NBR Complete Transcripts: 05-09-2007
Wednesday, May 09, 2007Interest Rates Remain Unchanged
SUSIE GHARIB: The Federal Reserve held steady on interest rates today and the Dow continued its record climb. The blue chip index jumped 53 points to a new all-time high. The NASDAQ rose 4 1/2. The rally came after the Fed's decision to keep its key short-term rate at 5 1/4 percent, where it stood since June of last year. Policy makers signaled that they have no plans to change rates any time soon. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The simple explanation for why the Federal Reserve held interest rates steady today is that the economy doesn't need a change in monetary policy. Not only has growth downshifted this year, but the slowdown is helping to reduce inflation. While some experts believe the economy is headed for a soft landing, Dresdner Kleinwort economist Kevin Logan says the Fed is actually in somewhat of a difficult position.
KEVIN LOGAN, SR. MARKET ECONOMIST, DRESDNER KLEINWORT: There's a tug of war between the fact that the economy's growth has slowed down, but inflation is still a little bit higher than the Fed would like. So they're caught in the middle. They're not going to change interest rates right now.
PRATT: There were only subtle changes in today's policy statement from the Fed's March statement. Policy makers added quote, economic growth slowed in the first part of this year, end quote. But they stuck with their call for improved growth in the second half of this year. The Fed also made no adjustment in its inflation assessment, saying quote, core inflation remains somewhat elevated, end quote. Most economists believe that's a very deliberate signal to financial markets that policy makers have no intention of changing rates in the near term. Deutsche asked management economist Josh Feinman predicts the Fed will remain on hold at least for the rest of this year.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: To get them to cut rates, I think you would need to see evidence that the housing correction was spilling over more broadly into the economy as a whole, consumer spending weakening and particularly the labor market start to deteriorate.
PRATT: Others however believe policy makers will be forced to cut rates much sooner, most likely by the fall.
LOGAN: Right now the Fed funds rate is 5 1/4 percent. We expect it will be about 4 1/2 percent by the end of the year. That probably means three rate cuts of 25 basis points, so they'll cut the rate 75 basis points before the end of the year.
PRATT: The next Fed meeting will be held exactly seven weeks from today on June 27th. Experts say there would have to be a seismic shift in economic conditions for policy makers to alter rates at that meeting. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Mike Holland of Holland & Company & Brian Wesbury, of First Trust Advisors Review The Fed's Decision To Leave Rates Alone
SUSIE GHARIB: More analysis now on that Fed decision today to hold rates steady. Joining us Mike Holland of Holland & Company and Brian Wesbury, chief economist of First Trust Advisors. Good evening gentlemen.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Good to be with you Susie.
GHARIB: Brian, let me begin with you. What was your interpretation of the Fed decision today?
WESBURY: They had a little bit of a look back and they said, hey, the economy was slow and inflation remained a little bit elevated and that's fine, because they looked back. But when they looked forward, basically they kept their statement exactly the same and that is, it looks like the economy will ride out the correction in housing and they're still worried about elevated inflation. And since their predominant concern, that's the word they used, is inflation, they're nowhere near easing monetary policy. I still believe by the end of this year because the economy will snap back, I expect it to, that they will actually have to hike rates.
GHARIB: All right, Mike, what do you think? Do you agree with what Brian's saying?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Brian and I go back a long way and no I disagree completely. I think that by the end of the year, it will clear that the Fed has been too tight for too long. I think that they have a restrictive monetary policy right now. The interest rates are too high. The overnight rate, the Federal funds rate is above the whole Treasury bond market yield curve. So I think that there's a governor on this market. They're slowing down the U.S. economy at a time when both gasoline prices, which are hiked and also house prices, which are moving down a little bit are not helping the economy. So we do have some slowing in the economy. I think they're going to have to change their way.
GHARIB: And on top of what Mike was saying Brian was that also say that job growth is slow. The GDP for the first quarter was slow. Isn't that all enough to justify a rate cut?
WESBURY: I don't think so and Mike and I are good friends. It's great to have this debate. The last three quarters of GDP have been weak, about 2 percent growth. But it's because of a huge drop in housing, which I think is a sector-related problem. It's not an economy-wide problem and it's not due to excessively high interest rates. If you take away housing, GDP has been growing above 3 percent. The rest of the economy is strong. Manufacturing is doing well and yes, the employment numbers have come in a little bit weaker, but that's expected. That's a lagging indicator. The more leading indicators, the Institute for Supply Management, both manufacturing and services numbers last week when they came out for April were very strong. Looks to me like the economy is picking up.
