NBR Complete Transcripts: 10-24-2007
Wednesday, October 24, 2007Merrill Lynch & Housing The Latest Credit Crunch Casualties
SUSIE GHARIB: A roller coaster day on Wall Street, after bigger than expected losses from Merrill Lynch and the housing sector. The nation's largest brokerage firm surprised investors today with an $8 billion write-off related to the credit crisis. The credit crunch also caused sales of existing homes to drop another 8 percent in September. We have two reports tonight looking at the turmoil in housing and at Merrill Lynch. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Merrill Lynch is the latest casualty of the sub-prime mortgage market. But a nearly $8 billion write-down puts it in a league all its own. Not only is Merrill's write down bigger than that of its four rivals combined, but it is the only big investment firm to report a loss as a result of bad bets on risky sub- prime mortgages and related securities. At $2.85 a share, the third quarter loss was about six times more than the $0.45 loss than analysts were expecting. In a heated conference call with analysts today, Merrill Lynch CEO Stan O'Neal took the blame. STAN O'NEAL, CHMN & CEO, MERRILL LYNCH: The bottom line is we got it wrong by being overexposed to sub-prime.
PRATT: The $7.9 billion in write-downs is about $3 billion more than Merrill pre-announced earlier this month. Merrill attributed the change to additional analysis, which caused it to be more conservative in its assessment of the value of underlying securities. Standard & Poor's, which together with Moody's and Fitch downgraded Merrill's debt today, called Merrill's loss startling. S&P analyst Scott Sprinzen said he found Merrill's big recalculation of its write-downs most troubling.
SCOTT SPRINZEN, CREDIT ANALYST, STANDARD & POOR'S: What it suggests is that there are problems with the risk management capabilities of this company, their ability to monitor and value their exposures. And that's really a key competency for someone in their business.
PRATT: The S&P downgrade accelerated a decline in shares of Merrill and put additional pressure on other financial stocks. That's as investors grow more concerned that other firms will take additional write-downs in the fourth quarter. But most analysts consider Merrill's loss the result of heavy exposure to the sub-prime market and misjudgment of risk by management. Morningstar analyst Ryan Lentell says he does not think it suggests more trouble for others in the sector.
RYAN LENTELL, EQUITY ANALYST, MORNINGSTAR: If we take the environment we're in today, I think most of the banks are in pretty good shape, as they just reported large write-downs. And that would be our feeling going forward is that most of them already took the large write-downs and they don't have anything out there.
PRATT: Nevertheless, if the credit markets seize up again as they did this summer, experts say all bets are off. Then, we could see more big write-downs and more bad earnings from big financials. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh in Washington. Alarming, dark, bleak -- those were some of the uplifting words used to describe the housing outlook as builders met in Washington to debate how much further their industry has to fall. Economist Mark Zandi says today's report on home sales confirms the gloomy outlook.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: It's a mess. The housing market is evaporating. This is about as bad as it could be and it looks like it is going to get worse before it gets better.
GERSH: The National Association of Realtors reports existing home sales for September fell 8 percent from a year earlier, the largest drop since 1999. The median home price tumbled 4.2 percent over the same period. Futures markets are signaling even more bad news, forecasting prices in the nation's top housing markets will fall 18 percent by the year 2010. UBS economist Maury Harris worries the downward momentum may freeze the market. MAURY HARRIS, CHIEF U.S. ECONOMIST, UBS: What happens if the lower prices just cause people to be afraid that they are going to go down any more, that you get deflationary psychology?
GERSH: The best that could be said today came from Daiwa economist Michael Moran, who argues the housing market may not be good, but it is not desperate. He says economic fundamentals are strong and troubled sub-prime loans account for only 3 percent of the mortgage market.
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA: Now, that's a big chunk. It's enough to influence the economy, but I don't think it's enough to derail the economy. I think it's a blow that the economy should be able to absorb.
GERSH: Even so, the nation hasn't seen housing stress like this in a quarter century. Zandi estimates the inventory of homes for sale is one million above normal. And, he adds, the nation's biggest banks hold $1.8 trillion in residential mortgage securities and other debt -- in all, a bit more than one-third of total assets. Zandi warns falling prices could touch off a deeper credit crunch.
ZANDI: It's less stark than it was four to eight weeks ago, but I would not be surprised if those embers that are still burning start on fire again.
