NBR Transcripts: 10-29-2007
Monday, October 29, 2007Investors Buy Into The Ouster of Merrill Lynch CEO, Stan O'Neal
SUSIE GHARIB: Shares of Merrill Lynch rose more than 2 percent today as investors waited for official word from the world's largest broker that Stan O'Neal is out as CEO. Reportedly the Merrill board ousted O'Neal over the weekend in the wake of the firm's huge losses from the sub-prime mortgage crisis. Today speculation heated up on who will take over the top spot at Merrill. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Losing billions of dollars for shareholders certainly didn't help the career of Merrill Lynch chief executive Stan O'Neal. After all, Merrill's third quarter loss of more than $2 billion on $8 billion in write-downs from bad sub-prime bets was the largest in Wall Street history. But long-time banking analyst Dick Bove says while Merrill's dismal performance may be the impetus for O'Neal's ouster, it is not the primary reason.
DICK BOVE, ANALYST, PUNK ZIEGEL & CO.: He just did not have good, strong relationships within the firm. There isn't a core group of Stan O'Neal supporters inside of Merrill Lynch and there are a lot of people who would love to see him pushed aside because he hurt them.
PRATT: Bove says Merrill is being too hasty with O'Neal, adding the firm has been fickle about its long-term strategy. Nevertheless, with O'Neal out, Merrill's board will have to decide whether to promote a new CEO from within or look outside. Merrill Co-President Gregory Fleming and brokerage head Robert McCann are two names reportedly under consideration. Many analysts say Blackrock Chief Executive Laurence Fink could be the top contender. Blackrock, a money management firm, is 49 percent owned by Merrill and Fink is highly regarded on Wall Street. Others, however, are critical of putting Fink at the helm.
BOVE: It's not based upon an internal study which says this is the direction of the firm, because this is where the industry is going over the next 20 years and this is the right guy to execute. It seems more to be this is a very bright, capable guy with a good image. Let's grab him and put him in the top slot.
PRATT: As for the rumor the firm may now be in play, most analysts believe it's unlikely. That's because the three U.S. banks large enough to swallow Merrill -- Citigroup, Bank of America and JPMorgan Chase -- are not believed to be in the market for a monster-sized acquisition. And because Merrill is likely to be in transition for many months, some recommend steering clear of the stock. Morningstar analyst Ryan Lentell disagrees, adding that $76 a share for Merrill would be fair value.
RYAN LENTELL, ANALYST, MORNINGSTAR: I think Merrill overall is performing pretty well. They need to recover from the misstep in fixed income, make sure they have risk control procedures in so it doesn't happen again. But overall we think the stock is undervalued today.
PRATT: Some analysts are concerned that Merrill is taking so long to make an announcement about O'Neal. They now worry that there are other problems at Merrill the board may be trying to get a handle on before going public regarding leadership. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The Bank Owned Property Boom
PAUL KANGAS: Adding to worries that the housing downturn is nowhere near over, the head of KB Homes today said that he sees home prices in California falling another 10 to 15 percent over the next year and a half. That comes as banks and other lenders are increasingly becoming home sellers. As Stephanie Dhue reports, inventories of bank-owned properties are growing as the nation's foreclosure rates soar.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Nearly 400,000 homes have entered foreclosure already this year and many of them are sitting on the market. Countrywide Financial alone has nearly 14,000 homes listed for sale on its web site. Countrywide's Steve Bailey says his company isn't interested in having a fire sale on its growing inventory.
STEVE BAILEY, MANAGING DIRECTOR, LOAN ADMINISTRATION, COUNTRYWIDE: In no way are we trying to dump any properties. Essentially we are trying to make sure that property sells for the market that it's in for a reasonable price.
DHUE: But the definition of reasonable is changing. In many once-hot markets, home builders are now slashing prices as more homes glut the market. Guy Allen specializes in selling bank-owned properties in Prince William County, Virginia. He expects banks to soon re-price some of their properties.
GUY ALLEN, BROKER, ONE STOP REALTY: Sometime around the next 30 to 60 days, we're going to see a major drop in pricing. Banks are going to realize that, OK, we've got to get our prices in line with where the rest of the market is if we want to sell this inventory.