GHARIB: All right, Mike, if you believe in interest rate cuts, how soon and how deep?
HOLLAND: Well, as Brian just enunciated, there must be people at the Federal Reserve who vote for Ben Bernanke today who were espousing exactly what Brian - so I think we're in for a long period according to what we're hearing from Fed speakers all the time, have no change in the 5 1/4 that we have. And I think that's a problem for the economy. I don't want to overstate it, but I think the market today was - the stock market - was pleased that they didn't screw up anything any more than they have.
GHARIB: I was going to ask you actually about the market reaction, because the Fed does nothing and then the markets interpret this do-nothing decision as a positive event. Why so?
HOLLAND: My reaction was the same as the markets, a sign of relief that they didn't do something untoward. They've already done something which I think is a little goofy by having these interest rates overnight so high as they are. If that's the worst that they do, I'm happy with that.
GHARIB: Let me ask you Brian. (INAUDIBLE) Go ahead.
WESBURY: I was just going to say, I think there's another reason that the market reacted this way and that is, there's this sense in the market that the Fed knows something we don't. And every time they come out with a statement and they don't say, oh no, sub-prime lending or the housing market's about to take down the entire economy or there's systemic problems out there. Every time they don't say that, we breathe a sign of relief. So I don't necessary think it's just about rates. I think it's also about whether these problems are spreading and becoming worse than people think they might be.
GHARIB: One of the problems that I hear from time to time from some of our guests who come on the program is their concerns about stagflation, slow growth plus inflation in the economy. Brian, do you think that that's at all a possibility?
WESBURY: I don't think so. I think we've been through a weaker period of growth, but growth is going to pick up. Nominal GDP should accelerate by the end of this year with both a little bit of higher inflation and a little bit higher real growth. That's not a stagflationary environment and I think that's an overly pessimistic view of the economy.
HOLLAND: Susie, if I could just jump in here. Inflation has gone down during this year. We were at a high of 2.8 percent, which by the way is relatively low compared to what the Fed has engineered over the decades. It's gone down from 2.8 to 2.1, the most recent reading. They said they want 2 percent. They're pretty close. There was no reference to that in their statement, so I think Brian's right when he says that they're still vigilant.
GHARIB: Real quickly, Mike, what is your investing strategy in this economic climate that we're in?
HOLLAND: No question the companies outside the U.S. or companies in the U.S. who do a lot of business outside the U.S. are going to benefit from accelerating growth outside the U.S. as we have slowing growth in the U.S. So I think (INAUDIBLE) investing companies that have exposure to overseas markets.
GHARIB: And Brian, real quickly, between now and the next Fed meeting on June 28th, what is the most important economic data that you're going to be watching?
WESBURY: Well we always watch the employment report. I think we'll see a rebound in that, but more importantly, I watch those weekly initial unemployment claims. They're still very low. They've always crept higher before every recession in the past. They haven't done so so far. And then that Institute for Supply Management number, they've been picking up. I'm looking for that to continue.
GHARIB: OK, Brian, Mike, thank you so much. We appreciate you coming on the program. My guests tonight, Mike Holland of Holland & Company and Brian Wesbury, chief economist of First Trust Advisors.
"Street Critique"-Patrick O'Hare, Editor-in-Chief, Briefing.com
PAUL KANGAS: Tonight's street critique guest writes the bargain hunting column at the financial education website briefing.com. He's also the site's editor in chief. Patrick O'Hare joins us now to talk about the latest stock on his radar, Bed Bath & Beyond. Patrick, welcome to NIGHTLY BUSINESS REPORT.
PATRICK O'HARE, EDITOR-IN-CHIEF, BRIEFING.COM: Thank you, Paul.
KANGAS: Tell me a little about your column.
O'HARE: Yeah, well the bargain hunting column take us in two directions, really. One entails a contrarian approach whereby we look to find stocks that has fallen out of favor with the market for one reason or another and whose risk-reward profile looks relatively attractive for a patient-minded investor. The other approach entails looking for stocks that are cheap relative to their earnings growth prospects. And the price to earnings growth ratio or peg rating as it is also known, is a measure we like to use when we start our research for those types of ideas.
