NBR Complete Transcripts: 11-07-2007
Wednesday, November 07, 2007The Dow Takes Another Drastic Dive
SUSIE GHARIB: A dramatic sell off on Wall Street today. The Dow plunged 360 points, closing at 13,300. The blue chip average has now fallen 864 points from its record high set on October 9. The NASDAQ tumbled 76 points. Investors dumped stocks after General Motors reported a huge quarterly loss, the U.S. dollar hit a new low and gold and oil rose to new highs. Scott Gurvey has more on what's rattling the markets.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Every analyst today seemed to have at least a half a dozen explanations for the broad sell off. Start with the ever-weakening U.S. dollar, which fell overnight following reports China might want to diversify its dollar-denominated holdings. Factor in the credit crunch and the exposure of financial institutions and then add crude oil prices nearing $100 a barrel, although oil prices retreated a little at mid-morning following the weekly inventory report. What you got was a flight to quality where only gold and other precious metals seemed acceptable. December gold set a record for a front month contract at $833.50 an ounce. Commodities analyst George Gero of RBC Capital says investors are playing defense.
GEORGE GERO, COMMODITIES ANALYST, RBC CAPITAL MARKETS: The driver is the U.S. dollar, the interest rate and the problems in the credit markets where people want alternative investments. And so they turn to gold, whether they buy an ETF or they buy a future's contract, they do asset allocate by making sure that their purchasing power doesn't diminish.
GURVEY: The impact of the mortgage crisis was also felt at General Motors, where losses at its financial unit added to a big tax-related charge giving GM its largest quarterly net loss ever, $38.6 billion. GM's CFO Fritz Henderson says 2008 will also be a tough year.
FRITZ HENDERSON, CFO, GENERAL MOTORS: The market is actually running below what we typically run at in the United States and that in and of itself is a challenge. I would say that the challenge is in the market today. We're not at least forecasting a significant worsening of primary demand, but we're also not for in the short term a rebound.
GURVEY: Market volatility will continue, says David Katz of Matrix Asset Advisor, until some of the uncertainties are resolved.
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISOR: You're going to have to see some sort of the market settling down in terms of its fear about sub-prime and its issues related to the financial sector. When that settles down, we think the market is going to look beyond a lot of what's going on with the currency and also with higher oil prices.
GURVEY: Several Federal Reserve officials made market soothing comments today. Tomorrow we'll hear from Fed Chairman Ben Bernanke, who testifies before the Joint Economic Committee of Congress. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Stuart Schweitzer, Global Market Strategist at JPMorgan Private Bank
SUSIE GHARIB: Back now to our top story, today's sharp stock sell off on Wall Street and joining us now with more analysis, Stuart Schweitzer, global market strategist at JPMorgan Private Bank. Hi, Stu.
STUART SCHWEITZER, GLOBAL MKT. STRATEGIST, J.P. MORGAN PRIVATE BANK: Hey, Susie.
GHARIB: All right. Give us your analysis of what was behind today's big sell-off.
SCHWEITZER: A little bit of everything, I think and certainly a lot of concern ultimately about what all of the news means on oil, on housing, on the dollar, means for the outlook for the economy and corporate profits. And I think that we are headed into more challenging conditions than we got used to over the last few years. This economy is poised to stay very sluggish, I believe, for several more months with job growth weakening. But I don't think it's going to end up being a recession. If that's right, then the market should at some point ultimately find its footing.
GHARIB: Stu, my colleague Paul wants to join in on this conversation. Paul?
KANGAS: Yes, Stuart, you know, on recent sharp sell-offs at least we had during the day some reflex rallies, some signs of bottom fishing. This one we saw nothing like that. How much further down can we go without some kind of a bottom occurring?
SCHWEITZER: Well, Paul, I think you made an important point. The fact that the market closed at its lows is probably a pretty negative omen for the days immediately to come. I think when in the last hour you typically have market professionals trading and if the market goes down then that says the pros are looking for things to get weaker. I don't know where the bottom will be or when the bottom will be reached. It does feel to me as though an awful lot of the bad news is getting discounted. Take the financials which are down so much this year. A lot of the bad news on the financials is getting discounted. If we don't ... all of it, I'm not so sure about that. I do think in the end that this market is going to get help from the Federal Reserve, not withstanding the more balanced directive that they issued last week after their meeting.
GHARIB: Stu, today there was a lot of talk on Wall Street about dollar weakness and a lot of concern that foreign investors want to get out of dollar-denominated securities. How concerned should American investors be about that?
