NBR Complete Transcripts : 10-25-2006
Wednesday, October 25, 2006Interest Rates Remain Unchanged
SUSIE GHARIB: No change in interest rates today by the Federal Reserve, as the central bank said the economy is slowing down. The decision marked the third time in as many months the Fed held its key benchmark rate steady at 5.25 percent. As Erika Miller reports, economists are split on when the Fed will make its next move.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Although the Federal Reserve did not raise rates today, the central bank kept the door open to future rate hikes. Repeating warnings in previous statements, the Federal Reserve said inflation risks remain and additional firming may be needed. Although the statement was virtually the same as last time, there were some subtle changes. Policymakers said quote, economic growth has slowed over the course of the year, end quote. Previously, central bankers said quote, the moderation in growth appears to be continuing, end quote.
STEPHEN GALLAGHER, CHIEF US ECONOMIST, SOCIETE GENERALE: What's new in this statement was that they said going forward they continue to see the economy growing at a moderate pace. I would say they're not fearful the economy is going to suddenly collapse or fall into -- be mired in deeply slow growth.
MILLER: The Fed also removed a phrase suggesting that energy and other commodity prices have the potential to push up inflation. The Fed's comments overshadowed its decision to keep interest rates unchanged. The Federal funds rate remains at 5.25 percent. It's the third straight pause after a more than two years of rate hikes. Economists say the Fed is in wait-and-see mode.
GALLAGHER: I think it's really uncertainty on the economy. We are seeing some slowdown. We know that eventually some slowing in the economy will bring down those inflationary pressures. And the Fed can't be too certain just how deeply the economy is going to slow.
MILLER: The decision to hold rates steady was not unanimous. For the third time in a row, Federal Reserve Bank of Richmond President Jeffrey Lacker , voted for a quarter point rate hike. The question now is the timing and direction of the Fed's next move. A minority of economists think the Fed will bump up rates perhaps as soon as December. But most think rates will stay where they are for an extended period of time.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: I think they are going to continue to wait for developments on the economy. They want to see just like the rest of us whether the knock on effects from housing to the rest of the economy are going to be big or small or contained or spreading.
MILLER: There's one thing nearly all economists agree on. The Fed is likely to reverse course and start lowering rates next year. Some think the first cut could come as soon as January, but others don't think it will happen until the second half of the year. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Money Managers Analyze Unchanged Interest Rates
SUSIE GHARIB: Joining us now for more analysis of today's Fed decision to hold interest rates steady, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company.
Michelle, let me begin with you. As we know, it was expected that the Fed would be on hold for another meeting. But was there anything that stuck out from today's meeting? Anything new?
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Well, you know, as was mentioned earlier, there weren't many changes to the statement. I do think that the Fed tried to signal that they, perhaps, think that the moderation in economic activity has started to slow, that going forward, they think that the pace of growth will be steady, but there really weren't any changes which provide a lot of insight as to what we're going to see from the Fed between now and year-end and even into early 2007.
GHARIB: Mike, how about you? What was your take on today's announcement?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: I was delighted with the action or no action of the Fed. I think Erika Miller's comment a few minutes ago, their wording was virtually unchanged. To the stock market and bond market, that was just what it wanted to hear, each of those wanted to hear and both of them, as Paul Kangas just said, rose in price.
GHARIB: Michelle, a former Fed governor was on our program last night and he said that the inflation rate of 2 1/2 percent as far as the Fed is concerned is too high;; it's unacceptable. So what do you think is the Fed's game plan here?
GIRARD: That's really, I think, one of the reasons why we keep seeing the Richmond Fed president dissenting. He wanted to raise interest rates today and the reason is because the current level of inflation at 2 1/2 percent is about a half a percentage point higher than the Fed sort of implied target range of 1 to 2 percent. And so he wants to take further action to bring the inflation rate down. I think the Fed is going to cool its heels here. I think they're going to wait and see how the economy fares but, if growth doesn't slow sufficiently to help bring those inflation numbers down, then I think in 2007, the Fed indeed may take further action.
GHARIB: And by that you mean raise rates?
GIRARD: In terms of raising interest rates, right, to help to relieve it in some of the inflation pressures.
GHARIB: As you heard Mike from our report, that's the whole debate, what's the Fed's next move going to be? Where are you in this, rate hike or rate cut?
HOLLAND: I think the Fed has no business making a move in either direction until we get a significant change one way or the other from here, which means, I think, for most of the voting Fed members with the exception of Mr. Lacker, that they will do nothing until maybe next spring, next summer at which point my guess is -- my guess is we will have a decline and they will reduce rates. I think we are going to be surprised at how benign inflation is. Inflation numbers continue to be good around the world.