DHUE: While those lower prices will help clear out bank inventory, it will also put more pressure on other would-be sellers. Mark Fleming of Corelogic says banks selling at deep discounts can create a vicious cycle for homeowners looking for a way out of their mortgages.
MARK FLEMING, DIRECTOR OF ECONOMICS, CORELOGIC: If they face a payment reset or divorce or job loss, something that causes them to not be able to make their mortgage payments, that makes the situation worse for them and they are then more likely to go into foreclosure.
DHUE: Analysts say banks face a dilemma. While holding out for higher sales prices may keep the housing market from falling faster, it may also be stalling a housing recovery. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Dale City, Virginia.
"Energy Options: Nuclear" - Nuclear Power's Battle (Part 1)
SUSIE GHARIB: Electricity demand in the U.S. is expected to increase 50 percent over the next 20 years. Nuclear power may be one way to meet that demand. Nuclear energy fell out of favor following the Three Mile Island accident three decades ago, but its reputation has been improving. And now, many utilities are making plans to build new reactors. Over the next four nights, Diane Eastabrook will look at the energy options of nuclear power. We begin with the potential of nuclear energy and the problems that come with building new reactors.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In Raleigh, North Carolina, late summer heat waves often throw air conditioners into overdrive. The added demand for power puts even more pressure on Raleigh's electrical infrastructure, already taxed by a growing economy and population. North Carolina's seemingly insatiable appetite for power is the reason Progress Energy wants to build a second nuclear reactor at its Harris plant, 20 miles southwest of Raleigh. Chairman and CEO William Johnson says it would be Progress Energy's first new reactor in 20 years.
WILLIAM JOHNSON, CHAIRMAN & CEO, PROGRESS ENERGY: You've seen a lot of new infrastructure like roads, schools, buildings. Of course you need new plants to serve those new facilities and so we're really looking at 10 years in the future. What will we need in the next 10 years to meet that growing demand that we've had in the last 20 years.
EASTABROOK: After decades of dormancy in the U.S., nuclear power is making a comeback. Increased energy demand and economics are two reasons. Utilities say nuclear power is cheaper than coal, oil or natural gas. The environment is another. The nuclear industry is promoting itself as a clean, environmentally friendly source of power. Nuclear power plants don't emit greenhouse gases that are believed to contribute to global warming the way fossil fuel plants do. Roughly 20 percent of the nation's electricity now comes from the 100 nuclear reactors that dot the nation's landscape. But the Bush administration, led by Energy Secretary Samuel Bodman, thinks nuclear should play a larger role in meeting America's future energy needs.
SAMUEL BODMAN, SECRETARY, U.S. DEPARTMENT OF ENERGY: We need to double the number of reactors that we have available in the fleet nationally. So seeing it go from roughly 100 to roughly 200, I don't think is beyond the scope of what we are working at.
EASTABROOK: It has been 30 years since a utility company filed an application with the Nuclear Regulatory Commission to build a new reactor. But last month NRG Energy and the south Texas project nuclear operating company jointly applied for a license to build and operate two more reactors at their Matagorda County, Texas plant. The NRC says more than a dozen other utilities have signaled they plan to file applications over the next year to build another 30 reactors.
Most of the new reactors that utilities want to build over the next decade at existing nuclear plants like Progress Energy's Harris facility. That's because the utilities already own the land and have the infrastructure in place to support additional reactors. That advantage, coupled with a streamlined licensing process, could help pave the way for more nuclear plants. Still, NRC Chairman Dale Klein says it could be years before new reactors start producing power.
DALE KLEIN, CHAIRMAN, NUCLEAR REGULATORY COMMISSION: We will go through a rigorous review since we are the regulator. We have budgeted 30 months to do the technical review for the first application. Then there is a 12-month hearing process.
EASTABROOK: But experts agree nuclear energy's road to revival could be long and difficult. Cost is one possible roadblock. Analysts estimate a single reactor could cost up to $5 billion. Proposed government loan guarantees could help offset the expense. But Morningstar utilities analyst Paul Justice says unpredictable market conditions could make it hard for many utilities to foot the rest of the bill.
PAUL JUSTICE, UTILITIES ANALYST, MORNINGSTAR: If you run into problems with rising interest rates, rising capital costs, rising metals prices, that can also increase the cost of building a project that has to take five years to construct.
