NBR Transcripts-February 19, 2008
Tuesday, February 19, 2008A Refinery Fire & Reserve Worries Send Oil Prices Above $100 Mark
SUZANNE PRATT: Oil prices closed above $100 a barrel today for the first time. At the New York Mercantile Exchange, March crude futures surged $4.51 or nearly 5 percent, to settle at record $100.01 a barrel. Fueling today's spike -- concern that OPEC will cut production at the cartel's meeting in two weeks. Oil ministers are reportedly worried about falling demand for crude as the global economy slows. But oil trader Ray Carbone doesn't believe OPEC will take any action with crude prices at $100 a barrel.
RAYMOND CARBONE, OIL TRADER, PARAMOUNT OPTIONS: It really depends on what happens between now and the OPEC meeting. If we are where we are today, I don't think OPEC will increase production or cut. But if we go back below $90 and we still have weak economic numbers, I think OPEC would be reluctant to add production into a weakening demand environment, so they're walking a fine line.
PRATT: Oil wasn't the only energy commodity that hit a record today. Gasoline and heating oil futures also closed at new highs on supply concerns following a weekend refinery fire in Texas.
PAUL KANGAS: Those high energy prices are seen as a wild card by the nation's biggest retailer. Wal-Mart posted better than expected fourth quarter results today, but sounded a cautious outlook on worries about the sputtering U.S. economy and soaring fuel costs. But as Jeff Yastine reports, the chain's price-cutting strategy continues to be its ace in the hole with consumers.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Shoppers were opening their wallets at Wal-Mart in the final quarter of 2007. From flat- panel televisions to toys, the retailer was doing what it does best, marking down prices and reaping the results. Excluding charges, Wal-Mart earned $1.04 a share in the fourth quarter, beating analyst estimates by $0.02. But the real question is whether the company can continue to hit its profit forecast in the face of a weakening U.S. economy. Wal-Mart president and CEO Lee Scott acknowledged the challenge in a statement, noting, we know that the economy remains a critical factor in this new fiscal year, adding that customers were more cautious in their spending in January.
The retailer sees earnings of $0.70 to $0.74 a share for the first quarter, while most on Wall Street were looking for $0.74 a share. Edward Jones retail analyst Stephanie Hoff took the retailer's cautious outlook in stride.
STEPHANIE HOFF, RETAIL ANALYST, EDWARD JONES: It was not unexpected that Wal-Mart would be a little cautious in its guidance and I think we'll see that from a number of retailers when they report next week. So we're looking at Wal-Mart and just thinking about the fact that the company still expects growth in '08. In our view, that's pretty strong relative to some other retailers that are likely to show declines.
YASTINE: One of the challenges faced by Wal-Mart and its future outlook is the rising cost of energy. Executives say the increasing price of fuel for the chain's vast distribution network of diesel trucks remains a quote potential headwind. With the price of oil topping $100 a barrel, that headwind shows no sign of abating.
HOFF: When you look at Wal-Mart's ability to control expenses and distribution, it's awfully hard -- it's awfully hard for any retailer. If the oil prices stay roughly at this level, I think Wal-Mart will figure out a way to manage this year. They're certainly doing things on the cost side of the equation with their fleet to update the technology and become more fuel efficient. So while, it's still a headwind, it might be less of a headwind than they actually faced last year.
YASTINE: Other analysts point out a bright spot for the chain -- overseas growth. Wal-Mart's sales growth in foreign markets rose 19 percent last quarter, nearly four times its U.S. stores. Analysts say that should help the retailer continue outperforming its rivals. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
Stuart Schweitzer of JPMorgan Private Bank Reacts to the Market's Rally Reversal
SUZANNE PRATT: Joining me now to discuss today's market activity, as well as look into the future, is Stuart Schweitzer of JPMorgan Private Bank. Stuart, welcome back to the program.
STUART SCHWEITZER, GLOBAL MKT. STRATEGIST, J.P. MORGAN PRIVATE BANK: Thanks Suzanne. Good to be here.
PRATT: What happened to today's rally? Should we blame it on oil and the commodities for the reversal?
SCHWEITZER: I think so, but I think you've got to start a little before even oil had the impact because this morning when shares were up, there just wasn't a whole lot of volume behind it. There was not the weight of money that I think you need to see for the market to be able to advance in a sustainable way. And then you had the weakness that came from higher oil prices. And oil is a rock versus a hard place kind of thing because on the one hand, if oil stays high, it's going to constrain the consumer and that's going to make it tough overall for the economy and the market. And on the other hand, if the consumer comes back, as I think you could argue the consumer will when the tax refund checks start coming, then I think higher oil prices are going to be a source of potential inflation. So it's a very tough situation.
