NBR Complete Transcripts: 09-07-2007
Friday, September 07, 2007The Dow's Triple Digit Tumble
SUSIE GHARIB: Troubling news today from the Labor Department sent stocks falling on Wall Street. The government said for the first time in nearly four years, U.S. payrolls declined as American employers cut back on hiring in August. The news surprised economists and investors. The Dow tumbled almost 250 points, the NASDAQ fell 48, on concerns that problems in housing are spilling over to the rest of the economy and could trigger a recession. We have two reports looking at today's employment data and how the Federal Reserve is likely to respond. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The debate over the health of the economy took a sharp turn this morning with the release of the employment report for August. For the first time in four years, payrolls fell for the month. Employers cut 4,000 jobs. Economists had been expecting them to add more than 100,000. In addition, the Labor Department made big revisions cutting payroll numbers for June and July. A separate household survey found the unemployment rate holding steady at 4.6 percent. But economists attributed this to the fact that the survey shows a large number of people stopped looking for work. Josh Feinman, chief economist at Deutsche Asset Management, warns against reading too much into one report.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: You need to see several reports like this before you could be definitively sure that we have shifted dramatically. But, it certainly raises that possibility. So, on average, over the last several months, private sector employment growth clearly has slowed down.
GURVEY: The biggest declines were in manufacturing and construction. Government jobs declined by 28,000; an increase had been expected. There were gains in the service sector with increases in retail jobs, health care and food services. The markets have been calling for a Fed funds rate cut and Fed watchers say today's report makes such a cut more likely. Bond prices were up and yields down in today's trading. But stocks sold off on the news, with traders concerned that an economic downturn will affect corporate earnings. Equity strategist Tony Dwyer at FTN Midwest says the market is worried more bad news is coming.
ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: The only real bull market killer is when you have negative earnings. You get negative earnings in a recession and that's led by negative job growth a lot of times. Now we don't think a recession is coming, but that's the fear.
GURVEY: Some cities are already worrying about a downturn. New York is considering a hiring freeze in anticipation of falling revenue. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh reporting. For Ben Bernanke and his colleagues, analysts say the question now is not whether to cut interest rates, but how much. Political economist Tom Gallagher says the downward revision in June and July employment shows hiring was weakening even before the financial market meltdown, a fact that will influence Fed thinking.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: That tells you that the trajectory was already weak and it's been bumped down even further, so I think this is an important data point for the Fed. It really tells them that their forecast for the economy was too strong and they now have to have a weaker forecast which I think will push them toward cutting rates.
GERSH: Former Federal Reserve Governor Lyle Gramley expects the central bank will shave a quarter percentage point off its benchmark interest rate at its September 18 meeting, in part because it can't afford to seem asleep at the switch. But Gramley says the case for a half a point cut hasn't been made.
LYLE GRAMLEY, SR. ECONOMIC ADVISER, STANFORD WASHINGTON RESEARCH GROUP: August retail sales numbers will probably be half-way decent. We know that auto sales seasonally adjusted were up. These chain store sales figures look half-way decent. So we haven't seen the deterioration in consumer spending yet which would lead them to the conclusion that they had to really push the button hard.
GERSH: Pressure to do more is growing on Wall Street and Capitol Hill. Congressman Barney Frank chairs the committee that oversees the Fed. Frank called on Bernanke to make a meaningful cut in rates and keep in mind that the law requires the Fed to both control inflation and maintain employment.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: This is really a test of the Fed. Do they really take the dual mandate seriously? Are they equally concerned about maintaining inflation and maintaining adequate employment, because a failure to recognize that now would be very serious.
GERSH: For now, Fed officials are still worried an aggressive rate cut would encourage investors to believe they'll be bailed out whenever markets turn south. But that worry could fade if we get more economic numbers like the one today. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Market Monitor"-John Manley, Managing Director of Global Wealth Management at Citi
SUSIE GHARIB: Despite today's sharp sell off, our "market monitor" guest says the stock market will still do well for the rest of this year and into 2008. Joining us now John Manley, managing director of global wealth management at Citi Smith Barney. Hi John.
JOHN MANLEY, MANAGING DIRECTOR, GLOBAL WEALTH MGMT., CITI: Hi Susie.
GHARIB: As you heard, economists are talking more and more about recession in view of today's employment report. How can stocks do well in that kind of economic environment?
