NBR Complete Transcripts: 09-14-2007
Friday, September 14, 2007Consumer Spending Takes A Cautious Shift
SUZANNE PRATT: Fresh evidence today that U.S. consumers are still spending, but at a slower rate than expected. August retail sales rose .3 of a percent, while the latest reading on consumer sentiment revealed Americans are still fairly confident about their spending plans. As Scott Gurvey explains, these are two more pieces of the economic picture the Federal Reserve will look at before it meets Tuesday to decide on interest rates.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was a weaker than expected report on retail sales in August. The Commerce Department said sales gained .3 of 1 percent for the month, down from the .5 of 1 percent gain in July. And if the sales of autos, which can vary greatly from month to month are removed, August sales actually fell .4 of 1 percent. That's the biggest drop since September of last year. Chief economist David Wyss of Standard & Poor's says economists fear the consumer is cutting back on spending.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: We're worried that higher gasoline prices are convincing people to delay any car purchases and that's going to hurt the economy. Also, with housing so weak, we're seeing extreme weakness in areas like building materials, which are down 1 percent in August and furniture sales have been soft for the last year. So, there's a lot of elements of weakness here in the economy and we can't afford to add another one.
GURVEY: The gloom triggered by the retail sales report was offset later with the release in mid-morning of a more forward looking indicator. The University of Michigan's sentiment index for September rose to 83.8 from 83.4 in August. Economists were expecting to see the index at 83.5. The confidence index, while improved, is still near its lowest level for the year and most economists have been lowering their estimates for economic growth in the third and fourth quarters. Some, including Kathy Camilli of Camilli Economics, have even been using the "R" word.
KATHLEEN CAMILLI, PRESIDENT, CAMILLI ECONOMICS: The consumer expectations index that's part of the University of Michigan survey is one of my indicators. Now, that indicator today did not fall another five to 10 percentage points, but if it does drop again in late September or early October, along with the S&P 500, it will be a more definitive signal that the U.S. economy is headed for a recession.
GURVEY: Also out today, reports showing industrial production up .2 of 1 percent in August and tighter inventories in July -- nothing, economists say to change their view that the Fed will lower interest rates when it meets next week. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
John Casesa, Mangaing Partner, Casesa Shapiro Group On Automotive Industry Contract Negotiations
SUZANNE PRATT: At midnight tonight, the contract between General Motors and the United Auto Workers union is set to expire. Joining me now to talk about contract negotiations and the outlook for U.S. auto makers is John Casesa. He is managing partner at the Casesa Shapiro group, an advisory firm here in New York City. John, welcome back to NIGHTLY BUSINESS REPORT.
JOHN CASESA, MANAGING PARTNER, CASESA SHAPIRO GROUP: Thank you.
PRATT: So do you think there's a good chance of a strike against GM?
CASESA: No, I think there's a very small chance of a strike against GM or any of the auto makers. The strike vote which the union took is standard operating procedure as we get to a deadline. It happens in every negotiation. And although I think this is a watershed year and the negotiations may be contentious, strikes in a contract year are very, very rare.
PRATT: What would a strike do to GM financially, though, if there was one, even for a short period of time?
CASESA: Well it could be very painful. I mean, it would cost the company billions of dollars a month and unlike even four years ago when the last contract was up, this company's financial resources are depleted. It has a lot of cash, but it's got an awful lot of debt. So it would be very painful and I think it would be damaging for union because once the strike is over the company would have less to invest in jobs and products.
PRATT: So let me get back to what you said just a minute ago. Why is this a watershed year for U.S. auto makers?
CASESA: Well, because the U.S. auto makers' financial condition has deteriorated steadily for the last 20 years and it's gotten to the point now where after selling off assets and borrowing heavily, these companies don't have many more financial options and their market share is still falling. As a result, they are under immense pressure to get -- to change the labor agreement, which is extremely generous. And this year, the focus is on retiree health care costs. GM has four retirees for every active employee. The company and the union knows that this is an unsustainable burden and so the discussions are around radically changing the wage and benefit package to reduce that burden on the auto makers.
PRATT: But do you think that they ultimately will reach some type of agreement regarding that health care trust?
CASESA: I think it's probable. The general idea is that this liability, which is gigantic -- $50 billion on GM's books -- is unfunded. So it's a promise, but it's not funded. GM, I think, will suggest to the union that they take it off GM's books, put it in independent trust at some discount to the current value, but that GM will promise to fund it. So I think they're saying to the union, why take a chance that we won't be able to do this and instead take something of a discount and we'll fund it now. And that's the kind of bargain these two sides are trying to strike.
