NBR Complete Transcripts: 06-25-2007
Monday, June 25, 2007The Housing Market Stalls
SUSIE GHARIB: A U-turn on Wall Street today as stocks reversed gains over jitters about the impact of sub-prime mortgages on financial firms. The Dow slipped eight points after being up as much as 120 points and the NASDAQ lost 11. Another concern for investors, a new report today showing more weakness in the housing market. The National Association of Realtors reported that sales of existing homes dropped for the third straight month. The median price dropped as the supply of unsold homes surged to its highest level in 15 years. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: At the end of May, there were nearly 4.5 million existing homes for sale. The National Association of Realtors says at the current pace of sales, it will take nearly nine months to sell those homes. That's putting pressure on prices. The national median existing home price is 2 percent lower than a year ago. Still, the group's economist Lawrence Yun expects a pick up in sales that could stop prices from sliding.
LAWRENCE YUN, SENIOR ECONOMIST, NATIONAL ASSOCIATION OF REALTORS: We anticipate that given the recent rise in mortgage purchase applications, that the third quarter sales would be higher than the second quarter home sales and with rising sales, they would begin to thin out inventory and with inventory declining, prices will begin to firm up.
DHUE: Fannie Mae economist David Berson disagrees. He expects home sales to fall further this year and says mortgage purchase applications may be telling a weaker story.
DAVID BERSON, CHIEF ECONOMIST, FANNIE MAE: Because lenders have tightened credit standards, it may be that borrowers have had to apply in multiple places in order to get a loan. So again, it doesn't reflect the strength in the housing market.
DHUE: While overall sales are weak, some regions are showing signs of strength. Sales jumped 5.8 percent in the northeast and rose 0.7 of a percent in the Midwest, but fell 0.8 of a percent in the west and 3.4 percent in the south with all areas lower off a year ago. George Washington University Finance Professor Richard Green expects prices to continue under pressure as long as there is more than a six month supply of homes for sale.
RICHARD GREEN, FINANCE PROF., GEORGE WASHINGTON UNIVERSITY: If inventories are greater than six months, you can expect to see a price decline. And when I say price decline, I should caution that I mean in inflation-adjusted terms. So the purchasing power price of a house will decline. That could mean that house prices remain flat in terms of what we observe, but their real value is falling.
DHUE: New home sales data out tomorrow is also expected to show weakness. Many economists expect higher mortgage rates, tighter lending standards and record inventories will keep home sales under pressure into next year. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Robert Doll, Vice Chairman & CIO, Black Rock
SUSIE GHARIB: Even though stocks sold off today, our guest says the markets will still end the year higher. That was one of his 10 predictions when I talked with him back in January. A short while ago I checked in with Bob Doll, vice chairman and global chief investment officer of equities at Black Rock, for his mid-year update. I began by asking if the bull run on Wall Street is over.
ROBERT DOLL, VICE CHAIRMAN & CHIEF INVESTMENT OFFICER, BLACK ROCK: Don't think so, Susie. We use the phrase at the beginning of the year reasonably constructive to describe this year. The constructive means an up year. The reasonably means maybe not as much as last year and a few more bumps along the way. Volatility is normal when you're an equity investor. When you own stocks, you got to go to go through life with your seat belt on.
GHARIB: Bob, let's go over your predictions. The first one on your list is that you said the economy is going to slow to 2-2.5 percent. Any change there in your prediction?
DOLL: No. We think the U.S. economy below trend because of housing, 2-2.5 is a good number.
GHARIB: All right. How about prediction number two on earnings? First quarter numbers were pretty strong. Are you still on track for this prediction?
DOLL: They were. What's happening, Susie, is because of the S&P's significant representation outside the U.S., profit growth is slowing less quickly than economic growth. And our guess is when the year is said and done, a single-digit year for earnings growth, much less than the last five.
GHARIB: Prediction number three deals with inflation and interest rates. Are you still predicting that the Federal Reserve will cut rates by the end of the year?
DOLL: Our guess is there's still some possibility. They may defer that to the first of next year, but the prediction really was meant to say slightly inverted yield curve beginning of the year, slightly positive at the end of the year. We think that comes true.