GERSH: Sometime next year, the housing market is expected to begin to recover. But when it does, analysts believe builders will be doing 40 percent less business than they did during the boom years. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Energy Options: Coal" - Coal and Jobs (Part 3)
SUSIE GHARIB: After decades of layoffs and consolidation, the coal industry is staging a comeback. Half of the electricity generated in the U.S. now comes from coal. Power producers have turned to coal to fire their plants as natural gas prices increase. But there are still challenges. As we wrap up our special series, "Energy Options: Coal," Stephanie Dhue examines one of those challenges -- finding employees to replace an aging workforce.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Miners here at Consol Energy are working to meet the surging demand for coal. The company operates 20 mines in six states, including two in southwestern Pennsylvania known as the Bailey Enlow Fork complex. Dave Hudson, who heads up Consol's Pennsylvania operations, says its annual output has increased.
DAVE HUDSON, VICE PRESIDENT PA OPERATIONS, CONSOL ENERGY: 21 million tons plus, between the two mines -- that's clean tons will provide the power for seven million households, the electricity for seven million households in this country. Now, that's pretty amazing when you think about that number.
DHUE: Another big number for Consol is employees nearing retirement. 1,250 people work here in the Bailey Enlow Fork complex. In the last year and a half, the company has hired 250 new employees as 50 have retired. That surge in new hires comes as Consol plans for the next decade, when half its work force will be eligible for retirement. The coal industry as a whole expects a similar need over the next 10 years. Coal companies now plan to hire 50,000 new workers to replace their aging workforces and meet increased demand. But finding that number of qualified workers is a challenge. Vladislav Kecojevic teaches mining engineering at Penn State. The program is helping to unearth the next generation of miners. There are 26 students in the undergrad mining engineering program and eight graduate students. The goal is to double that number over the next two years.
VLADISLAV KECOJEVIC, MINING ENGINEERING PROFESSOR, PENN STATE: It really takes a lot of time and effort to convince the students, to explain really the importance of the mine.
DHUE: Job opportunities for these students are promising. Kecojevic says multiple job offers are common, as are $60,000 starting salaries, bonuses and tuition loan payoffs. Matt Mowry, president of the Student Mining Society, is also helping recruit would-be miners.
MATT MOWRY, PRESIDENT, MINING SOCIETY: Currently, our efforts are focused more towards students in other colleges of engineering, other engineering disciplines, that perhaps are realizing that the opportunities aren't as great as they thought they were in what they're doing.
DHUE: Coal companies are also finding workers in other industries. Don Blumetti worked as a foreman in a local factory for 17 years. Fearing his job could be outsourced to China, he moved into coal mining.
DON BLUMETTI, SECTION FOREMAN TRAINEE: It was an opportunity for us and for my family to where I would have a 25-year career hopefully. The financial rewards are there and it's exciting. It's not a mundane -- go to the same chair everyday.
DHUE: Still, it's a dirty and dangerous business. The August accident at the Crandall canyon mine in Utah is one of the latest reminders of that. Six miners and three rescue workers were killed in that incident. Last year, 47 miners perished on the job in the U.S. The National Institute for Occupational Safety and Health says 1,500 miners die each year from black lung disease. Still, with overtime, coal workers can earn a six figure salary. They have health care, pensions and the promise of a long career. Brian Jones started in the mines two years ago, after a 25-year career in construction. He says, while trained to constantly think about safety, it's not really a worry.
BRIAN JONES, SECTION FOREMAN TRAINEE: Everybody has to work together as one a big team. There's a lot of men working underground at one time and if every man does what they're supposed to do and what they're trained to do, then there shouldn't be a problem with disasters.
DHUE: But the biggest hazard emerging for the next generation of miners may be the future of the industry itself. Whether coal continues to thrive or not will depend on how it meets the safety, environmental and political challenges that lie ahead. Stephanie Dhue, NIGHTLY BUSINESS REPORT, West Finley, Pennsylvania.
"Street Critique"-Patrick O'Hare, Editor-in-chief, briefing.com
PAUL KANGAS: Tonight's "Street Critique" guest is always hungry for a good bargain. He's Patrick O'Hare, editor-in-chief at the investor education web site briefing.com. And pat welcome back to NBR.
PATRICK O'HARE, BRIEFING.COM: Paul, thank you.
KANGAS: You write briefing.com's bargain hunting column where you're quite the contrarian. And I understand Brinker International which trades on the big board under ticker symbol EAT appropriately enough has landed on your radar. It has several restaurant chains in the casual dining segment, but its chart doesn't look too appetizing. Let's have a look at that chart if we may. It's pretty depressed here. Why do you like it at this level?
