NBR Complete Transcripts: 11-01-2007
Thursday, November 01, 2007Credit Concerns Ruin The Interest Rate Reduction
SUSIE GHARIB: A huge sell off on Wall Street today, as investors dumped shares of financial stocks. The Dow tumbled 362 points and the NASDAQ fell 64. Triggering today's selling, an analyst downgrade of Citigroup, which caused its shares to plunge nearly 7 percent. A big concern among investors: can we expect more bad news from the financial sector as a result of the sub-prime mortgage crisis? Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Most experts would agree Citigroup is facing serious challenges. Not only could there be additional write downs in the fourth quarter from bad sub-prime loans, but now some analysts are questioning the firm's financial fortitude. Since yesterday, three Wall Street firms have downgraded Citi on concerns about insufficient capital reserves, with one analyst suggesting Citi may need to cut its dividend. Still, it's unclear whether Citi's problems are limited to the nation's largest bank or likely to ripple throughout the financial sector. The Henssler Financial Group's Ted Parrish says he's been underweight financials because he's worried about the impact of the credit crisis on their bottom lines.
THEODORE PARRISH, DIR. OF INVESTMENTS, THE HENSSLER FINANCIAL GROUP: Now that we're seeing some of those write offs, we think it's justified and we don't think the worst is over in terms of the write offs. Whether the worst is over for the stock price performance is another question though.
PRATT: Adding to concerns today was word that Credit Suisse is taking a $2 billion write down to third quarter profits because of the credit market crisis. And earlier this week, Merrill Lynch chief Stan O'Neal stepped down in the aftermath of the firm's huge quarterly loss. Morningstar analyst Ganeesh Rathnam says investors are overreacting.
GANESH RATHNAM, BANKING ANALYST, MORNINGSTAR: I think the market is discounting a lot of bad news into financial stocks, a lot more than is deserved, a lot more than history suggests that the market should. And, I think it's overdone.
PRATT: It makes sense that investors are focused on financials when you consider the sector comprises a fifth of the S&P 500. Third quarter profits for big banks and investment firms were a big disappointment to Wall Street, and concerns are deepening about the fourth quarter. Right now analysts expect to see only a 1 percent jump in year-over-year earnings growth for the sector in the fourth quarter. That compares to expectations of 7 percent just a month ago. Thomson Financial's Mike Thompson believes additional cuts to profit forecasts are coming.
MICHAEL THOMPSON, DIR. OF RESEARCH, THOMSON FINANCIAL: There seems to be a movement afoot that would lead us to believe that you're going to see continued revisions down in the financials as nerves start getting wound up regarding adjustable rate mortgage resets and the damage that might do.
PRATT: Some investment banks will begin reporting their fourth quarter results in mid-December as their fiscal years end later this month. Experts say those numbers could be the first indication as to whether problems in the financial sector are deepening. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Don Felsinger, Chairman and CEO of Sempra Energy
SUSIE GHARIB: Sempra Energy posted lower third quarter earnings today, but better than analyst expectations. Excluding special items, the big San Diego utility earned $1.24 a share. That was $0.21 more than estimates. Joining us now for more analysis, Don Felsinger, chairman and CEO of Sempra. Welcome back to NIGHTLY BUSINESS REPORT, Mr. Felsinger.
DONALD FELSINGER, CEO, SEMPRA ENERGY: Good evening, Susie. How are you?
GHARIB: I'm fine, thank you very much. Well, you told analysts today that you were boosting your guidance for 2007 earnings $4 a share which was more than what most analysts were expecting. Where is the extra strength coming from?
FELSINGER: You know, Susie, actually it was coming from all of our businesses. Every one of our business units were operating at the high end of the guidance we gave Wall Street. We took a look at the last two months of this year and felt very comfortable raising our guidance to over $4 a share. So strong quarter is going to be a good year for us. Too bad it is happening in the term of the short rally on Wall Street.
GHARIB: Yes. Now you also are dealing with those wildfires and the effects of that in southern California. What impact will that have on your year-end results?
FELSINGER: Well, that was a real tragedy on the community, but it has really no financial impact on Sempra. We -- we are probably going to spend about the same amount of money that we spent four years ago fighting wildfires which is about $50 million. It's kind of immaterial to our business, but we have the ability here in California to file for a recovery of our incremental rates. We will be doing that and feel very comfortable in the fact we will get that rate relief. No impact on our business. It has mainly been an impact on our employees, our customers and neighbors and friends that have this tragedy happen to them.
