NBR Complete Transcripts: 12-29-2006
Friday, December 29, 2006The Last Trading Day Disappoints But Doesn't Discourage
SUSIE GHARIB: No champagne rally on Wall Street today. Stocks slipped in the final trading day of the year, but most of the major averages were still up double digits for 2006. The Dow lost 38 points closing just below its record high for the year. The NASDAQ fell 10 points. Suzanne Pratt takes a look at the best rally in three years and where stocks go from here.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 2006 stock market is likely to be remembered for its surprising strength after a very shaky start. Not only did the Dow Jones Industrial Average end the year in record territory, but it has rallied about 1,800 points since July. Market pros credit a resilient economy, the Federal Reserve and declining oil prices for investors' enthusiasm for stocks this year. Portfolio manager Jim Awad says sentiment turned decidedly positive in the third quarter.
JAMES AWAD, PORTFOLIO MANAGER, AWAD ASSET MANGEMENT: People got comfortable with the economy, got comfortable with inflation and got more optimistic about the prospects for profits. And, it was really much better than most people had predicted in the beginning of the year.
PRATT: All of the major indexes ended the year well on the plus side, although the small cap Russell 2000 index led the pack. That trend, however, is not expected to extend into next year. While most market strategists are forecasting another positive year for stocks, they expect large caps to dominate. Many predict gains of about 5 to 10 percent for the major averages, as M&A activity and appealing valuations will make it hard for investors to ignore stocks in 2007. Julius Baer strategist Brett Gallagher believes stocks will sell off early next year, but says private equity cash will help underpin the market.
BRETT GALLAGHER, HEAD OF U.S. EQUITIES, JULIUS BAER INVESTMENT MGMT.: There are a number of fundamental factors that are supporting the market. One of the biggest being the private equity funds that have been raised, roughly $170 billion this year. We've seen some pretty big deals of late, but they've still only managed to spend over half of the funds raised.
PRATT: Experts say there are, however, definite risks for stock investors in 2007. Some pros are concerned about inflation spiraling higher, forcing the Fed to hike rates and derailing the stock market. Others are worried housing will slump further, perhaps pushing the economy into recession. They say those bipolar economic risks could mean a choppy 2007.
AWAD: There are going to be times when the market is worried about the economy being too weak. Then there are going to be other times when the market is worried about the economy being too strong and what does that mean for interest rates. So there will be down month. There will be down days. There will be down weeks. It's not going to be a straight up market.
PRATT: Straight up or choppy, the key point for investors is that most experts believe 2007 will ultimately be an up year for stocks. If that happens, that will make the fifth straight up year for the S&P 500. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
GHARIB: One additional note regarding Wall Street tonight. Most major financial markets will be closed on Tuesday, out of respect for former President Gerald Ford, whose funeral is Tuesday. The NYSE, the NASDAQ, American and Chicago Stock Exchanges will all be dark. The Federal Reserve will also be closed and the bond markets are expected to have a shortened trading day. Wall Street has a long history of closing on the day of a national funeral, dating back to the burial of President Ulysses S. Grant, in 1885.
The $86B AT&T & BellSouth Merger Connects
JEFF YASTINE: An $86 billion merger of AT&T and BellSouth is a done deal tonight. The two companies closed on the pact late today after the Federal Communications Commission OKed it. That FCC vote was 4-0 with the two Democratic commissioners voting in favor after AT&T offered to make concessions. As Darren Gersh reports, one big concession came in a crucial area.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Consumer groups say this is the first time a telephone company agreed to define what's known as "net neutrality." In practice, that means a merged AT&T-BellSouth would not charge more to direct traffic onto the Internet equivalent of the fast lane, while forcing those who don't pay into a traffic jam. The Consumer Federation's Mark Cooper says that will help keep the Internet open to competition and innovation.
MARK COOPER, RESERCH DIRECTOR, CONSUMER FEDERATION OF AMERICA: They can't privilege somebody's traffic. They can't degrade other peoples. They can't prioritize. They can't sell priority privilege to anybody. They have to operate in a neutral fashion.
GERSH: In a letter to the FCC, AT&T agreed to maintain net neutrality for two years. The company will offer a stand-alone DSL service for $19.95 a month. And it will spin off radio spectrum that could be used to develop a new competitor using next-generation wimax broadband service. AG Edwards analyst Kent Custer who has a "hold" recommendation on AT&T, says the merger concessions sacrifice flexibility but not finances.