EASTABROOK: Safety is another issue. The industry's track record has improved since the Three Mile Island accident 28 years ago. But Kinette Benedict, executive director of the Bulletin of the Atomic Scientists, says nuclear safety remains a concern and should outweigh economics.
KENNETTE BENEDICT, EXEC. DIR., BULLETIN OF THE ATOMIC SCIENTISTS: I think it's important to remember that we need to think about the technological issues which aren't necessarily easily remedied by a market solution.
EASTABROOK: The general public also seems ambivalent about nuclear energy. While a Harris poll conducted last year found 30 percent of nearly 1,500 Americans surveyed had a positive perception of nuclear energy, the rest had neutral or negative perceptions. In North Carolina, a grassroots organization called NC Warn is already preparing to battle Progress Energy over its planned new reactor. NC Warn's executive director Jim Warren argues utilities and their customers should be seeking alternatives to nuclear and fossil fuels.
JIM WARREN, EXECUTIVE DIRECTOR, NC WARN: Our society in general needs to be getting much more energy-efficient and ramping up clean technologies: solar, wind and others.
EASTABROOK: Warn's points are not lost on Progress Energy's Chairman and CEO. Johnson says even if Progress gets a license for a new reactor, it may not necessarily build it.
JOHNSON: We're keeping that as an option for the next 10 years or so to see how renewables and efficiencies work out, what demand looks like, so we can build that plant if we need it, when we need it.
EASTABROOK: Analysts says that kind of caution is key if there is to be a nuclear energy renaissance in the U.S. They say the previous industry downturn partly resulted from utilities building too many nuclear plants too quickly. Experts think that is a mistake the nuclear industry won't repeat. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Raleigh, North Carolina.
"Commentary"-Microsoft's Setbacks Prove Lucrative
SUSIE GHARIB: In tonight's commentary, the virtues of being out of fashion. Here's Justin Fox, business and economics columnist at "Time" magazine.
JUSTIN FOX, BUSINESS & ECONOMICS COLUMNIST, TIME: It is hard to think of a technology company less fashionable today than Microsoft. Ten years ago, Bill Gates' software juggernaut was poised to rule the world. It dominated personal computing, while longtime rival Apple computer flailed. It appeared to be on its way to taking over the Internet and making big inroads in mobile devices. It was so dominant that the Justice Department sued it in 1998 for antitrust violations.
Now, Apple rules the lucrative business of digital music players and is beginning to regain lost ground in personal computers. Far from taking over the Internet, Microsoft has been reduced to celebrating being allowed to pay $240 million for a tiny stake in facebook. The company has made inroads in video gaming with Xbox, but that operation is only barely profitable. It also just lost an antitrust case in Europe, but that seemed more a bizarre throwback than a sign of current strength.
There's only one thing complicating this picture of a once-great company in decline. It's that last week, Microsoft reported an after-tax profit of $4.3 billion in the quarter that ended in September. That's more than 10 times what it was making a decade ago and puts Microsoft among the most profitable enterprises in the land, a territory dominated by giant oil companies and banks. Microsoft's profits, unlike theirs, are growing and rapidly. It's true that Microsoft's potential no longer seems boundless and that it no longer strikes fear and awe into the hearts of competitors. But man, it makes a lot of money. Clearly, there's something to be said for being unfashionable. I'm Justin Fox.
"Last Word"-The Red Sox Furniture Windfall
SUSIE GHARIB: And finally tonight, now that the Boston Red Sox have won baseball's World Series, there's a big payoff, but not just for the Red Sox. Nearly 30,000 people can stake claim to free sofas, mattresses, dining tables and beds. Back in the spring, the Jordan's furniture chain ran a promotion promising buyers would get their money back on specific items if the Sox won it all. Customers paid for their merchandise up front and were given rebate certificates to fill out in case the Sox were able to pull off the statistical long shot. Jordan's, by the way, is owned by Warren Buffett's Berkshire Hathaway. But Paul, lest you think the cash will come out of Berkshire's pockets, Jordan has insured the promotion for more than $20 million.