GHARIB: What about looking at oil and natural gas prices? Oil approaching $100 a barrel, natural-gas prices at about $8.60. Should they be at these levels?
FELSINGER: They should not. The fundamentals do not support oil and natural gas at these prices. I'll just take natural gas as an example. We have plenty of natural gas in storage. We have had mild weather all this year. We're about to end the hurricane season with no hurricanes. A lot of gas in storage and so, but prices are around $8. They just shouldn't be there. It is not good for the economy. It's not good for our customers. That's why we had been building natural gas infrastructure to get more supplies of natural gas to North America.
GHARIB: And what is the impact of these high prices on Sempra, both as an energy trader and your commodities trading business and as an energy user?
FELSINGER: Well, as an energy user, the high prices get passed on to our customers and that is not a good thing. Because customers, in fact, don't like these high prices as you can understand. We're about to come into the winter heating season and people will see the impact of these higher prices. From the standpoint of our commodities business, the volatility is something that provides business opportunities for us because our large customers like to buy insurance, fix the prices of natural gas so it creates business opportunities. But it's a very unsettling market for both consumers and users.
GHARIB: Now you talked about bringing more natural gas on stream. I know you've got that pipeline in the Colorado Rockies which should be coming on line in 2008 and also that Mexico LNG plant that you told me about many other times that you've been on our program. What impact are these going to have on your earnings looking ahead to 2008/2009?
FELSINGER: When these facilities go into operation next year, they will have a positive impact on earnings. As you just stated, we are building one of the only liquefied natural gas receipt facilities along the west coast here in Baja, California. That facility should do a lot to help stabilize and even lower the price of natural gas going forward. And the same with the Rockies express pipeline, being able to get constrained natural gas out of the Rockies region into the eastern markets where there is a demand for gas, is going to be a good thing for customers there also.
GHARIB: All right. That is all very fascinating. We hope to talk to you more about it in the future. Thank you so much for tonight and coming on our program.
FELSINGER: Thank you.
GHARIB: My guest tonight, Don Felsinger, chairman and CEO of Sempra Energy.
Will The AMT Patch Hold or Hold Up Returns?
PAUL KANGAS: There's a tug of war over taxes on Capitol Hill, specifically over the alternative minimum tax. The House Ways and Means Committee today passed a bill to patch the AMT for a year, so 23 million taxpayers are protected from it. There's widespread agreement the tax should be changed. But as Stephanie Dhue explains, the question is just how to pay for it.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: If the alternative minimum tax is temporarily tweaked so fewer Americans pay it, the result would be a $50 billion hole in the Federal budget. House Ways and Means Committee Chairman Charlie Rangel says that hole should be filled.
REP. CHARLES RANGEL, CHAIRMAN, WAYS & MEANS COMMITTEE: We say, don't borrow the money, make up for it, find out where there's unfair advantage, but raise the revenue that way.
DHUE: One proposal to raise revenue is to change the tax treatment for investment management services known as carried interest. That change would mean private equity and hedge fund managers will pay a 35 percent income tax rate, as opposed to the 15 percent capital gains rate they currently pay. That would hit hedge fund and private equity billionaires like Stephen Schwarzman and Henry Kravis. Similar groups like real estate partnerships and venture capital firms would also pay higher taxes under the same proposal. But those groups want to be treated differently than private equity. Mark Heesen represents venture capital firms.
MARK HEESEN, PRES., NATIONAL VENTURE CAPITAL ASSOC.: We're the innovators. We're supporting entrepreneurs. We work with entrepreneurs from the very beginning. If anything we are more akin to entrepreneurs and founder stock than we are to a financial engineering entity.
DHUE: The tax battle this year is a warm-up for a larger debate that will happen in the next Congress. Deloitte tax expert Clint Stretch says to permanently repeal the AMT and extend the Bush tax cuts will require major changes.
CLINT STRETCH, TAX PRINCIPAL, DELOITTE TAX: We're going to be looking at changing individual rates. We're going to be looking at limiting mortgage interest deductions or health care exclusions or state and local tax deductions. Those things are really scary.
DHUE: While lawmakers promise to fix the AMT this year, time to do that is running short. Because the IRS needs some lead time, if the fix isn't in place in the next few weeks, 50 million filers could see their returns seriously delayed. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Energy Options: Nuclear" - Nuclear Power and Jobs (Part 4)
SUSIE GHARIB: The nuclear energy industry will lose thousands of workers to retirement over the next few years. Experts say that could short-circuit a nuclear energy revival. As we wrap up our series "Energy Options: Nuclear," Diane Eastabrook looks at how companies and universities are aggressively trying to recruit new workers and dangling big bucks to do it.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At Purdue University recently, student members of the American Nuclear Society served up hot dogs and career advice on the campus mall. This cookout was part of Purdue's nuke week. Senior Dan Jabaay says the event was aimed at drafting students into nuclear engineering at a time when the industry desperately needs workers.
