NBR Complete Transcripts: 07-02-2007
Monday, July 02, 2007Mergers & Acquisitions Spark Fireworks on Wall Street
SUSIE GHARIB: Fourth of July fireworks came early to Wall Street as a host of deals kicked off the third quarter and ignited stocks. The Dow jumped 126 points and the NASDAQ added 29. Virgin Media topped the list of today's deals. The British cable television provider said it has received an offer from an unnamed bidder. Sources close to the company said that bidder is private equity firm Carlyle Group and that the offer values Virgin Media at roughly $10 billion. Virgin will only say that it has hired Goldman Sachs to lead a strategic review of its business, which could lead to a sale.
Carlyle Group was busy on this side of the pond. It's offering $6.3 billion in cash and debt for Manor Care. It's an operator of nursing homes and acute care facilities. As the heat of summer rises, Reddy Ice Holdings has agreed to a buyout. GSO Capital Partners is buying the distributor of packaged ice for just over a billion dollars. Also over the weekend, Canadian telecom firm BCE agreed to go private in a deal valued at $32.6 billion. It would be the largest private equity deal in history. The buyers include the Ontario teachers' pension plan, Madison Dearborn Partners, and Providence Equity partners.
Elements & Events That Will Move The Markets
PAUL KANGAS: Investors are hoping that merger and acquisition activity will continue to lift stocks. What are the issues that could dominate trading for the next six months? Here's Suzanne Pratt with a look at what to expect.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks got off to a strong start in 2007 and many market pros are forecasting additional gains in the second half. Most believe major market indexes will end the year above current levels, even though all three have already posted solid increases so far -- 6 percent for the S&P 500 and 8 percent for the Dow and NASDAQ. Brown Brothers Harriman strategist Andrew Burkly predicts the S&P 500 will close out the year up a total of 13 percent thanks to better than expected corporate profits.
ANDREW BURKLY, MARKET STRATEGIST, BROWN BROTHERS HARRIMAN: Our read on the second quarter is that the analysts are way too low again on their earnings expectations for the second quarter. So right now they are looking for about 4 percent year over year growth in the second quarter. We think we could double that, maybe up to 8 percent year over year growth in the second quarter.
PRATT: Others say reasonable valuations and respectable economic growth will help lift stocks higher. But most are also forecasting a bumpy ride for investors. Citi market strategist John Manley is looking for double digit gains for the major averages in 2007, punctuated by big price swings.
JOHN MANLEY, MANAGING DIRECTOR, CITI SMITH BARNEY: There's no question the market has become more volatile because a lot of the players and a lot of the money is much more short-term oriented, so they react much more quickly. There are less tolerant, they are more willing to dump something that's losing or pile on something that's winning. So I think the volatility stays with us.
PRATT: A list of worries is expected to contribute to that volatility, but not rob the market of its upward momentum. Some experts say additional spikes in energy prices and a deepening of the housing market slump are among their greatest concerns. Others worry the U.S. economy may heat up too fast for the Federal Reserve in the second half.
BURKLY: I think if that were to happen, then the Fed definitely would not be comfortable lowering interest rates at that point and may actually be starting to thinking about tightening at some point.
PRATT: One additional concern for investors in the back half of this year is inflation. Experts say if higher food and energy prices spread throughout the economy, the bull run could come to a quick end. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Phil Dow, Director of Equity Strategy at RBC Dain Rauscher
SUSIE GHARIB: Our market guest tonight thinks stocks will go higher from here and he's forecasting that the S&P 500 index will be up 10 to 12 percent for 2007. Joining us now to explain, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi, Phil.
PHIL DOW, DIRECTOR OF EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie, nice to be with you.
GHARIB: Nice to have you on our program again. That is a very upbeat forecast. Tell us why you are so bullish.
DOW: Well, I think in general the crowd is kind of negative. There is record short interest right now. The trading community is just on kind of tenterhooks from time to time. Today they are up, tomorrow they could be down, tremendous amount of derivative activity in the market that could lead to further buying. I think the fundamental picture is quite strong. Our economists look for pretty solid economic growth both this year and next with growth accelerating next year. And earnings growth that ought to be pretty good next year, so we think that basically this year earnings are going to improve. The market is fairly valued and could go higher, Susie.
