NBR Complete Transcripts: 08-22-2007
Wednesday, August 22, 2007The Bulls Are Back...But Are They Staying?
SUSIE GHARIB: A bull run on Wall Street today. The Dow surged 145 points and the NASDAQ jumped 31. Recent concerns about credit eased today as expectations grew that the Federal Reserve will soon cut interest rates. Also pushing stocks higher, news about several high profile deals and the hope that they signal a return to robust merger and acquisition activity. But as Suzanne Pratt reports, experts say the M&A window is only opening slightly.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a quiet month in the M&A world, takeover talk is warming up on Wall Street. Shares of MGM Mirage surged today after the company said the government of Dubai agreed to buy a stake. Nymex holdings also jumped on word the world`s largest energy exchange may be sold and there was fresh buzz about a deal between online brokerages Etrade and Ameritrade. Nevertheless, M&A expert Tom Burnett says investors are getting ahead of themselves in thinking M&A activity is making a comeback.
THOMAS BURNETT, PRESIDENT, MERGER INSIGHT: Financing is harder. You`ve still got fear of a recession. And even though the markets are recovering, a lot of that deal flow that was on the sidelines is probably going to stay there.
PRATT: It was a swarm of mergers and acquisitions that helped drive stocks to record highs earlier this summer. M&A experts say getting those deals done is what`s critical to the marketplace rather than hunting for new ones.
BURNETT: Right now, the focus at Blackstone and KKR and Texas Pacific is, let`s close the ones we have. Remember, huge fees are at stake here and these fees are what keep the LBO private equity firms going.
PRATT: In the last month, as financing evaporated, the window for M&A deals has closed. But, some experts say it has not been nailed shut. According to Thomson Financial, there have been a scant $34 billion in announced deals so far in August. That compares to $205 billion in all of July and a monthly average of $169 billion in the first half of the year. Value investors are ultimately expected to enter the market and scoop up distressed companies. Thomson Financial`s Richard Peterson believes the environment for some consolidation remains positive.
RICHARD PETERSON, SR. RESEARCH ANALYST, THOMSON FINANCIAL: There`s plenty of liquidity. Corporate profits are very strong. Companies` cash holdings are very good. Corporate balance sheets remain intact. What we`re seeing now is more a financial situation rather than an economic situation.
PRATT: Peterson says when the deal-making picks up, it`s likely to involve strategic combinations between companies in similar businesses and he believes private equity will become a much smaller piece of the M&A pie. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Dubai Word Now Has a $5B Stake in MGM Mirage
PAUL KANGAS: The big deal today is the government of Dubai buying into MGM Mirage. It`s a $5 billion investment being made by Dubai World. As Darren Gersh reports, these types of investments by so- called sovereign wealth funds are growing fast and politicians and policymakers are taking notice.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Las Vegas loves a high roller and the government of Dubai`s investment fund has the money to lay down big bets. Its $5 billion stake in MGM Mirage and the new city center development is a small fraction of the United Arab Emirate fund`s estimated annual cash flow. Trade expert Gary Hufbauer says Dubai and many other foreign governments have so much cash, they need to invest it in the United States.
GARY HUFBAUER, SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: You know, they pump out more oil and more money than they can possible use, even though Dubai is filled with construction cranes.
GERSH: Sovereign wealth funds are government-controlled investment companies financed with oil revenues or foreign currency reserves. Dubai and the other Arab Emirates may have the largest fund, worth up to $875 billion. Next up is Singapore with around $330 billion, followed by Norway and China. Altogether, the top 20 funds may have as much as $3 trillion invested around the world. And that amount is growing fast, some 20 percent a year. Analyst Alan Tonelson says with such deep pockets, it`s easy to see how sovereign wealth funds can have a big impact.
ALAN TONELSON, RESEARCH FELLOW, US BUSINESS AND INDUSTRY COUNCIL: When U.S. companies have to compete against rivals who are funded by these funds, they are competing not only against another private company, they are competing against a foreign treasury.
GERSH: Todd Malan represents foreign companies with investments in the United States. He says sovereign fund investments help create jobs.
TODD MALAN, CEO, ORGANIZATION FOR INTERNATIONAL INVESTMENT: That doesn`t mean we shouldn`t be careful and that doesn`t mean that we shouldn`t screen these investments and look at them and hold them up to the light of our protecting national security.
GERSH: Some sovereign wealth funds argue they act like any other pension fund, providing financial stability by investing for the long haul. The problem Hufbauer says, is that some funds are highly secretive.
