NBR Complete Transcripts-09-04-2006
Monday, September 04, 2006How The Global Terror Threat Is Affecting Stocks, Oil Prices & The Economy
SUSIE GHARIB: The U.S. financial markets were closed today for the Labor Day holiday. So tonight, we bring you "Risk Factor," a look at how the global war on terror is influencing American businesses and the U.S. economy.
Since 9/11, fear of terrorist attacks and the war in Iraq have pressured U.S. financial markets, oil prices and the economy. Diane Eastabrook examines the impact of geopolitical risk on the markets.
DIANE EASTABROOK, NBR CORRESPONDENT: From Wall Street to Main Street, terrorism is a specter that haunts the U.S. economy, but has not paralyzed it. U.S. stock markets are trading higher today than they were during the weeks preceding the September 11th attacks. Still, some experts wonder if the markets would be trading even higher if 9/11 and other terrorist acts never happened. JAMES AWAD, CHAIRMAN, AWAD ASSET MGMT: On the margin, stocks are selling more cheaply than they would if we were in a benign geopolitical environment. But there is no way to really quantify it. All you can do is sort of qualify it in a subjective way, but you can`t really quantify it.
EASTABROOK: Following the September 11th attacks, the Dow Jones Industrial Average and the Nasdaq composite index plummeted. But within a couple of weeks, the two indices began recovering. Within a couple of months, the U.S. economy, in a slump on September 11th, began emerging from a recession.
It continues to prosper. Economists credit the Federal Reserve Board, U.S. business and consumers for getting the economy on track.
DIANE SWONK, MESIROW FINANCIAL: Really, what spurred that was in some extent the reaction to 9/11. The Federal Reserve eased rates even further, making interest rates even cheaper. We also saw consumers come out en masse, particularly buying cars, because the automakers -- this was the first of their 0 percent financing schemes.
EASTABROOK: Still, terrorism has created one problem the U.S. economy has not been able to control: High oil prices. Crude oil prices are nearly triple today what they were before the September 11th attacks. Experts say the oil markets have built a fear premium into the price of crude over concern that terrorism or political unrest in the Mideast could disrupt supplies. Energy analyst Phil Flynn says it is difficult to estimate how much the fear premium contributes to the price of oil, because it can fluctuate from day to day.
PHIL FLYNN, ENERGY ANALYST, ALARON TRADING: We know that we live in a world with terror, and that`s not going to go away anytime soon. So it`s going to be an added cost of doing business for some time. But that other part of the terror premium probably fluctuates between $3 and $10, depending on what is happening in the market.
EASTABROOK: Some economists say higher energy prices have created a split in the economy, with upper income consumers shrugging them off and lower income consumers adjusting their budgets.
SWONK: We`re seeing this sort of reallocation of spending, where consumers are shopping to get a bigger bang for their dollar. That, in turn, is holding down overall inflation. But of course, it also leaves many consumers not feeling quite as confident and good about the economy, even though the situation is better than it was in 2001.
EASTABROOK: Economists say perhaps the most lasting effect of 9/11 is the realization that the U.S. economy is resilient and can survive even the most horrific setback.
Diane Eastabrook, Nightly Business Report, Chicago.
Robert Hormats of Goldman Sachs & James Lucier of Prudential Securities
SUSIE GHARIB: For more analysis on how terrorism is affecting the American business landscape, we turn now to two experts: Robert Hormats, vice chairman of Goldman Sachs International; and James Lucier, senior Washington analyst at Prudential Securities.
We began our discussion talking about how 9/11 has changed consumer habits and the way businesses operate.
ROBERT HORMATS, VICE CHAIRMAN, GOLDMAN SACHS INTERNATIONAL: Immediately after 9/11, there was a great deal of concern about security, and people were reluctant to travel. Companies put in a lot of security devices.
I think companies are still exercising a lot of security controls -- access to buildings, security over their infrastructure and information. But I think the average individual now is more willing to travel, at least up until the events that occurred recently in London.
GHARIB: Jim, do you see noticeable changes since 9/11?
JAMES LUCIER, SR. WASHINGTON ANALYST, PRUDENTIAL: I think so. I think every type of business -- the large businesses, the international businesses -- are all in the risk management business today. And I think businesses are operating differently to observe this risk and deal with it, which is one reason why it`s less visible to the ordinary person.