KENT CUSTER, TELECOM & CABLE ANALYST, A.G. EDWARDS: What the concessions do is they promote competition without really significantly harming AT&T, so I wouldn't expect them to, these concessions to impact their financial guidance or our valuation of the company.
GERSH: Analysts say in recent years phone companies have been rapidly losing their residential phone customers to cable competitors. A bigger AT&T might be able to drive better bargains with suppliers and roll out video competition more aggressively. And with more customers after the merger, AT&T could also strike better deals with big media networks. AT&T is now trying to run video service through traditional phone lines, but is still a couple of years behind cable.
CUSTER: They're rolling out new Internet protocol television or IPTV technology to make that work. It has been working. They've been testing it for several months, but their rollouts now are on a very small scale and we'll have to wait and see if everything works as expected.
GERSH: Despite AT&T's concessions late today, FCC Chairman Kevin Martin said net neutrality protections were not necessary and would hurt new investment in the Internet. But consumer groups now plan to push the new Democratic Congress to write a definition of net neutrality into law and apply it to the entire telecom industry. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Japan's IPO Boom May Soon Go Bust
SUSIE GHARIB: The economic recovery in Japan this year has fueled a booming market in initial public offerings. But while there were some big successes in the market, several high-profile IPOs by U.S. private equity firms ended in tears. As Lucy Craft reports from Tokyo, some observers say the bull market in new listings may have run its course.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: By sheer volume of listings, Japan's IPO market was pumped up this year. Wiping out most other super-premium debuts was Idemitsu Kosan, a leading oil refiner and operator of gas stations. Idemitsu was among nearly 200 Japanese companies going public this year a 20 percent jump in listings year-on-year. Founded almost a century ago, its Apollo logo familiar across the country, Idemitsu was an exception amidst the slew of mostly new and unknown companies debuting in 2006.
EDWIN MERNER, PRESIDENT, ATLANTIS INVESTMENT RESEARCH: You had brokers who were looking for new clients, and you also had companies who were watching their competitors maybe or friends who were listing and they were saying, why can't I list, too?
CRAFT: Also driving the IPO boom is hotter competition among Japanese equity markets, some of them going public themselves.
TAKASHI NISHIBORI, DIRECTOR, TOKYO IPO (THROUGH TRANSLATOR): The only way for stock markets to boost revenue is by attracting more listings.
CRAFT: The smash hit of the year, Japan's social-networking sensation, known as Mixi.
MERNER: Mixi was a hot one. That was a big success. It did very very well and of course it's a fast-growing company, and people like the concept, this role-playing and you can be somebody else. You can be glamorous. You can be pretty. You can be handsome.
CRAFT: Japan's answer to myspace, Mixi allows users to share blogs, hobbies and music by invitation only, an asset in privacy-obsessed Japan.
YOICHI KOWARI, MANAGER DIRECTOR, MIXI INC.: Going public was a very good move. It has raised our profile and helped us in recruiting.
NISHIBORI: Mixi's market cap was bigger than that of a TV network, although they have only six million subscribers. But since they cater to the hyped youth market, they were extremely overvalued.
CRAFT: But several huge IPOs by U.S. owners hit sand traps this year. Observers blame a glut of IPO listings and uncertain growth prospects for the companies themselves. Golf course operator Accordia Golf, restructured by Goldman Sachs, was a flop. And Aozora Bank, floated by a U.S. private equity firm, also tanked.
NISHIBORI: The IPO was a total bust. The bank didn't list to gain equity financing, but merely to create capital gains for its institutional investors. So it was a badly flawed plan from the start.
CRAFT: In 2008, Japan is set to adopt its own version of Sarbanes- Oxley disclosure rules. Experts say that means the number of IPOs here will sharply drop over the next few years. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
4th Quarter Report With Sam Stovall, Chief Investment Strategist at Standard & Poor's
JEFF YASTINE: The fourth quarter has come to an end on Wall Street and that can mean only one thing: Sam Stovall, chief investment strategist at Standard & Poor's joining me for a look at the quarter's winners and losers. Sam, happy New Year. Welcome back to NIGHTLY BUSINESS REPORT.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Happy to be here Jeff.
YASTINE: Let's jump right in with a look at the relative performances of the major averages, the Dow, the S&P and the NASDAQ 100, all with respectable gains for the quarter.