HUFBAUER: This is kind of unnerving I think to the United States, to the Congress, maybe to some Americans that there are these very large, foreign official investors in this country who may have a mixture of motives.
GERSH: And a mixture of success. Many sovereign wealth funds have shown a tendency to overpay for trophy investments. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Joe Battipaglia of Stifel Nicolaus
SUSIE GHARIB: Joining us now for more analysis on today`s stock market rally, Joe Battipaglia, market strategist for the private client group at Stifel Nicolaus. Hi, Joe.
JOE BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS: Good to see you, Susie.
GHARIB: Good to see you, too. A lot of people were relieved today to see the market come back. Do you think things are settling down? Is the worst over?
BATTIPAGLIA: Well, certainly as it relates to the credit crunch, the Fed has made the right moves. The banking system is re-liquefying. Commercial paper markets are opening. Debt funding can be raised and so from that perspective, with each passing day, more confidence is restored in the system. The lingering question, of course, is what will be the effect of all this on the U.S. economy, particularly the consumer because we`re only now starting to see foreclosures, only now starting to see the resetting of a variety of mortgage products, a big chunk of it, almost $600 billion of it, being reset in the sub-prime arena alone over the next 14 months. So clearly that`s the challenge -- what happens to the U.S. economy. So a sigh of relief, a snap-back rally but then the question is now what?
GHARIB: Well and what is your answer to that question? What is the outlook for the economy?
BATTIPAGLIA: I think what will happen is that we`ll have a slower growth rate through the rest of this year to next. Durable good spending will continue to slow by the consumer and our economy may grow to only 1.5 to 2 percent at best. There`s still the risk of recession if the credit conditions were to deteriorate once again. And once you have that kind of mentality set in, then I would expect profit expectations to be cut somewhat and so, the performance of the stock market is going to be highly dependent on what happens in this economy going into 2008.
GHARIB: So sounds like you`re saying for investors who are seeing all these bargain-basement prices for stocks right now, too early to go bargain hunting?
BATTIPAGLIA: Well, it`s hard to say that this is, indeed, the bottom. For one thing, many financial companies are going to have to write off bad investments. It will be a hit to their earnings and to their book value. The housing industry is in a recession and all the related areas are also slumping as well. And we`ve seen car sales come off dramatically from last year to this year. So durable good are in question as well. So while there is this sense that you can get some cheap stocks here, perhaps it`s better to wait a bit and only stay with the strongest companies in the growth areas.
GHARIB: Joe, the last time you were on our program and again today, you brought us the word about recession, 50-50 chance of there being a recession. A lot of investors are counting on the Fed to cut interest rates at its September 18 meeting. Do you think that is going to happen? Is the economy going to be in that much of need for an interest rate cut by mid-September?
BATTIPAGLIA: The Fed has been very interesting through this process because going back to December, they declared the sub-prime mortgage issue to be self-contained and the economy will do fine. And then suddenly, their last meeting, they come out and say the same types of things, only a few days later to come into the market in a dramatic way to flush it with reserves. Why? We have a credit seizure. They then turn around and cut the discount rate and say that the risk is on the economy. So, clearly, when they cut rates, they will continue to do that into a weakening economy, which means the value of those rate cuts won`t be felt for quite a while yet, so they are somewhat behind the curve as it relates to the economy.
GHARIB: As we reported, a number of big banks went to the discount window, borrowed on the hope that other banks will do the same thing. Do you think that these moves are of -- are easing the credit crunch that we`ve been going through?
BATTIPAGLIA: There`s no question. Where you can see it is the fact that the commercial paper market has opened up again. The borrowing window is open for permanent finance in the corporations. Even some takeover activity has reemerged on to the scene. And I think investors generally feel a little bit more comfortable about general conditions for a prime borrower, for a customer whose got good credit. Now the question is beyond the banking system, what happens to the non-bank banks and other institutions who still have to go through this contracted phase. The Fed has nuanced their response so far. They are now going to be very sensitive to the economic data on durable goods, on spending and on employment, which may show softness in the coming months.
GHARIB: We have to leave it there, sounds like a lot of unknowns, a lot of uncertainties still out there. Thank you very much, Joe.
BATTIPAGLIA: You`re very welcome.
GHARIB: My guest tonight, Joe Battipaglia, market strategist for the private client group at Stifel Nicolaus.
"Street Critique"-Hilary Kramer, Market Strategist & Personal Finance Editor at AOL
PAUL KANGAS: Tonight`s "street critique" guest is doing some bargain hunting and has a list of stocks she says have been beaten down unfairly. She`s Hilary Kramer, market strategist and personal finance editor at AOL. And Hilary, welcome back to NIGHTLY BUSINESS REPORT. HILARY KRAMER, PERSONAL FINANCE EDITOR, AOL: Thank you, Paul.