GHARIB: Bob, since 9/11, terrorism has had little impact on the world economy. Do you see that changing in the future?
HORMATS: I think it probably will, in the sense that if the countries that are supporters of terrorism have their way -- Iran, for instance, which is a large supporter of terrorism -- and if they gain more influence, for instance if they get a nuclear weapon, then I think there is a lot more concern about stability in the major oil-producing areas of the world, Saudi Arabia and other parts of that region. And I think that would have a major effect on the world economy because of its affect on energy.
GHARIB: Jim, we`ve seen how airlines have been beefing up security, especially in view of the London terror plot most recently. Do you think that looking ahead, that these new measures are going to slow down business travel and pleasure travel for consumers, and what would be the impact of that? LUCIER: Well, I think that they`ll certainly raise travel costs to some degree. Businesses have to travel. Businesses are willing to pay what it takes to pay for the additional freight. But I really don`t see much of a slowdown in the volume of consumer travel. I mean, the consumers, as I said, seem to be a little more removed from the day-to-day reality of these risks.
GHARIB: Well, Bob, you travel all over the world for Goldman Sachs. Will you be cutting back, and do you see your counterparts in Europe and China doing the same?
HORMATS: I would say half the trips I take I could avoid if I used video conferencing. Meeting with one on one clients, you could do that on television or you could do that on the telephone. You don`t really have to travel as much. And I, for one, am going to look much more carefully at ways of avoiding traveling, not just because of the security problem, but because it`s going to become more and more inconvenient. And I think once people catch on to this, that you can use technology very effectively, travel will be reduced, at least that`s certainly my personal intent.
GHARIB: So what would be the economic impact, potentially?
HORMATS: I think economic impact is negative for airlines, negative for hotels, and very positive for new communications technology.
GHARIB: Jim, we keep talking about more security. At some point, could security paralyze the system?
LUCIER: It can, if you`re thinking entirely of safeguards. But what Bob just mentioned is very important. People are thinking of new ways of approaching things, whether it`s using video technology or trying to achieve the same end in a different way. We are re-engineering business processes. So while the security we go through may seem constrictive, in fact, it`s a force in function. It`s forcing us to find new and better and probably more efficient ways to do things.
GHARIB: Bob, people talk about the war on terror. Can we win this war, or is it like the war on poverty, it`s just this never-ending dilemma?
HORMATS: I don`t think we can win it overnight. It`s going to be a long war. It`s not like World War II, where it was over when it was over. We`re going to be threatened by terrorists for a very long time to come. The London events are one reminder of that; what happened in India; what happened in Spain.
The key point for us to remember is that we have got our priorities distorted in this country. We`ve cut taxes dramatically over the last few years, and we`ve dramatically underfunded our security requirements, infrastructure of security, all types of security, intelligence. We`ve got to get our priorities back in order. This is going to be a long war against terrorism, and we`re going to have to find ways of paying for it. And it seems to me that`s a much higher priority than holding down taxes. If we have to raise taxes to pay for it, we should.
GHARIB: Bob Hormats, Jim Lucier, thank you very much.
LUCIER: Thank you.
HORMATS: Great to be here on this show.
The Threat of Global Terrorism Triggers A New Business Boom
PAUL KANGAS: As we saw when British authorities foiled a plot to blow up airliners over the Atlantic, the terrorist threat is real, and the demand for homeland security is as pressing as ever. Now, that demand has translated into a huge industry that is maturing quickly. Darren Gersh reports.
DARREN GERSH, NBR CORRESPONDENT: Outside this Washington, D.C. metro station, ICX Technologies demonstrates the hardware it hopes to deploy on the frontlines in the struggle against terrorism.
HANS KOBLER, ICX CEO: If you close the door, I take you for a ride.
GERSH: ICX CEO Hans Kobler says the metro bought five of these sky watch sentinels. They`re designed to stop a bullet from an AK-47, but that`s not what makes them useful. It`s the radar and thermal imaging that can be mounted on top, or the bomb sniffers that can be used alongside.
KOBLER: We are moving now to the second generation, where you miniaturize things and make them more sensitive, and we`re working on the third generation. The third would be if you combine now the explosives detection with radiation detection. That`s really where the market has to go.
