NBR Transcripts-January 9, 2008
Wednesday, January 09, 2008Alcoa's Shining Start to the Fourth Quarter
SUSIE GHARIB: Stronger than expected earnings today from one of the world's largest aluminum companies. After the closing bell, Alcoa said fourth quarter earnings surged 73 percent, thanks to the sale of its packaging and consumer businesses. Excluding that one-time benefit, Alcoa made $0.36 a share, $0.03 above what analysts estimated. Lower metals prices took a toll on revenues, down 6 percent to $7.4 billion in the quarter, but still higher than estimates. In after-hours trading, Alcoa's shares rose about 2 percent. Alcoa is the first Dow component to report quarterly numbers, kicking off the latest earnings season. But as Erika Miller reports, Alcoa's strong performance may be the exception, not the rule, this quarter.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The U.S. is experiencing an earnings recession, often defined as at least two consecutive quarters of falling profit growth. The question now is whether that is a forerunner to a broader economic recession. Wall Street analysts believe profits for the S&P 500 firms fell by 11 percent in the fourth quarter. We'll know the extent of the damage in the next few weeks as earnings reports come out. That presumed decline comes on top of a 4.5 percent drop in the third quarter. Thomson Financial's earnings expert Mike Thompson says the fourth quarter's trouble is concentrated in a single sector.
MICHAEL THOMPSON, DIRECTOR OF RESEARCH, THOMSON FINANCIAL: The main culprit is obviously financials. They're down almost 70 percent over the same quarter last year and everybody is fully aware that it's all about the market-to-market pricing and the write-downs that these financial firms had to take.
MILLER: If financials are taken out, Thompson says the S&P 500 would be expected to show an earnings gain of 11.4 percent. Technology is expected to be the shining star, with a 22 percent profit gain for the quarter. But even strong performances like that may not be enough to stave off an economic recession. Today, Goldman Sachs joined Morgan Stanley and Merrill Lynch in forecasting recession for the U.S. economy this year. Goldman's chief economist Jan Hatzius thinks it will likely start in the second quarter.
JAN HATZIUS, CHIEF US ECONOMIST, GOLDMAN SACHS: What sort of pushed us to making recession the baseline scenario really has been the data over the last few weeks, in particular, the unemployment rate, the payroll data to some degree, the jobless data claims data to some degree.
MILLER: As a result, he predicts aggressive action by the Federal Reserve to boost economic growth.
HATZIUS: So, we've got them cutting the Federal funds rate target by 50 basis points at the January meeting. And then eventually, we see them going down to 2.5 percent on the Federal funds rate.
MILLER: Against that backdrop, experts say earnings will probably not be the main focus on Wall Street.
THOMPSON: I wouldn't be surprised to see that the earnings have kind of a muted attention this quarter, just because people are so uncertain about what the Fed's going to do, and the talk and rhetoric around -- the resolution around this credit crunch.
MILLER: The situation today is far different from the last earnings recession, which ended in 2002. Back then, technology was the big decliner in the face of the bursting of the Internet bubble. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Jason Trennert, Chief Investment Strategist at Strategas Research Partners
SUSIE GHARIB: Our market guest tonight is forecasting that the S&P 500 will rise 11 percent in 2008. Joining us now with his analysis, Jason Trennert, chief investment strategist at Strategas Research Partners. Hi Jason.
JASON TRENNERT, CHIEF INVESTMENT STRATEGIST, STRATEGAS RESEARCH PARTNERS: Hi, how are you, Susie?
GHARIB: I'm pretty good. All right. A lot of investors are worried about recession. They are worried about a lousy earning season and the first five days in the markets weren't very good, the worst since 1978, I am told. Why your optimism?
TRENNERT: I think it's because there are enough actors working for growth that my best guess is that we will be able to avoid recession in 2008. I think the Fed is going to ease very aggressively. I think you're going to get a fiscal stimulus package, which is announced in the state of the union. Government spending is going to be up about 7 percent this year. A weaker dollar should lift export growth. You put all those things together and there's a decent chance we should be able to avoid recession. I am a little bit more worried about 2009. It is a close call but I think you're going to get weak growth but you're not going to actually get to an outright recession.
GHARIB: Looking at the S&P performance since it hit its record in October of 2007, it is down 11 percent. This officially means that it's gone through a correction. How much more to go before things really turn around?
TRENNERT: I think we are pretty close to at least a short intermediate term bottom here. I think you're going to really, obviously the earnings season is going to be very important. More important than the earnings is going to be the guidance. I think that's going to give a lot of people some - really some indication of what's to come in the future. I think it is very interesting to note that earnings generally speaking will be pretty good for the fourth quarter except for the financials. The question is whether the weakness in the financials spills out in the rest of the economy. Again, our best guess is no. It's a close call. But I think when all is said and done, the markets should be higher by the end of the year than it is today.