PRATT: So if they do strike a deal on this health care trust though, is this going to sort of cure all the problems in the U.S. auto industry right now?
CASESA: Well, certainly not. This would be an extremely constructive development, would greatly relieve GM of an enormous liability and cost. But there's a great deal to do. These companies not only have a cost problem -- health care, pension, things like that - but a revenue problem. Their market share is falling and their cars are getting much better, but they need time and that takes money -- they need time to convince consumers to come back and try these cars. So while they're dealing with a cost problem at the bargaining table, they have a major revenue problem. That is going to take a long time to fix.
PRATT: But if they do reach an agreement on this health care issue, the health care trust, that certainly would be good news for investors, correct?
CASESA: Well, absolutely. I think investors should be very pleased because while this is necessary and not sufficient to fix these companies, it is a necessary enabler. They can make progress here. That will buy them the time to do some of the other things they need to continue to fix the business.
PRATT: OK. Thank you for joining us this evening.
CASESA: Thank you.
PRATT: My guest, John Casesa of the Casesa Shapiro Group.
The Libor vs. Treasury Rate
PAUL KANGAS: Economic worries are spreading from Wall Street to Main Street these days with one big concern, the unusually large spread between what's called the libor and the Treasury rate. The London inter-bank offered rate usually trades in tandem with the Treasury rate, but over the last six weeks, it has jumped nearly a half percentage point higher. As Stephanie Dhue reports, the libor is the benchmark interest rate for many adjustable rate mortgages and business loans.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The interest rates paid on adjustable rate mortgages reset based on an index. For 80 percent of sub-prime loans, that index is the libor. Global Insight economist Brian Bethune says this means some borrowers will be facing even higher payments.
BRIAN BETHUNE, US ECONOMIST, GLOBAL INSIGHT: Any borrower that has the libor in the fine print on their adjustable rate mortgage right now faces a pretty significant bump in terms of the adjustable rates, not only from the fact that the Federal funds rates are up over the past year, but also the spread on libor has increased.
DHUE: The reason for the unusually wide spread between Treasuries and the libor is that investors fear more bad loans could be lurking in mortgage-backed securities market. Mortgage Bankers Association economist Jay Brinkmann says banks moved to the libor index to boost returns.
JAY BRINKMANN, VP OF RESEARCH & ECONOMICS, MORTGAGE BANKERS ASSN.: Whenever we have a flight to quality, if there is an event in the economy, such as over the last month, 2001, with the Russian debt crisis back in 1998, that there is a flight to Treasury instruments and that artificially drives down yields on Treasuries relative to the rest of the economy and the rest of the rates that institutions are paying.
DHUE: The libor is also the benchmark for short-term corporate loans. Known as commercial paper, the market has grown from $40 billion in the 1990s to a $2 trillion market today.
BETHUNE: Corporations borrow floating rate based on spreads over the libor, so if libor rates go up, that impacts a very wide range of borrowers in the marketplace, including corporations.
DHUE: Former Fed Governor Lyle Gramley expects the libor rate to come down relative to U.S. interest rates. He says that could be spurred if the Federal Reserve reduces the Fed funds rate.
LYLE GRAMLEY, FORMER FEDERAL RESERVE GOVERNOR: I think also that the Fed is going to ease monetary policy and bring short term interest rates down generally. I wouldn't be at all surprised to see the funds rate 75 basis points lower at the end of this year than it is at the present, down to 4.5 percent and maybe even lower.
DHUE: The spread between the libor and Treasuries has narrowed somewhat in recent days. But with lingering uncertainty over bad mortgage debt, observers aren't sure that trend will continue. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Market Monitor"-Stan Weinstein, Editor & Publisher of "Global Trend Alert"
PAUL KANGAS: My guest "market monitor" this week is Stan Weinstein, editor and publisher of "Global Trend Alert", a financial advisory service for institutional investors. Stan, welcome back to NIGHTLY BUSINESS REPORT.
STAN WEINSTEIN, EDITOR & PUBLISHER, "GLOBAL TREND ALERT": Always my pleasure to be back, Paul.
KANGAS: The Dow as we know, hit a record high just above the 14,000 level in July and promptly sold off rather badly. Was that sell-off within the range of a normal correction for a healthy bull market or are we beginning to see the bear market?
WEINSTEIN: I don't want to get hung up in semantics because one person's bear market is another person's correction. What I feel very strongly about, Paul, very strongly, is that an important high was hit in the mid-July period and at least two-thirds will of the market is already in its own private bear market. So at best it's neutral and we're no longer in a healthy (INAUDIBLE) bull market.