SCHWEITZER: I'm not that concerned, Susie. I think that the real risk with the weaker dollar is the risk that we get higher inflation because foreign products cost more and then domestic manufacturers raise their prices. That whole chain of events, we've seen that movie before and that's not a pretty picture to watch. But in fact, inflation does look outside of oil. That's a big outside. But outside of oil it looks like inflation is broadly contained. If inflation were really getting to be problematic, we wouldn't have the bond yield down at 4.3 percent as it is. If bond yields were rising in here, I'd be a lot more worried. But bond yields are going the right way in my opinion.
GHARIB: You mentioned the Fed a moment ago. A lot of the people that I've been talking to and also Fed officials have been sort of hinting that there aren't going to be any more rate cuts any time soon. Is there anything that Fed Chairman Ben Bernanke can say tomorrow when he's testifying at Congress that will calm investors?
SCHWEITZER: Well, I think he should remain balanced in his statement but acknowledge that if the economy is threatened, that the Fed will be there. Yet they don't want to be soft on inflation. The worst thing of all would be to allow the weaker dollar, to allow the higher oil prices, to feed into a generalized rise in inflation. That would be very damaging and I don't think he'll concede that point at all.
GHARIB: One quick last question. What should investors do in this climate, long-term investors?
SCHWEITZER: We have been advising our clients at JPMorgan Private Banks to keep a balance between higher risk and lower risk assets in their portfolios, roughly a 50-50 split between higher and lower risks and within the lower risk to have more cash than normal. More cash helps you to do two things. Number one, it lets you sleep better at night. That's not a bad thing. And secondly, it gives you the dry powder (ph) to take advantage of bargains in the market when and if they arise and it sure looks like they are a-coming.
GHARIB: OK, sure does look like that. Thanks so much, Stuart. We appreciate you coming on the program.
SCHWEITZER: Always a pleasure.
GHARIB: Our guest tonight, Stuart Schweitzer, global market strategist at JPMorgan Private Bank.
"Economic Choices '08" - Iowa's Take on Free Trade
SUSIE GHARIB: The House of Representatives is moving tonight towards passage of a trade agreement with Peru. The Bush administration says the deal will reduce tariffs and boost exports for U.S. companies. Critics say it will cost U.S. jobs. If those arguments sound familiar, it's because they were also made about the North American Free Trade Agreement 14 years ago. Tonight as we continue our "Economic Choices '08" coverage, Darren Gersh looks at why NAFTA is an issue in the upcoming Iowa caucuses.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Load by load, they are scrapping more than a century of tradition in Newton, Iowa. This was Maytag's town and for 21 years this is where Ted Johnson worked. The assembly lines shut down late last month. Now the equipment is being shipped away. The only reminder of the thousands of people who once worked here is this monument left by the last shift. As local union president, Johnson represented those workers. He says Maytag's bad management undermined the company, but he also lays part of the blame on NAFTA, the North American Free Trade Agreement. Johnson believes the free trade deal with Mexico and Canada increased competition and put more pressure on Maytag and other manufacturers.
TED JOHNSON, PRESIDENT, UAW LOCAL 997: Foreign competition was not even a problem. When I started, I mean it was the last thing. I mean, before NAFTA, nobody ever even thought about it.
GERSH: NAFTA has become an unlikely issue as Iowa prepares for its presidential caucuses. To some voters, the trade deal is a potent symbol of what's gone wrong with our nation's economic policies. NAFTA also blurs traditional ideological lines. On the left, advocates for immigrants believe NAFTA has allowed subsidized U.S. corn to flood the Mexican market, forcing poor farmers there off the land. The result has been a surge of illegal immigrants into states like Iowa. A member of the Immigrants Voice Project in Des Moines, Ann Naffier says she's looking for a presidential candidate who understands the connection between NAFTA and immigration reform.
ANN NAFFIER, IMMIGRANTS VOICE PROJECT, AMERICAN FRIENDS SERVICE COMMITTEE: And I have not heard many presidential candidates talk about it from that point of view of what we as the United States, the most powerful country in the world, what we need to do with our own foreign policy and our economic policy to assure that people aren't forced to leave their country.
GERSH: On the right, Robert Ussery agrees NAFTA is forcing illegal immigrants to come to Iowa, though he disagrees with Naffier on the solution. As Des Moines chapter leader of the Iowa Minutemen, Ussery has little patience for the free trade rhetoric of the leading Republican candidates. He fears NAFTA is eroding U.S. sovereignty and enriching corporations at the expense of working families.
ROBERT USSERY, DES MOINES CHAPTER LEADER, IOWA MINUTEMEN: All those factories have gone south of the border. And now those manufacturing jobs are replaced by a service economy, minimum wage, no insurance, part time. And I don't want that kind of future for my daughter.
