NBR Complete Transcript: 08-24-2006
Thursday, August 24, 2006More Signs The Economy Is Slowing
SUSIE GHARIB: Evidence continues to mount that the U.S. economy is slowing dramatically, as Americans hold back on making big purchases. New government data today on housing and durable goods both showed sharp declines. Sales of new homes fell 4.3 percent last month to a seasonally adjusted rate of just over a million units. Inventories of unsold homes hit a record high, as the median price for a new home fell to $230,000, down $4,000 from June. Meanwhile, orders for long lasting, big ticket items dropped more than expected, nearly 2.5 percent in July, led by softening demand for automobiles and aircraft. But despite the gloomy data, most economists are not expecting the U.S. economy to fall into recession.
CARL RICCADONNA, ECONOMIST, DEUTSCHE BANK: Well, it looks like we`re not necessarily heading towards a recession, but we are looking towards a growth recession. And what this means when economists talk about a growth recession is not necessarily that growth is going to turn down, but we will be looking at very anemic growth figures going forward, probably on the order of about 1.5 to 2 percent GDP growth, which is certainly lower than what we`ve seen in the past couple of years.
GHARIB: Riccadonna believes the Federal Reserve will not need to raise interest rates again this year. But economists are split on whether the Fed will cut rates next year.
Drug Stores Find A New Prescription for Survival
PAUL KANGAS: The nation`s third largest drug store chain is getting larger. Rite Aid is buying part of Canada`s Jean Coutu group for $2.6 billion in cash and stock. Specifically, Rite Aid is acquiring more than 1,500 Eckerd drug stores, more than 330 Brooks Pharmacies and six distribution centers. All of the properties are located on the east coast or in the Mid-Atlantic States. Rite Aid is expected to remodel and rebrand the stores to carry the Rite Aid name. That`s a process that could cost the company almost a billion dollars over the next four years.
GHARIB: That Rite Aid deal is just one example of how many American drugstore chains are rapidly expanding these days. As Erika Miller explains, many are bulking up just to survive in an industry where being super-sized can be the key to survival.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Drug stores have come to look a lot like supermarkets and convenience stores, offering food and household items. But prescription drugs are still what bring most customers through the door, accounting for an estimated 70 percent of sales at chains like Walgreens, CVS and Rite Aid. It`s a desire to improve profitability in this area that`s driving many chains to merge.
JOHN RANSOM, HEALTHCARE & DRUG STORE ANALYST, RAYMOND JAMES: I think the leading factor is everybody in the pharma channel has to get big so they can beat up on the vendor. In this case, those are the pharmaceutical manufacturers mostly.
MILLER: Rite Aid`s bid for Eckerd and Brooks is just one of several drugstore mergers this year. CVS purchased Albertson`s drugstore business and Walgreen`s bought Mid-Atlantic regional chain Happy Harry`s. But experts say consolidation isn`t the only positive for the sector. An aging population is also a big boon.
MARK HUSSON, CONSUMER BRANDS ANALYST, HSBC: Pharmaceuticals are driven by demographics, not economics. So as we all age in the United States, clearly this is an area where people are getting older and fatter and uglier and more in need of pharmaceuticals, so, it`s a good place to be.
MILLER: In addition, many drug retailers have made their stores more appealing through renovations and expansion of store hours. Those changes are helping them boost sales of non-pharmaceutical items, which typically carry higher margins. Finally, experts say drugstores are less sensitive to changes in the economy, so they predict that if the economy continues to slow, the sector will likely outperform.
HUSSON: The outlook for the sector, in general I think is quite a positive one because, just as we`re seeing some deceleration in consumer spending in other sectors, in pharmaceuticals, we`re seeing actually expenditure increases quite markedly year over year. So the demand drivers in this sector are better than almost any other sector I can think of in retailing.