KANGAS: What indicators warned you that the rally to the new high, all-time high was suspect?
WEINSTEIN: There were so many. Let's just focus on the fact that the advance decline line hit its high all the way back in early June, on June 4 and then the Dow made a series of new highs thereafter, always unconfirmed. That's a warning and also very mediocre new highs throughout July and the icing on the cake, one day after the Dow hit that high 14,000, there were more new lows than new highs, both on the New York and (INAUDIBLE) market. Not a good sign.
KANGAS: On your last visit with us in mid-November, when the Dow was at about 12,300, you warned that if it fell below 11,200 the market was in big trouble. It didn't fall below that. Here we are at 13,400. Do you have a new Dow worry level?
WEINSTEIN: Here we go -- my new level is 12,800. If at any point the Dow breaks down and closes - at the close below 12,800, that would turn what's a problem market into a much bigger problem.
KANGAS: Well, how do the other technical indicators that you follow stack up right now?
WEINSTEIN: There are mixed but there are a lot of other things to worry about. The Dow Jones transportation average, not doing very well. That doesn't look good. My proprietary S&P survey which measures the percentage of stocks that are healthy in that universe, only 30 percent of all S&P stocks are technically healthy. This is a very difficult market and you have to treat it with great caution and selectively.
KANGAS: Is this market going to remain highly select and volatile like it's been?
WEINSTEIN: I think it is, especially with hedge funds becoming a bigger and bigger part of the market, I think we are going to remain in the selective market because even though the market is bearish, hedge funds will still look for the one or two sectors that they can do buying in. So I think it's a fact of life.
KANGAS: That word "sector." What sectors do you like?
WEINSTEIN: I am still bullish on technology, which last time I was on the show I liked and I think technology in general looks good. Health care also looks good. I like I lot of gold stocks and other metals, industrials, fertilizer stocks. Those are the good places. Even in good areas Paul, there's some bad charts.
KANGAS: What do you dislike?
WEINSTEIN: There are some bad stocks. Banks, brokers and retail, those are bad. They're oversold. In a rally, don't buy them. Sell the rally.
KANGAS: OK, so it's too early to get in for the long term.
WEINSTEIN: Absolutely.
KANGAS: Now you touched on gold and you like it. Any further follow- up on that?
WEINSTEIN: Absolutely. I think gold is very bullish and I have a new worry level for gold. I told you last time 600, Now 640. If any point it closes below 640, then gold becomes a problem. What I would think is going to happen if some point gold goes top side and it closes above the 732 level, then I think gold is going to really shine.
KANGAS: OK, now how about bonds? Are they a safe place to be to avoid the volatility of stocks?
WEINSTEIN: I think that it's a safe place, but it's not my number one investment area, but it's moderately OK.
KANGAS: Now short selling, should the individual investor get into that?
WEINSTEIN: I do think so. As I wrote in my book, "Secrets of Profiting in Bull and Bear Markets," I think everybody should learn how to sell short. Otherwise it's like driving a car with no reverse. You only have one gear. I think you should learn how to do it, but do it the right way with protective buy stocks. And then when you do it right, the few judicious shorts will make you run your own account like a hedge fund.
KANGAS: But as they say on Wall Street, he who sells what isn't his'n buys it back or goes to prison. It's a dangerous proceeding.
WEINSTEIN: Right. You have to learn the proper way to do it.
KANGAS: OK. Any final thoughts? We have about 20 seconds.
WEINSTEIN: I think that this market volatility is more than anything I have seen in my 40-plus years of market tape reading here and I think people have to learn to sell rallies in the bad stocks and use pull backs as a buy (ph) in things that I'm bullish on like some of the technology issues.
KANGAS: Good advice. Stan, as always it's a real pleasure to have you with us.
WEINSTEIN: Paul, it's my pleasure.
KANGAS: My guest Stan Weinstein, of the "Global Trend Alert."
"Last Word"-Ernest, Julio, & Martha
SUZANNE PRATT: And finally tonight, Ernest and Julio Gallo were instrumental in popularizing wine to U.S. consumers. Today, their vineyard announced it's harvesting a relationship with Martha Stewart. The new brand will be called Martha Stewart vintage. Beginning next January, it will debut in six cities, including Atlanta, Boston and Denver. And Paul, Martha Stewart vintage will include a chardonnay, a cabernet sauvignon and a merlot. Each will cost about $15 a bottle.
KANGAS: I'll drink to that.
PRATT: Me too. That's NIGHTLY BUSINESS REPORT for Friday, September 14. I'm Suzanne Pratt. Good night everyone and have a good weekend. You, too, Paul.
