NBR Complete Transcripts: 11-05-2007
Monday, November 05, 2007The Shake Up at Citi Sends Shockwaves Through The Financial World
SUZANNE PRATT: The turmoil at Citigroup continued today even in the wake of Chuck Prince's departure as chairman and CEO. Shares of the nation's largest financial services firm fell almost 5 percent in reaction to Citi's admission that it will write down as much as $11 billion in losses related to the sub-prime mortgage crisis. The firm also plans to restate its third quarter earnings. Scott Gurvey looks at the outlook for Citi.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: With the resignation of Chuck Prince of Citi coming right on the heels of the resignation of Stan O'Neal at Merrill Lynch, the second shoe has fallen. The problem facing Wall Street is the fear the sub-prime monster has more than two feet. Analysts believe there is more bad news to come as the financial sector tries to mark to market investment instruments originally sold for hundreds of billions of dollars. Frank Braden of S&P says some of these packages are so complex, they have no liquid market.
FRANK BRADEN, FINANCIAL ANALYST, STANDARD & POOR'S: It's not a very transparent business. To this point in time, a lot of businesses haven't been very forthcoming with their exposure. Citigroup did a little better job today of explaining exactly what their positions were and marking those positions to where they think they should be valued. But there is a lot of uncertainty as to where the market goes from here.
GURVEY: In the end, Prince took the rap for the 35 percent decline in the value of Citi's share price since the start of the year. The company is also taking between $8 and $11 billion in write-downs for the third quarter and cutting its already reported third quarter results by $0.03 a share. But Citi and Merrill are not alone. Analysts say Bear Stearns, Morgan Stanley and Bank of America are among the other big financial firms with large exposure to mortgage securities and other debt pool instruments. They see weak fourth quarter earnings and more write-downs throughout the financial sector, which may explain why Citi has turned to insiders Robert Rubin and Sir Win Bischoff to run the company on an interim basis, and why executive search expert John Challenger says filling the shoes at Citi and Merrill will be difficult.
JOHN CHALLENGER, CEO, CHALLENGER, GREY & CHRISTMAS: You want someone who has been in a role that suggests that he or she could handle the challenges that are in front of these companies, so specific experience in regards to risk management, the biggest problem facing these companies, as well as a high-profile executive that is going to reassure the markets that this person is going to know what he or she is doing.
GURVEY: Challenger also says, the sooner the new CEO is selected, the better. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Mike Ryan of UBS Wealth Management Offers His Financial Outlook
SUZANNE PRATT: Joining me now to talk about his outlook for the broader market is Mike Ryan, chief investment strategist at UBS Wealth Management. Mike, welcome back to NIGHTLY BUSINESS REPORT.
MICHAEL RYAN, CHIEF INVESTMENT STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT: Thanks Suzanne.
PRATT: How it is possible that the Dow is still at 9 percent for the year when we're seeing all of this turmoil in the financial sector, not to mention oil prices nearing $100 a barrel?
RYAN: Well, it's proved the resiliency of this market. I think there are a couple things that the market has in its favor. First of all, it's not a terribly expensive market. Even though we've had a decent move (INAUDIBLE) in the Dow, the S&P is only up a little bit less than 6 percent and we're seeing is that from a multiple basis, this market is not very expensive. Again, on the P/E, it's trading about 15 times. And even though we have seen a slowdown and are likely to continue to see a slowdown, especially in earnings in the financial sector, overall earnings momentum hasn't collapsed, especially from those companies that generate earnings from outside the U.S. So broad based we have a decent market because it's well supported from valuation and we continue to see decent earnings momentum, especially from companies outside the United States.
PRATT: So what happens if the turmoil in the financial sector continues, if we continue to see companies with large write-downs and if the financial sector stocks remain under pressure? What happens to the broader market then?
RYAN: This is going to pose a bigger challenge. And I think it's on two fronts. First of all, it's not just the impact in terms of the re- pricing within the equity markets, but it's also potential spillover effect as you noted to the real economy, because at some point, when does a financial market event begin to trickle and become a real economic event? When does it start to weigh on investor sentiment? When does it start to weigh on consumer confidence and when does this prompt a response from policy makers? So from my perspective, what we are going to see is, if we continue to see further fallout from financial services, if this begins to take a bigger bite out of the equity markets in general, then you run the risk that this translates into a real economic event.
PRATT: Would you be a buyer at all of financial stocks at these levels? Some of them have gotten pretty beaten up in the last few weeks.