MILLER: It`s clear that the consolidation wave still has a ways to go. Analysts say the big three drugstore chains have a combined market share of about 40 percent, and there are still 22,000 independent pharmacies in the U.S. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
The Post Katrina Insurance Flood of Trouble
PAUL KANGAS: The Gulf Coast marks a somber anniversary Tuesday, the first anniversary of hurricane Katrina. She was the costliest storm in U.S. history, and her wind and water caused big changes for the nation`s insurance industry. The homeowners` claims paid by insurers are now approaching the $1 million mark. Total insured losses have now reached $41 billion, with more than half of that from businesses. As Darren Gersh reports, now insurance companies are trying to cut their future losses and that means big changes for coastal communities.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: One year after Katrina, another flood is coming. Hundreds of thousands of families across the Gulf Coast are finding their homeowners insurance premiums are doubling. Many policies are being canceled outright. Alabama escaped the worst of Katrina, but now it is paying a price for the storm.
WALTER BELL, COMMISSIONER, ALABAMA DEPARTMENT OF INSURANCE: What we are seeing is that the premiums are skyrocketing, anywhere from three to 10 times what were the renewal periods of the past. We`re seeing insurers getting off of exposures by non-renewing people, not wanting to increase their exposures there.
GERSH: Insurance companies say the premium increases reflect the increased risks of hurricane disasters. And it`s not just the Gulf Coast, insurance companies are pulling back from markets as far away as Long Island and Cape Cod and homeowners near saltwater who can renew usually face higher deductibles and tighter limits on coverage.
THOMAS UPTON, INSURANCE ANALYST, STANDARD & POOR`S: So if you owned a home in the way of hurricane Katrina last year and suffered an out of pocket loss of $25,000, this year, under the same circumstances with the same home, the same loss or the same damage would result in a loss to you of $50,000.
GERSH: Katrina has also split the insurance industry. Allstate, State Farm and many companies selling homeowners insurance are pushing for the creation of tax-exempt, government-managed catastrophe funds to help cover losses from natural disasters. Re-insurers disagree. Those companies sell insurance to other insurance companies and say the private sector can handle hurricane losses, if premiums reflect the true costs of disasters. The industry does agree states should tighten building codes and restrict development in risky areas.
MARC RACICOT, PRESIDENT, AMERICAN INSURANCE ASSOCIATION: At what point in time are we going to have the courage and the integrity to say at some point in time, we have got to make some decisions about how many people can squeeze themselves along the coast and still be safe.
GERSH: As insurance companies cut back, state-sponsored insurance pools are taking on the risk and the red ink. But insurance commissioners say it`s unfair for company executives to drop policies they have been writing for years.
BELL: Somewhere along the line, it would have been more prudent for them to have slowed down their writings in these areas than to continue to write at a fast pace and then all of a sudden hit a brick wall and say, I`ve got to get off of all of that exposure that I`ve written within the last two or three years.
GERSH: In Louisiana, state law does not let an insurance company cancel a homeowner`s policy until repairs have been made or until the end of the year. That means thousands of New Orleans area homeowners may begin 2007 with a cancellation notice. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Bill of Health"-Ritzy Retirement Communities
PAUL KANGAS: As the nation`s baby boom generation grows older, yet another industry is preparing for a wave of growth: operators of nursing homes and other types of assisted living communities, but not just any assisted living communities. As Jeff Yastine reports in tonight`s "Bill of Health" segment, upscale housing is the key these days.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bertha Singer -- that`s her in the center between two friends -- is 93 years old and having the time of her life. Her home is this adult living community, the Palace Suites in Miami. And a palace it is, from the live piano music in the main lobby to the fresh flowers and multi-course, chef-prepared meals in the dining room, to the one- and two-bedroom apartments that look and feel like home, not an...
BERTHA SINGER, RESIDENT, THE PALACE SUITES: .Institution. Right. Very friendly. I can`t explain it. I`ve never been back to my house and yet it`s only three-quarters of an hour`s drive.
YASTINE: Executives say most clients are in their mid-80s when they arrive here, and the upscale feel of the place is part of changing expectations among today`s seniors and their aging baby boomer children.