GHARIB: Number four is with your market outlook, you said more volatility, some bumps along the way. So what are you saying is the outlook for the year?
DOLL: We think this is going to be another good year for the record books for equities. But there are just a few more bumps along the way. The last couple years have been pretty smooth as you know Susie. Our view is the year is less than half over, but the gains for the year are more than half over. So a more difficult second half but still up. Stocks closed higher than where they are today in our view.
GHARIB: Bob, you said that large cap stocks would outperform small cap stocks. So far they've been slightly better. How is it going to play out for the rest of the year?
DOLL: Our guess is Susie that big stocks will continue to beat smalls. They did the first 5 1/2 of this year but maybe the lead lengthens a little bit during the second half. Big stocks are delivering better earnings growth than small ones and they're cheaper.
GHARIB: All right. In terms of sectors, you favored when we talked in January you favored energy, health care and the tech sectors, how about now?
DOLL: Still like all of those, Susie. Obviously energy has worked very well after the tough start in January. Our guess is with price accrued staying stubbornly high those set back sector works again. Health care we like for the aging of the population and the demographics. Technology is always controversial, but if the world is going to continue to grow above trend it will spend money on tech.
GHARIB: Let's talk a little bit about the dollar. You predicted declines to its lowest level in a decade. Any change on that thinking? Is this a negative for the markets?
DOLL: Well, it's positive and negative as these things always are, Susie. The decline of the dollar has a positive effect on earnings translation back to the U.S., but of course it robs the U.S. of standard of living relative to the rest of the world. Our guess is over the next year or two, the dollar slowly but surely keeps working its way down because of all the imbalances in this country.
GHARIB: All right. You predicted that Japanese stocks would outperform other global markets. Doesn't look like that's happening. Are you revising your prediction there?
DOLL: Of the 10, this is the one we're struggling with most. The Japan market has lagged as you pointed out. Our view is with Japan's geographic proximity to booming Asia, with the end of deflation, with reasonable earnings growth, Japan will do better as the year progresses, but it's going to have to play some catch-up for this prediction to come true.
GHARIB: Prediction number nine says that volatility will increase. We've had plenty of evidence on that. Let's jump ahead to 10. You say the populist politics experiences a renaissance. Are you seeing that? Is it too early to tell?
DOLL: We think there are. There are lots of noise headline risk, let's put it that way, around populism related to creeping protectionism, lots of talk about raisings taxes on this group and that group, a lot of noise. We don't think we get a lot of legislation this year, Susie, but it's political season. The candidates want votes. When you want votes, you usually talk more populist. More of that to come.
GHARIB: In 10 seconds what's your advice for investors?
DOLL: Our view is stick to the long term. Make sure you have diversification beyond the United States. If your time horizon is long enough, stocks are cheap relative to bonds so be over weighted in equities. That's our view.
GHARIB: Lots of good information. Bob, thank you very much.
DOLL: Thanks, Susie.
Milk Money Is Leaving Many Customers Sour
PAUL KANGAS: There's a new sticker shock in America. Consumers are feeling pain not only at the gas pump, but also in the dairy aisle. Milk prices have surged to record levels and as Erika Miller reports, that's worrying some economists.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: These are good times for dairy farmers like Richard Byma. With milk prices at record highs, he says it's desperately need relief for the industry after a year of low prices.
RICHARD BYMA, OWNER, BY-ACRES HOLSTEINS: We are making money at the present time, which is a good feeling because it has been the last 13, 14 months we've been below costs. We've used up all our savings and had to borrow some money.
MILLER: At the Chicago Mercantile Exchange, milk futures have surged about 45 percent since the start of March. That has pushed up the retail price of whole milk to about $3.25 a gallon on average nationwide. That's more than a gallon of gasoline in most of the country. Rising milk prices are having a domino effect, pushing up the prices of other dairy items including butter, cheese, yogurt and ice cream. Farmers say the increase is the result of rising production costs. Higher energy prices have made it more expensive to get products to market. In addition, it is costing farmers more to feed their cows. Corn prices have shot higher, as more of the crop gets diverted to ethanol production.