STOVALL: Absolutely, and interestingly enough, very close to one another. So the fourth quarter was fairly equal versus the whole year, where the non-NASDAQ did the best.
YASTINE: Let's look at the individual winners and losers in the fourth quarter as well, and starting things off, the big gainers among the Dow, we have IBM leading that list.
STOVALL: Well, IBM came out with very strong third quarter earnings, particularly in the crucial services area.
YASTINE: And then moving on to the Dow losers, Pfizer topping that list.
STOVALL: Pfizer share prices tumbled as the company ended the development of a new blockbuster drug.
YASTINE: And then if we go to the S&P 500, again, looking at the winners in that particular group, Allegheny Technologies topping that one.
STOVALL: Its third quarter results were better than expected, further enhancing its year-long momentum.
YASTINE: What happened with Goodyear Tire, again, up 40 percent or plus?
STOVALL: The company benefited from strong third quarter earnings driven by a better product mix and pricing as well as cost cutting.
YASTINE: All right now. If we go to the losers in the S&P 500, the biggest drop seen there is Citrix Systems.
STOVALL: Well, Q3 results and Q4 guidance was less than encouraging, implying that lofty expectations would not be fulfilled.
YASTINE: And then Circuit City, what's wrong with them? With Best Buy seeming to have done fairly well and yet, they're a competitor. What happened?
STOVALL: I think it came down to investors buying concerned over razor-thin flat-panel margins that might hurt overall gross margins.
YASTINE: All right. Let's slip over to the NASDAQ 100 and we're looking at the biggest gainers there and that's Millicom International Cellular.
STOVALL: This is a holding company that offers a pure play on wireless and emerging market which were two very hot areas in '06.
YASTINE: And then again, the loser, Citrix Systems as you mentioned a moment ago.
STOVALL: That's right.
YASTINE: All right, Sam, what's your feeling for 2007? We come off a pretty good 2006, especially here in the last half of the year. What do you see as we head into this New Year?
STOVALL: I think most of the good news has already been baked in. What we have to focus on now is the Fed and whether earnings will actually advance by 10 percent as S&P projects. So we think we'll probably end up seeing about a 6 percent game to 1510 on the S&P 500.
YASTINE: What do you see, when you say about the Fed, are you one of those folks who may be expecting them to step back up and start increasing rates again, perhaps being scared a little bit by some of the newer economic data we've seen the last couple of weeks?
STOVALL: I think that might cause investors to be a little bit worried heading into the New Year, but I think once we approach the second half, we're probably going to see the Fed start its rate reduction program. We forecast right now, the Fed funds rate at 5.25 percent to end '07 at 4.5 percent.
YASTINE: And then with oil being where it is, how much of a wild card is that in this particular factor?
STOVALL: I think it's a wild card. Right now, we expect it to stay a page three story, but if it becomes a page one story all over again, that could affect profit margins, as well as consumer sentiment.
YASTINE: And then again this year, we've seen the blue chips outperform the NASDAQ for the year by a considerable margin. Do you see that continuing, this particular emphasis among fund managers, the institutions, on buying these big, liquid, steady growth type of names?
STOVALL: Well, in 2006, technology only posted about a 2 percent profit improvement. Yet, in 2007, they're expected to show more than a 20 percent advance. Also, if we do get the rate cut and if history repeats itself -- and there's no guarantee it will -- tech could be among the better performers in '07.
YASTINE: But you need to have that rate cut in order for that to happen, it sounds like.
STOVALL: Well, the rate cut certainly wouldn't hurt, but I think if we do get the substantial improvement in earnings, then that could definitely benefit not only telecom but also technology.
YASTINE: All right, Sam, any particular disclosures amongst what we've discussed here?
STOVALL: No, I don't own any of the stocks that we might have discussed here.
YASTINE: All right, Sam, appreciate your time very much. Thank you. Have a great new year's as we head into 2007.
STOVALL: Thanks a lot, Jeff.
YASTINE: Our guest, Sam Stovall, chief investment strategist for Standard & Poor's.
Paul Kangas' Stocks in the News
JEFF YASTINE: With the exchanges closed for the next four days, few investors were interested in doing much on this, the last trading session of 2006. The Dow made a quick run at yesterday's highs, before fading lower in the first half of the day. But it didn't help that oil prices and interest rates both ticked slightly higher for the day. And as you can see, the NASDAQ did not fare any better. So the Dow ended the day down 38.37 points at 12,463.15. And in this holiday shortened week, it rose twice and fell twice for a net overall gain of 119.93 points.