GERSH: What does it mean, that it`s next generation?
KOBLER: Well, it means it is generally lighter, faster, more precise.
GERSH: That`s the key. After 9/11, the government bought whatever was on the shelf. But the homeland security industry is evolving, seeking out specially designed technologies to detect radiation and now liquid explosives. ICX won a $20 million chunk of the more than $1 billion the federal government is spending to detect radioactive materials coming into the country. ICX will develop the electronic brains of the detection portal.
KOBLER: You push and you analyze it.
GERSH: It`s a good example of how this fragmented industry is sorting itself out. Companies like ICX Technologies are buying up the even smaller companies that develop leading edge applications. The strategy is to get big enough to be a potential partner or acquisition for the so-called prime contractors like Boeing, Lockheed Martin and Raytheon. The primes, in turn, handle the tricky task of dealing with the ultimate client, the federal government.
KOBLER: We are small enough to be very nimble of developing leading- edge technologies. Yet we are big enough to fund it properly, provide the right introductions, and serve our prime customers, the primes, with the solutions that they then can deploy to the government.
GERSH: Many other investors, venture capitalists and entrepreneurs have the same idea, flooding the industry with the kind of cash not seen since the dot-com era.
Former Congressman Tom McMillen raised more than $40 million to create Fortress America. The company started as a blank check. Its only purpose: To find an investment in homeland security.
TOM MCMILLEN, FORTRESS AMERICA: The real positive side of the story is that what`s going on at our universities and in our labs are creating the technology that will make America more secure, and that has to be backed by capital.
GERSH: After weighing his options, McMillen decided to put his money into secure data centers.
MCMILLEN: That part of your economy is really the brains of your economy. If you somehow disrupt it, you destroy your economy.
GERSH: Demand for security spending is growing fast, some 16 percent a year. According to brokerage firm Morgan Keegan, spending on technology and systems to track people, protect assets and prevent attacks could reach $65 billion next year.
But as the spending has ramped up, so have the expectations of the taxpayers, who ultimately pay the bill to keep the homeland safe.
DANIEL PRIETO, DIRECTOR, HOMELAND SECURITY CENTER, REFORM INST.: I think you are reaching the point now where the blank check phase is ending. The blank check phase lasted for the first three, four, five years since 9/11, and now people are going to start asking tough questions about what have you bought and how has it made the country safer.
GERSH: So while spending on homeland security will continue to grow, so will the pressure on companies to prove their new technologies deliver the security they promise.
Darren Gersh, Nightly Business Report, Washington.
One on One With Jules Kroll, Founder & Chairman of Kroll Inc.
SUSIE GHARIB: Our next guest has been a pioneer in providing security and crisis management services for large corporations and governments. Jules Kroll is the founder and chairman of Kroll, Incorporated. I met with him to follow up on a conversation we had shortly after 9/11, and to get his analysis of how corporate America is doing five years later.
I began by asking him how prepared are American businesses to handle another terrorist attack.
JULES KROLL, CHAIRMAN, KROLL, INC.: They`re much, much better prepared than we were before 9/11. Many companies, usually the best companies, have done quite a bit of work in this area in many, many respects, from IT to physical security, to knowing where their employees are. So there`s been a, generally speaking, a significant change.
GHARIB: Mr. Kroll, recently President Bush said that the United States is safer than it was before 9/11. Is that the case?
KROLL: No. No, but that has little to do with people`s attempts at defending themselves. The world situation has simply deteriorated. We`re fighting in three parts of the world. It is -- it`s just a more complex, more diffused situation. And for that reason, it is less safe.
GHARIB: When the British recently uncovered that plot to blow up several planes, some people said that the British have a better counterterrorism apparatus than the U.S. Do you agree with that?
KROLL: Well, the British counterterrorism apparatus is a lot older. Remember, they`ve had the IRA issue to deal with for decades. They also separate the function, the police function and the intelligence function. And I think we ought to think about doing that in the United States. I think it would work better.
The FBI is a great crime fighting organization. I think the intelligence operations, domestically, should be separated. Certainly not being done by the CIA in the United States, but separated out. It is a different activity. GHARIB: It seems like the terrorists are thinking more and more out of the box, coming up with unthinkable ways of doing bad things. Do you think that governments and businesses are thinking enough out of the box, in terms of security measures?
