economy, with their spending accounting for about two-thirds of all U.S. economic activity. Today, fresh data helped to raise questions about the resilience of U.S. consumers. First, the government reported that retail sales fell one-tenth of one percent in June, well below expectations. And June`s weakness followed a tiny increase the month before.
DAVID WYSS, MOODY`S: It looks to me like the consumer is starting to feel a little bit of a squeeze. You look at these numbers-- they were down 0.1 percent, despite a 1.1 percent increase in gasoline stations sales. That`s the problem. People are spending their money at the gas station.
PRATT: On top of that, consumer attitudes also appear to be floundering. The University of Michigan`s preliminary reading on consumer sentiment in July was 83, down from June`s final reading of 84.9.
WYSS: Consumers don`t like what they`re seeing. Most of the declines that we saw were in their assessment of current conditions. Their expectations remain pretty strong. They think things are going to improve, but right now they`re feeling squeezed.
PRATT: Experts say consumers are feeling squeezed, not just because of higher gas prices, but because the housing market is weakening. In addition, higher interest rates are increasing debt burdens for many Americans. But most economists believe record oil prices remain the biggest problem for U.S. consumers. And, with still higher energy prices expected in the coming months, discretionary consumer spending is likely to suffer. Nevertheless, most experts say even if the U.S. economy cools, the Federal Reserve will still hike rates again at its August 8 meeting. That`s because they say policymakers are most concerned about the rising cost of energy.
DREW MATUS, LEHMAN BROTHERS: The consumer is likely to pull back a little bit, maybe a little bit more than we were anticipating. However, it also increases inflation, so it just puts additional pressure on the Fed, who is already worried about inflation pass-through from higher energy prices, to really work to contain inflation going forward.
PRATT: Most economists agree the U.S. consumer is feeling pinched from all sides. But, most also predict the U.S. consumer may be surprisingly resilient, particularly because wages and salaries are finally starting to rise. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The Mideast Threatens To Shake The G-8 Agenda
PAUL KANGAS: President Bush is in St. Petersburg, Russia, tonight, meeting with President Vladimir Putin ahead of this weekend`s G-8 summit. Escalating violence in the Middle East may put some of the major G-8 agenda items on the back burner. Darren Gersh reports from Washington.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Russian President Vladimir Putin meant for energy security to be the main topic of discussion at this weekend`s G-8 summit with President Bush and other world leaders. If the fighting in Lebanon doesn`t crowd out the rest of the agenda, analysts say there are useful steps the G-8 could take to calm oil markets.
DAVID SANDALOW: First, promoting some open investment regimes, second, promoting coordination on strategic petroleum reserves and other mechanisms to prevent supply disruption, third, promote clean energy and, fourth, broaden the dialogue.
GERSH: The leaders of China and India will attend the G-8 meetings in St. Petersburg on Monday, but analysts say a real discussion of energy security requires deeper engagement with emerging economic giants and key oil producers like Saudi Arabia. For its part, the United States wants to address broader security issues relating to Iran`s nuclear ambitions. Fear of a confrontation with Iran is a key reason oil hovers near $80 a barrel.
ROBERT GALLUCCI: If the United States and Russia are not on the same sheet of music with respect to carrots and sticks with the Iranians, then our ability to induce the Iranians to adopt a position we want and give up this uranium enrichment program is diminished substantially.
GERSH: The Russian president has his own ideas of what energy security means. He`s reasserted state control over oil and gas production, and now wants more direct access to European energy markets. The Russians would also like respect and greater investment from the west.
LEON ARON, AMERICAN ENTERPRISE INSTITUTE: Their sense is that, look, we`re already second to Saudi Arabia. We`ve done wonderfully since `99. What more do you want from us? Why don`t we get pats on the back?" Well, they don`t get pats on the back because we want more oil, because the price of oil is very high.