ADAM ROSENBLUM, VP MARKETING & SALES, THE PALACE MANAGEMENT: So for the time being, we see their parents moving to communities such as the Palace, people who are in their 80s and their 90s. And as the baby boomers will continue to age, we`ll find they will be the end users for this product as well, because they`ll have been familiar with it from their experience with their parents.
YASTINE: Experts see the changes not just through luxury assisted living centers like this one, but also lower and mid-priced centers as well. Slowly fading away is the sterile, institutional feel of many facilities and that`s being replaced by building designs and d‚cor that feel more like home.
DAVID KYLLO, EXECUTIVE DIRECTOR, NATIONAL CENTER FOR ASSISTED LIVING: Today`s assisted living facilities look different than the facilities of 20 years ago. They`re larger. The room sizes are larger. They have more types of locations and the ability to do different types of things, like access the Internet. So we`ve really seen a change and continued evolution of what senior living looks like in our country.
YASTINE: That evolution is just fine for another resident of the Palace Suites, 87-year-old Marcel Dominique Chassagne.
MARCEL DOMINIQUE CHASSAGNE, RESIDENT, THE PALACE SUITES: It`s very important, because I have a feeling that I live in a luxurious place, which it is and you feel you like to leave your room or your apartment to come down to the first floor.
YASTINE: Jeff Yastine, NIGHTLY BUSINESS REPORT, "Bill of Health."
Commentary: The Future of TV & The Internet
SUSIE GHARIB: The merger of the Internet and your television set could hold great promise, or maybe not. Tonight`s commentator examines the prospects. Here`s Robert X. Cringely, columnist at pbs.org.
ROBERT X. CRINGELY, COLUMNIST, PBS.ORG: Television programs on the Internet is a hot business just now, with industry-leading player Youtube claiming its members are downloading an average of 100 million short video clips per day. That`s an eclectic selection of home movies, borrowed copyrighted material and the occasional licensed content, hardly what we think of as television on PBS or the commercial networks.
Whether or not this will redefine television is still up for debate. However, it is probably the future of television distribution. What it isn`t however is a real business making real profits. Youtube has almost no revenue and huge costs. The company is only slowly adding advertising and struggling to find a viable business model, as are its many competitors in this popular space. What this feels like to me is 1996, not 2006, and Youtube is Netscape, a high flyer from a decade ago that never did find its own revenue base. And like that earlier Internet boom, this one too will probably crash with only a few players surviving to actually redefine television. Maybe that`s just the way new technical industries have to be founded these days. Anyway, it should be exciting. As these Internet video companies go public, their shares soar, but the party has to end sometime, so don`t be surprised when it does. I`m Bob Cringely.
Last Word: Pluto Is Out As A Planet
SUSIE GHARIB: And finally tonight, for millions of Americans, say the word Pluto and we think of either the cartoon dog with the floppy ears or the last planet in the solar system. Now Pluto -- the planet, not the dog -- has been demoted. An international group of scientists voted today to strip Pluto of the planetary status it`s had since it was discovered back in 1930. The scientists say Pluto doesn`t meet the new, official definition of a planet because, technically, its orbit overlaps with Neptune`s. The move officially shrinks the size of our neighborhood, astronomically speaking, from nine to eight of what are called classical planets. Paul, Pluto is now classified as a dwarf planet and experts say there could be dozens of them out there in our solar system.
KANGAS: Well, that certainly adds to the gravity of the situation, doesn`t it?
GHARIB: Yes, it does.
