NBR Complete Transcripts: 10-19-2006
Thursday, October 19, 2006The Dow Reaches 12K And Stays!
SUSIE GHARIB: A new record high and a new milestone for the Dow today. The blue chip average closed above the 12,000 level for the first time. The Dow edged up 19 points to 12,011.
PAUL KANGAS: Ironically, the Dow record was achieved on the anniversary of the stock market crash of 1987, one of the darkest days in Wall Street history.
GHARIB: Joining us now for more analysis about Dow 12,000, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi Phil.
PHIL DOW, DIRECTOR OF EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie. Glad to be with you.
GHARIB: Glad to have you with us. What is the outlook from here? As you know, it took seven years to make it from 11,000 to 12,000. Is it going to take another seven years to get to 13,000?
DOW: Probably not. We're probably going to make it quicker than that. But this could be a pretty good sign that the psychology of the market is changing Susie. In the last year, larger companies have done better than smaller ones in the marketplace with the Dow really kind off outperforming in the last month or so. My guess is that it's an indication that people perceive value there. So I think you could see an important psychology change for people begin to think that the risk is less in larger company stocks. That is a first now in seven years.
KANGAS: Well, Phil, do you believe that they are right about that, that we're going to see continuing weakness, for instance, in some of the major high tech stocks and more and more money is going to come into the blue chips?
DOW: Well, my guess is blue chips are going to be a beneficiary. Paul, one thing going on is everybody believes that the economy is slowing down. But one important point is that earnings are not slowing down as dramatically as the economy. Earnings have averaged about 7 percent growth historically. They're probably going to be high single digits next year and double digits this year and that means that the profit outlook is reasonably robust. The place where profits are most stable, balance sheets are most stable and business plans are stable is the large cap area and those stocks haven't done much for years. So I think it bodes well for continued market highs in the Dow. It will be spotty from time to time, but I think we can go higher.
GHARIB: But Phil, analysts are saying that the earnings have peaked. This is as good as it is going to get and as you said, the economy is slowing. So is there a disconnect between the enthusiasm in the markets and economic reality?
DOW: You know, I don't think so, Susie. We still have yet to see the big deceleration in economic growth. It is likely to happen. But my guess is that profit growth is going to be stronger and more robust with the large capitalization companies. And if you look at the analysts' estimates right now Susie, the amazing thing is corporate profits have doubled in the last five years, but the valuation on the market, if you look at P/E ratios, the relationship to earnings, cash flow is down 30, 40 percent. So to investors, the risk is lower right now. The opportunity is greater. So I think within a historical perspective, earnings growth rates are still pretty robust going into next year.
KANGAS: Phil, where do you think the big buying is coming from? Is it from the individual investors, institutions, hedge funds? What do you think?
DOW: My guess so far is the big buying has been people short that have been short the market, getting more to a neutral position. I don't think this tape tells me that it is a get me in at all costs kind of rally. I think you could see institutions begin to play a larger role. The public, which is who I deal with, is still kind of skeptical of this rally. To the extent they've been investing, it has been foreign stocks. My guess is a year from now, Paul, U.S. stocks will be much more popular for the U.S. investors.
GHARIB: So for investors who now have some money and are maybe thinking of getting into the market, where should they be putting their money? I know you can't name specific stocks, but what industry groups are attractive to you right now?
DOW: Well, right now, I'd be looking at market leaders in healthcare and in the industrial side of things and in some financials, like insurance companies. These companies have robust balance sheets, business plans that I think are going to deliver reasonable earnings growth, and most importantly Susie, great dividend policy. You can buy companies that have 2 to 3 percent current dividends, that I think will double in the next few years. Dividend policies are enlightened now, so I think it is a great time for investors to buy quality, Susie.
KANGAS: Phil, a couple of the laggards in the Dow which were just put in in 1999, Intel and Microsoft. Do you think that the big move in the average overall is going to help those two high tech stocks?
DOW: You know, hindsight is perfect on this and my guess is that the business plans of Microsoft -- the business plan of Microsoft is going to be enhanced by the Vista introduction next year. Who knows. I guess it is a reasonable holding. And then with Intel, with their size and scale, it is likely that they're going to always be the dominant player in semis. So it's a question of when they get popular. I think technology in general is reasonably priced right now and attractive for the longer term, Paul.
KANGAS: Uh-huh.
GHARIB: Phil, thank you so much for coming on the program. I hope next time you come on, we have another record to talk about.
DOW: It would be fun. Thanks, Susie, thanks Paul.
