NBR Complete Transcripts: 06-19-2007
Tuesday, June 19, 2007The Housing Sector Shows More Signs of Uncertainty
SUSIE GHARIB: It looks like the housing market still has more room to fall. That's the opinion of analysts after the Commerce Department reported housing starts dropped in May, the first decline this year. Housing permits, an indicator of future activity, showed mixed results. And as Darren Gersh reports, there's more uncertainty on the horizon.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Housing starts no longer look like they are falling off a cliff, but they are still rolling downhill. The Commerce Department reports overall housing starts, including apartment buildings, were down 2.1 percent in May. That's more than 20 percent below the level a year ago. Starts for single family homes fell harder, down 3.4 percent last month. Building permits, considered a leading indicator, were up 3 percent overall, but permits for new single- family homes were off almost 2 percent. National Association of Home Builders economist Dave Seiders says the collapse of the sub-prime market has led to a sharp increase in sales contract cancellations, leaving builders in no mood to expand.
DAVID SEIDERS, CHIEF ECONOMIST, NATIONAL ASSOCIATION OF HOME BUILDERS: The trend is still clearly downward, but the rate of decline is slowing. I think it will continue to slow as we go forward. I mean, these numbers are not going to hit zero.
GERSH: The pain has been most acute for the nation's big, publicly- traded home builders, who focused on hot markets that have now gone cold. Economist Mark Zandi says most of the adjustment so far in the housing market has come from a pull back in new construction.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: You get the sense that we're coming to a bottom, in terms of construction. So that means, if this market is going to clear, if we're going to find a bottom in the housing market, it's only if sellers cut prices. If they don't, then the builders have a lot more work to do, and they're going to have to cut construction significantly more.
GERSH: And there is more pain lurking in the market. Prime mortgage rates are up more than half a percentage point in recent weeks. And many adjustable rate mortgages are due to reset in coming months. Seiders says builders are now watching interest rates like a hawk.
SEIDERS: All of a sudden, it occurs to you that rising interest rates could become part of this pattern. A lot of us expect the Fed to be easing policy somewhat in the later part of 2007. I think the Fed has made it pretty clear that they are not going to be dropping rates.
GERSH: Seiders says home builders hope solid job growth and decent income gains will provide a floor for the housing market, that is, assuming the market can find the bottom. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Gold Prices Take a Shine to the Soft Housing Market
SUSIE GHARIB: The softening U.S. housing market gave gold prices a boost today. Gold futures for August delivery gained $4.80 an, to close at $664.70 an ounce. The precious metal has tacked on $12 in the last four trading sessions. Suzanne Pratt takes a look at where prices could be headed from here.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For gold bugs, it looks like patience will be required in the next several months. That's because most experts are now saying it's unlikely the precious metal will revisit $700 an ounce this summer. They point to central bank selling, a strengthening U.S. dollar and higher Treasury bond yields, all of which are putting pressure on gold prices. Gold trader Lou Grasso describes the yellow metal as a follower and he says lately it's been following oil prices.
LOU GRASSO, GOLD TRADER, MILLENIUM FUTURES: If oil can't hold this rally that it's had over the last week or so-- this strong rally up to $69.50 a barrel -- if it can't hold that, I see gold probably falling down below the 200-day moving average, which is about $656.50
PRATT: Gold climbed above $700 an ounce earlier this spring. But it met resistance in the last few months, particularly as investment demand for the precious metal fell off. Analysts explain higher global interest rates are hurting gold's appeal, as it offers no fixed returns. On top of that, gold has had to compete with growing demand for other assets, including real estate and art. And finally, there's the inverse relationship between the dollar and gold. The stronger the U.S. currency gets, the more investors it will lure away from gold. Metals analyst Jim Steele thinks gold prices are consolidating, but says it will be tough for gold to venture beyond $700 in the current environment.
JAMES STEEL, METALS ANALYST, HSBC: Don't forget, two-thirds of gold demand is jewelry demand. And most of that is in the developing world and buyers in India and China and elsewhere are very price-conscious. And you can imagine how expensive it gets when it gets above that level.