KROLL: They really aren`t thinking that much out of the box. I think we just got to get -- we`ve got to bet better at the basics and the follow- through and the execution.
If you look at the recent liquid explosive problem that existed in the U.K., this was the Ramzi Yousef situation when it exploded on him back in 1995.
There`s not a lot that`s really new. It`s old stuff. And it gets down to taking the offensive, understanding from an intelligence point of view, getting the information back to the respective authorities, and there has been headway in that respect.
GHARIB: What are you telling your clients to do in terms of safeguards for their businesses and their employees?
KROLL: Number one, you need to know where your employees are, and tracking those employees, particularly when they`re traveling, is very, very important. Number two, and I`ve said this in the past, you need to train people on how to get out of the building that they`re in should there be a problem. It`s critical. And the third thing is to look at the parts of the world in which you are attempting to do business. And there are clearly certain parts of the world that are much more chancy and much more difficult. Be selective about where you go.
GHARIB: For a company that doesn`t have a disaster plan in place, what would you say is the most important first step they should take?
KROLL: To not have a disaster plan, to not have business continuity planning in light of what we`ve seen in the world in the last five, 10 years, is grossly irresponsible. And so, the first thing they need to do is take stock; understand what their peers are doing -- their geographical peers, their industrial peers -- and use that as a starting point.
GHARIB: So is there any one take-away lesson in the five years since 9/11?
KROLL: What we`ve learned is these people are not going away. Their mission is to kill as many people as they can to promote their agenda. And we just have to assume that we have a long-term challenge ahead of us.
GHARIB: Mr. Kroll, thank you very much. KROLL: You`re welcome.
Travel Changes Post 9/11
PAUL KANGAS: From stringent passenger screening requirements to a flood of red ink on the balance sheets of the major carriers, the travel industry has undergone huge changes in the five years since 9/11. As Jeff Yastine reports, those changes continue as travelers and the airlines deal with the aftermath of the U.K. airline terror plot.
JEFF YASTINE, NBR CORRESPONDENT: The terror plot, foiled by British authorities, resulting in the banning of liquids and gels from flights, is just the latest in a wave of changes that have washed over the airline and travel industries in recent years.
The volume of air travelers has rebounded past pre-9/11 levels, yet higher security costs and rising fuel costs have contributed to the bankruptcies and ongoing restructuring of some of the largest U.S. carriers, including Delta and United Airlines. And as anyone who flies can attest, air travel itself has changed radically.
BILL CONNORS, EXEC. DIR., NATIONAL BUSINESS TRAVEL: You`ve got security issues, you`ve got airport hassle factor issues that I think have moderated and changed people`s behavior. I think you`ll see people -- and you see it now -- not taking a flight if it`s less than maybe 400 miles. That tipping point I think changes based on what the restrictions are.
YASTINE: For corporations, that`s led to other changes, such as increased use of business jets, both owned and leased. Another post-9/11 invention: The trusted traveler program, now being tested in a few U.S. airports. For a yearly fee, travelers undergo a personal security check by the government, which entitles them to sidestep the long lines and luggage hassles of airport security.
But experts say other post-9/11 travel effects haven`t been so easy to avoid. For foreigners, it`s gotten a lot harder to obtain visas and visit the United States, much to the consternation of travel industry pros.
ROGER DOW, PRESIDENT & CEO, TRAVEL INDUSTRY ASSOCIATION OF AMERICA: We have empirical data every way we measure it that people feel 17 percent better about Americans than America. That would be just like if you owned a car dealership and you knew that 17 percent of the people who took a test drive told their friends about it and bought your car. What would you do? You`d have more test drives.
We`re doing the opposite. We`re telling people it`s hard to come here, difficult to come here, and I think the thing we want to prevent we may just cause down the road. YASTINE: And more changes are in the works. A new U.S. law, called the Western Hemisphere Travel Initiative, will soon require Americans for the first time to carry a passport when reentering the U.S. by air or by sea from the Caribbean, Mexico or Canada -- yet another reminder of how 9/11 continues to affect the travel industry to this day.
Jeff Yastine, Nightly Business Report, Miami.