GHARIB: We've been speaking with Phil Dow, director of equity strategy at RBC Dain Rauscher.
OPEC To Curb Its Output
PAUL KANGAS: Crude oil prices gained $0.85 a barrel today to close at $58.50 as OPEC readied to cut output for the first time in two years. Meeting in Qatar today, OPEC ministers debated whether to trim actual output or production quotas. Experts say OPEC is trying to return a sense of equilibrium to the marketplace. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: OPEC is hoping a cut in production will stabilize oil prices worldwide and help the cartel regain control of the market. But many experts say the market had already discounted a drop in output. On top of that experts say discord between OPEC members in the last few weeks has weakened the cartel's influence.
RAY CARBONE, OIL TRADER, PARAMOUNT OPTIONS: When you have infighting with OPEC, it's usually bearish. We saw this in the late '80s, all the way through the '90s. It's only when OPEC agrees and they have their act sort of on the same page that the market really took off and went to the highs of the last few years.
PRATT: In the last three months, oil prices have fallen about 25 percent from a mid-July high of just under $80 a barrel. In the last few weeks prices have been trading around $60 a barrel. Experts say OPEC no longer formally targets a particular price, as it did just a few years ago. But it's clear to many that $55 a barrel is the number the cartel wants to defend.
KEVIN SAVILLE, MANAGING EDITOR, PLATTS: They would be happy with a price in the mid $50s to $60. They would still be getting enough revenue from crude sales in order to fund capital projects back home. And at the same time, $55, that we've seen over the past year and even higher, is not even enough to cause what they call demand destruction. PRATT: Experts say in an effort to keep prices at current levels, OPEC's largest producer Saudi Arabia is already talking about the group's December meeting, saying a cut in output then is certainly possible.
SAVILLE: Hopefully that will show the market that OPEC is serious. They want to establish credibility in the market after they had let the market get away from them over the past year and a half.
PRATT: OPEC's power may be somewhat diminished, but mother nature's is not. Experts say if winter is harsh, that will go a long way to stabilizing oil prices. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Capitol Impact 2006"-What Elections Mean To Investors
SUSIE GHARIB: With the midterm election now 19 days away, a new Harris poll shows the voters favor a divided government. By an overwhelming margin, voters prefer one party to control the White House and another to control Congress. That's the outcome that stock market analysts are also expecting. As we continue our series "capitol impact 2006," Darren Gersh looks at the election outcome scenarios and what they could mean to investors.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Call it the consensus scenario. The Iowa futures markets show a 40 percent chance of a split decision. Democrats take the House, but Republicans hold the Senate; in other words, gridlock.
THOMAS GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: Investors should expect policy drift on most of the major issues they care about through the '08 presidential election. So I think the significance of '06 is just to tell you how calm or choppy the waters are, but you're still drifting.
GERSH: That's just fine with Wall Street, where the saying is gridlock is good for stocks. But Washington analyst Brian Gardner calls that cliche overcooked. In years where one party controls the White House and both houses of Congress, Gardner says the total return for S&P 500 was 12.5 percent. In years of gridlock it was 12.1 percent.
BRIAN GARDNER, WASHINGTON ANALYST, KEEFE, BRUYETTE & WOODS: It's just not what people think it is. It's right in line with the historical trends of the market. It does as well in years of gridlock as it does in years of united government, so I don't get too pumped up about that.
GERSH: Not many people are talking about a status quo scenario, but odds makers consider it a 30 percent chance Republicans barely hang on to power in both houses of Congress.
GALLAGHER: That would be probably a short-term relief rally that the waters would be calm, not choppy. GERSH: And what about the blow-out scenario? If the voting was held today, neo-conservative political analyst Stuart Sweet says Democrats have an 80 percent chance of tying or taking the Senate. Sweet says that would be a national "no" vote on the Republican party.
STUART SWEET, PRESIDENT, CAPITOL ANALYSTS NETWORK: You'd have to say that the leading ideas of the Republican party, the Republican revolution, have seen their high water mark and are receding rapidly. What remains to be seen is what the new themes and the new ideology of the Democratic party will be.
GERSH: Brian Gardner says another election benchmark for investors is the seventh year of the Bush administration. In the seventh year of a presidential term, right before an election, markets have turned in an average increase of almost 20 percent. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Bill Simons, Exec VP Pressional Services Wal-Mart
SUSIE GHARIB: Wal-Mart said today it is expanding its $4 generic drug program to 14 more states. The discount drug plan will now be extended to 1,264 Wal-Mart stores, including locations in New York and Texas. The move comes less than a month after the retailing giant launched the plan in Florida. Wal-Mart charges a flat $4 rate for a month's supply of more than 300 commonly used medicines. Earlier today I talked with Wal-Mart's executive vice president in charge of the program and asked him when the drug plan will go nationwide.