PRATT: Some gold experts say it's not out of the question for gold prices to hit $800 an ounce or beyond. But they say that would probably only happen if there was a major geopolitical conflict, such as an escalation of tensions in the Middle East. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"State of Repair" -Blocked Locks
SUSIE GHARIB: Call them the nation's water highways. The Mississippi River, the Ohio River and a dozen other major tributaries run across the nation's industrial midsection. But moving cargoes of grain, coal and other commodities to the booming global export market is harder these days. As we continue our series, "State of Repair," Jeff Yastine shows us how crumbling infrastructure is hurting business.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: They are a fixture of life on the nation's busiest waterways. River captains and their towboats spending their days pushing long lines of barges, filled with bulk commodities -- coal and corn, grains, chemicals, concrete. For 70 years, those barges have been pushed through structures like this one, the Emsworth (ph) lock on the Ohio River near Pittsburgh. The lock's 600- foot long chambers are filled and emptied each time boats and barges pass through. They play a key role in river commerce, letting boat traffic safely traverse the rapids that would otherwise block navigation here. But the locks, built more than 70 years ago, are showing their age. The chambers are obsolete, only half the size of modern locks. Concrete is cracking off in some areas. The miter gates which open and close for boat traffic are rusting and some of the internal piston valves, which control the flow of water in the lock, are worn and cracked.
Conditions like that worry businessmen like Paul Buddeke. He runs the River Road terminal near Louisville, Kentucky. It's a major distribution center on the Ohio for commodities like coal, road salt and fertilizer. The aging locks on the Ohio, Mississippi, and elsewhere are prone to mechanical failures and closures that can last days, even weeks. Buddeke says that can be a major problem for shipping businesses like his.
PAUL BUDDEKE, PRESIDENT, RIVER ROAD TERMINAL: The cost of transportation is becoming such an issue with our customers that being able to move large volumes of material through a system like that and having the barge system be able to bring the product to them at a faster pace for a crucial supply. It's essential that it upgrade and keep upgrading throughout the history of the use of the river for transportation use.
YASTINE: One of those upgrades can be seen here at the McAlpine (ph) locks near Louisville. The new chambers are capped on each end by huge metal gates that hold back the Ohio River. They will let barge loads nearly a quarter of a mile long go through. Building new locks on the Ohio River is not an easy task. This project started in 2000, when the first shovelfuls of dirt were being turned and it won't be finished until 2009, at a cost of about $430 million. The U.S. Army Corps of Engineers says one of the problems in a multi-year construction project like this is getting consistent funding from Congress. Each year's appropriation depends on the shifting priorities of lawmakers. Corps engineers like George Flickner say contractors have to adjust accordingly.
GEORGE FLICKNER, PROJECT MGR., USACE-LOUISVILLE DISTRICT: It's tough. What you end up with is a less than efficient construction process with the contractor really not being able to progress and finish as soon as they could have, because you're controlled by dollars. It is a challenge, but what we do is we try to defer items that are not on our critical path schedule and therefore we keep the most important phase of the project moving.
YASTINE: But for users of these river highways, the improvements aren't happening fast enough. Barry Palmer is president of the American Waterways Council.
BARRY PALMER, PRESIDENT & CEO, WATERWAYS COUNCIL INC.: To a fourth or fifth generation farmer in Minnesota or Iowa, it's absolutely essential to have a modern well- maintained system of locks and dams. If you're up in Minneapolis-St. Paul, and you want to get your grain to the world market, you've got to be through 27 locks and dams from St. Paul-Minneapolis down to Baton Rouge or to New Orleans.
YASTINE: The Ohio, the Mississippi and their tributaries hold the bulk of the nation's river locks. Those nearly 200 locks average more than 50 years old. So the work to replace them will be going on for the next 50 years. Jeff Yastine, NIGHTLY BUSINESS REPORT, Louisville, Kentucky.
"Of Mutual Interest"-Socially Responsible Investing
SUSIE GHARIB: For most investors, their financial goal is simply to make as much money as quickly as possible. But for a growing number of people, there's another guiding principle: social values. As Erika Miller reports in tonight's "Of Mutual Interest", socially responsible investing has become a major force in the mutual fund industry.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Rima Vesely- Flad is passionate about protecting the environment and supporting human rights. So when the time came to save for retirement, she put her money where her heart is-- in a socially responsible mutual fund. She's one of a growing number of investors seeking to balance profits with values.
RIMA VESELY-FLAD, SOCIALLY CONSCIOUS INVESTOR: I do know that I'm not heavy in my heart in terms of how I've invested money. So, I do have a sense that it perhaps is contributing to something good, or at least is not doing harm.
MILLER: Although socially conscious mutual funds have been around since the 1970s, they've increased in popularity in recent years. There are now 119 U.S. mutual funds with a social focus, up from 54 a decade ago. Over $48 billion is currently invested in the group domestically, a more than six-fold increase in that time frame. Calvert is the nation's largest family of socially responsible funds. Bennett Freeman is its head of social research and policy and says making the right investment choices can pay off.
