NBR Complete Transcripts: 11-06-2007
Tuesday, November 06, 2007Oil Prices Barrel Closer To $100
SUSIE GHARIB: Stocks on Wall Street rallied today, even as gold soared to its highest level since 1980 and oil topped $97 for the first time ever in intra-day trading. In New York, December crude futures jumped 3 percent or $2.72, to settle at $96.70 a barrel -- a new record high. Oil prices continued their march toward $100 on expectation of tomorrow's government inventory report showing another sharp drop in crude supplies. Oil prices have surged more than 40 percent just late August and oil trader Chris Motroni believes speculators are behind this huge spike.
CHRISTOPHER MOTRONI, INDEPENDENT OIL TRADER: Speculators have driven the technical market to the point that we are in uncharted territory. So instead of having any real numbers to play with, people are just panicking buying. So it's kind of irrational, but at the same time, we are having these massive draws in the weekly numbers that have driven it up as well.
GHARIB: Motroni says oil could close at the $100-level this week and definitely by the end of November. And Paul, we just want to apologize to viewers that here at the New York Stock Exchange, there's a celebration going on on the floor and thus the music.
3rd Quarter Results Yield 4th Quarter Fears
PAUL KANGAS: Those high oil prices however are a big concern for American businesses and corporate earnings are a big worry as well. Third quarter results have been disappointing and as Suzanne Pratt reports, analysts are now raising red flags about the fourth quarter.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the first time in more than five years, quarterly earnings growth for corporate America looks like it will be negative for the third quarter. With 80 percent of S&P 500 firms having turned in results for the period, profit growth is averaging negative 1.7 percent. This follows many quarters of healthy earnings. Financials, led by Citigroup, were the primary culprit for the third quarter's poor showing. More than a third of financial firms issued numbers that fell short of expectations and profits fell 16 percent for the sector. Thomson Financial's Mike Thompson says the damage was localized.
MICHAEL THOMPSON, DIRECTOR OF RESEARCH, THOMSON FINANCIAL: If you extract out just a handful of industry groups, you can jump right back up to about 5 percent growth and those include the culprits in diversified financials, the investment bank and brokers and the homebuilders. We're talking about a handful of companies.
PRATT: Thomson Financial predicts weak results will continue in the fourth quarter. For example just today, it cut fourth quarter estimates for the S&P 500 to positive 6.9 percent. Yesterday, estimates stood at 8.7 percent. On October 1, they were 11.5 percent. But for now, it appears that profit problems will remain isolated to financials and home builders. For that reason, many experts believe the overall stock market can withstand further disappointments from large financials. Still, S&P strategist Alec Young says with several more weeks to go in the fourth quarter, it's hard to say how earnings will affect the market.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: Overall we see the market in a trading range throughout the rest of the year. Low valuations kind of help support the, limit the damage on the downside. But a lack of economic and earnings visibility we think is probably going to prevent the market from hitting new highs through year end.
PRATT: Much of corporate America will report fourth quarter results in mid January. Experts say between now and then, it's still possible that fourth quarter earnings for the S&P 500 could also go negative. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Ronald Hermance, Chairman & CEO Hudson City Bancorp
SUSIE GHARIB: Amidst all the gloomy news about the credit crunch and sub-prime mortgage mess, there are some bright spots. Take Hudson City Bancorp for example. It's the largest savings bank in New Jersey and recently was cited for having one of the highest quality loan portfolios in the country. It's also profitable and growing. Joining us now, Ronald Hermance, Hudson's chairman and CEO. Mr. Hermance, nice to have you on the program.
RONALD HERMANCE, CHMN, & CEO, HUDSON CITY BANCORP: Thank you, Susie.
GHARIB: So how did you and your loan officers avoid the temptation of offering exotic loans, especially in the height of the whole sub-prime boom?
HERMANCE: Well, we knew it to be a risk-reward situation, Susie, and for 30 years we've underwritten loans one at a time. There didn't seem to be a reason to veer from that path, and you know, we remain focused on our market, which is the prime market.
GHARIB: Given the shakeout in the mortgage industry, do you see any opportunities now to expand or any acquisitions that you might want to make?
HERMANCE: Well, expansion de novo is certainly in our plans. This year alone, Susie, we've been able to increase our mortgage applications by 30 percent and through August, we had outstripped the entire amount of mortgages we had originated last year. So people that tell you that the mortgages are hard to get, I don't believe it.