O'HARE: Well, it's not appetizing unless you are a contrarian investor. When you look at it, you notice that it's down about 25 percent off the 52-week high. And that's been driven by concerns related to consumer spending slowdown. But we think that it's now more reasonably priced for an entry point for a patient-mind investor.
KANGAS: Brinker had earnings out just yesterday. How did it do?
O'HARE: It missed the consensus estimate by $0.05, but year-over-year earnings were up 7 percent, which isn't bad growth. But the miss was attributed really to the company selling some of its units, closing some of the underperforming units and then the impact of some higher commodity costs.
KANGAS: Macaroni Grill, which is Brinker's Italian restaurant chain has - the company says it's negotiating with several potential buyers to sell that chain. What would the sale do for its bottom line?
O'HARE: It should help the bottom line. The proceeds that are received from that sale which it expects to close by the end of fiscal '08 could be used to help buyback stock or even help pay down debt and that should help boost the bottom line for Brinker.
KANGAS: Same store sales have been under pressure recently. How is Brinker going to fix that?
O'HARE: They're in the midst right now of a re-imaging program where they're looking to modernize their existing units, make them more contemporary. They're also introducing some more value-priced menu initiatives that hopefully will drive increased traffic. Importantly, they're slowing their new store development so as to mitigate the impact of cannibalization on existing units.
KANGAS: Brinker owns a large portion of its franchises, but the company wants the change that. It's moving to sell a huge chunk of its Chili's franchises. How does that make Brinker more attractive?
O'HARE: Well, what it will help do is it should help operating margins improve because the cost that the company would have incurred to run company-operated restaurants should decrease. In turn, as they succeed in selling these existing units to existing franchisees, you should see depreciation expense go down, as well and then finally, with the monies they receive from these sales, it again would help them go help repurchase stock and pay down some debt if they choose to do so.
KANGAS: We just have half a minute left, Pat. How long before you expect to see a decent return from this stock?
O'HARE: Well, it's clearly an uncertain economic environment right now. We do think earnings estimates are still at risk. So you need to be patient here, but that's a virtue of value investing.
KANGAS: OK.
O'HARE: Roughly about a year to 18 months here we think the patient- minded investor will be well-rewarded for waiting it out.
KANGAS: Do you own Brinker shares or have any other disclosure to make?
O'HARE: Not at the moment, although I do eat at Chili's.
KANGAS: OK. Thanks for joining us, Pat.
O'HARE: Thank you, Paul. KANGAS: My guest Patrick O'Hare, editor-in-chief at briefing.com.
"Money File"-Mid-Life Marriage
SUSIE GHARIB: In the "Money File" tonight, while it's not always romantic, there are financial pros and cons to be pondered when getting married later in life. Here's Eric Schurenberg, managing editor at "Money" magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Falling in love at mid-life is a complicated affair. But figuring out when to tell the kids, let alone your ex-spouse, is nothing compared to working out the money angle. You're talking about merging two financially mature households, with multiple homes, inheritances, debts, different money styles, the works. No wonder that more than a million couples over age 45 today live together unmarried. The number of seniors choosing this arrangement -- up 70 percent over the past decade.
Now, the decision whether or not to marry is between you, your intended and your conscience. But whatever you choose, you'll have to grapple with these questions. First, will marrying lower your income? You already know you'll lose any alimony you may be collecting. Remember, too, that remarrying before 60 will cost you any rights you have to Social Security and, probably, a pension from a previous marriage.
Second, will marrying raise your taxes? If you combine incomes, you're likely find yourself owing more to Uncle Sam next April. That might be offset by better treatment on capital gains on your home. That's because a married couple can exclude up to half a million dollars of profits on a home, double the break that singles may claim.
Finally, will marrying disinherit your kids? This may be the stickiest issue of all. If you remarry, your spouse, not your kids, gets first dibs on your estate. If you still want to control how they're taken care of once you're gone, you'll need a new estate plan. Then again, whenever you get married, you have to figure that making new plans is just part of the bargain. I'm Eric Schurenberg.