GERSH: Analysts say President Putin pushed energy security to the top of the G-8 agenda, in part to begin taking steps to address the issue, but also to remind his guests of Russia`s role as an energy super power. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
China May Not Be As Cheap A Choice As First Though
SUSIE GHARIB: The big attraction for foreign companies that set up in China is the cheap wages. But in the most developed manufacturing hubs along China`s coast, labor costs are rising. And as Nick Mackie reports from China, those rising wages are having an impact on where companies invest and how they recruit workers.
NICK MACKIE, NIGHTLY BUSINESS REPORT CORRESPONDENT: When U.S. Electronics Group Whitcomb (ph) decided to expand its China operation, instead of staying near its Shenzhen (ph) factory opposite Hong Kong, it set up production 900 miles inland at Fu Lin (ph). Amidst the dust and noise of construction work, Whitcomb discovered that the government is eager to offer financial incentives. After all, Fu Lin (ph) needs quality companies for a 10 square mile development park that will swallow up this neighboring township.
With the building work well under way, the local authorities now want to bring in the manufacturers. The big attraction for investors is the large labor pool and the low labor costs. The minimum wage in China`s booming coastal cities is around $90 per month. In western China it is under $50. Over the past 12 months, Whitcomb has recruited and trained 2,000 local workers. This is quite an achievement in an area where nimble fingered staff like 19-year-old Chen Rong would normally update sewing machines or decorate cakes.
CHEN RONG (THROUGH TRANSLATOR): Before here I worked for a food company but it was far away from my home. I chose this company because it was nearer.
MACKIE: (INAUDIBLE) has a workforce of 470,000. But as much of the available labor is from the outlying countryside, the authorities understand that training is a must. That`s why both urban and rural teenagers are encouraged to join one of the area`s 50 vocational schools. These teach a wide range of subjects from electronics to administration. And they find people jobs.
TAN MINGCE (THROUGH TRANSLATOR): We have contracts with many companies to train and supply students and for a few we prepare special courses appropriate to their needs where we train up a hundred students every year.
MACKIE: Companies with strict quality criteria, however should be prepared to invest heavily in in-house training and need to establish a production line work ethic that exists in the more developed regions, but not here. But the added training costs can be offset by other savings. Unlike factories by the coast, most of the workforce here is local. So the numbers requiring board and lodging are limited. The local workers are keen for good manufacturing jobs to move inland even though working away pays more.
RONG: I am the only child in my family. It would be difficult to go. So I found a job here. If this company wasn`t here, maybe I would have gone away.
MACKIE: For the past five years, governments in China`s heartland have had a tough job trying to woo investors with promises of tax breaks, cheap land and finance. Now with labor costs on the rise in China`s coastal cities, the traffic of executives checking out the interior is growing. Nick Mackie, NIGHTLY BUSINESS REPORT, Fu Lin, China.
"Market Monitor"-James Stack, President of Investech Research
PAUL KANGAS: My guest market monitor this week is James Stack, president of Investech Research based in Whitefish, Montana. Welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES STACK, INVESTECH RESEARCH: Thank you Paul. It`s great to be here.
KANGAS: When you were last with us in mid-December, you were growing very cautious on stocks, noting the bull market was already older than most and showing warning flags. You had moved to 40 percent cash, the highest level in 3 1/2 years. Has this week`s sharp drop turned you into a full- fledged bear?
STACK: Well, Paul, for the past five months, we`ve actually increased to a 60 percent cash position and yes in Montana, you learn that if it walks like a bear and growls like a bear, you better treat it like one.
KANGAS: And things don`t seem to be going the market`s way. I mean, how much of an impact will the Middle East hostilities have on Wall Street?
STACK: Well, geo political instabilities like what is going on in the Middle East conflict seldom have any lasting impact on Wall Street. The problems on Wall Street have been developing for a number of months. Our technical indicators are heading downward. In addition, we have a flat yield curve today that carries over an 85 percent historical probability that we could be looking at a recession in the next 12 months.