PRATT: Does that mean tomorrow's consumer price index is going to be a big focus for Wall Street? Is everybody nervous about that number?
SCHWEITZER: Absolutely. Just look at the back up in bond yields in the last 10 days. Bond yields are up something like 20 basis points on 10- year Treasuries over that time span. And I think that is partly because very much really because of a concern about the inflationary potential of higher oil and other commodity prices.
PRATT: Are you worried about stagflation at all?
SCHWEITZER: I'm a little bit more concerned than I'd like to be frankly. I think in the near term as the economy cools down and I think we're either in a recession or we're going to find ourselves shortly to be in more recessionary kind of conditions, that that may reduce oil demand enough to take a little bit of the heat away from the oil market. But once this economy gets going, if oil stays high and it's not just OPEC's supply, it's supply from non-OPEC as well that's very constrained, if oil stays high, I think there will be inflation risks and I think that's going to mean higher interest rates sooner than anyone would like.
PRATT: When we spoke earlier today, you told me that you were recommending to your client...
SCHWEITZER: I'm sorry. I lost it my earpiece. Just let me get it back in.
PRATT: OK. All right.
SCHWEITZER: Sorry about that.
PRATT: Can you hear me now?
SCHWEITZER: I can hear you now.
PRATT: Great. When we spoke earlier today, you told me that you're recommending to clients that they keep 14 percent of their portfolio in cash. That seems like a rather large number. What's average for you and why that high number for cash?
SCHWEITZER: Well, what's average is 3 or 4 percent. Normally cash is a wasting asset in a portfolio that clients want to use as a source of preserving and then growing capital. But what's behind it is a concern that we may not yet have seen the bottom in the market. I will say that we had a little bit more cash than that at the beginning of the year. We had as much as 17 percent cash. And then when stocks got hit back in January, we did put a little bit of money to work, but it's one toe at a time into the water. We're not rushing in; picking your spots is going to be really critical.
PRATT: So what are your spots?
SCHWEITZER: It's a very challenging year.
PRATT: What are your spots?
SCHWEITZER: Number one is large cap U.S., not small cap and number two would be non-Japan Asia, which has gotten hit back pretty hard over the last three months. And I think non-Japan Asia will be positioned to benefit from growth when growth resumes.
PRATT: OK. Let's leave it there. Thank you so much for joining us tonight.
SCHWEITZER: Always a pleasure.
PRATT: My guest this evening, Stu Schweitzer of JPMorgan Private Bank.
The Toy Game Gets Ready For A Rebound
SUZANNE PRATT: In New York this week, it's all about fun at the international toy fair. The toy industry is coming off a rough year, with toy recalls and U.S. sales falling 2 percent to about $22 billion in 2007. But as Scott Gurvey reports, hope springs eternal when new toys are in view and this week's extravaganza is no exception.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the toy industry, 2007 was a tale of two worlds - weak sales, especially in the fourth quarter in the United States, offset by much better than expected results from overseas. Hasbro CEO Alfred Verrecchia predicts strong worldwide demand this year for Hasbro's transformers, Nerf, and Fur Real Friends lines and he notes that toy sales hold up fairly well in difficult economic times.
ALFRED VERRECCHIA, CEO, HASBRO: When people cut back, they're generally cutting back perhaps on vacations or things of that nature. They try to do well for the children and because we are a relatively low-priced product line, people can go out and continue to buy toys.
GURVEY: Industry leader Mattel is coming back from a 3 percent sales decline last year, after recalling millions of toys due to safety issues. This year, 80 percent of Mattel's toys have a computer or electronic element. For the 40th anniversary of hot wheels, there is a model which connects to the Internet. Barbie owners can be real fashion designers with computer software. There is even an electronic element to the classic Tickle-Me Elmo, and D-Rex (ph), the latest in dinosaurs. Mattel President Neil Friedman says his company anticipates increased costs this year, but is prepared.
NEIL FRIEDMAN, PRESIDENT, MATTEL: Commodities are going up. Lbor is going up, you know, all the things, transportation -- all the things that we know about are going up, so there will be some increases in toy prices. However, 80 percent of our toys still are under $30 and Matchbox and hot wheels cars are still $0.99, so there's always something for the consumer to buy that's popularly priced.
GRUVEY: Toys analyst Sean McGowan of BMO Capital Markets is bullish on Mattel. He says the company's stock was over-punished" last year.