MANLEY: I actually disagree with Mr. Dwyer a little bit because I think that negative earnings comparisons aren't necessarily bad for stocks when they happen. Federal Reserve liquidity, liquidity for the system is generally the thing that drives the market. And while there's no question housing is having some impact beyond itself, we still don't think that's out of control and I really wouldn't read too much into today's numbers.
GHARIB: So what's your investment strategy in this climate?
MANLEY: Well, we're still investing. We haven't changed our equity mix at all. We're haven't changed our target. We're still using 1600 for the S&P and 14,400 for the Dow.
GHARIB: That's pretty bullish, actually.
MANLEY: As it gets closer and closer, it gets more bullish, but I don't think this is necessarily the big one as Fred Sanford used to say. There are a lot of issues here. There are two main problems. One is the short-term liquidity seizure in the capital markets. The other one is the effect of housing. The first one I think the Fed can deal with fairly easily. The second one will take a while to work out. The very thing the Fed would use to sort of offset that potential weakness is the thing that in the past has been a pretty positive thing for stocks.
GHARIB: OK, let's go over some of your recommendations. You have Metlife (MET) at the top of your list. What is the attraction there?
MANLEY: I think the story here basically is changes in pension laws, changes in GAAP accounting that really make the granting of the fund benefit pensions sort of a volatility increaser for corporations for their earnings. We think that as this year progresses into next year, you're going to see more and more corporations farming out their pension plans in various self-financing forms. We think Metlife picks up a lot of that business.
GHARIB: Financial stocks have not been very popular with investors. Why should they take a fresh look at Metlife?
MANLEY: First of all, I don't think Metlife, if it's been tarred, it's been tarred with too wide a brush. I think you still have a very strong story here in terms of an individual bottoms-up. We got exposure to a lot of things that people have talked about as being specific problems for financial companies.
GHARIB: Let's look at the next one on your list. (TJX) TJ Maxx. It's been struggling recently. Why do you like this one?
MANLEY: Here again we think we have a couple things going on. From the bottom up, we think we have a very good cost-cutting story. They have a new CEO in there. What she's done is to really focused on the bottom line. We think they're going to increase their margins going into next year as they cut back on their supply chain. They make it tighter. They watch employment levels. They more rationally source. They have more feedback on what they're selling and what they're not selling. We think that all helps get to the bottom line. From the top line, I think it's number one a bet the American consumer doesn't go away but it's also an acknowledgement that if times get difficult, because they're an off-price name, they may actually pick up clients or pick up customers as people trade down a little bit.
GHARIB: Let's move along so we can get in all of your recommendations. Give us your analysis on Marriott International (MAR).
MANLEY: Well I think two things are happening here. Number one, we think it doesn't have the big property exposure that other hotels had, so it didn't run up as much. Number two the story out of Marriott, we think, really comes down to improvements in (INAUDIBLE) acceleration of (INAUDIBLE) and from the top down, they're actually -- the hotel stocks are actually a beneficiary of tighter capital markets. It keeps the shortage of hotel rooms in place longer, discourages building.
GHARIB: OK, International Game Technology (IGT). This is a company I guess that makes slot machines, (IGT).
MANLEY: Right. I think it's a phenomenal story if you really look at it the right way. It's product cycle upgrade. Basically what they've done, they're applying the technology that was developed and paid for five or six years ago. They're in a new product cycle as far as introducing new slot machines that are much more interactive, that give the casino owners much more control and much more feedback as to what's happening on the floor and the ability to do more to adjust more quickly, to actually recognize clients in some cases and give them individual treatment. I think it's a phenomenal story. They add value to the people who buy from them.
GHARIB: John, do you own any of these stocks or do you have any other disclosures to share with us?
MANLEY: I do not.
GHARIB: Thank you so much for coming on the program, a lot to examine here that you've given us. Thank you so much.
MANLEY: Thank you, Susie.
GHARIB: My guest tonight, John Manley, managing director of global wealth management at Citi Smith Barney.
Meet Atsushi Saito, President of the Tokyo Stock Exchange
JEFF YASTINE: In a break with custom, a 67-year-old former investment banker is now heading the Tokyo stock exchange. Named to the post in June, observers hope the new president will make the exchange more efficient and take advantage of Japan's nearly $12 trillion worth of household assets. From Tokyo, Lucy Craft reports.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Atsushi Saito, new president of the Tokyo stock exchange arguably has one of the toughest jobs in Japan: making the snafu-plagued, clubby and insular Tokyo stock market modern and internationally competitive. Saito concedes Japan's peerless manufacturers and rich capital base have allowed the stock market to grow complacent, scarcely touched by the financial revolution unfolding overseas.