GHARIB: Jason, a lot of focus on the speech that Fed Chairman Ben Bernanke is supposed to be giving tomorrow, what does he need to say to make investors confident again?
TRENNERT: I think he's got to say that the Fed is very aware of the dislocations in the credit markets, that it's not overly worried about inflation. My own particular view is that Fed, inflation will be the worst - it'll be the least of the Fed's worries six months from now if they focus on inflation as opposed to growth. Growth is very weak right now. It could get a lot weaker if the Fed doesn't act aggressively. I think Chairman Bernanke will reassure the markets, but that's what he's got to say.
GHARIB: You mentioned financials a moment ago. We saw some financial stocks were up today. Is it too early to buy financial stocks?
TRENNERT: I would say for the average investor, the answer is yes. I think for those deep pockets and long time horizons, if you're Warren Buffett or Wilbur Ross or Abu Dhabi, they're buying the financials, but again, they have a very long term time horizon. I think what I would like to see and God forbid, that I would actually wait to see a high profile bankruptcy before I would actually step in to buy the financials. I think that's probably, this is a classic cycle. That's what's got to happen to get the Fed to remove any ambiguity about its future actions.
GHARIB: Aside from that kind of event, if some long-term investors have some new money, what would be the one or two stocks or sectors that you think would be a really good place to put it right now.
TRENNERT: I like technology quite a bit. I like Cisco quite a bit. It has a very strong international presence. It's going to be - it's going to benefit a great deal by the weaker dollar. I'd also look at some of the health care stocks like let's say Merck or Pfizer, some of the drug stocks. Those are very cheap right now, a very good defensive place to be as the economy slows. So we have a little bit of what I would call barbell approach where you are kind of taking somewhat riskier bets on technology and pairing them with less riskier bets in some of the defensive sectors.
GHARIB: Interesting way of putting it. Thank you so much for coming on the program, Jason.
TRENNERT: Thank you.
GHARIB: My guest tonight Jason Trennert, chief investment strategist of Strategas Research Partners.
Countrywide Financial's Latest Crisis
PAUL KANGAS: More problems for Countrywide Financial tonight. Late today, Moody's investor service downgraded the ratings of some of Countrywide's mortgage debt and is considering additional downgrades. Shares of the mortgage lender have been in free fall on concerns about a possible bankruptcy. But Countrywide says it's making progress, pointing out that it made $24 billion in new loans last month. Still, it also said foreclosures doubled from a year ago and the number of borrowers late with payments is growing. As Stephanie Dhue reports, the question now is whether Countrywide, the nation's biggest mortgage lender, is too big to fail.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Countrywide is more than just a mortgage company. It's also an FDIC-insured bank with more than $60 billion in deposits and it has more than $55 million in loans from Federal home loan banks. That's why S&P equity analyst Stuart Plesser, whose firm may do business with Countrywide, says the government has an interest in avoiding a Countrywide collapse.
STUART PLESSER, EQUITY ANALYST, STANDARD & POOR'S: It would have a major impact on home prices because of originations and also the securities market for mortgage-backed securities, because of the paper that Countrywide holds. And this is a pretty big enterprise that the government really has to keep a watch on.
DHUE: But some analysts say the impact of a Countrywide failure on investor confidence is small at this point, since traders have already discounted a possible bankruptcy. "Inside Mortgage Finance" publisher Guy Cecala says competitors could replace Countrywide's lending, but the psychological impact of a failure may prompt regulators to keep it from going bankrupt.
GUY CECALA, PUBLISHER, INSIDE MORTGAGE FINANCE: They'd have to work out a planned marriage or merger to another financial institution, preferably a large bank and they'd have to make it attractive enough for that bank to assume those liabilities and associated costs with that.
DHUE: Countrywide received a $2 billion cash infusion from Bank of America in August. But if Countrywide were to declare bankruptcy, AEI's Peter Wallison says the assets would be snapped up.
PETER WALLISON, SR. FELLOW, AMERICAN ENTERPRISE INSTITUTE: Countrywide, in fact, would be a rather easy bankruptcy, because its assets turn out to be things that are readily marketable. They'll be marketable at a discount of some kind, but they are mortgages and many people are standing by to buy mortgages that will eventually become very valuable assets.
DHUE: Countrywide said today it is pleased with the progress that it's made in positioning itself to navigate the current challenging environment. The company has promised a return to profitability in the fourth quarter, but many analysts are skeptical they can pull it off. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Hilary Kramer, Market Strategist & Author of "Ahead of the Curve"
PAUL KANGAS: While it has been a rough start for the year so far for stocks, tonight's "Street Critique" guest says that could change at the end of the month, when Federal Reserve policy makers meet on interest rates. She's Hilary Kramer, market strategist and author of "Ahead of the Curve." And Hilary, welcome back to NBR.