GHARIB: Let's just say, Michelle, that we see the economy grow much faster. I know on Friday, we are expecting a weak GDP report, but let's say by early next year, the GDP, the growth in the economy is coming in at 4 percent.
GIRARD: Right.
GHARIB: Would that be the trigger for the Fed to raise interest rates?
GIRARD: Yeah. I mean, Susie, you are right. First of all, like you said, we're going to get a weak third quarter number, but the fourth quarter number is probably going to look a whole lot better, in large part because, as a result of the decline in gasoline prices, it looks like it's going to be a pretty good holiday shopping season and we don't even have to get 4 percent growth next year. The Fed needs to see the growth rate hold below, say, 3 percent potential GDP rate. If it's not growing slower than that, you are not going to see dollar pressure on inflation. And so I think even if you see growth in the 3 to 3 1/4 percent range, I think that's going to be a good healthy debate about whether or not further tightening action should be taken.
GHARIB: How about the market reaction today, Mike? It doesn't seem like there was much debate there?
HOLLAND: The market got exact what it wanted to get. I think as Paul Kangas said a little while ago, the market was actually down going down into the announcement at 2:15. It was worried about a bad outcome from the Fed, either some action from one of the other dissenting governors or even some words, in which case we would have had some problem with all the markets today. We had just the opposite. Ben Bernanke is in dire trouble looking as if he is completely reasonable. The markets are getting very comfortable with him. And if have to say that if growth causes inflation, then China should have 5 percent inflation. The Fed is talking about I think money supply around the world is tight and I think we're going to get surprises going into next spring and next summer, that inflation doesn't go anywhere with growth as Michelle just said in the fourth quarter looking very good.
GHARIB: We just have 30 seconds left. What's your overall outlook for the market? Some people I have been talking to say if he Dow peaks between now and election day.
HOLLAND: Michelle, go ahead.
GIRARD: I think the bond market is going to be seeing upward pressure in yields because I think the economy is going to surprise the markets with the strength in the near term.
HOLLAND: Susie, I think the stock market is going to be at new highs at the end of the year.
GHARIB: All right. I hope you are right about that. Thank you both, Mike and Michelle for coming on the program.
GIRARD: Thanks, Susie.
HOLLAND: Thanks Susie.
GHARIB: We've been speaking with Michelle Girard of RBS Greenwich Capitall Management and Mike Holland of Holland and Company.
GM Shifts Closer To The Road To Recovery
PAUL KANGAS: General Motors' turnaround could be gaining some traction. The auto maker today reported a $115 million loss in the third quarter, much narrower than the $1.7 billion loss during the same period last year. But if you take out restructuring costs, GM made money. Diane Eastabrook reports.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: General Motors says overall improvement in its global operations helped it trim losses in the third quarter versus the same period last year. And there was other good news from the world's largest auto company. If costs from GM's North American restructuring are excluded, the company actually made a profit of $0.93 in the quarter. That is almost double what Wall Street expected and far better than its nearly $2 loss during the same quarter last year. Still, the company's chief financial officer wasn't satisfied with the results.
FREDERICK HENDERSON, VICE CHAIRMAN & CFO, GM: I think an important guidepost, if you will, an important step in the turnaround. But we are by no means where we want to be.
EASTABROOK: GM still faces several hurdles to solid profitability. They include negotiating reduced wages and benefits with former parts unit Delphi, which is currently in bankruptcy. Reducing the amount of cash GM is burning while it restructures and shoring up sales in an increasingly competitive market. GM has seen its global market share slide, but Henderson says the company is optimistic that new products headed to U.S. showrooms over the next few months will help reverse that trend.
HENDERSON: We are entering the sweet spot of our product portfolio. We have an all new family of full-size pickups which is the largest product, the largest single product we have within our company and it's still the largest segment of the U.S. market -- very, very excellent product.
EASTABROOK: Although investors punished GM's stock today for a less- than-stellar third quarter, the stock has been improving in recent months. Some analysts say they are satisfied with the progress the company is making and think GM's fortunes will eventually reverse.
GEORGE MAGLIANO, DIRECTOR OF AUTO RESEARCH, GLOBAL INSIGHT: I think from operations they're making more money per vehicle. Their value pricing scheme seems to be working, in fact a lot better than other people thought and so I think they are in a good position now and it was good to see the news this morning.