GHARIB: Well, I was going to ask you about that. Given that home prices are down and home sales are weak, one would think that mortgage applications would also be down and it would impact your business. Why is your business still going on as business as usual?
HERMANCE: Well, it's the sector of the market we work in. It's this northeast quadrant -- Connecticut, New York and New Jersey particularly -- and by virtue of our geography, we're pretty much in a jumbo market. So far for the last three years running, people have put down 41 percent on their applications, which is well above our standard 20 percent requirement. So it seems to me like they really want to own their homes rather than just mortgage their homes.
GHARIB: Now with interest rates also coming down, what impact is that having on loan applications, whether for mortgages or refinancing?
HERMANCE: They've increased, but seasonally adjusted, the third or excuse me, the fourth and first quarter are the most difficult quarters for us to increase volume. But so far we've had no problems with that because it's the liability side of the ledger, the funding side that's also coming down, so we're seeing improved funding costs, which allows us to have plenty of inventory to take care of the demand.
GHARIB: As you look at the credit markets, what does worry you? Where are the risks?
HERMANCE: You know, the credit markets, Susie, I don't serve enough of the other needs of the credit markets. I would say unemployment is my single biggest worry. And here in the east, you know, I think we're 4.6 nationally. We're less than that on the east coast. When problems arose back in the late '80s, early '90s, it was led by unemployment. If you were not out of a job, you knew somebody that was and the consumer confidence was terribly low. That's not true nowadays.
GHARIB: OK. Let me ask you about Hudson stock. It's been taking off ever since the summer credit crunch. What risk, if any, could stall that momentum?
HERMANCE: You know, I don't know. You'd have to ask an analyst about that because I'm pretty biased about it, Susie. But our profits this year have been first quarter $0.13, second quarter $0.14 and $0.15 for the third and the analysts are predicting $0.16 for the fourth. So I'm finding it hard to see what's going to get in the way. Our operating overhead is very low. Our credit quality is very strong.
GHARIB: All right. You're one of the few companies in the financial services that has an optimistic report to make. We appreciate you coming on the program. Thank you so much.
HERMANCE: Thanks very much, Susie.
GHARIB: My guest tonight, Ronald Hermance, Hudson City's chairman and CEO.
"Economic Choices '08"-Iowa Electronic Markets
SUSIE GHARIB: In political markets, Hillary Clinton contracts are up 72 percent over the last six months, while republican front-runner Rudy Giuliani is up 36 percent and we are not making that up. As we continue our series "Economic Choices '08" Darren Gersh introduces us to the Iowa Electronic Markets, where trading in political candidates is a closely watched indicator of who's winning the race to the White House.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: After watching many a presidential caucus, professors at the University of Iowa's Tippie college of business set up a kind of case study, asking what's the most accurate way to predict who will win a presidential election? Professor Joyce Berg says the solution was to replace public opinion polls with prices.
JOYCE BERG, PROF., TIPPIE COLLEGE OF BUSINESS, UNIVERSITY OF IOWA: And we're a business school, so we naturally turn to markets as a way to collect information and disseminate information.
GERSH: The result was the Iowa Electronic Markets, IEM for short. It works just like these guys, except the contracts being bought and sold aren't for pork bellies or corn. They're futures contracts on Hillary Clinton, Rudy Giuliani and the rest of the presidential field. Three times out of four, this market is more accurate than the polls, Berg says, because people pay more attention when there's real money at stake. The IEM also reacts immediately to news and is not a random survey; it's a market for insiders and political junkies.
BERG: In our markets, people who have thought hard are coming in the markets, so there is more information going into our market price.
GERSH: IEM traders can speculate on the outcome of next November's elections. But right now the action is in buying or selling contracts on each candidate running for his or her party nomination. Because a winning contract pays a dollar and losers get zero, the current price reflects the market's view of the odds a candidate will sweep the convention.
BERG: So right now for instance, if you were interested in Giuliani, you could buy Giuliani from another trader for $0.37.5. So if you thought he was definitely it, that would be a very attractive price for you and you'd want to buy.
GERSH: So right now, what the markets are telling you is that there is a 37 percent chance here that Giuliani will be the Republican nominee and Romney has a 33 percent chance.
BERG: That's exactly right.
GERSH: So this is different than the polls. This is much closer than the polls would show you. At $0.74, the market considers Clinton a better than 70 percent lock for the Democratic nomination. But Berg says that is not the same thing as predicting a Clinton victory.
