NBR Complete Transcripts: 01-18-2007
Thursday, January 18, 2007IBM's Profits Spark A Sell Off
SUSIE GHARIB: A tech sell off on Wall Street today. The NASDAQ tumbled 36 points or 1.5 percent led by a big drop in shares of Apple. And the selling continued after the bell. Shares of IBM fell almost $6 or nearly 6 percent, even though big blue reported solid quarterly earnings and revenues. Excluding charges, IBM earned $2.26 a share in its fourth quarter, $0.07 more than analyst estimates and a 12 percent increase over last year. Revenues jumped 7 percent to $26.3 billion, also stronger than Wall Street forecasts.
The company benefited from several software acquisitions and big services contracts. CEO Sam Palmisano said IBM is quote, well-positioned in the growth areas of a changing IT industry, end quote. But while software was solid, IBM's hardware sales were sluggish and that raised concerns that sparked the after hours sell off in the stock.
How Inflation Stands To Influence Interest Rates
SUSIE GHARIB: Even though oil prices are coming down, consumer prices are on the rise. The Labor Department said today that its consumer price index rose a half a percent in December. The big question now is whether the inflation report changes the outlook for interest rates. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's inflation data has many economists even more confident the Federal Reserve won't cut interest rates soon. The consumer price index, which measures inflation at the retail level, rose a half a percent in December. That's the biggest gain since April. The core rate, which excludes volatile food and energy costs rose 0.2 of a percent after a flat reading in November. The data shows core consumer prices rose 2.6 percent in 2006. That's well above the Fed's comfort zone, which S&P economist David Wyss says is about 2 percent.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: Obviously, there's concern. The Fed is very worried that the inflation rate is going in the wrong direction and we're seeing some upward pressure on wages, which has them worried. So, they are going to be looking very closely to see what happens to the labor market, to wages and what the impact of that is on these core inflation rates.
MILLER: Nearly every category in the December survey posted an increase. But energy was by far the biggest gainer, up 4.5 percent. Some economists say the latest data is another sign that inflation is not easing as quickly as the Federal Reserve would like. Nearly everyone on Wall Street expects the Fed to hold short term interest rates steady at its next meeting January 30. But some Fed watchers think the central bank could raise rates a quarter of a percentage point at the following meeting in March to ensure inflation remains subdued. Others, like economist Joe Lavorgna of Deutsche Bank think the Fed's next move will be a rate cut, perhaps as soon as May.
JOSEPH LAVORGNA, CHIEF US ECONOMIST, DEUTSCHE BANK: We believe if the economy retains its current momentum, inflation is likely to stay where it is, if not drift lower. And the Fed will not have to raise rates in response to inflation.
MILLER: The good news for investors and consumers is that many economists think inflation pressures will retreat in the months ahead. They predict that falling oil costs will lead to lower costs for many other goods and services. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Fed. Chairman Ben Bernanke Says Baby Boomer Spending Should Be A Capitol Concern
PAUL KANGAS: Federal Reserve Chairman Ben Bernanke raised a yellow caution flag on Capitol Hill today at a Senate hearing on the long-term outlook for the Federal budget. Bernanke is worried that entitlement spending could get out of control if something isn't done sooner rather than later. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ben Bernanke is not the first Fed chairman to warn the government's spending habits could damage the economy in the long run. But he may be the most blunt about it. Calling recent reductions in the deficit the calm before the storm, the Fed chairman warned interest payments on the national debt could triple as deficits rise to pay for entitlement programs supporting baby boomers in their retirement.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: If early and meaningful action is not taken, the U.S. economy could be seriously weakened with future generations bearing much of the cost.
GERSH: We can't grow our way out of the problem, Bernanke said, because Social Security and Medicare spending increases with the size of the economy. Without reform, Bernanke warned the nation may find itself in a vicious cycle of rising deficits, higher interest payments and skyrocketing debt. Given the risks, New Hampshire Senator Judd Gregg asked why the bond market doesn't seem to be reacting.
SEN. JUDD GREGG (R) NEW HAMPSHIRE: If I was buying long term debt 10, 15, 20, 30 years out, I would sure want a much higher interest rate than what appears to be what the markets are demanding today. What are they assuming we're going to be doing that I'm not aware of?
GERSH: Alan Greenspan called that question the bond market conundrum. So why are long-term interest rates now about the same as those on a five- year bond?