BYMA: Since ethanol has come into the picture, we have to pay twice as much for our feed than we did a year ago. So those costs have doubled.
MILLER: Industry experts predict milk prices will continue to rise because supplies remain tight. The world's milk supply has been sapped by drought in Australia and lower subsidies in Europe. Futures trader Brian Rice says demand for dairy products remains strong, here and abroad.
BRIAN RICE. DAIRY FUTURES TRADER, RICE DAIRY: International demand has been the biggest driver. If you look at population growth combined with wealth increases in Asia, that equals more food consumption, especially in dairy proteins.
MILLER: Consumers aren't the only ones feeling the pinch from higher dairy prices. Major food corporations say they're also being hit hard. Hershey's and Starbucks have both recently said higher dairy costs are hurting profits. Dean Foods, the maker of Horizon Brand milk, also says earnings are suffering because the cost of producing its products is rising faster than retail prices. Dominos Pizza expects to pay more for cheese through the rest of the year. Cheese accounts for about a third of the cost of each pizza. Rising food prices are worrying some economists. Carl Weinberg of High Frequency Economics says they pose a greater threat to the U.S. economy than high gasoline prices.
CARL WEINBERG, CHIEF ECONOMIST, HIGH FREQUENCY ECONOMICS: Food is three times more important in our CPI than energy. So that a rise in food prices could potentially have a bigger impact on our spending on other goods and services than energy prices were the shock to become big enough.
MILLER: So far, consumers haven't cut back on milk and other staples. Most people would rather slash spending in other areas than take food off the table. Erika Miller, NIGHTLY BUSINESS REPORT, Sussex, New Jersey.
"Commentary"-A Marshall Plan for Africa
SUSIE GHARIB: In tonight's commentary, a business plan to improve the economic infrastructure in Africa. Here's Glenn Hubbard, dean of the graduate school of business at Columbia University and former chairman of White House Council of Economic Advisers for President George W. Bush.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIV.: Sixty years ago this month, U.S. Secretary of State George Marshall announced what became known as the Marshall plan for Europe in a famous commencement address at Harvard. Given the high rate of extreme poverty in sub-Saharan Africa and the fact that Africa is poorer today than it was 20 years ago, why not a Marshall plan for Africa?
A true Marshall plan for Africa could ignite growth and reduce poverty, but only through a different set of institutions than the current aid system. Familiar grand aid plans have little in common with the original Marshall plan. Familiar grand aid plans have little in common with the original Marshall plan. The Marshall plan for Europe fostered business sector development with an emphasis on loans and economic infrastructure. A real Marshall plan for Africa would also do only business development. Of course, Africa has tremendous social needs that call for concentrated attention from expert agencies, but those same aid agencies contain many small units that have pioneered support for African business.
An African Marshall plan would expand the best practice of those agencies from a sideshow to the main event in African aid. George Marshall was very clear that the breakdown of Europe's business structure was the problem that aid must solve. That logic applies to Africa today. A thriving business sector is the key to improving political and social progress. Aid must help, not hinder, and reform itself and our business leaders have a responsibility to act. I'm Glenn Hubbard.
"Last Word"-Taken to the Cleaners
SUSIE GHARIB: And finally tonight, victory for a small business owner in Washington, DC in the case of the $54 million pants. A judge today ruled in favor of Custom Cleaners after it was sued for that amount over a pair of missing trousers. A customer named Roy Pearson took the cleaners to court when it lost, then found a pair of his suit trousers. Pearson claimed a sign in the cleaner's window saying "satisfaction guaranteed" violated DC's consumer protection act and he wanted big bucks. He asked for $1,500 for every day the sign was displayed over a four-year period, multiplied by three defendants. He also wanted $15,000 to rent a car to take his clothes to another cleaner for 10 years. Paul, Pearson must now pay Custom Cleaners' legal fees for trying to take his dry cleaner to the cleaners at a cost of just under $1,000.
KANGAS: Well, Susie, off the cuff I'd say that an out of pocket expense.
GHARIB: That's cute. You know, you've got to admit this guy, there are so many of us who get frustrated with our cleaners, you admire his persistence.