BERG: It also means there's a 30 percent chance that Clinton won't be the nominee. That's pretty high -- a 30 percent chance that something else will happen. So if the weatherman says 30 percent chance of rain, lots of people are carrying umbrellas.
GERSH: Thousands of traders from around the world take part in the IEM online, but individual accounts are limited to $500. This is primarily a teaching tool. University of Iowa senior Michelle Collins says the IEM gave her a feel for what it takes to trade.
MICHELLE COLLINS, BUSINESS STUDENT, UNIVERSITY OF IOWA: When I wasn't paying attention to it, that's when I did lose a little bit. I learned a very inexpensive lesson to pay attention to it. I got caught up in final exams.
GERSH: Collins also learned not to let sentiment get in her way. You sold Obama, you're out of Obama. No chance.
COLLINS: Sorry, I actually like him.
GERSH: You like him, but no chance. This is money right?
COLLINS: Yeah, I want my dollar back.
GERSH: Berg says some Wall Street analysts use prices in the IEM to figure out how the election might affect portfolios.
BERG: These firms will use our market prices as really a point prediction of what is going to happen.
GERSH: MBA student Chuck Mersch is part of a group of students that manage a small portion of the university's endowment. He says the IEM helps them decide how the election might affect the health care stocks they've selected.
CHUCK MERSCH, MBA CANDIDATE, UNIVERSITY OF IOWA: I think at some point we'll see it up on the ticker with the Dow Jones and the S&P about which candidate is going up and down.
GERSH: The business school is so encouraged by the market's forecasting performance, it's now studying whether the IEM could be used to predict hurricane landfalls and flu outbreaks in addition to figuring out who has the best chance to be the next leader of the free world. Darren Gersh, NIGHTLY BUSINESS REPORT, Iowa City, Iowa.
"Of Mutual Interest"-Bernard Horn, Fund Manager of the Polaris Global Value Fund
PAUL KANGAS: With the recent market volatility, many investors are looking for a mutual fund that can show consistent performance over the long term. One fund investors may want to consider is Polaris Global Value Fund. While its returns so far this year have been below the benchmark for its category, the numbers further out tell a different story with an annualized return of 21 percent over the past five years. Bernard Horn, Jr. has managed this fund since it began as a limited partnership in 1989. And Bernie, welcome to the NIGHTLY BUSINESS REPORT.
BERNARD HORN JR., FUND MGR., POLARIS GLOBAL VALUE FUND: Thank you, Paul. It's quite an honor to be here this evening with you.
KANGAS: Global and value are the two descriptive terms that are in your fund's name. Does that mean that you're searching for companies that are good values regardless of where they're located?
HORN: Absolutely, Paul. We're looking for companies that generate good, strong sustainable free cash flow and we're willing to go virtually anywhere in the world, any sector, any country.
KANGAS: It's interesting to note that your American stocks make up a third of your portfolio, double the position of any other country. Does that mean that you find the American market to be generally undervalued relative to the rest of the world?
HORN: Actually Paul, we think that the American market is still a bit overvalued relative to the rest of the world. We've got two-thirds of the portfolio outside of the U.S., and the U.S. exposure is a bit below its benchmark weighting. So right now we feel that the market in the U.S. is good value in certain areas, but not everywhere.
KANGAS: Even before the recent sell-off in financial stocks, the biggest sector of your portfolio was the financials and of course, that's been a factor in your underperformance this year. But are you sticking with the financials?
HORN: We absolutely are. We've noted that the financials are getting better and better value all the time and specifically we think that the European financials are extremely good value. They've been unduly hit by some of the institutions that have taken quite a lot of risk. That's a stretch for good, high yields. The problem is that the risk has backfired and unfortunately, that's sent all financial stocks down, not just the ones that took high risk.
KANGAS: You have less than a minute left. At the end of September, your fund's biggest holding was Marathon Oil. Is that still the situation?
HORN: Yes, Paul, it is. It's a great holding with good low-risk assets and expanding production.
KANGAS: What other individual companies do you like right now?
HORN: We like -- in the European financials we really think that Anglo Irish Bank of Ireland and Lloyd's Bank are extremely undervalued. We think that in three to five years we're going to make terrific returns on those.
KANGAS: For the record, do you personally own any of these stocks that you've mentioned?
HORN: Virtually all my money Paul is invested in the funds that we run, so absolutely yes.
KANGAS: So you own them indirectly?
HORN: Absolutely.
KANGAS: All right. I want to thank you very much for being with us, Bernie.
HORN: Thanks, Paul and good evening.
