NBR Complete Transcripts: 03-27-2007
Tuesday, March 27, 2007Lennar's Latest Losses
SUSIE GHARIB: A somber outlook today from one of the nation's largest home builders. Lennar said that its quarterly earnings plummeted and its CEO doesn't see the U.S. housing market stabilizing anytime soon. Lennar shares tumbled in reaction, but by the close, recovered most of their losses. The news also pressured stocks on Wall Street as investors continued to worry about the impact of the slumping housing market on the economy. Scott Gurvey has more on Lennar.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lennar's report was just as expected, which is to say, terrible. The company posted a 73 percent drop in profit for its fiscal first quarter. Lennar said home deliveries fell 3.8 percent, while its average selling price fell 7 percent. Lennar earned $0.43 a share compared to $1.58 in the first quarter of last year. Analyst Paul Puryear of Raymond James, which has done business with Lennar, says it is a matter of too much building and too many people looking for a quick profit in real estate.
PAUL PURYEAR, HOME BUILDING ANALYST, RAYMOND JAMES: It's largely overbuilding. I think the second thing is -- I think the market, meaning the builders, grossly underestimated the impact of the speculative buyer and the minute he exited the market -- and I think he has, for the most part, exited the market -- the whole demand equation looked different.
GURVEY: Unsettling Wall Street, Lennar withdrew its forecast for 2007 earnings. In January, it predicted 2007 earnings would match those of 2006, in spite of a 20 percent drop in home deliveries. Today, CEO Stuart Miller said in a statement quote, given the state of the market, we do not expect to achieve our previously stated 2007 earnings goal and we are not comfortable providing a new earnings goal at this time. Lennar warned that housing trends are being exaggerated by the recent problems with sub-prime mortgages. KB Home said something similar last week when it reported an 84 percent decline in profit. But analyst Tom Smith of Standard & Poor's says the sub-prime impact on Lennar's total revenue is only 5 percent.
TOM SMITH, HOME BUILDING ANALYST, STANDARD AND POOR'S: Lennar, I think, is doing pretty well compared to the home building industry altogether. It's one of the bigger players and the bigger players have diversified enough so that they can withstand some hits in some particularly bad markets where they really have to write down quite a bit. Also, they have access to capital that some of the smaller players don't and that will help them survive.
GURVEY: Most analysts say it will take the remainder of this year to work through the industry's inventory excesses. Most do not expect the housing market to stabilize until 2008. Scott Gurvey, NIGHTLY BUSINESS REPORT.
One on One with Colin Blaydon, Dir., Center for Private Equity and Entrepreneurship at Dartmouth College
SUSIE GHARIB: Goldman Sachs said today it plans to raise as much as $20 billion for its next private equity fund. CEO Lloyd Blankfein told shareholders at Goldman's annual meeting that amount could be a little more or a little less. The Goldman mega-fund would be larger than most of its current private equity clients, suggesting the investment bank could soon be competing for deals with those clients. The announcement comes just days after rival private equity firm Blackstone Group said it plans to go public later this year.
Joining us now for more analysis about the Goldman announcement and the private equity boom, Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business. Colin, a pleasure to have you on the program.
COLIN BLAYDON, DIR., CENTER FOR PRIVATE EQUITY & ENTREPRENEURSHIP: Good to be with you.
GHARIB: Well, let's begin by just talking about the outlook for this private equity business. The Goldman mega fund comes on top of all of this other private equity money that's out there. Is the bubble about to burst?
BLAYDON: Well, no one thinks that in the next few years the returns will be as high as the phenomenal returns we have seen for the last two or three years, but I don't think anything is about to burst yet.
But what could go wrong with all of this money out there, chasing all those deals?
BLAYDON: Well, the biggest thing that could happen is if one of these very dramatic and well-publicized public/private transactions these companies have done, should go bust. That would bring everybody's attention in and could cause some questioning, some fullback.
GHARIB: There is a lot of excitement about the Blackstone IPO. Does it make investment sense for individual investors?
BLAYDON: Well, for the first time, individual investors may, if they wish, get some exposure to this private equity sector. But as Blackstone said in its S-1 that it filed with the SEC, they are looking for people who are going to be long-term investors. It's not for somebody looking for a quick hit to get in and get out.
GHARIB: There's speculation that a lot of the other private equity rivals to Blackstone will be next in line to go public, the names like Carlisle come out Kohlberg, Kravis, Roberts. Is there a public appetite to own stock in these private equity companies, do you think?
BLAYDON: Well, the first one that came out recently was Fortress and it trade up with a pretty substantial first-day pop. So there's clearly an appetite out there. I think people are expecting the same to happen for Blackstone. But there is a previous history in Europe that calls into question just how big the appetite is going to be, but I think we're going to find that out this year.
GHARIB: We're seeing these private equity deals with big price tags, $30 billion, $40 billion, is there a limit? Do you see these prices -- these deal prices going even higher?