KANGAS: Those are the basic benchmarks that you use when you're looking for stock bargains?
O'HARE: Yes, they're starting points for us that we've found to be very good.
KANGAS: So given that, why are you writing about Bed Bath & Beyond now?
O'HARE: There is a lot of debate surrounding Bed, Bath & Beyond. It was considered one of the great growth companies actually in the late '90s and the early part of this decade.
KANGAS: We do have a five-year chart of the stock. We'll put that up now. We can see it's had a bouncy time of it.
O'HARE: Yeah and you'll also see it really hasn't done much over the last five years. It is up 18 percent in that period, but against the S&P 500 which is up 54 percent over the same length of time, it's been a real source of frustration for investors.
KANGAS: They're about the same level as early 2004 right.
O'HARE: Yeah, they are. But interestingly enough, earnings over that five-year period have compounded at an annual growth rate in excess of 20 percent. So you've seen some multiple compression there that put it on our radar screen as a value-based idea.
KANGAS: In addition to that, rival Linens & Things was taken private by the Apollo Group last year. Do you think there's a chance that Bed Bath & Beyond could be a buyout?
O'HARE: These days there is a chance that any company.
KANGAS: You got that right.
O'HARE: But in the case of Bed, Bath & Beyond, it certainly fits the bill in that respect. It doesn't have any debt. It's got over $3.50 per share in cash on the balance sheet and it is cash-flow positive. So very interesting idea, I would also add that its founders, Warren Eisenberg and Leonard Feinstein great managers in their own right are in their 70's now and may be more receptive to a buyout offer.
KANGAS: What are the big challenges the firm faces now? Incidentally, what kind of a price would you think it would bring on a buyout?
O'HARE: Yeah, well Linens & Things went out at about a 10 percent premium to the price it was trading at the day that the offer was made. Bed Bath & Beyond though, given its strong track record of executing so beautifully on the earnings front, I think the shareholders would be up in arms if it didn't command anywhere say about a 20 percent premium or more on its current price level.
KANGAS: Fair enough. Patrick, do you own the shares of Bed, Bath & Beyond or have any other disclosure to make?
O'HARE: No, I do not, Paul.
KANGAS: OK. Very interesting stuff, Pat, and I thank you very much for being with us.
O'HARE: Thank you.
KANGAS: My guest, Patrick O'Hare, editor in chief at briefing.com.
"Money File"-How Roth 401K Pays Off
SUSIE GHARIB: In the money file tonight the benefits of a Roth 401k. Here's Terri Cullen, personal finance columnist at the "Wall Street Journal" online.
TERRI CULLEN, COLUMNIST, WALL STREET JOURNAL ONLINE: Employers have been slow to adopt Roth 401(k)s for their company retirement plans because the rules governing these accounts were a bit murky. But that's likely to change now, after the Department of Treasury came out this past week with new rules to clear up some of the uncertainties. The government's new rules detail how the plans should operate and give clearer guidance on taxes. That's good news for employees.
A Roth 401(k) blends the tax benefits of a traditional 401(k) and a Roth IRA. Employees pay taxes on their contributions to the Roth 401(k) accounts upfront and when they take the cash in retirement, they pay no taxes on the earnings. There are some restrictions. You must be at least 59 1/2 to qualify for the tax-free withdrawals and you must have contributed to the account for at least five years. Is a Roth 401(k) right for you? Hands down a Roth 401(k) beats a traditional 401(k) if you're a younger worker, because you'll have many years to accumulate tax-free earnings. And it's also more beneficial to contribute to a Roth 401(k) instead of a traditional 401(k) if it's likely your income tax wont be substantially lower than it is now when you retire.
With a traditional 401k, your contributions are tax free up front, but your withdrawals in retirement are taxed at your personal income tax rate. No matter which account you choose, be sure to contribute at least as much to get your employers matching contribution. By saving enough to meet your employer match, you're doubling your money up front. Whether you're taxed on the money now or later, that's one investment that's hard to beat. I'm Terri Cullen.