BENNETT FREEMAN, HEAD OF SOCIAL RESEARCH, CALVERT FUNDS: We believe that companies that are committing to the right standards, the right principles, the right policies and whose performance begins to match those commitments, are companies that will be the best investment bets for the future.
MILLER: Most socially responsible funds steer clear of companies involved in tobacco, alcohol and gambling. Many also screen for additional criteria, like avoiding companies that do business in Sudan, manufacture weapons or have poor environmental records. Some of the funds are highly specialized. For example, the Ave Maria funds follow Catholic tenets, the Amana funds invest according Islamic principles. The women's equity fund promotes female empowerment. According to Morningstar, there's no reliable evidence that socially responsible funds do better or worse than other funds over the long term. But mutual fund analyst David Kathman says there can be differences short term.
DAVID KATHMAN, MUTUAL FUND ANALYST, MORNINGSTAR: In many cases, socially responsible funds would have more growth-oriented stocks, especially technology stocks, because those pass the screens more easily. They tend not to have environmental issues. They tend to treat their employees well.
MILLER: Kathman also points out that socially responsible funds tend to have higher expense ratios, because of extra research costs. Socially responsible investing is not limited to passive screening. It also involves shareholder advocacy. Calvert and other fund families use shareholder resolutions, proxy votes and other strategies to encourage companies to change.
FREEMAN: Today, we're very involved in the Sudan divestment campaign for example. We're active in promoting labor and human rights around the world. We're very focused on environmental advocacy.
MILLER: Socially responsible investing isn't for everyone. Some investors may even find themselves more aligned with the vice funds, which invests only in alcohol, tobacco, gaming and defense companies. Portfolio manager Charles Norton says the fund is not making moral judgments, just focusing on industries with strong fundamentals.
CHARLES NORTON, PORTFOLIO MANAGER, THE VICE FUND: These sectors are steady performers. They're highly profitable. And they're not as tied to U.S. economic cycles. So if you're looking for a defensive strategy, it makes sense to take a look at these sectors.
MILLER: The four-year-old fund gets Morningstar's top five-star rating. It returned 23 percent last year and 18 percent annualized the past three years, beating the S&P 500 benchmark for both. But for investors like Rima Vesely-Flad, it's not just about the returns. It's about her being able to sleep at night.
RIMA VESELY-FLAD: We live in an extraordinarily wealthy country and the way that we spend our resources here reverberates everywhere around the world and that it matters. It matters if we care about our world and the people in it.
MILLER: Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Commentary"-The Power of Hedge Funds
SUSIE GHARIB: Tonight's commentator looks at the power of hedge funds, especially when it comes to forcing change through shareholder activism. Here's Mukul Pandya, executive director and editor of chief of "Knowledge at Wharton."
MUKUL PANDYA, EDITOR-IN-CHIEF, KNOWLEDGE@WHARTON: With more than $1 trillion under management, hedge funds undoubtedly have the ability to move markets. The question is, how does that happen? In one of the first academic studies to examine this issue, researchers at four business schools found that when hedge funds publicly announced that they would push for change at a targeted company, the result was a 5 to 7 percent jump in that company's stock price. These gains represented an abnormal return on top of the broad markets.
Wei Jiang, a visiting professor of finance at Wharton, conducted the study with colleagues from Duke University, the University of San Diego and Vanderbilt University. Jiang told knowledge@wharton that the share price boost came during the 40-day period surrounding a hedge funds announcement of a push for change. The study looked at 888 cases of shareholder activism by 131 hedge funds between 2001 and 2005. It found that, instead of seeking troubled companies, the funds sought out healthy firms with undervalued stock, as value investors do. The study also found that the average abnormal returns from that activism dropped from 10.6 percent in 2001 to 4.8 percent in 2005. In other words, as more funds chase attractive targets, abnormal returns might diminish or even disappear. It's good to know that the laws of economics are alive and well in hedge fund land. I'm Mukul Pandya.
Paul Kangas' Stocks in the News
PAUL KANGAS: That drop in housing starts and lower earnings from Best Buy sent stocks on Wall Street to a lower opening. The Dow fell 31 points at the outset and the NASDAQ lost 10 points. Analyst upgrades on stocks like Textron and Cigna helped the market rebound into the mid-session hours with the Dow posting a 27-point gain at 1:00 p.m. and the NASDAQ was up 2 points then. After another dip, stocks rallied on higher bond prices, so the market ended with a slightly positive bias. The Dow Industrial Average closed up 22.44 points at 13,635.42. The NASDAQ Composite edged up .16 to 2,626.76. Standard & Poor's 500 rose 2.65 points ending at 1,533.70. In the bond market, the 10-year note rose 12/32 to 95 15/32, lowering the yield to 5.09 percent.