BLAYDON: Right now, given the funds that have been raised, a number of the big guys have raised funds in the $15 billion to $20 billion range. The debt markets are still generous. They're also combining on deals. So you look at the resources they've got available. Probably deals in the $30 to $40 billion range are what we're going to see. To get through 50 is going to take another substantial fund raising cycle.
GHARIB: What I find is interesting is a lot of these deals are with run of the mill kinds of companies. They're really not edgy or techie, state of the art businesses. Can one expect to get big returns from these kind of mundane companies, as it were?
BLAYDON: This has been the bread and butter of these buyout firms over their entire history. This is what they do. It's what they do well and they generated some great returns. They buy at attractive prices. They're pretty aggressive. They are superb financial engineers and put a lot of debt on the deals. And they are very aggressive in restructuring the companies and improving the cash flows and over the last three years, they have generated some phenomenal returns.
GHARIB: All right. Well, thank you very much. Really appreciate you coming and shedding some light on the topic.
BLAYDON: Good to be with you.
GHARIB: My guest tonight, Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business.
President Bush May Find Himself Wrangling With Rangel Over Trade Policy
SUSIE GHARIB: Top Democrats in Congress today called for big changes in U.S. trade policy, so trade deals now in the works can be approved. The Bush administration needs a green light from lawmakers to finalize agreements with Peru, Colombia and Panama. But as Stephanie Dhue reports, there could be some strings attached to get those deals wrapped up.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Congressional Democrats know how they would rewrite trade deals. House Ways and Means Committee Chairman Charlie Rangel says the Bush administration now understands their view.
REP. CHARLES RANGEL, CHAIRMAN, WAYS & MEANS COMMITTEE: We have won the election. We are in the majority. It just makes sense that we should not have to beg for consideration for things that we thought were good for trade and good for America.
DHUE: Democrats outlined the basic principles they want for all trade deals. They include proposals to combat global warming, provide access to medicine for developing countries and improve labor rights. Thea Lee of the AFL-CIO says a broad approach is the best way to fix trade deals.
THEA LEE, CHIEF INTERNATIONAL ECONOMIST, AFL-CIO: The problems are big and they can't be solved by small tinkering around the edges. So there's really no point in doing small fixes. What we need is something pretty dramatic.
DHUE: Business groups are taking a pragmatic approach. The Chamber of Commerce's Christopher Wenk says businesses are willing to be flexible to get the deals done.
CHRISTOPHER WENK, SENIOR DIRECTOR, INTERNATIONAL POLICY, U.S. CHAMBER OF COMMERCE: This is about lowering their barriers to our exports. So I mean, this is about engagement and engagement is very important I think for the U.S. business community. We want the United States to continue to be a player in the global economy and that's what this is all about.
DHUE: Greg Mastel was a Democratic trade advisor. He says the trade debate now will set the stage for renewing the president's trade promotion authority.
GREG MASTEL, SR. ADVISOR, AKIN GUMP: These agreements may be seen by some as fairly small in scope, but obviously setting a new template that's a precedent for everything that follows. That will likely be a bit more controversial.
DHUE: The president's current trade promotion authority expires in June. The Bush administration says it will continue to work with Democrats to expand trade. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today."
SUSIE GHARIB: Our Tuesday night look at mutual funds poses a question for investors: how much diversification is good for your portfolio and how much puts you overboard? With some answers in our weekly "Of Mutual Interest" segment, here's John Waggoner, mutual fund columnist at "U.S.A. Today."
JOHN WAGGONER. MUTUAL FUND COLUMNIST, USA TODAY: If you've bought a new car recently, you know that your key not only opens your doors and windows from a distance, but can summon help, pop the trunk, and play the piccolo solo on the "Stars and Stripes Forever." If you've ever run a new key through the wash, you know that complex is not always better. For most investors, the key to success is simplicity and that means owning no more than six to 10 funds.
Most investors collect funds over time. Sometimes you get a fund portfolio through a company savings plan, such as a 401(k). Other times, you get sold a fund through a stockbroker or you buy a fund that just seems like a good idea at the time. After 10 or 20 years, you'll find yourself with a litter of a dozen or more funds. Your portfolio will just duplicate the performance of the broad stock market.
Now, being broadly diversified isn't bad, but you're probably paying too much for it. The average stock fund takes about 1.5 percent of its assets each year to pay expenses. So if your fund earns 10 percent a year, you keep 8.5 percent. The difference between 8.5 percent and 10 percent a year, over time, is enormous. A $10,000 investment will be about $175,000 in 30 years at 10 percent. At 8.5 percent, it will be $115,000, a $60,000 difference. Your best bet, keep the bulk of your investments in two or three low-cost index funds. If you want to try for higher returns, add one or two actively managed funds. It's a simple approach, but like an old- fashioned car key, it nearly always works. I'm John Waggoner.
"Last Word"-City Slogans That Stick
SUSIE GHARIB: And finally tonight, if we asked you to name the American city that uses the slogan "Celebrate and Discover," chances are you wouldn't know it. That's the problem facing tourism officials in Washington DC. They've started a campaign to find a new, catchier slogan for the nation's capital. There are some really successful examples out there, like "what happens here, stays here" which is Las Vegas, of course or "I Love New York." The DC campaign is using focus groups, interviews and online surveys to figure out how best to brand the city to help bring in tourists. And Paul, tourism is a big business in DC, $5 billion worth last year alone.