GERSH: On the Democratic side, candidates Barack Obama and John Edwards have pledged to renegotiate NAFTA, but Hillary Clinton seems to stop short, promising to review the trade deal. That's not enough for Ted Johnson.
JOHNSON: They should have reviewed it before it got signed and perhaps they should have listened to some folks who said "hey, this is not a good deal."
GERSH: Not far from the Maytag plant, farmer Bob Talsma is rushing to bring in the harvest. He says he's sympathetic to the pain caused by the Maytag shutdown.
BILL TALSMA, OWNER, I-80 FARMS: The Newton plant is a bad deal. My wife worked there, so it's tough for me and I have lots of friends, everybody around here worked at Maytag.
GERSH: But Canada and Mexico are Iowa's two largest trading partners. And like many in this agricultural state, Talsma considers exports vital.
TALSMA: Mexico is a huge customer of ours. So, we're all for free trade. So I guess I'm for NAFTA. I think all farmers are.
GERSH: Almost 14 years after it took effect, NAFTA remains a divisive issue in the presidential caucuses. The trade deal is creating opportunities for some while eroding the security voters like Ted Johnson once took for granted.
JOHNSON: Right now in Newton, you're going to have to drive to look for a job and don't ask me which direction to drive, because I myself am going to be looking for a job.
GERSH: Darren Gersh, NIGHTLY BUSINESS REPORT, Newton, Iowa.
One on One with John Chambers, Cisco Chairman and CEO, Shares Success Secrets
SUSIE GHARIB: As we mentioned earlier, Cisco Systems reported better than expected fiscal first quarter results. Joining us now with more analysis, Cisco chairman and CEO John Chambers. Hi, John, congratulations on a good quarter. JOHN CHAMBERS, CHAIRMAN & CEO, CISCO SYSTEMS: Thank you, Susie. It was a record quarter and we were very pleased with it.
GHARIB: You forecast also for the upcoming, the current second quarter, 16 percent revenue growth. Investors are disappointed. In after hours trading Cisco stock dropped something like 8 percent. Why the disconnect?
CHAMBERS: Well, Susie, I don't focus on the immediate term in anything that we do here at Cisco. I think two, three, five years out. We did report not just record earnings above expectations. We're at the very high end of our guidance for this next quarter as well at 16 percent growth. So if we continue to get these results, the stock will take care of itself. And if a CEO watches about how their stock performs on a day or quarterly basis, it's a mistake. They have to think longer term and when my peers think about that, I've got them.
GHARIB: Let's talk about future orders. Do you expect to see any impact from the credit crisis? I know financial institutions are big customers of Cisco. Will they postpone some of their tech spending?
CHAMBERS: Susie, one of the nice things about our business is it's so balanced around the world that even in the U.S., the small to medium business is going well, growing about 20 percent. Service providers have been on par for 11 quarters in a row with video going to the home with IPTV (ph) and what you see behind me videoconferencing expanding to tele- presence (ph) type capability. We did see some softness in the U.S. enterprise which we said could occur on our last quarter conference call. Yet we projected very strong record growth again next quarter as well. So I'm very comfortable with our ability to grow given what we see in the marketplace today with the appropriate caveats.
GHARIB: Cisco is a big, global company. Will you feel any effects of a weaker dollar? Everybody is talking about the weak dollar and the impact on American businesses. What do you see for your company?
CHAMBERS: Well, if you look at what is driving the economy in last quarter's growth of 3.9 percent was way above the economists' projections. It was driven in my opinion by two factors: exports and also the Fed's action. I think exports are going well for us. A lower dollar allows us to sell a lot more and by the way, generate more jobs here in the U.S. We've added 10,000 jobs in the U.S. over the last two decades.
GHARIB: Cisco stock has had a pretty impressive performance since May, up 30 percent but to what extent do you worry on days like today when the Dow and the NASDAQ fall sharply like they did on any kind of ripple effect on your company's stock?
CHAMBERS: Well, I focus, Susie, on what we can control and influence. I think we're about to enter the second phase of the Internet which will drive the growth of Cisco for (INAUDIBLE) for the next decade. It will enable new business models, new forms of productivity, higher standards of living for people here in America if we do that right. So I think we produce the growth we'll be fine. I can't influence some of the other factors, but I can tell you most of my customers are more optimistic in terms of the soft landing for the U.S. than perhaps what the markets indicated today. We'll see if they're right or wrong. The global economy is going very well and driving our growth and many of my peers' growth as well.
GHARIB: All right. Thank you so much for coming on the program. Hope to talk to you in the next quarter.