KANGAS: The last time you were with us, you wrapped up the segment saying cash is king. Sounds like you might be changing your mind a bit and starting to dip in on the buy side, true?
KRAMER: It would only be with the stocks that have really been beaten down and there are opportunities that fit into the future, which might be a recessionary environment.
KANGAS: Elaborate a little bit more on the fundamentals that have to be in place for you to do a little buying.
KRAMER: We would have to have revenue growth, real revenue growth potential. And we would have to have a strong management team and a company that is a killer in its space. You want the top player in each sector.
KANGAS: All right. Let`s cut to the chase. Tell me about your first selection.
KRAMER: OK, Metalico (MEA), Metalico was a stock that was thrown in the scrap metal heap. This is a recycling company, metal recycling and the stock came all the way off because some hedge fund had to unwind their positions at $7. Metalico is really a bargain and I see it going to $12.
KANGAS: We see the weakness on that chart. I also know you like Comverge (COMV), which just went public on April 13 at $18 a share, a little above that now. What do they do?
KRAMER: Comverge is a company that helps prevent blackouts. What they do is they provide efficiency to electric utility companies, grid upgrades we call it and also metering. Comverge, COMV, is a bargain at $24. It`s been as high as $39. Again, the baby was thrown out with the bath water.
KANGAS: How about another selection?
KRAMER: Tetra Tech (TTEK). This is a water company, a water utility based in Pasadena, California. I know this company, strong management, amazing contract with municipalities, governments and yet Tetra Tech came all the way down because again hedge funds had to sale. They had margin calls. You will see Tetra Tech go from $20 all the way up to $24 probably even in the next six months.
KANGAS: I understand your last pick is a semiconductor testing firm.
KRAMER: That`s right, that`s right. ASE Test (ASTSF), they test semiconductors and you can see how this company just came crashing down. The expectation is that we`re going to see ASE be acquired by its parent company and I still think it`s going to happen, so we are going to see ASE come back. At $11, it certainly could go back at 15.
KANGAS: All these charts have a similar pattern of recent weakness so you`re picking out bargains according to what your thoughts are.
KRAMER: That`s right. It`s all about bargains and companies that will go for the long term.
KANGAS: Do you own any of the stock you mentioned or have any other disclosure to make Hilary?
KRAMER: Yes, Metalico and Comverge, I`m betting on those with money.
KANGAS: OK. Any final thoughts on today`s market comeback? Is it laying the foundation for a run back up to record highs?
KRAMER: Paul, it`s all about expectation. We`re not going to have record highs just yet, long term, yes. We have the best stock market, but short term, it`s a head fake. It`s about expectations. It`s about people thinking that we`re finally secure and that the Fed is going to come and rescue us. It`s expectations, don`t be fooled.
KANGAS: That`s why you like these defensive selections.
KRAMER: That`s right.
KANGAS: It`s great to have you on again. We`ll see you once more on September 5.
KRAMER: Thank you, Paul.
KANGAS: My guest, Hilary Kramer, personal finance editor at AOL.
"Money File"-Timing Is Everything
SUSIE GHARIB: In the "money file" tonight, the pitfalls of market timing. Here`s Jonathan Pond, author of "You Can Do It! The Boomer`s Guide to a Great Retirement."
JONATHAN POND, AUTHOR, "YOU CAN DO IT! THE BOOMER`S GUIDE TO A GREAT RETIREMENT": The golden rule of investing is thou canst not predict the markets. The allure of market timing is certainly understandable. Long bull markets make investors skittish. Quick market downturns, like the one that spoiled our summer, scare everyone. The notion that you can actually get out of the market just before it takes a dip, and then get back into the market just before it rebounds is terribly attractive.
The major challenge in trying to time the stock market is not so much getting out of the market before it drops as it is deciding when to get back in. Some investors do manage to get out in time, but more often they get out in anticipation of a drop that doesn’t arise. But the real challenge is reinvesting your cash at the moment the market begins to rise from the ashes. Usually, stock prices surge quickly after a drop and the jump occurs when gloom and doom permeate Wall Street and Main Street.
Recognizing that you`ll never be able to predict the near-term performance of the investment markets is liberating. Then you can confidently devise a diversified investment strategy and stick with it, even when you`ve lost money and the Wall Street pundits are spewing nothing but awful forecasts for stocks or bonds or both.