BERNANKE: Either this is a trading phenomenon and holders of the bonds are not really thinking about the out-years in the future, but the other possibility which is that one way or another, the bond holders do expect that Congress will take whatever measures are needed to insure that the bonds are paid off and that it's done in the context of price stability.
GERSH: For his part, Bernanke says the Federal Reserve would not allow the government to inflate its way out of this problem by printing money, though he is unlikely to be Fed chairman 15 or 20 years from now when the big bills come due for the baby boomer retirement. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Ray Neidl, Airline Analyst , Calyon Securities
SUSIE GHARIB: More signs today of the turnaround in the airline sector. Quarterly results from Continental Airlines showed that the carrier is flying back toward the black and trimming its losses. Excluding charges for a payment with the pilots' pension plan, Continental lost just $0.04 a share in the fourth quarter. That was a much smaller loss than analysts were expecting. Sales at the airline rose 11 percent to $3.2 billion, right in line with analyst estimates. Looking ahead, Continental says the airline is positioned for sustained profitability, with costs rising just 3 percent in the current quarter. Joining us now with more analysis of the outlook for airlines, Ray Neidl, airline analyst with Calyon Securities. Hi, Ray.
RAY NEIDL, AIRLINE ANALYST, CALYON SECURITIES: Hi.
GHARIB: Well, you know, we've seen better than expected earnings from airlines, not only Continental today, but also American Airlines yesterday as well as Southwest Airlines. What is going on that the airlines are doing so well these days?
NEIDL: Well, the fourth quarter is the slow quarter for the airlines and results are marginal. In fact, for me a little disappointing because of winter storms in December. What we are looking at though is going into 2007 we are expecting strong results. The cost-cutting that the airlines have done, capacity constraints and price increases should lead to good profitability for the industry for this year.
GHARIB: And jet fuel prices are coming down and that's got to help. Do you see that continuing throughout 2007?
NEIDL: Well, in my projections, I'm assuming high fuel prices around $60 a barrel. So any discount we get in jet fuel prices will just be a bonus to the earnings that the airlines can achieve this year.
GHARIB: Ray, you have a couple of stocks that you have put on your "buy" list, including AMR, American Airlines, Continental, UAL, the parent of United, US Airways and Alaska Air. Tell us why you like these stocks.
NEIDL: Well, I think the legacy carriers have more upside potential in a good market. They've got more ability to raise prices. They've got more yield buckets (ph) to play with to get their yields up and they've been doing a good job in cutting their costs. Low-cost carriers are already low cost. They don't have as yield buckets (ph) to get their prices up.
GHARIB: Looking at these stocks today, Continental was down, AMR was up sharply, so was UAL. Why were the stocks down today and is this a good buying opportunity now?
NEIDL: It is. They had a good run earlier this week and last week. They were up for a while today. I think they went down with the whole market. Oil prices were down, but when the market went down late in the day, a lot of the airlines went down as well.
GHARIB: Ray, do you have any disclosures to make on these stock recommendations you are making?
NEIDL: No, I don't participate in the airline stocks because of the complications.
GHARIB: OK. Tell us a little bit about your outlook for Delta. You know that US Airways has a bid, a takeover offer for Delta. Do you think that deal is going to go through?
NEIDL: I am more conservative on this. I rate it no better than 50/50. I think the deal is a good deal for the creditors at Delta. I'm not sure if the regulars (ph) are ready to approve that. Also there is overlap in those two systems. It not a real end on end merger and the regulators may take a hard look at that.
GHARIB: How do you think Delta will do as a stand alone carrier in this competitive environment?
NEIDL: In an up market, they will do OK. But down the road we've got too many airlines with too many hubs and we're going to have consolidation even through mergers or in the next economic downturn, some airlines will disappear through liquidation.
GHARIB: You said in a recent report that out of the six legacy airlines, you expect only three to remain mostly because of consolidation. What are possible combinations that you think that Federal regulators will let go through?
NEIDL: Well, it could be any number of combinations. I think the Federal regulators would look a little more favorably on end-to-end, in other words, where there is not a lot of overlap and I'm not predicting these mergers. But American and Northwest would be a good fit. United and Continental would be a good fit. And Delta would be a good fit with either United or Northwest.
GHARIB: All right. Thank you very much. Really appreciate your coming on the program.
NEIDL: OK.
GHARIB: We've been speaking with Ray Neidl, airline analyst with Calyon Securities.