RYAN: You want to be a little careful here. We do see value in the sector. There's no question there. What we've seen is the proverbial babies being thrown out with the bath water. We've seen a lot of financials kind of lumped together. And while we do think there is going to continue to be writeoffs and probably into the fourth quarter and there is significant exposure in the sub-prime sector, it doesn't mean that the exposure is going to be necessarily uniform throughout the sector. But again, what we want to emphasize here is not necessarily trying to bottom fish in the financial sector, but rather we want to position those sectors that we think are pretty well positioned at this point of the cycle. That is, we like consumer staples because of the defensive element. We also like, for example, industrials and technology because of the ability to leverage growth prospects outside the United States.
PRATT: So what do you believe is the greatest risk for the stock market right now?
RYAN: I do think what we already talked about. The greatest risk is that we see lack of transparency in some of the losses in the sub-prime sector and further fallout in the financial services, that this now becomes a bigger factor, that it starts to weigh again on investor confidence and that we start to see this play out over a multiple quarter. We don't see it over a one or two-quarter affair, that it stretches into 2008 and then what you start to see is the ability for consumers to go out and spend money because of their lack of confidence. That starts to be impacted.
PRATT: So are you factoring a recession into your outlook for 2008?
RYAN: It's certainly one of the risk scenarios. We don't want to be for a moment dismissive of it, but our baseline forecast right now is not for recession. It's just for significantly slower growth. We do think that the combined impact of the fallout from housing, the significantly sustained higher energy prices, that's going to certainly weigh on consumer spending, but there are also some positives here. Keep in mind what we do continue to see is robust growth outside the United States, the fact that we do expect the Fed to continue lowering interest rates. Those are some of the positives that will offset some of the drags we see in the economy.
PRATT: OK, Mike. I think we have to leave it there. Thank you for joining us.
RYAN: Thanks, Suzanne.
PRATT: My guest this evening Mike Ryan of UBS Wealth Management.
Ethanol Profits May Be Losing Steam
PAUL KANGAS: Archer Daniels Midland, the nation's largest ethanol producer, reports earnings tomorrow. Last quarter, its ethanol profits fell almost 18 percent. And with ethanol prices down sharply, many analysts say ADM's ethanol group could be in for a repeat performance. That drop in ethanol prices has prompted some producers to put the brakes on construction of new facilities. But as Diane Eastabrook reports, some experts say these growing pains may be healthy for the ethanol industry.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chet Perry, president and CEO of Itec Refining and Marketing, thinks he has the ingredients for a lucrative ethanol plant. His firm bought 85 acres of land in prime Illinois corn country for a facility. The site has access to highways, railroads and water, plus the community of Princeton granted Itec tax abatements for 10 years. But Perry says one missing ingredient has put the plant on hold.
CHET PERRY, PRES. & CEO, ITEC REFINING & MARKETING CO.: The missing ingredient right now is the economy. We have to find a way to bring the construction costs of ethanol plants down.
EASTABROOK: Itec's project isn't the only proposed U.S. ethanol facility in limbo. Projects by big producers including Aventine and Verasun have also been shelved for now. High stainless steel prices to build new facilities are part of the problem. An ethanol glut is another. Thirty new ethanol plants came on line this past year, boosting production by 50 percent. As a result, wholesale ethanol prices have been freefalling since spring. If prices don't recover soon, Morningstar energy analyst Michael Tian thinks another 75 plants currently under construction could be temporarily halted or scrapped altogether.
MICHAEL TIAN, ENERGY ANALYST, MORNINGSTAR: A lot of them are pretty much speculative ventures that got started up in the boom days in 2006 and now things are turning south and sources of financing and what not are drying up, so people are not going to be able to finish them.
EASTABROOK: High corn prices -- the main ingredient for ethanol -- are another concern. Demand for corn has sent prices up more than a dollar a bushel in the past year, squeezing profit margins. At the Chicago Board of Trade, futures prices for corn show no sign of retreating. But trader Matt Zeman thinks ethanol producers will be able to absorb those higher corn prices. He's convinced rising oil prices will make ethanol an attractive fuel alternative and that could ignite demand.
MATT ZEMAN, TRADER, LASALLE FUTURES GROUP: Right now prices are obviously well off the high point, but I think they are going to stabilize somewhere in this area, and I would expect in the coming years to see them rise again.
EASTABROOK: That kind of optimism has Perry confident that Itec's ethanol plant will be built next year.
PERRY: We are anticipating that we'll be breaking ground at the end of first quarter or the beginning of second quarter.
EASTABROOK: Analysts say this recent bump in the road for ethanol may actually be good for the industry in the long run. They think it could drive some marginal ethanol producers out of business and that could bring stability to prices and the industry in general. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Princeton, Illinois.