HILARY KRAMER, MARKET STRATEGIST: Thank you, Paul.
KANGAS: As a market strategist, what do you make of the markets right now and what are you expecting from the two-day Fed meeting starting January 29th?
KRAMER: OK. Well, I am a contrarian, Paul. I believe that we are going to see Fed intervention in the next two trading days, absolutely. There's too much weakness across the economy in too many areas and the market action today, the turn around late in the day showed me that they were short covering and that someone knew something, that the Fed was coming in.
KANGAS: The Fed's going to make a move of some sort and it won't be higher interest rates.
KRAMER: That's my prediction.
KANGAS: OK. Well, should investors be on the sidelines or is now the time to jump in?
KRAMER: I believe that now is the time to jump in, but on the broken stocks that have potential to really skyrocket.
KANGAS: Plenty of those. You brought some stocks for our viewers that have been beaten up badly and you think they will move higher if the Fed cuts rates late in the next month or even before. What's your first pick?
KRAMER: Goldman Sachs. Goldman Sachs is best of breed. They are supreme. They are the best financial institution out there and their bankers love to see that stock price go up. They don't like it under $200 and my prediction that Goldman Sachs (GS) will be a $250 stock.
KANGAS: OK, let's keep them coming.
KRAMER: OK, Apple. Apple is easily going to get to $220, (APPL). The reason I love Apple is that they are going to have fantastic earnings and there's no death of the consumer out there. Maybe it is tight. Maybe it is difficult. But we all still have our iPods.
KANGAS: OK. Let's have another one.
KRAMER: Jacobs Engineering (JEC). I have talked about Jacobs before. I love it. By year end '08, I see $120. It is an infrastructure company. A construction company that has a lot of contracts in the Middle East and the $100 oil is getting a lot of money to the middle easterners who are doing a lot of infrastructure building and Jacobs will have fantastic earnings in February.
KANGAS: OK, let's keep moving along with some more selections.
KRAMER: OK, Kaydon. (KDN) is the ticker symbol. This is a ball bearing company that makes ball bearings for the wind industry, for transportation and as well for the oil services arena. So they have a very, very good client list and you're going to see Kaydon be a $72 stock. But it might take 18 months to 24 months there.
KANGAS: OK. We only have a minute left. How about some more?
KRAMER: OK. I will go very quickly, Google. Google will easily get back up there and I can see Google hitting $800 by year end, '08 (GOOG). They're going to take it up. The traders are going to bring Google up. It is what we call high beta stock, high volatility. Fed cuts rates. Everyone goes into Google and the ones that they can ride on to go up high. The other one is Applied Materials (AMAT). This is one of my favorite stocks. I have been buying it as if it's been going down. Applied Materials could easily be $24 by the end of '08. It's in the semiconductor arena and it's just gone down but only because they make the manufacturing equipment for the semiconductors. It's a phenomenal company, real earnings.
KANGAS: All right. Hilary do you own any of the issues you've recommended or have any other disclosures to make?
KRAMER: Yes. I own all of these stocks, all of them.
KANGAS: All right. That's quite a vote of confidence. Thanks for being with us again. We'll see you in two weeks.
KRAMER: Thank you Paul.
KANGAS: My guest, Hilary Kramer author of "Ahead of the Curve."
"Money File"-Social Security Gets Carded
SUSIE GHARIB: In tonight`s "Money File," the benefits of using a debit card instead of checks from Social Security. Here`s Terri Cullen, personal finance columnist at "the Wall Street Journal."
TERRI CULLEN, REPORTER, THE WALL STREET JOURNAL ONLINE: Social Security checks may soon be a thing of the past. This year, the Treasury Department plans to introduce prepaid debit cards for people who collect Social Security retirement, disability and survivor benefits. The new cards will be launched in some states in the spring and are expected to be available nationwide later this year. The government hopes the cards will offer cheaper, safer benefits payments for people with no bank accounts. Benefits recipients soon will receive letters encouraging those who have no bank accounts to sign up for the debit cards. Once enrolled, benefits payments are automatically loaded onto the cards each month. Cardholders may then use the debit card to obtain cash or make purchases, just like any other debit card. For those receiving benefits, the cards offer three advantages. Card holders will be able to access money faster and more easily than those who have to cash checks. Reloadable debit cards are also safer than receiving checks in an unlocked mailbox and the cards eliminate the steep fees charged by check-cashing services. That said, some fees are involved: cardholders will get one free ATM cash withdrawal per deposit per month, but will be charged $0.90 for each additional withdrawal. ATM surcharge fees must also be paid, though there will be some designated ATMs that charge no fees. Is the Social Security debit card right for you? If you already have a bank account and you`re still receiving Social Security checks, enroll in direct deposit and have your money automatically transferred to your bank account. That way, you`ll ditch some of the fees while still getting access to your cash quickly and securely. I`m Terri Cullen.