Congress Tries To Pull The Plug On Oil Perks
SUSIE GHARIB: There is a move afoot in Congress to cut tax breaks and deductions for big oil companies and end sweetheart deals on oil leases. The House passed the energy bill today capping the last of the Democrats 100 hours agenda but as Stephanie Due reports, the controversial bill faces an uncertain future in the Senate.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The message to big oil from Democrats: times have changed. The bill repeals tax breaks for oil and gas exploration, rescinds tax deductions for domestic oil and gas manufacturing and rewrites oil drilling royalty leases. Texas Democrat Lloyd Doggett said the bill signals the end of special treatment for big oil.
REP. LLOYD DOGGETT, (D) TEXAS: They prospected in Washington and they never came up with a dry hole. It was one gusher of tax benefits and special benefits and special privileges after another. Now we finally have an opportunity to rewrite a genuine energy policy.
DHUE: The bill would generate $14 billion in taxes and royalty fees over the next 10 years. That money would go to fund alternative energy initiatives. But it shines little light on just how the money will be spent. Republicans blasted the legislation as a political ploy for sound bites at the expense of sound energy policy. They argue the proposal will drive oil and gas prices higher. New York Congressman Phil English called the bill a placebo.
REP. PHIL ENGLISH (R) NEW YORK: That will ultimately reduce domestic energy production, give American energy companies less of a reason to invest in exploration here at home, encourage greater dependence on foreign oil and damage America's manufacturing base.
DHUE: The House bill won't be taken up directly by the Senate. Senate Majority Leader Harry Reid says the Senate will approach energy and global warming issues together with a series of proposals, among them rescinding oil industry tax breaks.
SEN. HARRY REID, MAJORITY LEADER: I think we want to do it for a number of reasons, not the least of which, we're going to pay for everything. We're not going to do deficit spending, as has been done the past six years and this is a pot of money that certainly we should have.
DHUE: House Speaker Nancy Pelosi called today's bill an important first step and she also announced the creation of a select committee to work on gaining energy independence and stopping global warming within 10 years. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Tech Talk"-Giving Your Business The High Tech Edge
SUSIE GHARIB: In tonight's tech talk segment, ringing up sales, ramping up your fashion sense when it comes to your cell phone and reaching out to others at your next big business meeting. With an explanation of what all that entails, here's our technology maven Scott Gurvey.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The numbers on personal computer sales are in and they are not good for Dell. Hewlett- Packard expanded its lead over Dell in the fourth quarter with 17.4 percent of global PC shipments. China's Lenovo was third.
South Korea's LG Electronics said today it will ship a cell phone co- branded with the Italian fashion house Prada next month. The phone is buttonless and has a touch screen and if that sounds familiar, it does resemble the Apple iPhone, announced with great fanfare last week. IPhone ships in June. The LG Prada phone was actually announced in December.
Apple has some trouble claiming a first for the iPhone brand as well. IPhone was trademarked years ago by a company now part of Cisco Systems. Cisco is not commenting on its trademark dispute with Apple but is eager to show off its wonderful tele-presence meeting system. It's hard to do justice to this on conventional television, but Cisco's tele-presence is to other teleconferencing systems what a Mercedes is to a Model T. Tele- presence works as an integral part of an enterprise's video and data network system. And with high definition video and surround sound, these specially designed rooms display life sized images and real time audio.
RICK MORAN, VP MARKETING, EMERGING TECH., CISCO SYSTEMS: After about 10 minutes people just settle into the fact that you're at a meeting at an oval table. The fact that the distance between the two halves of the table is significant is irrelevant. And you'd be amazed. People get into arguments across the table. You know they actually get into a real discussion as if literally there was only a piece of glass between us instead of ...
PHILIP GRAHAM, SR. DIR. OF ENG., TELEPRESENCE UNIT, CISCO SYSTEMS: Or even humor, transcends the technology which with old video conferencing technology it really didn't.
GURVEY: Amortized over three years, a tele-presence room costs $10,000 to $12,000 per month, not much compared to real travel expenses even without considering the value of time lost to travel.
MARTHIN DEBEER, SR. VP, EMERGING TECH. GROUP, CISCO SYSTEM: Bringing multiple cities together around a virtual table to have one meeting is another capability that we will enable and of course that is not really something you can do with travel. This takes it one step beyond that, being able to get on a plane and go something. You can only be in one place at a one time.
