NBR Complete Transcripts: 09-26-2006
Tuesday, September 26, 2006Inversion Anxiety
SUSIE GHARIB: A big rally on Wall Street today powered the Dow to its second highest close ever. The blue chip index is now just 54 points shy of its all-time high, thanks to good news about the economy and lower oil prices. But in the bond market, economic pessimism has pushed the yield on the 10-year Treasury to 4.59 percent, well below the Federal funds rate. As Erika Miller reports, that`s a troubling sign for the economy.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: An unusual situation is happening in the bond market now. Short-term interest rates are substantially higher than long-term rates. Ordinarily, the opposite is true, because investors generally expect higher returns for tying up their money for longer periods of time. The current situation is known as an inverted yield curve. As an extreme example, the yield on the Federal funds rate, the overnight bank lending rate, stands at 5.25 percent. That`s much higher than the rates for the 10, five and two-year Treasuries. Inversions are often viewed as a warning sign about the economy.
RICHARD VOLPE, HEAD OF GOVERNMENT TRADING, BEAR STEARNS: I think the bond market is sending you a message that they feel growth in the coming quarters is going to be slower than we had originally anticipated. MILLER: Inversions have preceded the past five recessions. But there have also been plenty of times when inversions were not followed by major economic downturns. For now, most experts don`t think recession is on the horizon. They say the current situation in the bond market reflects the expectation of a major shift in the Fed`s monetary policy.
BULENT BAYGUN, HEAD OF FIXED INCOME STRATEGY, BARCLAYS CAPITAL: What the bond market is saying right now is that Fed hikes are over and that the next move is going to be a rate cut. And the first rate cut according to the futures pricing right now is going to be before year end.
MILLER: Another explanation for the inversion is that long-term rates remain low because of heavy foreign demand for U.S. bonds. The theory is that high demand for those securities has been propping up prices, keeping yields low.
BAYGUN: Over here in the U.S., there`s this perception that the Fed tightening cycle is over. Whereas in Europe, there are supposedly two more rate hikes to come. And in Japan they are in the early stages of tightening. So, if you look at it from a total return perspective, it makes a lot more sense to be in a market where the tightening is done.
MILLER: Many fixed income strategists expect this inversion will continue for at least a few more months. But some think the 10-year note has gotten ahead of itself and the spread between long and short-term rates will narrow. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One With Tom McManus, chief investment strategist of Bank of America Securities.
SUSIE GHARIB: As we`ve been reporting, the Dow is getting close to setting a new record high. But our guest tonight is still cautious in his outlook. Joining us now, Tom McManus, chief investment strategist of Bank of America Securities. Hi, Tom.
TOM MCMANUS, CHIEF INVESTMENT STRATEGIST, BANK OF AMERICA SECURITIES: Hello, Susie. How are you? GHARIB: I`m fine, thank you. So you told me today that you`ve been surprised by the strength of this rally. Tell us why. What`s your analysis?
McMANUS: Well, I think your opening piece did it. On the bond market we`ve been surprised by the strength of the bond market. The 10-year Treasury yield is down almost 70 basis points from the highs in the past three months. And so that`s a much bigger rally than we would have expected. Energy prices are down. That`s not really a big surprise. The magnitude of the drop, perhaps is, especially given what happened last week with the big hedge fund problem. And I think that the reaction in retailing stocks and other consumer discretionary stocks is also larger than what we would have expected given the decline in gasoline prices that we`ve seen so far.
GHARIB: Investors, as you know, are waiting eagerly for the Dow to rack up 54 more points and hit this new all-time high. Let`s say that that happens whenever. Will it be sustainable after that or is there enough momentum to keep the rally going or are there troubling signs out there?