BILL SIMONS, EXEC. VP, PROFESSIONAL SERVICES, WAL-MART: Well, let's say days and weeks, rather than weeks and months. All 50 states, there are some issues as we work through them in timing, in order to be compliant with, as you can imagine, the pharmacy and regulatory issues in each of those states.
GHARIB: Mr. Simons, there are thousands of generic drugs that are out there and yet Wal-Mart is offering around 300 or so. Will you be offering a wider selection and particularly some of the newer generics like Zipamax or Zocor?
SIMONS: Sure. Yeah. The generics that are on this list for us today represent 25 percent of all prescriptions we fill in our pharmacies there, safe and effective drugs that have been used and are used regularly to treat common therapeutic issues. It is important for us to make sure that this is a profitable venture for us because if it is profitable, it is sustainable. So as the prices of those generics, the newly released ones, become more competitive and we can get them to a point where we can sell them at a $4 price and make money, they'll be added to the list.
GHARIB: From the analysts I've talked to, my understanding is that this $4 drug program, Wal-Mart is really not making any money, when you do all the math of the pharmacy costs and everything else.
SIMONS: I can assure you these are among some of the most profitable items we have.
GHARIB: Can you give us some kind of characterize how profitable they are for you?
SIMONS: I can give you some top-line results from the Florida pilot. As you can well imagine, our prescription counts are up 20 plus percent. Our total pharmacy dollar sales are up double digits in sales. Our gross profit is ahead of the market trend, and store traffic is up. So on all of the financial and economic indicators, this is a very, very good business proposition for us as well.
GHARIB: Are you finding that people who come in to buy their drugs are going about and buying, making other purchases inside the Wal-Mart and how significant are those purchases?
SIMONS: Well, you know, 84 or 85 percent of the U.S. population shops at Wal-Mart at some point during the year. So these are our costumers who were not receiving the same value on prescription drugs in the marketplace that they were on everything else that was sold in Wal- Mart. This is a move for us that takes our strength and our core competency and applies it to the prescription drug segment. So there are costumers and they are buying other things, but they're in the store anyway. They're just coming in maybe one more time to pick up a prescription.
GHARIB: All right, Mr. Simons, thank you very much and good luck to you.
SIMONS: Thanks so much, appreciate it.
Commentary: The Auto Assembly Line Takes A Dangerous Financial Turn
SUSIE GHARIB: Tonight's commentator says working on an auto assembly line was once considered a good job, but times have changed. Here's Robert Morison, director of research at the Concours Group and co-author of "The Workforce Crisis."
ROBERT MORISON, DIRECTOR OF RESEARCH, THE CONCOURS GROUP: One of the reasons General Motors has been in the news lately is its buyout offer for 113,000 hourly workers; 35,000 accepted, a new record for major corporate buyouts. Now Ford is following suit.
From a workforce standpoint, what's happening here? These buyouts are a financial strategy, not a workforce strategy. The employer can't control who takes the offers and stands to lose many of its more capable and experienced people. GM is reportedly already hustling to plan transfers, employee recalls and even hiring to keep the plants staffed.
We cannot really conclude that the industry is in trouble. Americans still buy cars. Foreign auto makers with manufacturing operations in the U.S. are adding capacity and jobs. Total auto industry employment was in decline well before these buyouts, but the rate of decline is actually slower than for American manufacturing overall. We can conclude that the definition of a good American job has changed irreversibly. Blue collar jobs with generous, union-protected security and benefits are now scarce. Today's good job is defined more by opportunity than by security, more by interesting work than by extensive benefits. And the color of the collar is shading from blue toward white as jobs require more education and training.
Ford's buyout offer to many employees includes tuition reimbursement for themselves and family members. That's absolutely the right thing to do to help people transition from yesterday's good job to tomorrow's. I'm Robert Morison.