DAN JABAAY, NUCLEAR ENG. STUDENT, PURDUE UNIV.: They are seeing a lot of an aging workforce basically, so there is going to be a really big surge in the job market at some point and we're just trying to compensate for that and let people know that it's happening.
EASTABROOK: Experts say a worker shortage could be one of the biggest roadblocks for a nuclear energy revival in the U.S. According to the Nuclear Energy Institute, nearly 30 percent of the people who currently work in the industry will be eligible to retire in five years. The NEI estimates another 13 percent could leave their jobs through attrition. Those statistics have many energy companies taking action. Along interstate highways in the Midwest, Exelon Corporation and Linn State College have erected billboards touting lucrative careers at nuclear power plants where starting salaries are as high as $55,000 a year. General Electric recently moved its nuclear division to Wilmington, North Carolina, from California, hoping the south might be more appealing to prospective workers. President and CEO Andrew White thinks the strategy is working.
ANDREW WHITE, PRESIDENT & CEO, GE NUCLEAR: We've been able to recruit from schools. We've recruited people experienced in the industry to a place that is much more cost effective for the people. It's a much more friendly place to work for business.
EASTABROOK: The industry not only needs nuclear engineers to run power plants. It also needs civil, mechanical and electrical engineers to build them. Those are highly skilled workers that other industries are seeking as well. Dave Barry is nuclear division president for Shaw Group, an engineering and construction firm. He says competition will heat up for top talent.
DAVE BARRY, PRES. OF NUCLEAR DIVISION, SHAW GROUP: All of us are going to have to work together: the owner, the community, the contractors, the labor themselves. We've all got to work together starting right now.
EASTABROOK: At many universities, interest in nuclear engineering is beginning to take off again. After a drop-off in enrollment in the 1990s, the number of students in Purdue's nuclear engineering program has more than doubled since the beginning of the decade. Associate dean of engineering Audeen Fentiman thinks better salaries and the industry's efforts to sell itself as a clean energy source are paying off.
AUDEEN FENTIMAN, ASSOC. DEAN OF ENGINEERING, PURDUE UNIV.: The students that we have now in classes were born after the cold war ended and so they are more concerned about environmental issues. They are concerned about greenhouse gases and global warming.
EASTABROOK: The NEI says some universities are even restarting nuclear programs that were shut down a decade ago when nuclear energy fell out of favor. But now that it's coming back into favor, experts say increased energy demand for energy, new technologies, a possible resolution to the nuclear waste issue and a new generation of professionals could help the industry thrive for decades to come. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Commentary"-Sovereign Wealth Funds
SUSIE GHARIB: Tonight's commentator has a quick lesson on sovereign wealth funds. She's Chrystia Freeland, U.S. managing editor of the" Financial Times." CHRYSTIA FREELAND, US MANAGING EDITOR, FINANCIAL TIMES: Don't worry if the acronym SWF hasn't entered your business vocabulary -- yet. When I asked a top economist about it recently, he said that until six months ago, even in his rarified DC think tank, those three letters still meant, in Internet dating short-hand, single white female. Now, though, for anyone interested in global flows of capital, SWF stands for sovereign wealth funds, the huge, state-controlled pools of money that have been accumulated largely by the go-go emerging economies of Asia and the oil princes of the Middle East and Russia.
According to IMF estimates, SWFs hold between $2 and $3 trillion today, up from $500 billion in 1990. The IMF predicts their wealth could shoot up to $10 trillion by 2012. Their power in the U.S. has been enhanced by two of the big economic events of this year -- the liquidity squeeze in financial markets and the fall in the value of the U.S. dollar. A weak dollar makes American assets cheap for foreign buyers, like the SWFs and a credit squeeze means there aren't as many rival domestic bidders able to deploy a fat checkbook.