SEAN MCGOWAN, TOYS & SPORTING GOODS ANALYST, BMO CAPITAL MARKETS: If you "X" out the fact of the recalls, they actually had a better than expected year. So I think 2008, with the benefit of these entertainment properties that they have will be a very good year and the stock will do very well. Hasbro, I think, longer term, could work out pretty well, but the early part of this year will be challenged by difficult comparisons, so we're currently rating that a "hold."
GURVEY: The toy industry's own association and the Consumer Product Safety Commission are both taking steps to increase the amount of testing done to ensure safer toys. About 80 percent of the toys sold in America are made in China. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Fidel Castro's Resignation Gives American Inventors New Hope For Havana
PAUL KANGAS: The Bush administration says it can't imagine lifting the nearly 50-year-old embargo on Cuba anytime soon. U.S. business groups are hoping economic liberalization will go forward now that Fidel Castro has announced that he will resign as Cuba's president, clearing the way for his brother Raul to take charge. As Darren Gersh reports, it's not clear when or if American investors will be doing deals in Havana.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investment advisor Thomas Herzfeld compared the news that Fidel is stepping down to a birthday present. Stock in the closed-end Herzfeld Caribbean basin fund, which invests in companies that stand to benefit from trade with Cuba, soared 18 percent today. Now, Herzfeld is considering whether cruise lines and freight companies might do well if Cuba reforms its economy.
THOMAS J. HERZFELD, PRESIDENT, THOMAS HERZFELD ADVISORS: I think, eventually, Cuba will return to being the hub, both commercially and otherwise of the Caribbean. The timing is uncertain, but I believe trade will be resumed with Cuba. In the next year or two, I think that it will occur.
GERSH: But some analysts believe there is little reason for Cuba to cut deals with the United States. The CIA estimates, after a long period of stagnation, the Cuban economy is growing again, rising 7 percent last year. Venezuela's Hugo Chavez is pumping in oil and billions of dollars to support his leftist ally. And while U.S. companies are not welcome in Havana, Chinese state-owned enterprises are. Robert Muse is an international lawyer specializing in Cuba. He says the Chinese government is cutting deals to secure natural resources from the island.
ROBERT MUSE, INTERNATIONAL LAWYER: They're committed to investing billions of dollars in nickel production in. Cuba -- nickel prices are at an all-time high -- in oil exploration and extraction in Cuba and other primary industries.
GERSH: With other Latin American countries following Havana's lead and nationalizing their economies, Muse says Cuban leaders see no need to meet American demands on human rights and democracy in order to lift the U.S. embargo.
MUSE: Nearly 20 years I've been around the subject, they are less interested than they have ever been. In a way, the Cuban leadership feels vindicated by history.
GERSH: The New America Foundation's Patrick Doherty says the next president will need to change a policy that has failed to influence Cuba.
PATRICK DOHERTY, U.S.-CUBA POLICY INITIATIVE, NEW AMERICA FOUNDATION: Fidel Castro has the ability to blame the United States for anything that goes wrong in Cuba but because of our embargo and because of that, we've been able to preserve one of the few remaining communist states by creating ourselves as a scapegoat.
GERSH: Business groups remain cautious on Cuba. They know overturning the U.S. economic embargo would require a costly lobbying battle, one that's likely to wait until liberalization in Cuba is well under way. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest"- John Waggoner, Mutual Fund Columnist at "U.S.A. Today"
SUZANNE PRATT: In tonight's "Of Mutual Interest," investing internationally without leaving home. Here's John Waggoner, mutual fund columnist at "U.S.A. Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you've been to Europe lately, you know that a cup of coffee costs about $8 and that's if you don't want anything extra, like a lid. You can thank the weak dollar for that. But there is a bright side. The dollar's fall has supercharged returns from international funds. And that's the problem. To get good returns from international funds, you need red-hot stock markets abroad and a falling dollar. That's an unusual combination.
If you want to invest internationally, but you don't want to play the currency market, consider buying a U.S. fund that invests in big, multinational stocks. The average large company foreign blend fund gained 13 percent last year, according to Morningstar, versus 5 percent for the Standard & Poor's 500 stock index. A big part of that return came from the falling dollar, however. For example, the French stock market gained just 0.2 percent last year. When converted to dollars, U.S. investors reaped an 11 percent gain.