KANGAS: That is why Mr. Buffett and Berkshire have the big bucks.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street posted solid opening gains with bullish conviction, buoyed by Friday's big rally and a growing confidence the Federal Reserve will cut interest rates this week. The Dow rose 50 points early on, while the NASDAQ Composite was up 17 points. The market pulled back modestly over the mid-session hours as oil futures surged to record highs again, but buyers continued to hold the upper hand as stocks closed moderately higher. The Dow Industrial Average ended up 63.56 points at 13,870.26. NASDAQ Composite rose 13.25 points to 2817.44, while the Standard & Poor's 500 Index gained 5.70 ending at 1540.98. In the bond market, the 10-year note rose 4/32 to 102 28/32, putting the yield at 4.39 percent.
New York exchange volume leader on 15 million shares, EMC Corp (EMC) moving up $0.84.
Followed by Pfizer (PFE) a $0.20 gain, even though a German court revoked the active ingredient in the company's Lipitor product. The company will appeal that.
Citigroup (C) was a $0.06 gainer. The company received clearance from Japanese regulators to list its shares on the Tokyo Stock Exchange.
General Electric (GE) $0.18 gain there.
And then Ford Motor Co (F) moving up a dime per share.
Taiwan Semiconductor (TSM) up $0.60 per share.
Countrywide Financial (CFC) fell $0.47.
Co Vale do Rio (RIO) up $1.67.
And then Motorola (MOT) with a $0.29 loss.
JPMorgan Chase (JPM) fell $0.65, tenth in volume.
Boeing (BA) up $0.97 a share. The company says it's going to buy back up to $7 billion of its own stock. That's 9 percent of the outstanding shares, didn't specify any time period over which it would do that.
Verizon Communications (VZ), another Dow stock, edging up $0.39. Third quarter earnings fell to $0.44 from $066 a year ago, but that wasn't as bad as expected, especially in view of the tough competition from AT&T with Apple's iPhone launch.
Office Depot (ODP) tumbling $2.86. The company's delaying its third quarter financial report which was scheduled for tomorrow, citing a review by an audit committee of its vendor program funds. Analysts as a result of this audit and review expect the company financial restatements and management changes.
Humana (HUM) closed down $1.81, but this morning it was trading as high as $81.44. Third quarter earnings out 90 percent higher than last year, $1.78 versus $0.95. Revenues up 12 percent and the company expects to add 200,000 members to its Medicare advantage plan over the next year. The stock really took a tumble on profit taking later in the day.
Weyerhaeuser Co (WY) up $5.51. This week's "Barron's" financial magazine notes the company may be starting an intensive restructuring which could lift the shares above $100 each.
Radioshack (RSH) up $0.80, traded as high as $21.81 this morning after announcing a third quarter turnaround. Third quarter earnings of $0.34 versus a loss of $0.12 last year. Standard & Poor's upgraded the stock "sell" to "hold."
Radian Group (RDN) up $1.11. This week's "Barron's" suggests the stock is a good value, even if the mortgage market worsens because the stock has already lost 83 percent just since February.
Mortons Restaurant Group (MRT), the steak house chain, did not have a well done third quarter, had a loss of $0.04 versus a loss of $0.01 last year and that's despite a 7 percent rise in same store sales.
American Axle & Manufacturing (AXL) up $2.85. Keybanc brokerage upgraded it from "buy" to "aggressive buy."
Microsoft (MSFT) topped the NASDAQ active list, down $0.46 after good gains last week.
Apple (AAPL) $0.39 rise.
Then Yahoo! (YHOO) losing $1.84. Standard & Poor's downgraded Yahoo! from "hold" to "sell" on a valuation basis.
Google (GOOG) up $4.63.
And Research in Motion (RIMM) doing well, also up $2.25.
$12.11 gain in Baidu.com (BIDU).
Intel (INTC) $0.32 rise.
Cisco Systems (CSCO) up $0.51.
Dell (DELL) gained $0.49.
And then came Comcast "A" (CMCSA) with a $0.31 loss.
CTC Media (CTCM), this is a Russian entertainment company. The company had third quarter profits that doubled over last year. Stock up nicely, $4.14.
Then Schnitzer Steel Industries (SCHN) down $12.01. Fourth quarter earnings $1.28, down from $1.62 last year and $0.07 below the Wall Street estimate.
And over on the American exchange, Arizona Star Resource (AZS), which owns gold mining properties is going to be bought out at $18 a share Canadian by Barrick Gold.
Those are the stocks in the news tonight.