Paul Kangas' Stocks In The News
PAUL KANGAS: Stocks opened slightly lower on light profit-taking, but then rebounded on solid earnings reports from companies like Coca-Cola, Honeywell and Pfizer, which lifted the Dow to a mid-morning gain of 25 points at the 12,018 level, while the NASDAQ Composite was up five points. Higher oil prices pushed the market modestly lower at midday, but then more good earnings prompted renewed buying in the blue chips and boosted the Dow to that first ever close above 12,000. The Dow Industrial Average gained 19.05 points to a record 12,011.73. The NASDAQ Composite up 3.79 ending at 2340.94; Standard & Poor's 500 was up exactly one point to 1366.96. In the bond market, the 10-year note fell 8/32 to par and 22/32, putting the yield at 4.79 percent. .
The most active New York exchange issue on 37 1/2 million shares, Advanced Micro Devices (AMD) major casualty, down $3.22. Yesterday, third quarter earnings came out after the close and they were higher, but there is concern about the company's fading profit margins and today JPMorgan downgraded the stock from "neutral" to "under weight."
Then Pfizer (PFE) with a $0.42 loss, even though third quarter earnings were higher. After tax adjustments, $0.54 a share, $0.09 above the Street.
Cypress Semi (CY) down $2.13. A turnaround, third quarter earnings of $0.06 versus a loss of $0.04 last year, but the company said it's ended its attempt to sell itself and I think that's what hurt the stock.
Boston Scientific (BSX) an $0.88 gain. After the close yesterday, third quarter earnings excluding expenses for its Guidant acquisition earned $0.20, down from $0.46 the year before, but that was $0.03 higher than the Street expected.
Then McDonald's (MCD) a $0.70 loss, even though third quarter earnings came in at $0.68, a dime more than last year, but that was just in line with Wall Street estimates. The stock's had a good run recently too.
Nokia Corp (NOK) $0.52 drop. Third quarter earnings, $0.27, $0.03 below the Wall Street estimate.
General Electric (GE) in there with a $0.28. Then Time Warner (TWX) moved up $0.11.
AT&T (T) gained $0.81. The company's Cingular unit had a third quarter profit that tripled.
And then Sprint Nextel (S), tenth in volume, a $0.28 loss.
Citigroup (C) down $0.32. The company had third quarter operating earnings of $1.06, up from last year's $0.97, $0.03 above the Street estimate, but as you can see, the stock's had a pretty good run recently, a little profit taking.
And then Coca-Cola Co (KO) $0.95 gainer. Third quarter earnings, $0.62, up from last year's $0.54. That was $0.03 better than the Wall Street consensus.
Honeywell Intl (HON) another Dow stock, but this one down $1.05 despite higher earnings. Third quarter, $0.66, versus $0.54 a year ago, $0.03 better than the Street was expecting.
Continental Airlines (CAL) moved up $0.41, big jump in third quarter earnings to $1.36 versus $0.80 last year and that was $0.14 better than analysts were predicting.
Hershey Foods (HSY) down $2.32 a share, $0.78 and third quarter earnings $0.03 below the Street estimate. Standard & Poor's cut 2006 earnings estimates by $0.07 a share, down to $2.48 a share in earnings.
McGraw-Hill Companies (MHP) up $3.77, good third quarter earnings, $1.06, up from last year's $1 and it sees 2006 earnings overall at around $2.53 to $2.55 a share.
Wyeth (WYE), the big drug company a $0.14 loss. Third quarter earnings however were 33 percent higher than last year, $0.85, up from $0.64. Revenues rose 9 percent.
And then the best point gainer in the Dow was Altria Group (MO) moving up $1.85. The company will release third quarter earnings next Wednesday. That's a day later than normal and that's because the board is having its annual meeting and might announce details of a tax-free spin off of what it doesn't - hasn't already sold in Kraft.
Apple Computer (AAPL) topped the active list on NASDAQ and that was up $4.46 on yesterday's better than expected earnings.
Then Google (GOOG) up $6.75. You heard about those earnings, $0.20 better than the Street expected. The stock at $459 in after hours trading.
Intel (INTC) $0.08 loss there.
Microsoft (MSFT) down $0.23.
Cisco Systems (CSCO) a $0.02 loss. That was fifth in volume.
Then Ebay (EBAY) a $2 gain on yesterday's better than expected earnings after the bell.
Yahoo! (YHOO) a $0.15 rise.
Citrix Systems (CTXS) tumbling $6.91. After the close yesterday, third quarter earnings just barely higher, $0.25 versus $0.23 last year. Sales were quite disappointing.
Dell (DELL) down $1.58. Gardner Incorporated, a research firm, says Hewlett-Packard has overtaken Dell as the biggest personal computer shipper.
And finally, Sandisk (SNDK), tenth in volume, was up $1.59.
And those are the stocks in the news tonight.