McMANUS: Well, I think that there are some troubling signs and that we`ve already enjoyed a tremendous recovery in profits, a cyclical recovery in profits and we don`t expect profits to fall off a cliff, but we do think that with the Fed having pushed rate up, short-term interest rates up above 5 percent, there will be a deceleration in the economy. It will affect largely consumer discretionary spending, high-end consumer discretionary spending because that`s tied into what we`re seeing in the housing market. We don`t think the housing market is turning around any time soon and we think despite the drop in gasoline prices, which should stimulate the low end consumer spending, we think that the bulk of discretionary spending actually occurs at the high end. So we think that`s where the disappointments will be.
GHARIB: So what are you saying then? So what is the threat, what is the biggest threat to this market rally?
McMANUS: Well, I think that profits... We go through the weighing season of corporate profit results that starts in just a couple of weeks, I think you`re going to see an increasing number of companies that will be guiding down their profit expectations, just as Lowe`s did yesterday, guiding down their profit expectations for the fourth quarter and into 2007.
GHARIB: All right. Now, as much as you are cautious, you`re not bearish, because your asset allocation is 55 percent in stocks, in equities. So where are you investing your client money? McMANUS: Well, that 55 percent is a little bit less than what the traditional 60/40 mix or we actually consider 65 percent to be normal. But we`re much more optimistic about the prospects for large cap stocks. We think that large caps under performed for a number of years, clearly were victims of the rise in commodity prices that we saw over the last couple of years. Now that commodity prices appear to be coming down, we think that profit margins can expand for a lot of these companies and they`ve actually gotten a boost from the rally that we`ve seen in bonds.
GHARIB: What`s the sector that you find most attractive right now?
McMANUS: Well, the two sectors, actually, health care and consumer staples currently make up about 40 percent of our recommended model portfolio weightings, almost twice the weighting in the market. So we have a big defensive bet on companies that where we expect to see a P/E multiple expansion and we expect them to continue to drive sustainable profit gains.
GHARIB: all right. Interesting information. Thank you so much, Tom.
McMANUS: Thank you, Susie.
GHARIB: We`ve been speaking with Tom McManus, chief investment strategist of Bank of America Securities.
Higher Education With Lower Prices
SUSIE GHARIB: Education Secretary Margaret Spellings announced plans today to shake up the U.S. college system. The idea is for schools to cut costs, making them more affordable and to make colleges accountable for helping students succeed. As Darren Gersh explains, that`s a critical factor, since many colleges and universities are getting students in the door, but not getting them out with diplomas.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Don Brody didn`t think he`d be packing boxes for a living. He had hoped he would be a systems engineer by now. But college didn`t work out the way he planned. After a strong start to his first semester at George Mason University, Brody came down with mononucleosis.
DON BRODY, FORMER STUDENT, GEORGE MASON UNIVERSITY: I was out for two weeks. I couldn`t really do anything and when I tried to get back in the swing of things, my teachers weren`t very lenient with me turning in work late.
GERSH: He also admits that when he wasn`t sick, he was having a little too much fun. But Brody says he still wasn`t getting the support he needed from the school and tuition was adding up, so he dropped out.
BRODY: After my grades rolled downhill first semester, I kind of lost motivation.
GERSH: George Mason`s provost Peter Stearns is working to keep students like Brody from falling through the cracks. When Stearns came to campus eight years ago, the school was losing about a quarter of its freshman class each year and was graduating only about half of its students in four to six years.
PETER STEARNS, PROVOST, GEORGE MASON UNIVERSITY: It was pretty obvious that areas like university life, areas like advising, areas like the range of majors available to students, all of these things need attention.
GERSH: So the school has tried to do a better job advising students and has made it much easier for them to switch majors and still graduate on time. Now George Mason only loses about 17 percent of its freshman class and has bumped its graduation rate up to 60 percent. That may still sound low, but in fact it`s about the national average. Statistics show that nationally only about two thirds of college students graduate in six years. Less than half graduate in four. And at community colleges, less than a third of the students who say they want a degree get one. Education analyst Kevin Carey says it`s time governors and state lawmakers hold public universities to a higher standard.