EASTABROOK: GM says it is now meeting its cost cutting goals. Meeting sales goals will be key to staying in the black. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Street Critique"-With Dick Green, president of Briefing.com
PAUL KANGAS: Waiting for that Fed decision, tonight's street critique guest says those same investors just aren't paying enough attention to an earnings season that he's calling remarkable. Joining me now to talk about those corporate results and how they might play into an investment strategy is Dick Green, president of the financial information web site briefing.com. And Dick, welcome back to NIGHTLY BUSINESS REPORT.
DICK GREEN, PRESIDENT, BRIEFING.COM: Thank you very much.
KANGAS: Your brief opinion of the Fed's decision.
GREEN: It's bullish. There is little change in the Fed policy statement and that means good news for the stock market. Fed policy is on hold.
KANGAS: Do you think that they are holding where it is now because they see an economic slowdown coming?
GREEN: They've talked about moderate economic growth and that's what we see. They are looking at that and lower energy prices helping core rates in inflation come down. So there is no reason for them to raise rates at this time.
KANGAS: All right. Now let's get back to your believe that third quarter corporate earnings are to some point unappreciated.
GREEN: They are getting a lot of attention but these really are fantastic reports, particularly from the large cap stocks. For the S&P 500 in aggregate, we are looking at 19 percent earnings growth now for the third quarter over the same quarter last year. And that's on top of a 14 percent gain the prior year. So we are seeing some fantastic numbers spread across most sectors.
KANGAS: A good bull market cannot rest on its laurels. So we are talking third quarter, that's history. What about the fourth quarter?
GREEN: That's one of the best things with these reports we are getting, very fewer earnings warnings from companies. So we are looking at fourth quarter earnings growth that's going to be the 14th straight quarter of double-digit gains. We might be looking at 10 to 12 percent in the fourth quarter as well. The outlook is very good.
KANGAS: What sectors do you think will do the best?
GREEN: Energy has been putting up some great numbers lately, but we are also seeing financials, industrials and technology sectors now start to show some good earnings growth and we expect that to continue particularly in the financial sector.
KANGAS: But you see a lot of money coming out of mid cap and smaller cap stocks into the big blue chips.
GREEN: Well, frankly there might be a lot of money going in across the board, but we do like the large cap stocks now with a slower economic growth scenario, the risk/reward ratio on a lot of these large caps look very good and we saw some great numbers from the mega-cap stocks this quarter.
KANGAS: What are maybe two or three of your favorites? We just have about a minute left.
GREEN: Well, Bank of America is one I mentioned last time.
KANGAS: Uh-huh.
GREEN: We still like that a lot. We do like GE. It's not going to take off on you any time soon but it's a good high-quality stock. Intel is a stock in the technology sector in the mega-caps that we also like.
KANGAS: They have all been just kind off sitting on their hands for a long time. Do you think they are ready to break out on the upside?
GREEN: Yes, sir. In fact, some of them have started to do that. Johnson & Johnson as an example is another stock we like.
KANGAS: Do you own any of these stocks personally Dick?
GREEN: I own all four that I mentioned, I believe, yes.
KANGAS: You believe in eating your own cooking right?
GREEN: I own a lot of stocks so it's hard to avoid, yes.
KANGAS: Listen, thanks very much. We really appreciate it.
GREEN: Thank you.
KANGAS: My guest Dick Green, president of briefing.com.
"Money File"-Effortless Ways To Save
SUSIE GHARIB: In the "money file" tonight, taking the easy way out when it comes to making hard decisions about your finances. Here's Eric Schurenberg, managing editor of "Money" magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: If you wanted, you could spend every spare hour managing your money. But actually, for most of your big goals there is a decent shortcut. It's not a customized solution, but it will work and it's much, much better than doing nothing, which, let's face it, is really the alternative.
Take retirement. You could give yourself migraines over investment strategies or you could just buy a target date fund in your 401(k). In a 401(k) the money comes automatically out of your paycheck, so saving is effortless. And target-date funds are the ultimate one-decision investment. Just pick the one named after the year you plan to retire. You'll get a portfolio appropriate to your age that automatically adjusts as you close in on retirement. You don't have to do a thing. You'll get returns at least equal to what you'd get on your own, when you'd have to remember to save and create a portfolio and adjust it every year. This is one time simpler isn't just easier. It's better.
Or how about education costs? You know, 529 plans are a smart way to save for college, but you may not know if the one offered by your state is any good. The shortcut: go straight to the Utah educational savings plan. It offers good, low-cost mutual funds. You can set it up to draw money automatically from your bank account every month, and you can use it to pay college costs in any state. With one call, you'll put your kids' college fund in good hands and you can go back to helping your future scholar do her homework. I'm Eric Schurenberg.