You could argue, however, that the U.S. dollar has suffered enough, at least against the euro. Should the dollar rally, international funds will lag. So how do you catch a bit of global growth while minimizing currency risk? A simple answer would be to invest in a large company U.S. stock fund, which probably has big stakes in companies like Intel, Coca-Cola and ExxonMobil, all of which get significant revenue abroad. Many also own foreign stocks that are traded in the U.S., such as Nokia, the Finnish cell phone maker or Nestle, the Swiss chocolate maker. International funds are a good diversifier. But if you want to invest internationally without leaving home, large company stock funds are a good way, too. You might even earn enough for a double latte on your next trip to Europe. I'm John Waggoner.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those Wal-Mart results sat well on Wall Street early today, as the Dow soared 130 points at the outset of trading and the NASDAQ rose 20 points. Leading the rally were commodity stocks, specializing in oil, coal and iron ore. Some of the financial issues were under pressure on fear that more big write-downs might be in the offing. As oil surged to the $100-per-barrel level this afternoon, stocks saw much if not all of their gains evaporate and the market ended near its lows of the day. The Dow Industrial Average closed off 10.99 at 12,337.22. The NASDAQ Composite lost 15.60 at 2,306.20. Standard & Poor's 500 Index fell 1.21 to end at 1,348.78. In the bond market, the 10-year note fell 1 4/32 to 96 23/32, putting the yield at 3.90 percent.
Big board volume leader once again today on 22 million shares, Citigroup (C) down $0.16. The company is selling or closing some retail branches and consumer finance operations in Asia, Europe and Latin America. AT&T (T) was down $1.99. The company and Verizon are in a price war. Both companies unveiled unlimited flat rate calling plans to attract more high end customers.
Sprint Nextel (S) in there with a $0.34 loss.
Then General Electric (GE) down $0.09.
And there Verizon Comm (VZ) the competitor with AT&T losing $2.49 on that price war news.
Hewlett-Packard (HPQ) closed up $0.08. After the close, the company reported first quarter earnings excluding one-time items $0.86 a share. That's $0.05 better than the Street was expecting. In after hours trading, Hewlett stock was about $2 higher than this price on the board.
Bank of America (BAC) down $0.03.
And then the big mining company, that's Co vale do Rio (RIO), Brazilian firm, up $1.47. Some major steel producers in Asia and Europe have agreed to pay up to 65 percent more for the company's iron ore this year. The higher iron ore prices should result in higher steel prices and therefore higher profit margins for the steel producers.
Let's have a look at how they fared today. Nucor (NUE) up $1.88.
Steel Dynamics (GTLD) rose nearly $3.50.
And US Steel (X) itself, up $2.77.
Now back to the active list and we see Pfizer (PFE) with a $0.04 gain.
Followed by JPMorgan Chase (JPM) which was down $0.42, tenth in volume on the big board.
Holly Corp (HOC), this is a refining firm, up $5.81. Fourth quarter earnings $0.90 up from $0.84 last year. Revenues jumped 54 percent.
Alon USA Energy (ALJ), this is the company that had an explosion and fire at its Big Spring, Texas refinery. That will shut down daily production of up to 70,000 barrels of oil.
Then another energy stock, Foundation Coal Holdings (FCL) up $5.77. Raymond James financial brokerage upgraded it from "market perform" to "out perform."
RTI Intl Metals (RTI), this company's involved with titanium particularly and that was up $3.10 on earnings of - for the fourth quarter, $1.08, down from $1.16 last year, but that was $0.04 above the Street consensus.
Then Sony (SNF) up $2.18. The company has won the DVD format war, allowing its blu ray technology to become the industry standard over Toshiba's HD-DVD systems.
And then Blackrock (BLK) down $7.42, traded as low as $180 a share this morning, but the company then denied rumors it had sustained heavy losses on soured housing market bets.
Moving along we see Westlake Chemical (WLK) down $2.33. Fourth quarter earnings excluding one-time items, $0.17, up from $0.12 last year, but that was $0.16 below the Street consensus.
Then Officemax (OMX) did well, up $1.13. Fourth quarter earnings jumped to $0.92 from $0.76 last year and Goldman Sachs repeated a "buy" on Office Max stock.
Apple (AAPL) topped the active list on NASDAQ, down $2.49.
Followed by Google (GOOG) dropping over $20 a share.
Microsoft (MSFT) off $0.14.
Baidu.com (BIDU) down $12.35.
Research in Motion (RIMM) closed with a loss of $2.30. The company filed suit against Motorola and Motorola countersued. The companies have a disagreement regarding a long-standing technology sharing pact. They can't agree on new conditions apparently.
Cisco Systems (CSCO) $0.42 drop there.
First Solar (FSLR) was off $7.45.
Intel (INTC) a $0.05 gain.
And then Yahoo! (YHOO) down $0.65.
While Qualcomm (QCOM) was down $0.25 a share.
Onyx Pharmaceutical (ONXX) plunging $11.89 a share. The company halted trials of its lung cancer treatment because it did not improve survival rates.
And those are the stocks in the news tonight.