The NASDAQ ended today down 10.28 points at 2415.29, but it also had a split week, moving higher for two sessions and lower in the other two for a net overall gain of 14.11 points. And then the S&P 500 ended the day down 6.4 and ended at 1418.3. And in the bond market, the 10-year note falling 4/32 to 99 13/32, the yield now up to 4.7 percent.
Tonight we start off with GE (GE) losing $0.27, topping our active list with about 16 million shares changing hands. AG Edwards repeating a "buy" on GE shares. They're up about 7 percent for 2006.
Ford Motor (F) gaining a penny. Bear Stearns sees year-end clearance sales improving. The auto maker's December sales, which are due out next week - the report's due out next week.
AT&T (T) as you heard earlier, the stock rising a quarter and with the SEC giving its blessing to that merger of AT&T and BellSouth with some last-minute concessions from AT&T.
Pfizer (PFE) stock off $0.17.
EMC Corp (EMC) falling $0.17 as well despite positive comments on the stock in the latest issue of "BusinessWeek" magazine.
And then Time Warner (TWX) losing $0.22.
Excuse me, ExxonMobil (XOM) dropping $0.70.
And then Pier 1 Imports (PIR) losing $0.13.
Citigroup (C) down $0.18.
Wal-Mart Stores (WMT) with a gain of $0.17.
Cypress Semiconductor (CY) adding $0.51. An activist shareholder, Chapman Capital wants the chip maker to spin off its Sun (ph) Power division into a leveraged buyout of its core chip making unit. Cypress had no comment.
And then Alltel Corp (AT) jumping more than $2, also up on reports of private equity interest in the nation's fifth largest wireless operator.
And as you heard a second ago, DaimlerChrysler falling $0.38. The auto maker with a deal with China's "Chery" motors to produce a new small car made in China and exported they hope around the world.
Bradley Pharmaceuticals (BDY) dropping more than $3. The FDA approving a rival's generic version of Bradley's branded drug for treating peptic ulcers, down went the stock.
Keithley Instruments (KEI) (AUDIO GAP) $0.29. The maker of electrical measuring instruments earnings $0.16 a share in its fiscal fourth quarter. Also the company added that its chairman and CFO will not receive year end bonuses because of the cost of the company's option backdating investigation.
Marsh & McClennan (MMC) shares falling $0.06. The company looking to sell its Putnam Investments unit to Power Corp of Canada for almost $4 billion. No comment from the company. That's based on published reports.
And then Movado Group (MOV) rising $0.80. The watch maker going into the S&P small cap 600 index today, excuse me.
Ipsco Inc (IPS) shares losing more than $2. The maker of steel pipes used in oil drilling lowering its fourth quarter earnings expectation by about 11 percent.
And then we have Advanced Micro Devices (AMD) falling $0.22. A Delaware Federal court ruling yesterday that AMD rival Intel must produce documentation on its business connections to overseas PC makers. AMD claims Intel has discouraged its overseas partners from selling or supporting AMD chips.
Now moving onto the NASDAQ and there's Apple Computer (AAPL) rising nearly $4, a rebound of almost 5 percent. The company saying today that it cleared Steve Jobs with its investigation of any wrongdoing in its stock options backdating incidents.
Microsoft (MSFT) falling $0.12, up nearly 15 percent for the year.
Google (GOOG) down more than $2, with an 11 percent gain for 2006.
Intel (INTC) off $0.17.
Cisco Systems (CSCO) losing $0.09, but up more than 50 percent for 2006.
And then Research in Motion (RIMM) losing $1.82.
In the rest of our boards, Yahoo! (YHOO) adding $0.18.
Qualcomm (QCOM) gaining a dime.
Oracle (ORCL) with a loss of a fraction.
Amgen (AMGN) down $0.23.
Oscient Pharma (OSCI) rising $0.86. A change in its licensing contract will allow Oscient to sell its Factive antibiotic throughout the European Union. It's already approved for sale in the U.S.
And then Encysive Pharma (ENCY) losing $0.28. The company said it would take the FDA longer than expected to review the company's new drug called Thalin. Investors hoping for a quicker turnaround there.
And those are our stocks in the news tonight.