The big question is what the political reaction will be when the sheikhs and mandarins of the SWFs come shopping. Given the rise in protectionist sentiment and the coming 2008 presidential election, it could be hostile. At a time when the U.S. economy is counting on the rest of the world to save it from recession, that cold shoulder may have unforeseen and nasty consequences. I'm Chrystia Freeland.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street opened in a nosedive on those analyst downgrades of big banks like Citigroup and downgrades of many bond and mortgage insurers. Exxon's earnings shortfall was another factor that helped to send the Dow off 221 points just an hour into trading, while the NASDAQ Composite was down 40 points. As oil futures touched $96 a barrel, stocks remained sharply lower this afternoon and fell even further in the final hour of trading on nervousness over tomorrow's jobs report. The Dow Industrial Average closed down 362.14 at 13,567.87. The NASDAQ Composite tumbled 64.29 points to 2794.83, while the Standard & Poor's 500 Index plunged 40.94 points, ending at 1508.44. Over in the bond market, the 10-year note jumped one full point to 103 5/32, pushing the yield down to only 4.35 percent.
By far the most active big board issue, trading 50.7 million shares of big board volume and 169 million of composite volume was Citigroup (C) down $2.85. As you heard, many analysts see the company facing challenging problems.
Then came a new issue, Giant Interactive (GA). This is a Chinese online gaming company, 57.2 million shares offered to the public at $15.50, opened at $18.25, the high of the day, $20.46, backed off a little, but still had a strong debut.
General Electric (GE) $0.82 loss.
Bank of America (BAC) off $2.57. CIBC World Markets downgraded it from "sector outperform" to "sector perform."
Pfizer (PFE) in there with a $0.65 loss. Then we see Wells Fargo & Co (WFC), another weak bank stock, off $1.86.
ExxonMobil (XOM) down $3.49. Third quarter earnings came in at $1.70, down from $1.77 a year ago and $0.05 below the Wall Street consensus.0
JPMorgan Chase (JPM) down $2.65, financial sector also weak because of fading hopes for another Fed rate cut any time soon.
Ford Motor Co (F), there you see it, down $0.37.
And then came EMC Corp (EMC) with a $0.60 per share loss.
Ambac Financial (ABK) tumbling $7.26, traded as low as $26.96. Stocks of bonded mortgage insurers down on expectations the value of what they're insuring will continue to drop. Let's look at some other stocks in that sector.
MBIA (MBI), Radian Group (RDN) and Security Capital (SCA) all major losers percentage wise especially. But not all insurance companies were down.
Those that do more in the health and life insurance like Unum Group (UNM) up $1.98. Big third quarter earnings $0.60, well above $0.46 a year ago.0
And another one of those, Aon Corp (AOC) up $1.73, health and life insurance company. Third quarter earnings doubled to $0.64 from $0.32 last year. The company is going to cut 2700 jobs. Citigroup upgraded its price target from $50 to $58 a share.
Then Hornbeck Offshore Services (HOS) doing very well. Third quarter earnings $1.09, up from $0.86. Revenues jumped 22 percent from last year.
Valeant Pharmaceuticals (VRX) tumbling $2.42. The company turned in a third quarter loss of $0.13 a share, versus earnings of $0.14 a share a year ago.
Another major loser, Scotts Miracle-Gro (SMG) down $7.20. Fourth quarter loss of $0.11 out today, versus earnings of $0.02 a year ago. And the company said that its 2008 earnings will be flat to even slightly lower.
Timberland Co (TBL), the boot maker, down $2.08. Third quarter earnings fell to only $0.42 from $0.88 a year ago and a 14 percent drop in revenue. Standard & Poor's repeated a "strong sell" on Timberland stock.
Microsoft (MSFT) bucked the overall trend with a gain of $0.25 on NASDAQ, volume leader.
Then Apple (AAPL) down $2.51.
Google (GOOG) off $3.79, although it signed up myspace to its open social platform.
baidu.com (BIDU) bucking the trend, up $3.46.
And then Crocs (CROX) down $27.01, losing its footing on disappointing sales forecast, even though after the close yesterday, the earnings were strong third quarter, $0.66, up from $0.27.
Intel (INTC) down $0.40.
Research in Motion (RIMM) fell $2.43.
Cisco Systems (CSCO) it's an $0.88 loss.
Garmin Ltd (GRMN) down $7.39.
But then look at this, United Therapeutics (UTHR) up $25.67. Late stage trials are very promising for the company's inhalable drug to treatment pulmonary lung disease. Its stock really showed it.
Flotek Industries (FTK), over on the American exchange, down $14.35. The oil drilling tools and chemical company had third quarter earnings higher, $0.26 versus $0.19 a year ago, but that was below the Street estimate of $0.31 a share.
And those are the stocks in the news tonight.