"Economic Choices '08" - Iowa Health Care
SUZANNE PRATT: With the presidential election just 364 days away, polls show voters want to hear more about the issues and less about personalities. That's our goal as we continue our series, "Economic Choices '08." Darren Gersh visited Iowa to find out what voters there want to see happen with health care.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Kinter Construction has done all the usual things to control its health insurance costs, raising deductibles and switching plans. Now, to avoid a surprise when premiums come due in January, the company is taking a new approach: prevention. Owner Mike Kinter offers $1,000 cash awards to employees who quit smoking. He says he got the idea after he bought life insurance and his agent asked him whether he smoked.
MIKE KINTER, OWNER, KINTER CONSTRUCTION: If I didn't smoke, I got a better rate to buy life insurance. So I thought if the life insurance companies have been on this bandwagon for the last 30-plus years, health insurance carriers ought to start getting on this bandwagon, too.
GERSH: Kinter is also considering chipping in for employee gym memberships. It's the kind of pro-active thinking this staunch independent is looking for in a presidential candidate. With the Iowa caucuses approaching, Kinter wants to hear how Democrats and Republicans plan to inject more competition into the health care system. A good beginning, Kinter says, would be to make prices more transparent.
KINTER: You're not given an opportunity to shop for your -- and I think if that was available, I think that a lot of the carriers or a lot of the providers, would stop and take a look and say, well, you know what? Maybe we can do this a little bit cheaper, because so-and-so can do it cheaper. Let's look at what we can do to cut our costs.
GERSH: Much of the health care debate in the presidential campaign has focused on access to care. But in Iowa, more than 90 percent of the population has some form of health insurance. A key question for many voters here is how to keep their costs under control. Health care costs are a pressing issue for Mike Abrams, both as a business manager and an advocate for doctors. Abrams is executive vice president for the Iowa Medical Society and right now he's trying to figure out how to cover the organization's 22 percent health insurance premium increase.
MIKE ABRAMS, EXECUTIVE VICE PRESIDENT, IOWA MEDICAL SOCIETY: When I look at these kinds of increases, I wonder how long will we have that large portion of our population covered by health insurance.
GERSH: A likely Republican caucus voter, Abrams likes John McCain's plan to allow consumers to shop for insurance across state lines.
ABRAMS: Iowa and many states like Iowa, there is very, very little or no competition under the carrier, so when you get your premium increase, it is what it is and there's not a whole lot of opportunity to affect that.
GERSH: Many Iowans we spoke with are wary of putting too much control over health care in the hands of the Federal government. But they also want to hear candidates explain how to simplify a system that costs a lot and where the payments are hard to track. Independent pharmacist Kim Graziano wants to know why some drugs show up on plan formulary and others don't and she'd also like to see a candidate reduce her bureaucratic nightmare.
KIM GRAZIANO, INDEPENDENT PHARMACIST: And really, the pharmacists don't have enough time to do their profession, which is take care of people with counseling their medications, not trying to figure out what insurance is going to pay for and what it's not going to pay for. It is tying up the physicians and the doctors just trying to figure out how to get someone taken care of.
GERSH: Both Democratic and Republican candidates are counting on better prevention and management of chronic diseases to hold down health care costs. At the University of Iowa, Dr. Paul James worries, in a system which rewards specialization, there aren't enough frontline health care workers to deliver the primary care the politicians are counting on.
DR. PAUL JAMES, FAMILY MEDICAL CENTER, UNIVERSITY OF IOWA: They all want to provide universal access and if not universal access, the choice for every individual to purchase that. But with increasing access, one would logically think costs are going to go up. If everyone gets access to more expensive care, then how are we going to rein in costs?
GERSH: With the caucuses less than two months away, most Iowans seem to agree the nation's health care system is ailing, but they are not sure yet which candidate has the right cure. Darren Gersh, NIGHTLY BUSINESS REPORT, Des Moines, Iowa.
"Last Word"-Congeniality vs. Credentials
SUZANNE PRATT: And finally, it's common to get questions about your work experience during a job interview, but what about your sandbox skills? It's a new trend, hiring for congeniality, or the "plays well with others" factor. Some employers are getting so picky about who they hire, they want to weed out people with the right credentials but the wrong personalities. Here's the rationale: if employees are going to work together for up to 50 hours a week, it's important they get along. And Paul, group interviews, cameras in the waiting room and team exercises are all ways that employers are looking to measure likeability.
KANGAS: You know, Suzanne, I've been told that my likeability increases when the stock market goes up.
PRATT: What happened to hiring the smartest person for the job?
KANGAS: I don't know.