GHARIB: So earnings you think will improve for the second quarter numbers that are coming out, third and fourth quarter, all the way through.
DOW: The consensus is for about 4 percent gain this quarter. We think the number could be six to eight percent higher. Again (INAUDIBLE) the third quarter we think you could see a return to double-digit earnings growth by the fourth quarter this year and throughout next year Susie.
GHARIB: That is pretty upbeat. Let's talk though about some of the risks because we hear from a lot of the other market analysts who come on our program about concerns about the sub-prime mortgage crisis, about the housing down turn, about private equity deals drying up. To what extent could this derail this market rally that you are talking about?
DOW: Well, there are a number of things that could. But remember the last four years the average return on the S&P has been about 14 percent. People here that and say boy, it didn't feel that good. I think we are going to have a continuation of that kind of a trend, Susie. Right now the things that concern me are basically a potential for higher interest rates, a potential for isolationism, and just a general slowdown in the economy. But we've seen a resurgence in the economy and my bet and guess is that things are better than they seem.
GHARIB: We just came off of a Federal Reserve meeting last week. What is your read on the Fed? Do you think that interest rates could go higher sometime this year?
DOW: I've felt for some time that the economy is more resilient than investors give it credit for and that the Fed really probably is not going to have to do anything. I don't look for a cut. I think this economy could prove to be stronger and you could see a hike sometime early next year.
GHARIB: All right, let me ask you about, you know, Blackstone also going back to some of the risks. We see Blackstone trading below its offering price. What does that say about the market outlook? Or is that just a special situation?
DOW: My guess is Blackstone is kind of an isolated situation. These companies are doing the first half of a private equity transaction was the acquisition part. And you can do that on pretty reasonable credit. If interest rates go up, my guess is private equity will remain alive just by putting more equity in rather than debt. I think down the road the more challenging part will be selling these companies. And we'll have to see that the next market cycle in four, five, six years, Susie.
GHARIB: Now you told me earlier that this is a good time for investors to buy stock if someone has some new money that they want to put into the markets. What would you recommend where they put it?
DOW: Well, every stock I recommend I own personally. But I think the best place for serious investors and their serious money is dividend growth. You can buy ETFs and mutual funds that specialize in that. I think three stocks epitomize that kind of an investment: Citi, which we have an investment banking relationship, Citigroup, General Electric we have an investment banking relationship with and Johnson & Johnson. We do not have a banking relationship but if you bought equal amounts of those three, Susie, you would have a current yield of about 3.25, very enlightened dividend policy. I think the dividend will double every five years with these stocks. So I think for investors they are very attractive at this point in time.
GHARIB: OK. Thank you so much, Phil for coming on the program. Really appreciate it.
DOW: My pleasure, Susie.
GHARIB: My guest tonight, Phil Dow, director of equity strategy at RBC Dain Rauscher.
The Main Agenda For President Bush & President Putin in Maine is to Ease Tensions
PAUL KANGAS: Today President Bush and Russian President Vladmir Putin met at the Bush family compound in Kennebunkport, Maine. The talks were aimed at reducing the tension over a missile defense system and Iran's nuclear weapons program. But as Stephanie Dhue reports, despite recent diplomatic frostiness between the two countries, business investment in Russia is heating up.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: High oil prices have helped fuel economic growth in Russia. The country now has a growing middle class that is busy shopping, building homes, and buying furniture. Russia expert Leon Aron, says there's a pent-up demand for consumer goods.
LEON ARON, DIR. OF RUSSIAN STUDIES, AMERICAN ENTERPRISE INSTITUTE: This is the market that has been starved for the previous seven decades. So clearly, it's like in China, there's an immense amount of buying and they're pretty far from the saturation point.