KANGAS: When will the Fed relent in its long campaign of interest rate hikes?
STACK: I don`t think we`re far off from Bernanke and company basically standing pat on interest rates. With record oil prices and Wall Street starting to head south, we could see the head Fed not raise rates at their August 8th meeting. The thing to keep in mind is that that is not necessarily bullish on Wall Street. In fact, if you look at Federal Reserve history, in the past 80 years, there has been over a 71 percent probability that stock prices will be lower six months after the final rate hike. So even if we have seen the final rate hike, it doesn`t necessarily mean stocks are going to go up.
KANGAS: How about a quick comment on oil, headed for $100 a barrel?
STACK: I wouldn`t want to guess what is going on in, at least in the Middle East and how it will impact oil, but the important points on the strategy is to have some energy positions in your portfolio as a hedge against that development.
KANGAS: Is that one of the safety first steps that an investor should take now?
STACK: I think it is. You have to have diversification. You have to protect yourself against what is going on in the Middle East. But I think more importantly than that, you have to look at cash. You have to sell down to a level of comfort. You choose your own investment odds. And right now the odds on Wall Street are not that great.
KANGAS: Last December, you recommended buying three securities. Let`s see how they have done since then. You were with us on the 16th. PepsiCo is up 3.3 percent, not bad. Aflac, the big insurance company down 6.3 percent, although it was in a profitable position. Are you still with Aflac?
STACK: You know, we still like the company. I think it sold off in sympathy to Wall Street but it is still a good valuation on that company. I think it will still be higher six, 12 months from now.
KANGAS: You had a third recommendation which was the I shares of Japan. They`re down 3.2 percent, but they too were higher, over 15 at one stage. Did you take some profit there?
STACK: Well, no, we haven`t and part of the reason is because the turmoil in Japan, it is really a reflection of what`s happening on Wall Street. It`s moved more or less in tandem with the S&P 500 index.
KANGAS: How about some new recommendations? Any new recommendations?
STACK: I would still stick with PepsiCo. They reported excellent earnings this week. In addition 35 percent of their revenues are coming from international sales. So it is going to be more resilient to a bear market if we are in one on Wall Street.
KANGAS: It is a pretty strong chart, pretty strong chart.
STACK: It is a strong chart.
KANGAS: OK.
STACK: That`s what you want to be looking at for today, is stability and those kind of companies that are showing resilience.
KANGAS: OK.
STACK: Another stock that we like is Johnson & Johnson. It`s a diversified health care product manufacturer. Almost half of their revenues come from international sales. It`s got one of the lowest valuations that that company has had in over 12 years and it has 20 consecutive years of double-digit earnings growth.
KANGAS: Very good. Do you personally own any of the securities you`ve talked about here?
STACK: Absolutely, Paul. I wouldn`t recommend them if we didn`t.
KANGAS: OK. Jim, thanks for sharing with us your insights, appreciate it very much.
STACK: Always my pleasure, Paul.
KANGAS: My guest Jim Stack of Investech Research.
Paul Kangas' Stocks In The News
PAUL KANGAS: Wall Street headed sharply lower this morning for the third straight session as oil prices spiked to new highs on reports of increasing hostilities in the Middle East. Selling was also prompted by those anemic June retail sales and the drop in consumer sentiment. At midday, the Dow was down 115 points, NASDAQ off 20. The sell-off finally attracted some very cautious bargain hunting late in the afternoon, but the market still ended broadly lower. The Dow Industrial Average closed down 106.94 points at 10,739.35. It rose twice this week, fell three times, had a net decline of 351.32 points or 3.2 percent. The NASDAQ Composite lost 16 3/4 to 2,037.35 today. This week it rose just once, fell four times, posting an overall loss of 92.71 points or nearly 4 1/2 percent. Standard & Poor`s 500 Index fell 6.09 points, ending at 1,236.20 today. Over in the bond market, the 10-year note ended unchanged at par and 14/32 with the yield at 5.07 percent.