KEVIN CAREY, RESEARCHER, EDUCATION SECTOR: Schools have no financial incentives to graduate students. All the finances are based on enrollment. So as long as you have enough new freshman coming in the door, it doesn`t really matter if they ever graduate or not. That doesn`t mean that they don`t care. It doesn`t mean that they don`t want their students to graduate. It just means that their students don`t have to graduate.
GERSH: Financial aid is an obvious place to start. Scholarships and loans are not keeping up with increases in tuition.
BRODY: When someone my age has to pay for everything on their own, I guess I could go in and look for scholarships and financial aid and stuff like that, but I still have to work full time to support myself, so that only leaves me a certain amount of time I can go to class.
GERSH: But money isn`t the only reason so many students drop out. Many high schools don`t properly prepare students for college. Experts say colleges also need to improve the quality of their teaching and make drop out prevention a higher priority.
CAREY: The best way to keep a student in college is to help them succeed.
GERSH: Colleges argue graduation rates are a bit better than they appear. Dropout statistics don`t catch students who finish up elsewhere, or who come back to school after a few years off. Don Brody says he`s still taking some classes part-time at the local community college and in six months he plans to join the Air Force, which he hopes will help him complete his bachelor`s degree.
BRODY: It would be tough to do anything in the real world without a college degree, I mean, now especially if you don`t have a master`s degree, you`re still limited on the jobs that you can go into.
GERSH: A professor of literature might call it a tragedy. As a degree becomes an economic necessity, many students continue to leave college with their graduation dreams marked incomplete. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Commentary: Death Tax Debate
Tonight`s commentator looks at the debate over repeal of the estate tax, sometimes called the "death tax." He says it`s an idea that politicians on both sides of the aisle should be able to live with. Here`s Dan Henninger, deputy editor of the editorial page of the "Wall Street Journal."
DANIEL HENNINGER, DEPUTY EDITOR, WALL STREET JOURNAL EDITORIAL PAGE: The heads of the Republican and Democratic parties had an argument about the coming elections on the "Wall Street Journal" editorial page last week when taxes were part of it. The GOP`s Ken Mehlman said his party has cut taxes every year since Bush was elected and now wants to eliminate the estate tax. Howard Dean said if we had not cut those taxes, the budget would be balanced. The "Wall Street Journal" editorial page has been in the middle of this tax debate going back 30 years.
We supported Ronald Reagan`s tax cuts. Our politics is that we`re for whichever tax policy will produce economic growth. Lowering or killing the estate tax will keep money with some of the nation`s hardest working, most productive families. Also, income that has already been taxed at least once really should not be taxed again because of the mere accident of death. That is a moral issue. The largest number of beneficiaries here would be people with estates under $10 million. Typically these are family-run businesses. These estates are the product of a lifetime of work, savings and job creation. The really rich don`t pay much estate tax anyway because they can afford estate lawyers or they transfer their money to foundations. Some Democrats in the past have actually been for repeal of the death tax. Well, this is one tax cut that really does deserve the support of both parties. I`m Dan Henninger.
"Last Word"-Mona Lisa's Mystery
GHARIB: And finally tonight, one of the world`s most mysterious women has finally given up one of her secrets, with some help. Scientists studying Leonardo da Vinci`s "Mona Lisa" said it appears she had just given birth to her second son, when she sat for the painting. The scientists used special three-dimensional technology to scrutinize both sides of the 16th century masterpiece. It helped them discover that Mona Lisa`s dress is covered in a thin, transparent gauze veil typical of the kind worn in 16th century Italy by new mothers. It had never been seen before because the painting is dark and difficult to examine. Jeff, the woman with the half smile has been identified as the wife of a Florentine merchant.