KANGAS: And my slogan suggestion for DC - come to Washington and visit your money.
GHARIB: You ought to suggest it.
KANGAS: Right around tax time too.
Paul Kangas' Stocks in the News
PAUL KANGAS: Rising gasoline prices and stock market turmoil are weighing on consumer attitudes. The Conference Board's index of consumer confidence dipped to a reading of 107.2 this month. That was its first decline in five months. The research group says apprehension about the short-term future has cast a cloud over consumer confidence and stock market volatility is combining with surging gas prices to making consumers even more uncertain about what's ahead. That drop in consumer confidence, in conjunction with Lennar's sharp earnings decline, had Wall Street on the defensive this morning amid fears the economy's slowdown was more severe than estimated. Just before noon, the Dow was off 75 points and the NASDAQ down 20. The blue chips fell as much as 90 points this afternoon as interest rates rose and the dollar fell, but a little late bargain-hunting trimmed the market's closing losses a bit. The Dow Industrial Average closed off 71.78 at 12,397.29. The NASDAQ Composite was down 18.20 ending at 2,437.43, while the Standard & Poor's 500 Index fell 8.89 to 1,428.61. Over in the bond market, the 10-year note gained 3/32 to par and 8/32, putting the yield at 4.59 percent.
New York exchange volume leader on 15.7 million shares, the new merged company, CVS Caremark (CVS) down $0.25.
Motorola (MOT) a $0.14 drop. Investor Carl Icahn, who owns a 2.7 percent stake in Motorola, still fighting to gain a seat on the board of directors.
Pfizer (PFE) was down $0.18.
AT&T (T) moved up $0.13.
Time Warner (TWX) a $0.07 drop there, fifth in big board volume.
And then General Electric (GE) down $0.21.
Followed by Bank of America (BAC) with a $0.28 gain.
Halliburton Co (HAL) down $0.33.
Micron Tech (MU) up $0.40.
And Ford Motor Co (F), tenth in volume, dropped $0.02 a share.
United Health Group (UNH) losing $1.03. A consumer group is asking the Department of Justice to block the company's proposed bid to acquire Sierra Health Services because the group says that would limit patient choices.
Then we see DaimlerChrysler (DCX) up $1.47. The "Detroit News" reports the first round of bids for the company's ailing Chrysler unit may be submitted within days and the bidders may include such people as the Blackstone Group, Magna International, even General Motors among others.
Then we see Mylan Labs (MYL) moving up $1.06. The company may get exclusive rights to sell the generic version of Pfizer's blood pressure drug Norvasc for a period of up to 180 days. Merrill Lynch upgraded Mylan from "sell" to a "neutral."
Nice gain in Gamestop (GME) here, up $3.19. Fourth quarter earnings $0.81, well above $0.55 last year and a penny above the Street estimate. Same store sales jumped 26 1/2 percent and the company had a very strong first quarter guidance.
PPL Corp (PPL) the old Pennsylvania Power and Light, up $1.09. Lehman Brothers upgraded it from "equal weight" to "over weight."
And then Martha Stewart (MSO) up $0.75. Bear Stearns upgraded this stock from "under perform" to "peer perform."
On the downside, Ingersoll-Rand (IR) losing $1.52. UBS financial downgraded it from "buy" to "neutral" on valuation and also because of the guarded earnings outlook from the company.
Geo Group (GEO) down $1.48. The prison services company said first quarter earnings will be cut by $0.14 a share due to a write off of deferred financing fees.
Apple (AAPL) topped the NASDAQ active list, down $0.39.
Followed by Google (GOOG) off $1.38.
Microsoft (MSFT) fell a half dollar.
Amgen (AMGN) losing $0.93.
Cisco Systems (CSCO) down $0.41 a share, fifth in dollar volume.
Intel (INTC) $0.23 loss there.
Research in Motion (RIMM) fell $1.32.
But Dell (DELL) edged up $0.13.
Sun Micro (SUNW) $0.16 drop.
Qualcomm (QCOM) up $0.21 a share, tenth in volume.
Aruba Networks (ARUN) went public today. The company makes computer networking gear. There were eight million shares offered at $11, opened at $14, the high of the day, $14.39, closed very close to the high of the day, so a nice debut for Aruba Networks.
Electronic Clearing House (ECHO) tumbling $6.38. The company and Intuit have mutually called off their proposed merger.
And then over on the American exchange, Document Security System (DMC) up $2.35. That stock dropped $1.52 yesterday after a British court ruled the company's anti-counterfeiting patent was invalid in the United Kingdom. But today, the German patent office said that that patent is valid in Germany and the stock snapped right back.
Also on the American, Allied Defense Group (ADG) losing $1.93. The FCC is probing the company's restated third quarter results.
Those are the stocks in the news tonight.