Paul Kangas' Stocks In The News
PAUL KANGAS: Wall Street opened modestly higher on bargain hunting after three straight down days. But the gains evaporated as those durable goods and new home sales reports raised concerns the economy might be in trouble. At midday, the Dow was off 18 points, NASDAQ down 12. Anemic volume on the downturn convinced traders the path of least resistance was up, so some cautious buying got stocks back in the black. The Dow Industrial Average closed up 6.56 at 11,304.46. The NASDAQ Composite was up 2.45 at 2,137.11. Standard & Poor`s 500 Index gained just over 3 points to 1,296.06. Over in the bond market, the 10-year note rose 4/32 to par and 18/32, putting the yield down to 4.81 percent. Big board volume leader on 19.8 million shares, Ford Motor Co (F), the third straight day it`s topped the active list, no change. "USA Today" newspaper said now the company`s considering taking itself private.
Then of course Rite Aid (RAD) down $0.35. As you heard, they`re going to buy all the Eckerd and Brooks drug stores.
Lowes Companies (LOW) down $0.74. A slowing economy could have a big impact on earnings there, negatively of course.
Chico`s Fas (CHS) tumbling $6.13. After the close yesterday, second quarter earnings were a bit higher, $0.30 versus $0.27 a year ago. That was in line with expectations, but the company sees third quarter earnings falling to only $0.26 to $0.28. The Street estimate is $0.32. On top of that, Standard & Poor`s today downgraded it from "strong buy" to "hold." UBS Financial downgraded it from "buy" to just a "neutral" rating.
Sprint Nextel (S) dropped a nickel. That was fifth in volume.
ExxonMobil (XOM) up $1.09.
Cendant (CD) a $0.03 gain.
Time Warner (TWX) down $0.11.
Pfizer (PFE) gained a dime.
And Home Depot (HD), another company that could be affected by the slowing economy, down $0.21.
Caterpillar (CAT) is in that category too. A slowing economy certainly not going to help it, down $1.71. After the close, Caterpillar said it`s settled a number of lawsuits with Navistar and the firm signed a series of licensing and long-term supply agreements. Caterpillar stock moved up about $0.11 in after hours trading.
Johnson & Johnson (JNJ) up $1.17. UBS financial upgraded its target from $73 to $80 a share.
Fannie Mae (FNM) up $2.36. As you heard, a positive reaction to the Department of Justice`s ending its accounting probe without taking any action against the company.
Coach (COH) bagged a loss of $1.28. Piper Jaffray downgraded it from "out perform" to just "market perform."
And Wyndham Intl (WYN) which was earlier this month spun off from Cendant. It`s going to get $760 million from the sale of travel sport business. Goldman Sachs today upgraded it to a "buy" recommendation. William Sonoma (WSM) down $2.71. Third quarter, second quarter earnings $.30 up from $0.26 so sales were only up 1.2 percent though and the company cut its third quarter estimate to $0.22 to $0.26. It`s having some problems with its Pottery Barn operations. Prudential downgraded the stock to "under weight" today.
Toro Co (TTC) the lawn mower maker down $2.55. Third quarter earnings jumped to $0.91 from $0.74 a year ago, $0.05 above the Street estimate, but Toro lowered its sales growth target for the next two years from plus 8 percent to as low as plus 3 percent.
Then Genesco (GCO), the footwear maker, up $1.20. Second quarter earnings, $0.24, down from $0.27 a year ago, but $0.03 above the Street estimate.
Apple Computer (AAPL) topped the active list, up $0.50 as you heard all about that Sony battery recall.
Google (GOOG) a $0.30 gain there.
Intel (INTC) $0.18 rise.
Microsoft (MSFT) up $0.07.
And Cisco Systems (CSCO) was up $0.04, fifth in dollar volume.
Applied Materials (AMAT) a $0.19 gain.
Sandisk (SNDK) did well, up $2.36.
Oracle (ORCL) a $0.06 rise.
Ebay (EBAY) down $1.22. Piper Jaffray downgraded it from "market perform" to "under perform."
And Rambus (RMBS) a $0.73 gain, tenth in volume.
Coldwater Creek (CWTR), the women`s apparel retailer, boosted its full year earnings guidance from $0.61 to $0.64 up to $0.66 to $0.68.
And those are the stocks in the news tonight.