KANGAS: And you as well, Suzanne.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's started the day reacting to news from overseas as the Bank of England moved to bail out a major British mortgage banker. The news sent U.S. blue chips tumbling more than 100 points at the outset of trading. Also troubling investors was word that a Goldman Sachs hedge fund had lost 22 percent last month. But stocks made a quick comeback on that report of a rise in consumer sentiment. The noontime reading on the Dow was a six-point gain and the NASDAQ was off only one point. As oil prices eased, the market edged higher this afternoon and ended with modest gains. The Dow Industrial Average closed up 17.64 at 13,442.52. This week, it rose in four of the five sessions for a net advance of 329.14 points. That's 2.5 percent. The NASDAQ Composite gained 1.12 to 2,602.18 today. It fell twice and rose three times this week, had a net advance of 36.48 points. The Standard & Poor's 500 Index edged up .30, ending at 1,484.25 today, and for the week overall, it was up 30.70 points. Over in the bond market, the 10-year note rose 2/32 to 102 10/32, putting the yield at 4.46 percent.
Most active New York exchange issue on 15.2 million shares, Pfizer (PFE) moving up $0.06. Followed by General Electric (GE) with a $0.16 loss.
Then Countrywide Financial (CFC) up another $0.49. Yesterday it was up $2.31 after the company got $12 billion in additional borrowing capacity.
Ford Motor Co (F) edging up $0.11.
Citigroup (C) a $0.28 gain.
Time Warner (TWX) down $0.36.
General Motors (GM) up $0.93. As you heard, contract talks with the UAW coming down to the wire at midnight tonight.
ExxonMobil (XOM) edged up a nickel a share.
Co Vale do Rio (RIO) was a $0.25.
And then Bank of America (BAC) gained $0.09. The Federal Reserve has given the Bank of America a final approval to acquire Lasalle Bank for $21 billion from ABN Amro.
American Express (AXP) a Dow stock, off $1.66 after Merrill Lynch downgraded it from "buy" to "neutral" on concern about the slowdown in consumer spending. Merrill cuts its 2008 earnings estimate for AXP from $3.96 a share down to $3.85 a share.
Monsanto (MON) moved up $1.13. The company is in a cross licensing pact with a subsidiary of Dow Chemical and they will launch SmartStax, which is an improved variety of corn.
Cadbury Schwepps (CSG) down $0.97. The "Financial Times" reports the company turned a second offer of about $14 billion for its drink operations. The private equity group wanted Cadbury to finance one third of the deal and apparently that's what quashed it.
Aegean Marine Petroleum (ANW), this is a company that supplies fuel to ships at sea and Jeffries brokerage started coverage of the stock with a "buy" with a $42 a share price target.
Tween Brands (TWB), this is a girls' apparel retailer. It's going to buy back up to $175 million of its own stock and it boosted its third quarter earnings guidance from $0.45 at best to $0.47 at best.
Alaska Air Group (ALK) gained $1.39 on news the company will buy back up to $100 million of its own stock.
And then the Triumph Group (TGI) which is an aircraft components firm got an upgrade from Bank America from "neutral" to "buy."
First Acceptance (FAC) plunging $2.70 or almost 35 percent. The company reported a fourth quarter loss of $0.50 a share versus earnings of $0.30 a year ago as an increase in the auto insurer's loss exposure offset a 23 rise in its revenues.
And then John Wiley & Sons (JWA) up $2.31. Stifel Nicholas brokerage upgraded the publisher's stock from "hold" to a "buy."
Apple (AAPL) topped NASDAQ's most actives, gaining $1.61.
Followed by Intel (INTC) down $0.42. Merrill Lynch downgraded Intel from "buy" to "neutral" on valuation, sees little upside for the stock.
Research in Motion (RIMM) up $1.52.
Google (GOOG) did well, up nearly $4 a share.
Cisco Systems (CSCO) edged up just a nickel a share.
Microsoft (MSFT) down $0.12.
Qualcomm (QCOM) $0.26 gain.
Oracle (ORCL) down $0.38.
Yahoo! (YHOO) gained $1.01.
And then Sandisk (SNDK) was up $1.30 a share. The company's CEO and the company itself got subpoenaed from the Department of Justice for an alleged price fixing problem in the flash memory chip market.
ImClone (IMCL) up $4.46. The Friedman, Billings, Ramsey brokerage cut its price target from $64 all the way down to $45 a share in the belief that the company's Erbitux sales will be lower than expected.
And those are the stocks in the news tonight.