DHUE: U.S. companies are eager to help meet that demand. The U.S. and Russia now has a $30 billion trade relationship. While political tensions between the two nations have flared, Eugene Lawson of the U.S.-Russia Business Council hopes, like with our other trading partners, increased commercial ties will improve political relations.
EUGENE LAWSON, PRESIDENT, U.S.-RUSSIA BUSINESS COUNCIL: China's our third largest trading partner. We can't let the political rhetoric get too far out of hand. We must be able to talk to them, and what we're hoping for is growth in commercial trade with Russia, to put a perimeter around it.
DHUE: Russia has put a perimeter around foreign investment in what it deems strategic assets. It has pressured foreign investors to give back major oil and gas projects started before Putin came to power in 1999. And it has closed the door to investment in precious metals, transportation and nuclear materials. While President Putin has pushed for Russia to be a member of the World Trade Organization, some experts say Russia is only prepared to do that on its own terms.
ARON: The objective of joining the sort of liberal, free market, democratic, capitalist economy is no longer -- I believe by this Kremlin -- is no longer set even as a distant goal.
DHUE: Tom Carver of the consulting firm Control Risks, says for many companies doing business in Russia, politics are only a small factor.
TOM CARVER, SENIOR VP, CONTROL RISKS: If you're exporting woman's lingerie or shampoo or whatever to Russia that's not in a strategic sector, really what goes on at Kennebunkport is not going to make any difference to you.
DHUE: Carver says businesses should focus on the ongoing risks and be sure to understand Russia's complex regulations and find a credible business partners. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-An AccurateTake on Inflation
SUSIE GHARIB: Tonight's commentator asks the question: how accurate are the government's inflation figures? He's Bernard Baumohl, director of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: Is inflation really subsiding? The Federal Reserve says yes, but a visit to the supermarket, restaurant or gas station will tell you the cost of living is anything but subsiding. In fact, food inflation this year has been rising at the fastest pace in 15 years. And with oil hovering around $70 a barrel, gasoline prices have moved up as well. Clearly there's a growing disconnect between what consumers see and what the Federal Reserve views as inflation. The Fed conducts monetary policy based on how core inflation is behaving.
Core inflation tracks changes in consumer prices, but excludes that of food and energy because these two sectors are often influenced by short- term events like hurricanes or geopolitical tensions. The Fed doesn't want to set interest rates based on such temporary factors and rightly so. But these days, food and energy costs have been climbing because of fundamental changes in the two commodities.
For instance, corn, which has typically been used for food and feed stock, is being diverted to produce ethanol. That's caused the price of food staples linked to corn like meat and milk to skyrocket. Oil prices have jumped not as a result of short-lived events, but because global demand for crude is about to exceed production. Thus, the Fed's exclusion of food and energy may now be a mistake. It makes little sense to say core inflation is stabilizing, when Americans continue to lose purchasing power. I'm Bernard Baumohl.
"Last Word"-Big Bucks to Dine With Buffett
SUSIE GHARIB: And finally tonight, the saying goes, you get what you pay for and two investors hope to get their money's worth after paying a record amount to dine with billionaire investor Warren Buffett. Mohnish Pabrai and Guy Spier offered the winning joint-bid of $650,100 to have lunch with Buffett. Both men will bring their wives to lunch; Pabrai will also bring his children. The proceeds of the auction benefit the Glide Foundation, which provides social services to the poor and homeless in San Francisco. Paul, the bidding was pretty intense near the end. In the last hour, the bids went up by a quarter of a million dollars.
KANGAS: Let's see 20 percent of a tab of $650,000 for the waiter that is $130,000, that waiter's going to be one happy camper.
GHARIB: Sounds like he will be.