Big board volume leader on nearly 30 million shares, EMC (EMC) down $0.15. Twelve was the number for this company today. Second quarter earnings $0.12, same as last year`s $0.12 and it sees third quarter earnings coming in at, you guessed it, $0.12.
Lucent Technology (LU) down $0.07.
Then General Electric (GE) off $0.56, even though those earnings of $0.47 in the second quarter were right in line with Street estimates.
Pfizer (PFE) $0.46 drop.
Time Warner (TWX) lost a dime, fifth in big board volume.
Wal-Mart (WMT) stores losing $1.11. Yesterday as you recall, Merrill Lynch downgraded it from "buy" to "neutral." Let`s have a look at some of the other bigger losers in the Dow.
Boeing (BA) off $2.34.
Almost $1 loss in Honeywell (HON).
And United Tech (UTX) off $2.62.
ExxonMobil (XOM) up $0.83 on those record high oil prices.
Corning (GLW) making a nice rebound after recent weakness.
Ford Motor (F) down $0.18, cut its dividend yesterday.
Nortel Networks (NT) a $0.02 loss, tenth in big board volume.
DR Horton (DHI), the home builder, off $1.66. The company`s new sales orders for the third quarter down 4.4 percent and the company cut its third quarter full year earnings estimates, had quite an impact on a lot of other home building stocks.
Beazer (BZH) down $2.13.
Centex, (CTX), KB Home (KBH) and Ryland Group (RYL) all lost more than $1 per share today, very weak group.
Deere & Co. (DE) tumbling $2.38. CS First Boston removed it from its focus list because of weak June sales of farm equipment.
Then a good gainer, Forest Laboratories (FRX) up $6. A U.S. district court has determined the company`s U.S. patent for an anti-depressant called Lexapro is valid, enforceable and is infringing or being infringed by Ivax (ph), Teva`s proposed generic version of it. Jefferies upgraded the stock of course from "hold" to "buy."
Then another good gain, Kinetic Concepts (KCI) up $3.50. That`s on optimism the company will win a patent dispute regarding its wound closure technology.
Big loser, Chemed Corporation (CHE) tumbling $10.35. The company sees second quarter earnings of $0.48 a share, $0.06 below the Street estimate and said Medicare billing limitations could hurt 2006 earnings overall.
Borders Group (BGP) off a fraction. The company sees second quarter loss of $0.28 to $0.32 versus its previous loss estimate of only $0.10 to $0.20. Meanwhile, Deutsche Bank cut it from "buy" to "hold."
Gerber Scientific (GRB) losing $1.05. The company filed to delay its 10K report because it will have to restate the previous two years of its financials to correct errors.
And finally, another loser, Allegheny Technologies (ATI) off $2.54. Longbow Research downgraded the stock from "buy" to "neutral," citing slackening demand for titanium because of Airbus construction delays.
Google (GOOG) topped the active list on NASDAQ, off $5.33.
Apple Computer (AAPL) off $1.58. UBS cut fourth quarter earnings estimate on Apple.
Then Microsoft (MSFT) a $0.03 gain.
Intel (INTC) $0.15 gain.
Petco Animal Supply (PETC) up $8.44. As you heard, two private equity firms are going to acquire it for $29 a share in cash.
Cisco Systems (CSCO), $0.08 loss.
Broadcom (BRCM) moved up $0.24.
Sandisk (SNDK) losing $2.15.
Dell (DELL) $0.20 gainer.
Tenth in volume eBay (EBAY) down $1 per share.
Rocky Shoes and Boots (RCKY) tripped up for a $9.57 loss. The footwear maker warned that it`ll have a second quarter loss of $0.05 to $0.10 a share. The Street was looking for earnings of $0.45 a share, quite a difference.
And those are our stocks in the news tonight.