KANGAS: OK.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened higher as that drop in existing home sales gave investors some assurance the Fed won't be raising rates anytime soon. The early rally was also fueled by bargain hunting after Friday's big tumble and Goldman Sachs' upgrade today on General Motors shares to a "buy." At noon, the Dow was up 110 points, NASDAQ posted a 13 point advance. The gains evaporated this afternoon on renewed worries about hedge fund losses and a rebound in oil prices. So the Dow Industrial Average closed down 8.21 at 13,352.05. The NASDAQ Composite lost 11.88 at 2577.08 while the Standard & Poor's 500 Index fell 4.82 points ending at 1497.74. Over in the bond market, the 10-year note gained 12/32 to 95 16/32. That lowered the yield to 5.09 percent.
New York exchange volume leader as it was last Friday is Blackstone Group (BX). Of course it went public Friday at a price of $31, moved up $35 and a fraction during the day and closed there, but today a little profit taking, $2.62 drop and it traded as low as $31.90. It traded 24.8 million shares today.
General Electric (GE) a $0.03 loss.
And then Ford Motor (F) dropping a dime.
Followed by Pfizer (PFE) with a $0.02 gain.
Then ExxonMobil (XOM) a $0.15 loss.
AT&T (T) was up $0.23.
First Data Corp (FDC) $0.57 loss.
Citigroup (C) fell $0.72.
Motorola (MOT) $0.07 drop there.
Schlumberger (SLB) down $2.04. Morgan Stanley said the oil service group is due for a correction after some sharp recent gains.
Let's have a look at some other in the oil service sector. We see Halliburton (HAL) down a fraction.
But Smith Intl (SH) and Weatherford Intl (WFT) dropping well over $1 each.
General Motors (GM) an $0.81 gain, traded as high as $36.84. This morning Goldman Sachs upgraded it from "neutral" to "buy" in the belief that talks with its union will realize sizable concessions from labor.
Chevron (CVX) was up $1.40. Bank America today upgraded it from "neutral" to "buy" citing the company's deep water growth strategy, apparently impressed by that.
And then Boeing (BA) a $0.35 drop, although the company is raising its Jetliner prices almost 6 percent in order to keep up with rising labor and raw material costs.
Avis Budget Group (CAR) down $1.92. Morgan Stanley downgraded it from "equal weight" to "under weight" because of weak second car rental prices in the leisure sector.
Let's have a look at some other stocks in that sector that got downgraded, $ thrifty (Dollar Thrifty) (DTD) off $2.40.
Hertz Global Holdings (HTZ) was down just a fraction.
Walgreen (WAG) down $0.72 even though third quarter earnings nicely higher at $0.56, up from $0.46 a year ago and that was $0.02 better than the Wall Street consensus.
Stanley Works (SWK) gained $1.37. Soleil Securities began covering it with a "buy" last week, kind of a delayed reaction.
On the downside, American Oriental Bioengineering (AOB), this is a company that makes plant-based pharmaceutical products. It plans on selling 13 million of its common shares in a secondary offering and this week's "Barron's" magazine has negative comments, including allegations that the company has made muddled disclosures and misleading claims, negative in "Barron's" definitely.
Bear Stearns (BSC) off $4.65. CIBC World Markets brokerage cut its price target from $1.80 down to $159, saying the company faces risk in the U.S. mortgage market in the coming three months.
Volume leader on NASDAQ, Apple (AAPL) down $0.66.
And then Google (GOOG) a $2.44 gain.
No change in Microsoft (MSFT).
Cisco Systems (CSCO) up $0.11.
Intel (INTC) down $0.22 a share.
Research in Motion (RIMM) fell $4.88.
Amgen (AMGN) losing a dime.
Qualcomm (QCOM) $0.46 loss there.
Yahoo! (YHOO) up $0.26.
Nvidia (NVDA) down $1.15 a share.
Elsewhere, US Xpress Enterprises "A" (XPRSA), this is a big trucking company, a management-led group has made a $20 a share buyout bid for U.S. Xpress, stock did rather nicely.
And those are the stocks in the news tonight.