Paul Kangas' Stocks In The News
JEFF YASTINE: Those low interest rates in the bond market set the stage for a bullish romp for stocks. The Dow jumped nearly 70 points at the open, helped by a new Conference Board survey showing a rebound in consumer confidence. Profit-taking whittled those gains, but with oil prices low and the Dow close to an all-time high, it was just too much for the bulls to resist and the Dow going on to surge 93 1/2 points higher to close at 11,669.39. The NASDAQ picked up 12 1/4 points to 2261.34 and the S&P 500 rising nearly 10 to 1336.34. In the bond market, the 10-year note dropping 11/32 to 102 9/32, the yield at 4.59 percent.
Time Warner (TWX) topping our list, gaining $0.47 and a new yearly high, again on optimism for a turnaround at America Online.
Altria Group (MO) losing $1.30, hitting new three-month lows also on continued worries about fighting that new class action lawsuit over so- called light cigarettes.
General Electric (GE) gaining $0.55.
Ford Motor Co (F) adding $0.26.
ExxonMobil (XOM) jumping $1.37.
Then we have Lucent Tech (LU) which eked out a small gain.
Pfizer (PFE) gaining a nickel. Texas Instrument (TXN), part of a strong semiconductor chip sector today, rising $0.48.
And then a new issue, Mindray Medical (MR) jumping over $4. This is a Chinese medical device maker, specializing in diagnostic and ultrasound equipment, a decent gain, going public with 20 million American depositary shares.
AT&T (T) slipping $0.14.
And then we have Johnson & Johnson (JNJ) rising $0.48. The company suing Boston Scientific and Abbott Labs over the acquisition of Guidant. J&J claims Guidant was sending confidential information to the two firms, giving them an advantage in the bidding. Johnson & Johnson seeking over $5 billion in damages.
Then on to Reliance Steel (RS) which jumped nearly $4. The west coast steel maker saying it expects another quarter of record profits because of improving business conditions and that news helped all the other steel stocks today.
Alleghany Technologies (ATI) surging over 7 percent.
Nucor (NUE), Ryerson (RYI), Steel Dynamics (STLD), US Steel (X) each rallying about 5 percent.
And then Lear (LEA) rising $1.64. The company may sell its European and possibly its U.S.-based automotive interior divisions, that with financing from Wilbur Ross.
And then on the downside, Advanced Medical Optics (EYE) tumbling over $7.50. Executives see earnings coming in below previous estimates, because of less demand for laser vision corrective surgery.
Pentair (PNR) sinking nearly $3. The downturn in the housing sector causing a ripple effect for this company which makes spas and swimming pool products.
And then another one taking a hit on the slump in housing, Eagle Materials (EXP) down over $4. It makes gypsum wallboard products and cement.
Then Piper Jaffray Co (PCJ) losing a little over $4.50. Wachovia downgraded that brokerage firm on valuation.
Now on to the NASDAQ, Apple Computer (AAPL) rising nearly $2, hitting an eight-month high. Yesterday ThinkEquity partners set a $100 price target on that stock.
Google (GOOG) gaining a little over $2.50.
Intel (INTC) jumping $0.55, again semiconductors quite strong today.
Microsoft (MSFT) gaining $0.25.
Cisco Systems (CSCO) up $0.27.
Then on to Oracle (ORCL) rising $0.22.
Yahoo! (YHOO) was down for the day.
But Dell (DELL) gaining a little over half a dollar.
Broadcom (BRCM) down $0.50.
Ebay (EBAY) up $1.45. Analysts at Goldman Sachs see continued improvements at the online auctioneer.
Acorda Theraputics (ACOR) jumping $2.50 after gaining $6 yesterday. New clinical tests showing significant improvement for multiple sclerosis patients taking the company`s experimental drug.
Anormed (ANOR) soaring nearly $3. The company getting a take over bid from Millenium Pharmaceuticals. That`s 40 percent above a bid by Genzyme last month.
Merix Corp (MERX) plunging over $3. That company issuing a first quarter profit warning.
And then we have Avid Technology (AVID) tumbling over $6, also a profit warning there, coming in sharply below estimates.
And those are our stocks in the news tonight .