Keep investing using the power of dollar-cost averaging, periodically rebalance your holdings and resist the temptation to make major shifts in your investments. These have always been the keys to long-term investment success. I`m Jonathan Pond.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened sharply higher as investors were reassured by a resurgence of M&A activity and the belief the Fed`s recent moves to pump liquidity into the system are working. Thirty minutes into trading, the Dow vaulted 101 points and the NASDAQ was up 24 points. That news from Citi and others that they were in fact, tapping the discount window further boosted bullish enthusiasm, taking stocks higher right into the closing bell. The Dow Industrial Average rose 145.27 points, ending at 13,236.13. The NASDAQ Composite jumped exactly 31.50 points to 2,552.80, while the Standard & Poor`s 500 Index gained 16.95 points to end at 1,464.07. Over in the bond market, the 10-year note fell 14/32 to par and 25/32, putting the yield at 4.65 percent.
For the second day in a row, EMC Corp (EMC) topped the active list today on 17 million shares, the stock moving up $0.55. And then came General Electric (GE) with a $0.79 gain.
Followed by Pfizer (PFE) up $0.41.
Countrywide Financial (CFC) closed up just $0.03 a share. Yesterday it was up nearly $2 on speculation Warren Buffett`s Berkshire Hathaway might bid for parts of Countrywide. But the "Wall Street Journal" reported late today that Bank America is making a $2 billion equity investment in Countrywide via the purchase of preferred Countrywide stock yielding 7 1/4 percent and that stock is convertible and to common (ph) at $18 a share. In after hours trading, Countrywide stock was trading just about $25 a share, quite a move.
Citigroup (C) up $0.37. As you heard, the company borrowed $500 million from the Fed for its clients.
Ford Motor Co (F) a $0.07 drop.
Followed by JPMorgan Chase (JPM) another company that went to the discount window, a $0.20 loss there.
Bank of America (BAC) up $0.35.
And then Time Warner (TWX) a $0.29 gain.
Wells Fargo & Co (WFC) $0.67 drop, tenth in volume.
MGM Mirage (MGM) up $6.62. As you heard, the company has approved a deal in which Dubai World will acquire eventually 9 1/2 percent stake in the company for $5 billion.
BHP Billiton Ltd (BHP), this is a big Australian mining conglomerate. The company reported full year earnings up 28 percent and the company said turmoil in the global markets are posing no threat to the China-driven commodities boom behind its growth. That was a plus for other metal producers.
Let`s have a look at some of the majors. Alcan (AL), Alcoa (AA) doing well.
And Freeport-McM C&G (FCX) very well, up $4.30
And Kaiser Aluminum (KAIU) gained $1.53.
Target (TGT) up $3.48. Yesterday it had better than expected earnings. Today, Goldman Sachs upgraded it from "neutral" to a "buy" recommendation.
JW Nordstrom (JWN) up $1.61. The company will buy back up to $1.5 billion of its own stock.
Tween Brands (TWB) big loser, down $11. The girls apparel retailer had second quarter earnings all the way down to $0.07, from $0.18 a year ago. Same store sales dropped 2 percent and the company cut its full year earnings estimates on top of that.
Toll Brothers (TOL), the home builder, up $1.06, even though third quarter earnings plunged 85 percent from last year to only $0.16 a share versus $1.07, but the Street was looking for only a nickel a share. The company did decline to give any fourth quarter earnings guidance because of all the uncertainties in the housing business.
Campbell Soup Co (CPB) up $1.38. UBS financial upgraded it from "neutral" to "buy" on the belief the company will grow its earnings annually by 9 percent for the next several years.
Centurytel (CTL) up $2.95 on news it plans to buy back up to $750 million of its own stock.
And then as we touched on Nymex Holdings (NMX) up $7.28. The company in talks to sell itself for what it says is a meaningful premium.
Apple (AAPL) topped the active list on NASDAQ, up $4.94. The "Financial Times" is reporting the company is in agreements with three European firms to sell its iPhone.
Research in Motion (RIMM) down $0.11.
But Google (GOOG) jumped $6.14.
Intel (INTC) $0.26 gain.
Cisco Systems (CSCO) was up $0.16.
Then Microsoft (MSFT) $0.15 rise there.
Qualcomm (QCOM) up $0.37.
Baidu.com (BIDU) a gain of $7.29.
Dell (DELL) edged up $0.79.
And Comcast "A" (CMCSA) was up $0.48.
And finally, shares in Blue Coat Systems (BCSI) soared nearly $17 1/2 on a first quarter turnaround. Profits at the Internet security company jumped to $0.14 cents per share from a loss of $0.22 per share a year ago.