ATSUSHI SAITO, PRESIDENT & CEO, TOKYO STOCK EXCHANGE: Tokyo exchange has spent quite a long time in vain, I should say, I have to confess that because they enjoyed very good market share on the cash. So they were not so much keen concern on the derivatives products or any other future products, something like that, exotic products.
CRAFT: The stats are sobering, foreign company listings down 80 percent off their peak, average return on equity for Japanese companies about half the U.S. rate, trading volumes, a fraction of the turnover on the Shanghai and Shenzhen exchanges. Tokyo's glitch-prone trading system is one reason the world's second largest stock exchange has never come close to punching its weight.
SAITO: The top priority is very clear, that's IT, information technology
CRAFT: Saito, who spent 35 years with Nomura Securities, recently headed a government agency which turned around zombie companies, like retailer Daiei. The restructurings helping Japan shake off recession to score a record-long growth streak. Saito is a rarity at the exchange, normally run by retired bureaucrats or men promoted from within. Nomura Securities banker Takeo Sumino is a former colleague.
TAKEO SUMINO, MANAGING DIR., NOMURA SECURITIES: There are bureaucrats. There are regulators. There are also investors and there are also foreign capitals, foreign companies and even foreign stock exchanges. And I think, how do you communicate? How do you negotiate and how do you actually reach agreement with those people is very important. And I think Mr. Saito's background allows himself to be communicating leader for the Tokyo stock exchange and for the Tokyo capital markets.
CRAFT: Still, Mitsubishi UFJ Securities economist Richard Hostetter says Saito's latitude for action will be limited by Japan's risk-averse corporate culture.
RICHARD HOSTETTER, SR. ECONOMIST, MITSUBISHI UFJ SECURITIES: He's much more likely than any of his recent predecessors to do the right things to get the systems running better, to cope with these conflicts of interest, to inspire the listed companies who are traded on the exchange to be a bit more open-minded, to act a bit more aggressively, to tinker with their balance sheets in ways that are favorable to shareholders and earnings growth over time. Yes he can do that to a certain extent, but most of the big changes that need to happen are changes that he can't really trigger, that need to happen elsewhere, if you like.
CRAFT: Tokyo's quest to become the number one stock exchange in Asia should gain some traction in 2009. That is when the exchange is set to finish overhauling its antiquated trading system and to issue its initial public offering. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
"Money File"-Financial Responsibility 101
JEFF YASTINE: In tonight's money file, a lesson in financial responsibility for new college students. Here's Terri Cullen, personal finance columnist for the "Wall Street Journal" online.
TERRI CULLEN, PERSONAL FINANCE COLUMNIST, THE WALL STREET JOURNAL ONLINE: As students head off to college for the first time, many are about to get their first lesson in the dangers of credit card debt. This time of year credit card companies bombard students with offers of easy credit, luring them with a host of tempting freebies like university T-shirts and coffee mugs. So now is a good time to educate your child about the value of developing good borrowing habits.
Make sure your child knows the consequences of making late credit card payments. In addition to paying late fees of as much as $39, the interest rate on the card may jump. And explain the impact late payments have on your credit score. One late payment can shave your credit score by as much as 100 points. Get a copy of your own credit report and go over it with your child, showing how negative information is reported, and note that it may stay on your account for as long as seven years.
College students may find it hard to get worked up about how their credit scores affect their ability to borrow. After all, car loans and mortgages are years away. So make sure they understand that their credit score may also hurt their chances of getting a job after graduation. More companies are checking credit reports to get an idea about the stability and creditworthiness of job candidates. Encourage your child to resist the urge to open a bunch of new card accounts. The freebies offered are more than paid for by the fees and finances charges they'll eventually rack up. Besides, one credit card is really all any student needs. I'm Terri Cullen.
"Last Word"-Shoe In
SUSIE GHARIB: And finally tonight women love shoes and a new survey proves the point. The "Consumer Reports" research center says the average American woman owns 19 pairs of shoes. But she only wears four of those pairs regularly and some have only been worn once. Also, about a third of the women surveyed said they had trouble finding room to store all their shoes. That could be because the average woman buys four new pairs every year. And Jeff, here's a fact that will not surprise any woman who has ever worn high heels. Almost half of the women surveyed have been injured at least moderately by their shoes. I can attest to that one.