Paul Kangas' Stocks in the News
PAUL KANGAS: Ahead of the Fed's rate announcement, trading on Wall Street was predictably narrow and quiet this morning, with the Dow off single digits and the NASDAQ Composite averaging about an 11 point loss until noontime. The market's resilience in selling (ph) bolstered the bulls and the Dow rallied to a 30 point gain just before the Fed said it would keep rates unchanged. Then after a brief dip, the blue chips came on strong again and ended in record high ground. The Dow Industrial Average closed up 53.80 points at a record 13,362.87. The NASDAQ Composite gained 4.59 points to 2576.34, while the Standard & Poor's 500 Index rose 4.86, ending at 1512.58. Over in the bond market, the 10-year note fell 13/32 to 98 21/32, putting the yield up to 4.67 percent.
The most active big board issue on 16.7 million shares, Texas Instruments (TXN) a nice move up $1.66. The company reportedly is raising its profit margin target from 50 to 55 percent.
Pfizer (PFE) was up $0.10.
General Electric (GE) an $0.18 gain.
Ford Motor Co (F) dropped $0.02.
Motorola (MOT) a $0.20 gainer.
Micron Tech (MU) was up a half dollar.
Halliburton (HAL) rose $0.78.
And CVS Caremark (CVS) gained $1.01. The company's board of directors approved a $5 billion stock buyback for CVS.
AT&T (T) a $0.20 gainer.
And Citigroup (C) rounding out the active list with a $0.40 rise.
IBM (IBM) did well, up $1.09 after Goldman Sachs upgraded it from "neutral" to a "buy" rating.
Then Rio Tinto Plc (RTP), the big international mining company, up $31.62. It traded as high as $305 a share today on a rumor that BHP Billiton approached the company about a takeover but Rio Tinto said it's not aware of any such approach. Billiton stock was up $2.43 at $50.33 a share.
Fluor (FLR) did well, up $2.36. The company received a $1 billion contract for a Saudi petrochemical complex over in Saudi Arabia.
And the Barnes Group (B) up $3.81. The company's in precision metal products and first quarter earnings jumped to $0.50 from $0.36 a year ago and that was $0.10 above the Street estimate. The company boosted 2007 guidance from $1.60 at best to up to $1.83 at best.
Efunds (EFD) rose $3.42. First quarter earnings down to $0.22 from $0.23 a year ago, but the company said it's been approached by certain parties about exploring strategic alternatives.
Barr Pharmaceuticals (BRL) up $2.36. First quarter earnings down to $0.78 from $0.84 last year, but that was $0.17 better than the Street was expecting.
SWS Group (SWS), I believe the old Southwest Securities was the name, down $3.13. The broker dealer reported lower third quarter earnings of $0.28, down from $0.32. The company cited higher operating expenses.
And Dow Jones & Co (DJ), there you see it, down $2.80 after Rupert Murdock said his bid of $60 a share is full and fair, certainly sounds like they are not going to sweeten it.
NASDAQ's most active, Cisco Systems (CSCO) down $1.85 despite better than expected earnings out after the close yesterday. But the company kept its outlook unchanged and a lot of investors were apparently hoping for something better than that.
Apple (AAPL) up $1.82.
Research in Motion (RIMM) jumping $8.07. UBS Securities upgraded its target on the stock from $170 to $180 a share.
Google (GOOG) was up $2.44.
Intel (INTC) $0.32 gain there.
And then moving along, Microsoft (MSFT) edged up $0.03.
Foster Wheeler (FWLT) did well, up $14.60, a real turnaround. First quarter earnings of $0.18 versus a loss of $1.25 a year ago.
And Dendreon (DNDN) really hard hit, down $11.41 on news the FDA is requesting additional information on the efficacy of the company's promising prostate cancer treatment called Provenge.
Yahoo! (YHOO) was down $0.19.
And Comcast "A" (CMCSA) a $0.17 loss there.
Whole Foods (WFM) after the close, announced that their earnings for the second quarter were a bit lower, $0.32 versus $0.36 last year, blamed it on new store openings but in after hours trading, Whole Foods shares tumbled over $4 when the company said staffers at the Federal Reserve or the Federal Trade Commission have expressed antitrust concerns about the natural food retailer's takeover of rival Wild Oats.
And finally, Trio-Tech International (TRT) soared over $5 a share. This company is in the semiconductor testing business. Third quarter earnings surged to $0.33 a share, up from just a nickel a year ago on a doubling of revenues.