Paul Kangas' Stocks in the News
PAUL KANGAS: More major management shakeups and more huge credit market write-offs were not what Wall Street wanted to hear today and it showed its frustration with a broad sell off, which took the Dow to a 76-point midday loss, while the NASDAQ was off 19 points. The downturn took the blue chips off as much as 125 points this afternoon, but a sharp drop in oil futures and some late bargain hunting helped the market close above the day's lows. The Dow Jones Industrial Average ended off 51.70 at 13,543.40. The NASDAQ Composite fell 15.20 ending at 2795.18, while the Standard & Poor's 500 was down 7.48 at 1502.17. Over in the bond market, the 10-year note fell 6/32 to 103 7/32, putting the yield at 4.34 percent.
No surprise to see at the top of the active list, Citigroup (C). It traded nearly 63 million shares on the big board and 228 1/4 million of composite volume, down $1.83 on those management shakeups and also the big write offs.
Then came EMC Corp (EMC) with a loss of $1.06.
Ford Motor Co (F) lost $0.28, although the company and the UAW signed a new labor pact over the weekend.
Wells Fargo Co (WFC) losing $0.38.
And Merrill Lynch (MER) down $1.40. As we know, it's got its problems. Word has it that Merrill offered the CEO job to Lawrence Fink, the CEO of Blackrock. No word on whether he accepted it. Bank of America (BAC) a $0.66 loss.
General Electric (GE) $0.13 drop there.
No change in Pfizer (PFE) today.
Then came Time Warner (TWX), you just heard the news there, down $0.07.
And Morgan Stanley (MSN) another weak financial stock, down $3.31.
American Financial Realty (AFR), which owns office buildings and things like that, it's a real estate investment trust, up $1.56. Gramercy Capital will acquire the company for $5.50 a share in cash plus .12 of a share of Gramercy Capital. Today that combination works out to a value of about $8.41 a share for American Financial.
Legg Mason (LM), the big investment bank, down $1.64. Wachovia downgraded it from "market perform" to "under perform" and there's also concern that Citi will sell its 9.7 million shares of Legg Mason.
Wellcare Health (WCG) finally a good gain. That stock about eight business days ago was around $123 and then Federal and state agents began investigation. But today the company reported preliminary third quarter earnings sharply higher, $1.71 versus $1.06 last year on a 42 percent jump in revenues and the stock really made a nice comeback.
Marvel Entertainment (MVL) up $3.77. Third quarter earnings, $0.45, up from $0.16 a year ago, sales up 34 percent. Standard & Poor's upgraded it from a "strong sell" to a "hold."
Cardinal Health (CAH) losing $4.30. First quarter earnings were higher, $0.82 versus $0.61 but the company itself was disappointed in the performance of its health care supply segment. Down went the stock.
Nu Skin Enterprises (NUS), a personal care products firm, down $1.36 despite higher third quarter earnings, $0.21 versus last year's $0.19, but that was $0.03 below the Wall Street consensus.
And Stillwater Mining (SWC), which is into palladium and platinum, down $1.30. The company reported a third quarter loss of $0.12 a share versus earnings of $0.07 last year. Revenues dropped almost 10 percent from last year.
Midas (MDS) up $1.57. CL King brokerage upgraded the muffler company from "neutral" to a "strong buy."
And then came a big drop, almost $33 in Petrochina ADR (PTR), but the stock doubled in its debut on the Shanghai exchange making it one of the biggest cap stocks in the world, but it came down a little bit later on the New York exchange.
And then Beazer Homes (BZH) closed down only $0.12. After the close, the company warned that its fiscal fourth quarter, they'll have to take a $230 million charge. It's going to cut 25 percent of its staff and eliminate the dividend, tough times in the home building business.
Google (GOOG) topped NASDAQ's most active, up $14.40. As you heard, it's in a pact with IAC Interactive and that incidentally is a new closing high.
Then came Apple (AAPL) down $1.69.
Followed by Baidu.com (BIDU) $7.88 gain.
Research in Motion (RIMM) up $1.02. Then came Microsoft (MSFT).
Cisco Systems (CSCO) $0.57 gain.
Intel (INTC) up $0.15.
Crocs (CROX), the shoe company, down $6.07. Some negative comments in this week's "Barron's" financial about it.
Yahoo! (YHOO) was a $0.25 gainer.
And then came Ebay (EBAY) losing $0.92.
Dell (DELL) $0.08 drop, but the company said it's going to buy Equalogic, a privately held Internet technology firm and the price, $1.4 billion.
And then came Novacea (NOVC), a biopharmaceutical company, down $4.30, huge percentage drop on news the company halted late stage trials of its prostate cancer drug due to safety concerns.
And those are the stocks in the news tonight.