Those are our stocks in the news tonight.
YASTINE: It sounds like another area personal injury attorneys need to get involved in.
GHARIB: No, I hope not.
Paul Kangas' Stocks in the News
JEFF YASTINE: The hope of a pre-meeting rate cut was about all Wall Street's bulls had going for them as stocks headed lower today. The Dow lost 230 points in the first two hours with GM, Alcoa and Intel leading the way down. The NASDAQ dropped 57 in the same period. A small bounce came at midday and that became a chance for short-sellers to reload, selling off stocks into the closing bell. SO the Dow falling almost 250 points to 13,113.38. In this shortened work week, the index rose twice and fell twice for an overall loss of 244.36 points. The NASDAQ dropping 48.62 today and it also fell twice and rose twice this week for an overall loss of 30.66 points. The S&P 500 sliding 25 points today and for the week, it was off 20.44 points. And buyers fled to bonds where the 10-year note surged 1 2/32 to 102 28/32. That dropped the yield to a 20-month low of 4.39 percent.
And General Electric (GE) tops our list, losing $0.65 in today's sell off.
Pfizer (PFE) losing $0.37.
And Home Depot (HD) down $1.01.
Ford Motor Co (F) losing $0.26. It's approaching its mid-August lows.
And Citigroup (C) dropped $0.18.
And Bank of America (BAC) falling $0.77. The financials were down today, but not taking the biggest losses among the various sectors.
Motorola (MOT) losing $0.29. The company wants to improve its operating profit margins by shortening its cash conversion cycle and speeding up the time it takes to buy, assemble and ship cell phones out to customers.
Time Warner (TWX) losing a little over $0.50.
EMC Corp (EMC) dropping $0.42.
Countrywide Financial (CFC) losing $0.27. After the close, the lender said it will cut up to 12,000 jobs over the next three months. It's about 20 percent of the workforce. The variety of those cuts depends on credit market conditions. Loan originations will drop 25 percent next year.
And then running down a list of the biggest contributors to the Dow's losses today, Alcoa (AA), aluminum inventories have been building up the past week in London.
American Express (AXP) dropping $1.65.
Caterpillar (CAT) losing over $2.
General Motors (GM) down $1.50. Goldman Sachs cut estimates on General Motors.
Honeywell Intl (HON) down nearly $2. Together, these stocks accounting for about 73 points of today's nearly 250 point decline.
Harley-Davidson (HOG) skidding for a 9 percent loss, managers forecasting a 6 percent drop in 2007 profits after poor sales last month. The stock's off about 30 percent as you can see since late last year.
Office Depot (ODP) plunged to a two-year low. The stock fell over $2. Executives say small businesses are cutting back on their purchases and that will hurt Office Depot's second half results. Analysts cut their profit forecast and price targets.
Wyeth (WYE) finishing down $1.82. A Federal court decision will allow generic competition for Wyeth's largest selling heartburn drug Protonix (ph). Tava Pharmaceuticals wants to make a generic competitor when Protonix goes off patent in 2010.
Then Beazer Homes (BZH) down $1.41. A trustee overseeing $1.3 billion in outstanding notes from Beazer claims Beazer is in default because of the home builder's delays in its financial reports. Beazer says it is not in default and says the default notices from the trustee, U.S. Bank National Association, are quote, without merit.
And then Krispy Kreme Doughnuts (KKD) dunked for a loss of more than $2, reporting large second quarter losses and revenues fell more than 7 percent.
Looking at the NASDAQ, Apple (AAPL) down more than $3. The $100 iPhone rebates to customers announced yesterday will cost the company an estimated $100 million.
Cisco Systems (CSCO) dropping for the day.
Google (GOOG) down more than $4.
Intel (INTC) losing $0.68.
Microsoft (MSFT) off nearly half a dollar.
Research in Motion (RIMM) down more than $3.
Baidu.com (BIDU) reversing from yesterday's highs, down more than $6.50.
Dell (DELL) dropping $1.
Qualcomm (QCOM) losing more than $0.90.
Amazon.com (AMZN) down $1.69.
China Tech Development (CTDC) jumping $1.41. It's a computer network security firm. They want to get into the solar power industry.
And then finally, Interdigital (IDCC) climbing nearly $3. This is a wireless technology firm which raised its estimates on third quarter revenues. Of course, back in mid-August, the same company predicted a third quarter sales decline.