Paul Kangas' Stocks in the News
PAUL KANGAS: Sellers took command on Wall Street early today with stocks falling sharply on that Merrill Lynch loss and that home sales slide. Rising oil prices also helped to push the Dow to a 182-point loss by mid- day, with the NASDAQ off 67 points. The market stabilized and then rallied on a rumor that the Fed would make an emergency rate cut. The Fed itself declined to comment on that. But by the close of trading, losses were cut sharply. The Dow Industrial Average closed off less than a point, 0.98 at 13,675.25. The NASDAQ fell 24.50 points to 2,774.76, while the Standard & Poor's 500 lost only 3.71 ending at 1,515.88. In the bond market, the 10- year note climbed 18/32 to 103 7/32, putting the yield down to 4.34 percent.
New York exchange volume leader, interestingly, NYSE Euronext (NYX) trading 22.3 million shares, up $2.30, helped along by index fund buying since the stock was added to the Standard & Poor's 500 Index today.
Citigroup (C) down $0.62.
General Electric (GE) $0.25 loss.
Then Pfizer (PFE) losing $0.07.
And then came Merrill Lynch (MER) tumbling $3.90. It traded as low as $621.40 as you heard, taking that big $8 billion third quarter write off, a couple of corporate downgrades too.
Countrywide Financial (CFC) fell $1.22. The "Wall Street Journal" reports that the adjustable rate mortgages made by the company are going bad at a faster pace than the industry average.
Corning (GLW) fell $1.54 despite third quarter earnings nicely higher, $0.38 versus $0.27 a year ago, a penny above the Street, but the company says fourth quarter display glass volume will be up 2 to 5 percent. The Street was looking for as much as 8 percent.
Wells Fargo & Co (WFC) $0.28 rise there.
EMC Corp (EMC) fell $0.83.
Then Co Vale do Rio (RIO) down $1.14.
Boeing Co (BA) down $0.69 despite big third quarter earnings, $1.44 versus $0.89 last year, $0.20 above the Street estimate, but the company cut its 2008 revenue estimates because of plane delivery delays. The stock traded as low as $93.02.
Dupont (DD) moved up $0.73. The company boosting its quarterly dividend by 11 percent. It will go from $0.37 to $0.41 a share.
And then Bank of America (BAC) down $0.30. After the close, BAC said it's about to launch a major shake up in its investment bank, including a lay off of about 3,000 employees.
CME Group (CME) up $15.40. Third quarter earnings jumped at $3.87 versus $2.95 last year. That does exclude acquisition costs of the CBOT, Chicago Board of Trade.
Norfolk Southern (NSC), the big rail, up $1 - down $1.67. Third quarter earnings lower, $0.97 versus $1.02 last year.
Kennametal (KMT) had a great day up $6.18. First quarter earnings came in at $1.05, well above $0.82 a year ago and $0.05 above the Street estimate. The company also declared a two for one stock split and a 14 percent boost in the quarter dividend. It'll go to $0.24 a share.
CEC Entertainment (CEC), the parent of Chuck E. Cheese up $3.65. Third quarter earnings lower, $0.50 versus $0.53, but $0.02 better than the Street expected and the company set an additional $200 million stock buyback.
William Wrigley Jr (WWY) down $5.57. Third quarter earnings edged up to $0.59 from $0.53 a year ago, but a penny below the Wall Street consensus.
Plantronics (PLT), the maker of those headsets for electronics, down $5.78. Second quarter earnings higher, $0.39 versus $0.32 but the company sees third quarter earnings guidance short of Street estimates by as much as $0.06 a share.
Initial public offering today, Longtop Financial Tech (LPT), provides information technology services to China's financial sector, 10.4 million American depository shares offered at $17.50, opened at $27.01. The high of the day, $33.35, great day.
Apple (AAPL) $0.23 loss, topped the active list.
Followed by Google (GOOG) edging up a nickel.
Research in Motion (RIMM) down $0.63.
Amazon.com (AMZN) plunging just over $12. After the close yesterday as we reported, third quarter earnings $0.19, way up from $0.05, but that was only a penny above the Street estimate and there's concern about profit margins which are fading a bit. Today, Standard & Poor's says the stock's overvalued. Stifel Nicolaus repeated a "sell" recommendation.
Baidu.com (BIDU) down nearly $14 a share.
Microsoft (MSFT) moved up $0.35. The company confirmed after the close it has invested $240 million in facebook.com.
Intel (INTC) $0.79 loss.
Broadcom (BRCM) tumbling $7.14. After the close yesterday, Broadcom's third quarter earnings fell $0.02 short of Street estimates and profit margins there are falling a bit too.
Cisco Systems (CSCO) $0.28 loss.
And finally, Yahoo! (YHOO) rose $0.04 to $30.68 per share.