KANGAS: Very interesting indeed, my guest, Bernard Horn Jr. of the Polaris Global Value Fund.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street opened higher on some carryover buying which cut yesterday's losses. The Dow rose 46 points at the outset of trading, while the NASDAQ Composite gained 10 points. That surge to new highs in oil sent the market into a mid-day slump as the blue chips fell to a 22-point loss while the NASDAQ was off 10. But strength in the commodity sector, some bottom fishing in the financial group and buying in the tech stocks resulted in a solid late run-up. The Dow Industrial Average ended the day with a gain of 117.54 points, putting it at 13,660.94. The NASDAQ Composite closed up exactly 30.00 points at 2825.18. Standard & Poor's 500 Index rose 18.10 ending at 1520.27. Over in the bond market, the 10-year note fell 10/32 to 102 30/32 putting the yield at 4.38 percent.
For the second day running, Citigroup (C) topped the active list on the big board, trading 43.4 million shares today. The stock down $0.82. Bank America downgraded it from "buy" to "neutral," cut its price target from $45 down to $39 a share and a CIBC World Markets analyst said that the only answer for Citigroup is to break up the company.
Then came a new issue, SandRidge Energy (SD), oil and exploration firm, 28.7 million shares offered at $26, opened at $30.94, the high of the day $32.14, closed at practically the best level of the day.
Wells Fargo & Co (WFC) up $1.02, a little bottom fishing in the financials today you'll see.
General Electric (GE) was down $0.02.
Pfizer (PFE) $0.26 gain.
Then we look over to EMC Corp (EMC) with a $0.09 loss.
Tenet Healthcare (TNC) was up $0.72. That's a 22 percent rise. Tenet reported a third quarter loss of $0.06, but that was a penny better than expected. That excludes one-time items.
Coeur d'Alene (CDT), the gold and silver miner, up $0.52. That's a good percentage move. Gold hit an intra-day of $828 an ounce in the December contract and silver was up $0.60 to $15.38 an ounce today. Bear Stearns thinks Coeur d'Alene stock is under priced.
Bank of America (BAC) up $1.11.
And JPMorgan Chase (JPM), another financial where there's some bottom fishing going on, up $1.34.
Archer-Daniels-Midland (ADM), the big ethanol producer, up $2.37. First quarter earnings, $0.68, up from $0.61 a year ago. Sales jumped 36 percent. Standard & Poor's repeated a "buy" recommendation on ADM.
Nortel Networks (NT) had a good day, up $2.90. Turnaround third quarter earnings of a nickel versus a loss of $0.14 last year and that happened even though revenues fell 8 percent.
Chesapeake Corp (CSK), which is in the packaging products business, third quarter earnings excluding one-time items, $0.34, way up from last year's $0.13.
Valassis Communications (VCI) gained $2.23. A real nice third quarter, $0.34, up from $0.14 last year and revenues were boosted by the acquisition of Advo in March of this year.
Ambac Financial Group (ABK), the bond insurance company, defended itself against Morgan Stanley's recent negative analysis.
And then Cooper Tire & Rubber (CTB) down $3.06. Third quarter operating earnings, $0.28 versus a loss last year, but those earnings were $0.02 below the Street estimate. Down went the stock.
Apple (AAPL) closed at a new high with that gain of $5.61. The company's iPhones go on sale in the UK and Germany this week.
Another record high for Google (GOOG) up $16.14. The Sanford Bernstein brokerage set a new price target of $850 a share.
Baidu.com (BIDU) down $9.18.
Microsoft (MSFT) closed down $0.32. Goldman Sachs removed it from its "buy" list. And late today, the company dismissed its chief information officer, Stewart (ph) Scott for violating company policy, didn't say what policy.
Cisco Systems (CSCO) was up $1.
Research in Motion (RIMM) up $3.07. Credit Suisse upgraded RIMM from "neutral" to "out perform," nice move in the stock.
Yahoo! (YHOO) down $1.43.
And then Intel (INTC) $0.65 gain.
Sun Micro (JAVA) $0.55 loss.
Cognizant Tech (CTSM) tumbling $7.61. Third quarter earnings were higher, $0.32 versus $0.20 last year, but the company cut its fourth quarter revenue forecast and that really hurt the stock.
And here's a stock that's hurting, Momenta Pharmaceuticals (MNTA) with momentum in the wrong way. The FDA rejected the company's thrombosis drug treatment.
And those are the stocks in the news tonight.