Paul Kangas' Stocks in the News
PAUL KANGAS: All those mergers and a pickup in manufacturing activity triggered a bullish stampede on Wall Street as the third quarter began. The Institute of Supply Management says its index of manufacturing activity rose to a reading of 56 in June, its best level since the spring of 2006. By 11:00 a.m., the Dow was up 106 points and the NASDAQ posted a 25 point gain. The rally cooled down just a bit over the mid-session hours, but fresh third quarter investment money sent stocks surging again, especially after the yield on the 10-year Treasury note fell below 5 percent. The Dow Industrial Average closed up 126.81 points at 13,535.43. The NASDAQ Composite jumped 29.07 points to 2632.30 while the Standard & Poor's Index gained 16.08 points at 1519.43. In the bond market, the 10-year note gained 8/32 to 96 6/32, putting the yield below 5 percent, 4.99.
AT&T (T) was the most active big board issue trading 15.2 million shares. The company did have problems in activating about 2 percent of the iPhones over the weekend and the problems have been largely resolved now and we'll have more on AT&T later.
General Electric (GE) a $0.02 drop.
Pfizer (PFE) up $0.16.
EMC Corp (EMC) gained $0.45.
On those higher oil prices, ExxonMobil (XOM) rising $0.94 and very active.
Ford Motor Co (F) up $0.22.
Sprint Nextel (S) which has received a number of brokerage upgrades in the last week, up $0.87.
Time Warner (TWX) $0.47 rise.
Taiwan Semiconductor (TSM) up $0.15.
And LSI Corp (LSI) bouncing back $0.07 after recent losses.
BCE (BCE), the big Canadian phone company, as you heard will be acquired by a private equity consortium. It works out to about $40.12 a share on the takeover.
Manor Care (HCR) down $1.19. With Carlyle Group, buyout bid is worth about $67 a share. The stock bouncing up near there and then backing off.
Archer-Daniels-Midland (ADM) gained $1.12. Bank America upgraded it from "neutral" to "buy" with a $40 a share target, citing the strong biofuel demand that's going on and Archer's a major provider.
Volt Info Sciences (VOL) gained $1.56. The Sadoti brokerage upgraded it from "neutral" to "buy."
And then Maidenform Brands (MFB) moved up $1.29. The stock after the close today was added to the Standard & Poor's small cap 600 index, index fund buying helping the stock.
American Financial Realty (AFR), a $0.49 gain, traded as high as $11.02 today after UBS financial upgraded it from "neutral" to "buy" on a valuation basis, had quite a dip recently.
Reddy Ice Holdings (FRZ) up $1.96 as you heard, GSO Capital Partners will acquire the company for $31.25 a share and that obviously would be cold cash.
Angelica (AGL) was up $1.45. Pirate Capital, a hedge fund, which owns 9.8 percent, wants the company to explore alternatives, including its possible sale.
NASDAQ's most active, Apple (AAPL) down $0.78. Analysts estimate the company sold about 500,000 iPhones over the weekend, had a little problem with them, but apparently mostly resolved.
Research in Motion (RIMM) continues to surge higher, up $14.27 today. Last week it really had a sharp rally on big earnings and news of a three for one split. Today, JPMorgan boosted earnings estimates and repeated an "over weight" rating.
Google (GOOG) up $7.68.
Microsoft (MSFT) $0.27 rise.
Baidu.com (BIDU) which recently has received some brokerage upgrades, up $18.43.
Intel (INTC) $0.53 gain.
$0.04 rise in Cisco Systems (CSCO).
Dobson Communications (DCEL) rising $1.31. AT&T will acquire this company for $13 a share in cash.
Dell (DELL) moved up $0.38.
And Virgin Media (VMED) up $4.30. As you heard, the company reportedly has received a buyout bid that's somewhere between $30 and $35 from an unnamed private equity group which is rumored to be Carlyle Group. The company says it's not been in any talks.
Local.com (LOCM) up $2.04. The web search company received a patent on its mobile search tool.
And as we touched on earlier, Option Care (OPTN) up $3.84. Walgreen will acquire this company for $19.50 a share. This company provides home infusion pharmacy services.
And over on the American exchange, InterOil (IOC) which plunged sharply, almost $20 a share last week, rebounding $5.17. Raymond James financial brokerage said last week's sell out in the stock was over done and it upgraded it from "out perform" to a "strong buy."
Those are the stocks in the news tonight.