"Last Word"-Closing the Budget Books
SUSIE GHARIB: And finally tonight, wave bye, bye to Uncle Sam's budget books. For years, this is how the White House submitted its budget plans to Congress -- in big, bulky books. This year, the budget is going paperless! On February 4, the Bush administration will publish its fiscal 2009 spending plan on the Internet. The move will save nearly 20 tons of paper; that's the same as about 480 trees. But Paul, the budget books won't be gone completely -- the Government Printing Office will still produce some copies of the four-volume set.
KANGAS: But even so Susie, the government is barking is up the right tree for a change and I hope it spreads to other branches.
GHARIB: You're right about that.
Paul Kangas Stocks in the News
PAUL KANGAS: In the wake of yesterday's drubbing on Wall Street, cautious bargain buyers gave stocks a modest lift this morning. An upbeat outlook from Dupont helped the Dow rise by 75 points by 11 a.m., with the NASDAQ Index up 14 points. The early upturn had trouble gaining traction after that recession prediction by Goldman Sachs. So by noontime, the Dow and the NASDAQ indices were off single digits. In the absence of follow- through selling, however, an oversold rally developed and led by the financials and that gave the market a positive close. The Dow Industrial Average ended up 146.24 at 12,735.31. NASDAQ Composite up 34.04 at 2,474.55. Standard & Poor's 500 Index rose 18.94, closing at 1,409.13. Over in the bond market, the 10-year note fell 12/32 to 103 15/32, putting the yield at 3.83 percent.
Familiar name at the top of the active list, today 34 million shares traded in Citigroup (C). The stock up $0.37, although Morgan Stanley forecasts that Citi will cut its quarterly dividend from $0.54 to $0.30 in the second quarter and Morgan Stanley also widened its estimate for a fourth quarter loss for Citicorp from $0.56 in the red to $0.88 in the red.
Then came Countrywide Financial (CFC) down $0.43. As you heard, the company's December loan funding was up 1 percent, but that's still 45 percent below what it was a year ago.
That didn't help Washington Mutual (WM) stock, which fell $0.39.
Ford Motor Co (F) a $0.06 drop. Goldman Sachs cut 2008 earning estimates for Ford by 60 percent, down to only $0.20 a share.
AT&T (T) down another $0.07, says its consumer business is again softening a bit.
Pfizer (PFE) moved up $0.46.
Then Qwest Communications (Q) down $0.23 a share.
General Electric (GE) bucked the trend, up $0.42.
A $0.33 gain in Bank of America (BAC).
Advanced Micro (AMD), tenth in volume, down $0.47 a share.
Dupont (DD) which is a Dow stock, helped that average, up $2.10 today. The company sees 2007 earnings at the upper end of its previous forecast of $3.15 to $3.20 a share and that's thanks to strong foreign sales because of the weak dollar. The company also boosted its 2008 earnings estimate by $0.03 to $0.04 to as much as $3.55 a share.
Humana (HUM) did well today, up $3.93. It reaffirmed its 2008 earnings guidance of $5.30 to $5.50 a share.
And Robbins & Myers (RBN), a manufacturer of industrial products, posted good first quarter earnings, $0.80, up from $0.62 a year ago, $0.13 above the Street estimate. The company boosting its dividend 15 percent and also set a two for one stock split, nice combination.
MGM Mirage (MGM) up $3.79. The company and Dubai World will launch a 10 million share tender offer and pay no less than $75 a share, no more than $80 a share.
Oneok (OKE), the national natural gas distributor up $4.43. The company boosted its 2007 earnings guidance from $2.72 at best to $2.79 a share at best and sees 2008 earnings around $3.15.
MBIA (MB) a $0.55 drop. It's going to issue $1 billion of surplus notes and cut its quarterly dividend from $0.34 to $0.13 and the stock traded as low as $11.11 today, but Standard & Poor's upgraded it from "sell" to "hold" and that helped cut that loss.
Apple (AAPL) topped the active list, coming back $8.15.
Google (GOOG), good day, $21.52 gain.
Research in Motion (RIMM) up $2.11.
Baidu.com (BIDU) up - down $1.11.
And then Microsoft (MSFT) a $0.99 gain. The company is bidding $1.2 billion for enterprise search company called Fast Search Transfers, a Norwegian firm.
Cisco Systems (CSCO) $0.37 gain.
$0.49 rise in Intel (INTC).
First Solar (FSLR) up $3.75.
Garmin Ltd (GRMN) down $4.21, traded as low as $67.50 today. The digital map maker was downgraded by Deutsche Bank from "buy" to "hold" on concern about increasing competition.
And then Amazon.com (AMZN), tenth in volume, down $2.66.
And finally, Apollo Group (APOL) jumped $11.05 on stronger than expected first quarter profits of $0.88, $0.15 above analysts' estimates.