GURVEY: Cisco made its tele-presence rooms available to employees during the holidays, so they could visit with family members at other Cisco sites around the world. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Paul Kangas' Stocks in the News
PAUL KANGAS: An opening rally attempt by Wall Street's blue chips was undermined by that inflation news, which dashed hopes for lower interest rates. Negative sentiment gained ground on word of an unexpected surge in new housing starts and another drop in weekly jobless claims. Ninety minutes into trading the Dow was off 11 points but the tech-laden NASDAQ was off 25 points. The sharp sell off in tech stocks was a drag on the blue chips this afternoon, but tumbling oil prices prevented steep losses there. So the Dow Industrial Average closed off only 9.22 at 12,567.93. But the NASDAQ lost a hefty 36.21 ending at 2443.21. Standard & Poor's 500 Index fell 4 1/4 points to 1426.37. In the bond market, the 10-year note gained 9/32 to 99 1/32, putting the yield at 4.75 percent.
New York exchange volume leader on nearly 25 million shares, Ford Motor Co (F) moving up $0.14.
Followed by Motorola (MOT) with a $0.24 gain. Motorola due to report quarterly results tomorrow.
General Electric (GE) moved up $0.02. Reportedly, the company plans to acquire most of Abbott Laboratories diagnostic business for about $8 billion and after the market closed, GE did confirm that.
Pfizer (PFE) $0.28 gain.
Sprint Nextel (S) moved up $0.21, fifth in big board volume.
Time Warner (TWX) $0.15 gain there.
But ExxonMobil (XOM) down a half dollar on the sharp drop in oil.
EMC Corp (EMC) $0.29 loss there.
AT&T (T) up $0.53.
Texas Instruments (TXN) in a very weak semiconductor group, down $0.81, tenth in volume.
Abbott Labs (ABT) moved up $1.24. Positive reaction that it's going to sell most of its diagnostic business to GE for some $8 billion.
And then Barr Pharmaceuticals (BRL) gaining $1.98. The company received tentative approval from the FDA for its generic version of Roche's Kitril (ph) nausea treatment.
Then SLM Corp (SLM), used to be called Sallie Mae, up - down $2.53. Fourth quarter earnings just a touch higher than last year, $0.74 versus $0.73, but that was a penny below the Street estimate and the Friedman Billings brokerage downgraded it to just a "market perform" rating.
Merrill Lynch (MER) down $1.41 despite a lot of good news today. Fourth quarter earnings jumped 68 percent over last year to $2.41 versus $1.41 and that was $0.49 above the Street consensus. Merrill's also boosting its quarterly dividend 40 percent from $0.25 to $0.35 a share.
Oxford Industries (OXM) up $2.50. The Suntrust Robinson Humphrey brokerage upgraded it from "neutral" to "buy."
And then Harley-Davidson (HOG) down $1.89 despite higher fourth quarter earnings, $0.97 versus $0.84 last year and a penny above the Street estimate.
Jones Apparel Group (JNY) did well, up $1.23. There's speculation the company may be planning to break up.
CACI International (CAI) down $7.88. The company cut its second quarter and 2007 earnings outlook on slower demand for its services from the Department of Defense.
And then another IT company, SRA International (SRX) down $2.17. It was downgraded by JPMorgan from "over weight" to "neutral."
PPG Industries (PPG) losing $1.82 and despite fourth quarter earnings higher, $0.94 versus $0.68 last year, but that was $0.08 below the Street estimate.
JCPenney (JCP) however, hitting a 52-week high with that gain of $3.97. JPMorgan upgraded it from "neutral" to "over weight" on the strong earnings outlook for JCPenney.
Apple (AAPL) topped the active list, down $5.88 on the company's rather guarded outlook as stated yesterday.
Google (GOOG) in the weak high tech sector down $9.45.
Cisco Systems (CSCO) $0.53 loss.
Intel (INTC) $0.39 drop there.
Microsoft (MSFT) was down a dime. That was fifth in volume.
Research in Motion (RIMM) losing over $6.
Oracle (ORCL) $0.40 drop.
Applied Materials (AMAT) off $1.15. That's down on Lam Research's profit warning. That whole semiconductor sector was weak on that.
And Lam Research (LRCX) itself down nearly $8.
Nvidia (NVDA) yet another sweet (ph) semiconductor, down $2.86 a share.
But look at this gainer, Hoku Scientific (HOKU). Hoku means star in Hawaiian I'm told and it was the star of the day with that gain, 122 1/2 percent on news the company received a seven-year, $370 million contract to supply Sanyo Electric with poly silicone. What a move.
Those are the stocks in the news tonight.