Very active volume leader on 33 million shares, General Electric (GE) up $1.22, big move. It was an upside breakout in the stock to a five-year high.
Then came a new issue, Sterlite Industries (SLT), this is an Indian copper producer, 130 million American Depository shares offered at $13.44, opened at $14.10, the high $14.93, closed near the high on a pretty good debut.
Pfizer (PFE) dropped a nickel.
And then Bristol Myers Squibb (BMY) up $1.27. The company and its partner Sanofi-Aventis both strong after a Federal court ruled that their patent on stroke drug Plavix is valid and enforceable. Sanofi stock edged up $0.24 a share.
Time Warner (TWX) gained $0.35.
Then we look at Ford Motor Co (F) losing $0.20.
Bank of America (BAC)
up $0.64.
EMC Corp (EMC) $0.20 rise there.
Tyco Intl (TYC) down $0.49.
And Co Vale do Rio Doce (RIO), this is a Brazilian mining company offering $1.8 billion in convertible securities which of course represents potential earnings dilution.
Best Buy Co (BBY) down $2.83, traded as low as $45.01 after reporting first quarter earnings, $0.39, down from $0.47 a year ago, $0.11 below the Street estimate and that's despite a 3 percent rise in same store sales, but that was because low profit margin items apparently sold the best.
Then we see another big company, Home Depot (HD) a $0.31 gain. The company confirmed as the market was closing it will sell its supply business for about $10 billion to three private equity firms, namely Bain Capital, Carlisle Group and Clayton Dubillier (ph). It'll use the proceeds to buy back up to $22 1/2 billion in its own stock. In after hours trading, I saw Home Depot up $2.43 from this price at $40.70 a share.
Cigna (CI) edged up $0.68. Bank America upgraded it "sell" to "neutral" and boosted its price target from $36 to $57 a share, quite a boost.
Factset Research (FDS), this company's involved in providing financial information. Third quarter earnings rose to $0.56 from $0.41 a year ago, a nickel above the Street estimate. Revenues up 23 percent.
And then Harris (HRS) up $2.43. The company won a contract worth up to $7 billion to provide the U.S. Navy with hand-held radios.
Textron (TXT) moved up $4.98. Goldman Sachs upgraded it from "neutral" to "buy."
And then DirecTV (DTV) gaining $1.42. Morgan Stanley upgraded it from "equal weight" to "over weight."
On the downside, Leggett & Platt (LEG) which makes bedding and home furnishings, cut its second quarter earnings estimate by $0.11 down to the range of $0.31 to $0.36 a share. That's well below the $0.39 Wall Street consensus.
Then Cemex Sab (CX), this is the big Mexican cement producer, cut its second quarter earnings guidance. Merrill Lynch downgraded the stock from "buy" to "neutral."
NASDAQ topped the active list or Apple (AAPL) topped the NASDAQ active list losing $1.43. That's the eighth time in the last nine sessions Apple has topped the active list.
Then came Google (GOOG) down $0.89. The company aims to cut or offset all of its greenhouse gases by the end of this year.
Yahoo! (YHOO) $0.49 drop.
Intel (INTC) $0.07 loss.
Microsoft (MSFT) dropped a nickel. Reuters news reports that Microsoft has agreed to modify its new Vista operating system in response to complaints that its desktop search function puts Google and other potential competitors at a disadvantage.
Cisco Systems (CSCO) rose $0.09.
Research in Motion (RIMM) down $4.41.
Amazon.com (AMZN) lost $2.02.
Qualcomm (QCOM) moved up $0.36.
Comcast "A" (CMCSA) topped the active list with a $0.12 gain.
UAL (UAUA) up $2.60. The company's upbeat on the second quarter outlook and it underscored that by saying it's going to hire 100 new pilots by the end of the year. That had a positive effect on the airline sector.
Let's have a look at some of those, AMR (AMR), parent of American, up $0.73.
Continental Air (CAL) up $0.90.
And US Airways Group (LCC) up $1.85, getting an additional boost from UBS financial brokerage which upgraded it from "reduce" to "neutral."
Those are the stocks in the news tonight.