Sam Stovall of Standard & Poor's & Ernie Ankrim of Russel Investment Group
PAUL KANGAS: Joining me now to look at how to best protect your portfolio during uncertain times is Sam Stovall, chief investment strategist at Standard and Poor`s; and Ernie Ankrim, the chief investment strategist at Russell Investment Group. Sam and Ernie, welcome back to the program.
ERNIE ANKRIM, CHIEF INVESTMENT STRATEGIST, RUSSELL INVESTMENT GROUP: Happy to be here, Paul.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR`S: Thank you very much, Paul.
KANGAS: Many on Wall Street -- and around the world, actually -- were surprised at how quickly the U.S. financial markets shook off the recently foiled U.K. airline plot. Sam, why do you think the market was so resilient?
STOVALL: Paul, I think basically because they have had opportunities to experience this before. Certainly the first time was on 9/11, and the market gravitated toward the defensive areas of bonds, gold and defensive areas of the equity markets. And then, a couple of weeks later, rotated back into the highly cyclical areas. And then, as the other events occurred, instead of it taking weeks, it took days and then hours, and now it didn`t even happen at all.
KANGAS: Ernie, your thoughts on how the U.S. markets handled this latest threat?
ANKRIM: Well, I agree with Sam, and I think the additional thing is here, this was not news that we didn`t know. I mean, in some sense, the idea that there are people out there wanting to do bad things to us can`t be a surprise. If anything, it`s reassuring that the British agencies and other intelligence are able to capture people before they execute strategies rather than after.
KANGAS: That`s true. The thwarting of that whole thing was a real plus factor. But Ernie, what can the average investor do to risk-proof their portfolio? Start with you, Ernie. ANKRIM: Well, that`s a great question. I think, first of all, I`d caution people about trying to risk-proof their portfolio as a long-term strategy. Ultimately, taking all of the risk out of your portfolio, although in these days, you know, 5 percent might not be a bad return, ultimately as a long-term strategy, that`s kind of difficult.
I`d say two things. One, there are sectors of the economy that tend to be a little less sensitive to slowdown in economic activity and certain threats like this. That`s one way. The other thing is to ask seriously, can you tolerate the amount of risk that the equity markets are always going to present? Because I don`t think we`re ever going to find ourselves in a situation where there is no uncertainty.
KANGAS: Sam, what are the absolute favorite sectors that you favor when it comes to more conservative, less risky investments?
STOVALL: Well, Paul, I think in general and certainly right now, because we are in what I call the plateau period between the last rate increase, first rate decrease when investors are a little bit skittish about when this party might end -- in general, consumer staples. You would take a look at companies that are in the food, beverage, tobacco categories, because they represent fairly high dividend yield. They offer companies that have a long string of earnings and dividend increases, therefore called high quality. And again, because they have the ability to improve their margins over time, they would do relatively well.
KANGAS: Now, Ernie, does the approach you take to risk depend on how soon you`ll use your investment? Let`s say that you`re -- if you`re saving for shorter term or for a home, college tuition or maybe longer term like planning for retirement, is there a difference in your investment strategy?
ANKRIM: Absolutely. And Paul, you hit right on it. Each investor`s personal circumstance is going to dictate how much long-term risk versus short-term need for the cash they`re going to have.
And so for individuals that have a very short horizon, I think in this environment, short-term interest rates are still high enough to offer a reasonable return. I mean, 5 percent at the one-, two-, three-year level is very attractive if you`re trying to preserve capital and add something to it above what is probably right now the prevailing rate of inflation, maybe 2.5 percent to 3.5 percent.
On the other hand, I think what you look at in markets where fear is reigning is whether or not you`re a long-term investor. And if you are, it`s rarely the case that the scariest time is the best time to get defensive. More often, it`s the case when people can`t see any risk out there or think the risks are minimal that the market tends to be overpriced.
And I happen to believe that for long-term investors, at least some of the elements of their portfolio have to be exposed to these things that will be disappointing if we have bad events over short periods of time, but over long periods of time offer the opportunity for really greater return.
KANGAS: Ernie and Sam, I`m afraid our time is up, but thanks very much for joining us. We really appreciate it.
STOVALL: Thanks, Paul. Thanks, Ernie.
ANKRIM: My pleasure, Paul. Thanks. Thank you, Sam.
KANGAS: My guests, Sam Stovall of Standard and Poor`s and Ernie Ankrim of Russell Investment Group.