Paul Kangas' Stocks In The News
PAUL KANGAS: Stocks headed lower this morning on that surge in oil and news that sales of existing homes in September fell 1.9 percent when a rise had been expected. Losses in General Motors and Boeing stocks contributed to a 40-point loss in the Dow at noon, while strength in amazon.com helped the NASDAQ post an eight point gain. The market turned very choppy after the Fed's 2:15 p.m. announcement, but buyers gradually gained the upper hand. So the Dow Industrial Average gained 6.80 points to another record high at 12,134.68. The NASDAQ Composite was up exactly 11.75 to 2356.59. Standard & Poor's 500 Index advanced 4.84 ending at 1382.22. In the bond market, the 10-year note rose 15/32 to par and 27/32, putting the yield down to 4.77 percent.
Big board volume leader on 29.4 million shares, Corning (GLW) down $2. After the close yesterday, third quarter earnings excluding items came in at $0.28. That was $0.03 above the Street estimate, but revenues fell short of expectations and the company forecast fourth quarter earnings dropping to $0.27 a share. Even though that was in line with Street estimates, it sees weakness in its fiber optic business.
Ford Motor Co (F) moved up $0.19.
Then Altria Group (MO) rising $2.28. Third quarter earnings excluding items, $1.38, up from $1 - let's make it $1.39, up from last year's $1.38. That was $0.02 below the Street estimate, but it did boost its 2006 earnings guidance from the range of $5.40 to $5.50 (INAUDIBLE) as high as $5.53 a share. Also the board put off details of the Kraft spin off until January 31st.
Sprint Nextel (S) up $0.65.
Halliburton Co (HAL), which had good earnings out earlier in the week, up $1.80.
ExxonMobil (XOM) on the day's higher oil prices, rose $1.12.
Advanced Micro Devices (AMD) $0.51 gain.
Pfizer (PFE) up $0.17.
Texas instruments (TXN) rebounding $0.21.
And Lucent Technologies (LU) was up a penny, tenth in big board volume.
Boeing Co (BA) down $2.73. Third quarter earnings fell to $0.89 from $1.26 last year, but that was $0.26 better than the Street estimate, but the company sees higher research costs hurting 2007 results. That drop in Boeing stock hurt the Dow by some 22 points today.
Yankee Candle (YCC) glowing with a $5.01 gain. First quarter or third quarter earnings came out at $0.37, up from last year's $0.35, but the Madison Dearborn Partners LLP is going to acquire this company for $34.75 a share in cash, nice move in the stock.
Norfolk Southern (NSC), the major rail, up $4.93. Third quarter earnings $1.02, way up from $.73 last year and revenues were up a respectable 11 percent.
Manitowoc Co (MTW) did well, up $6.12. Third quarter earnings jumped to $0.82 from only $0.38 last year. Revenues were up 38 percent. Those earnings, $0.10 better than the Street consensus. Standard & Poor's repeated a "buy," has a $60 a share target for the stock.
Crane Co (CR) down $3.93. Third quarter earnings were higher, $0.74 versus last year's $0.66, but the company sees fourth quarter earnings dropping to $0.58 to $0.64, well below third quarter levels.
Radioshack (RSH) off $1.45. Third quarter loss of $0.12 versus earnings off $0.75 last year. Same store sales dropped 9.6 percent.
Then we see the big oil, Conocophillips (COP) up $1.35. Third quarter earnings jumped to $2.68, $0.31 better than the Street was expecting.
NASDAQ's most active, Google (GOOG) up $13.29 at a new closing high.
Amazon.com (AMZN) on yesterday's better than expected earnings, up $4.05.
$0.63 gain in Apple Computer (AAPL).
Microsoft (MSFT) edged $0.03 higher.
Intel (INTC) gained a dime. That was fifth in dollar volume.
Research in Motion (RIMM) $0.42 loss.
Yahoo! (YHOO) up $0.96.
Cisco Systems (CSCO) a nickel loss.
Nutrisystem (NTRI) down $4.03, even though it had higher third quarter earnings, $0.63 versus last year's $0.19.
Sandisk (SNDK) up $1.26.
And finally, shares in Lifecell (LIFC) plunged over $8 on lower than expected third quarter profits of $0.15 per share versus $0.07 a year ago. But the real problem was that its lead product Alloderm had disappointing sales.