CHAMBERS: Susie, it's a pleasure. I'd be honored to meet with you in the next quarter again.
GHARIB: Thank you so much. My guest tonight, John Chambers, chairman and CEO of Cisco Systems.
Paul Kangas' Stocks in the News
PAUL KANGAS: Given all those negative factors, it's no wonder the Dow plunged 121 points at the very outset of trading while the NASDAQ fell 24. The bears remained firmly in control as the day wore on because with all the gloom, even the most ardent bulls weren't willing to step in on the buy side. As a result, without so much as a hint of a technical rebound, the market closed at the day's lowest level. The Dow Industrial Average tumbled 360.92 points to 13,300.02. The NASDAQ Composite lost 76.42 to 2748.76, while the Standard & Poor's 500 Index plunged 44.65 to 1475.62. In the bond market, the 10-year note rose 21/32 to 103 18/32, putting the yield at 4.30 percent.
For the third day running, the most active big board issue was Citigroup (C) today on 35 million shares and it hit a 52-week low with that loss of $1.67. A shareholder derivative lawsuit was filed today against the company and some top executives, including former CEO Charles Prince.
Then some more weak financial stocks, Wells Fargo & Co (WFC) down $1.88.
General Electric (GE) off $1.10.
Bank of America (BAC) dropped $2.25.
And Washington Mutual (WM) plunging $4.19. Regulators are probing the mortgage appraisals that the company sold to Fannie Mae and Freddie Mac and the company sees mortgage lending in 2008 slumping to $1.5 trillion from the consensus of $2 trillion. Washington Mutual did say it's going to maintain its dividend for now, but it will review it as the fourth quarter progresses.
Ford Motor Co (F) down $0.39.
Pfizer (PFE) a $0.32 loss there.
EMC Corp (EMC) dropped $1.16.
AT&T (T) off $1.38.
And then came ExxonMobil (XOM) down $2.83 a share.
Agria Corp (GRO), this must have been a bad market today, because a Chinese initial public offering actually went down. This is a Chinese farm services company, 17.2 million American depository shares offered to the public at $16.50, opened at $16.50, the high of the day $16.96 and down it went after that.
General Motors (GM) down $2.21. As you heard, it posted that massive $39 billion quarterly loss. Standard & Poor's today issued a "sell" recommendation on GM.
American Intl Group (AIG) down $4.05. After the close, first quarter earnings, $1.19, down from last year's $1.61 and $0.43 below the Street estimate. In after hours trading, I saw the stock around $56.50.
Capital One Financial (COF) plunging $9.26. Company sees 2008 credit losses of up to $5 billion. The Keefe Bruyette brokerage downgraded it from "out perform" to "market perform" and Citigroup cut the price target on Capital One from $84 down to $66 a share.
Avis Budget Group (CAR) down $3.67. Third quarter earnings of $0.60, versus a big loss last year, but the company sees 2007 results at the low end of its previous guidance.
Mastec (MTZ), specialty construction firm, down $3.94. Third quarter earnings fell to $0.18 from $0.22 a year ago and it sees fourth quarter falling to $0.14 to $0.16. The Street was looking for $0.25 in the fourth quarter.
Assured Guaranty Ltd (AGO), a gainer, up $1.61. Third quarter operating earnings $0.70, well above $0.53 last year. JPMorgan upgraded it from "under weight" to "neutral."
And then we see NASDAQ's most active, Apple (AAPL) getting hit for a change, down $5.49.
Followed by Google (GOOG) losing $8.85.
But Research in Motion (RIMM) up nearly $2. Yesterday, Credit Suisse upgraded RIMM from "neutral" to "out perform," could be some carry over buying.
Cisco Systems (CSCO) down $1.33. After the close, Cisco reported first quarter earnings $0.40, versus $0.31 a year ago, $0.04 above the Street estimate, but the company also said it's bracing for weakness in business from financial institutions and the auto companies in the fourth quarter. After hours trading, I saw the stock down almost $3 from this level.
Microsoft (MSFT) - and we'll have an interview coming up with CEO John Chambers in a short time -- $0.89 loss there.
Baidu.com (BIDU) down $12.70.
Intel (INTC) $0.59 loss.
Yahoo! (YHOO) down $2.30.
And Garmin Ltd (GRMN) plunging $11.22. Its rival Tom Tom has boosted its buyout bid for the Dutch digital map maker Teleatlas (ph) to 30 euro and that's 5 1/2 euro above Garmin's bid.
Oracle (ORCL), tenth in volume, was down $0.73.
And those are the stocks in the news tonight.
