NBR Complete Transcripts-February 22, 2008
Friday, February 22, 2008Investors Take A Shine To Gold
SUZANNE PRATT: It was a record week in the commodities markets. Not only did oil prices close above $100 a barrel for the first time, but gold is now closing in on a record $1,000 an ounce. April gold futures at the New York Mercantile Exchange slipped $1.40 an ounce today to just under $948, but they still gained nearly 5 percent this week and many experts believe there's still good value in the yellow metal.
In the last seven years, gold prices have more than tripled. Supply/demand fundamentals, coupled with the economic environment in the U.S., have been behind the stunning climb. Some gold bugs believe prices will peak over $1,000 an ounce this year. Gold trader Paul Sacks says, despite the soaring price tag, investment interest is in no way dwindling. He says the market is in uncharted territory.
PAUL SACKS, INDEPENDENT GOLD TRADER: There's a lot of people coming in to buy gold for all sorts of reasons. There's a lot of interest in the options in the 1,100 strike, the 1,200 strike, even as high as the 1,500 strike. So that corresponds to gold trading at a price of $1,500 an ounce.
PRATT: Since 2003, gold prices have increased an incredible $100 an ounce each year. The precious metal is now trading about $50 shy of a four-digit price point. Early on in the price run up, global demand exploded as China and India became big buyers. Petrodollars from the Middle East were also a factor. Meanwhile, supplies of the yellow metal began to dwindle. More recently, gold has recaptured its status as a safe haven investment; that's as concerns about a recession in the U.S. grow, inflationary pressures escalate and the U.S. dollar remains extremely weak. On top of that, experts say sub-prime mortgage problems and the accompanying credit crisis have resulted in increased gold investment by funds seeking alternative asset classes. HSBC analyst Jim Steel also points out that gold and oil prices have recently been joined at the hip.
JAMES STEEL, METALS ANALYST, HSBC: The correlation between gold and oil since the year 2000 has been about .91. It's very high; that is to say that when oil moves, gold tends to move lockstep with it. And we've seen, of course, that oil has gotten to $100 a barrel and in fact, overall, the commodity markets have been very healthy.
PRATT: Steele believes gold prices will continue to trade higher in the short-term; that's as long as the Federal Reserve continues to cut interest rates.
One on One with Steve Odland, Chairman & CEO, Office Depot
PAUL KANGAS: With the economy slowing and growth concerns abounding, small businesses are feeling the pinch. They make up Office Depot's customer base, so the office supply retailer is often seen as a barometer of the small business community. NIGHTLY BUSINESS REPORT's Susie Gharib recently spoke with Chief Executive Steve Odland and began by asking him how his customers are doing.
STEVE ODLAND, CHAIRMAN & CEO, OFFICE DEPOT: They are hurting, because their business has slowed down dramatically so you see the effects of the housing market on their businesses directly, but I think also the housing market was a source of liquidity for these people, so the very smallest businesses are using home equity lines of credit, refinancing of their own homes in order to fund their business growth. Now that has dried up and so you are seeing less investment by these very small businesses, less growth and in fact, contraction.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT CORRESPONDENT: So Steve, I mean based on what you are saying about the economy and the impact on your small customers, small businesses, how do you manage in that environment?
ODLAND: We have cut back on investments in long-term spending to try to make sure that we govern our growth levels with the amount of business that we have. So we have cut back store openings for instance and expansion, trying to just make sure that we do the right thing for our shareholders and govern our spending to our growth levels.
GHARIB: I know you are not an economist, but what is your prediction for when this trend is going to happen?
ODLAND: There is a big inventory of housing in certain areas of the country that we need to work through, especially Florida and California, Michigan as well so I think what we hear is that things should work through the first half of 2008. It is going to be a little tough, but by the end of 2008 we should work through a good portion of this bubble.
GHARIB: So is business in Europe and other international markets where Office Depot has stores doing any better for you?
ODLAND: Well, Office Depot serves customers in 43 countries and we are seeing great growth around the globe, particularly in Asia, eastern Europe, Latin America, central America. We have seen a slowdown in the past quarter in the UK, which I think is also a sub-prime slowdown and some of the same issues with housing that we see in the U.S.
GHARIB: Staples has been opening stores in many of your markets like here in Florida. How is that affecting your stores and businesses?
ODLAND: I think it is important to understand that the top three retailers in the office products market only make up 10 percent of the entire business, so mass merchants, the direct marketers, grocery stores, drug stores, all of the club stores, all of these different sources make up 90 percent of all of the sales, so there is an incredible amount of market share that can still be had in these businesses and Office Depot needs to do a better job, I think, of getting market share from the alternate channels.
GHARIB: There certainly has been a lot of talk about consolidation in the office supplies business. Does it make sense for Office Depot to be a buyer or seller at this time?
ODLAND: Probably not a good time for us to be going out and buying other companies. I think what we need to focus on is making sure that we are taking care of the customers that we have and making sure that we get through this period of time.
GHARIB: Office Depot stock has dropped 60 percent in the past year. What has to happen to win back the confidence of investors?
ODLAND: I think Office Depot probably disproportionately benefited from the boom in the sunbelt and now we are disproportionately feeling the effects as the boom has gone into a bit of a recession. And as we work through this period of time and begin to get our momentum back, I think that our financial results will follow and certainly our stock price will follow.
GHARIB: Steve, thank you so much for your time.
ODLAND: It is great to be here, thank you, Susie.
"Taiwan Tech"-HTC
SUZANNE PRATT: Cell phones are morphing into mini-computers, known as smart phones. Apple's iPhone is the most prominent example. But, as Lucy Craft reports in our series "Taiwan Tech," there's a little known, Taipei-based handset maker that's hot on Apple's heels.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The unsung and anonymous suppliers to the global tech business for over a decade, Taiwan's IT industry lately is changing its tune. Taiwanese companies these days are vying to become brands in their own right. With margins dwindling on commodity devices, acquiring brand cachet is becoming an economic imperative for this nation of 23 million people. Peter Chou helped found one of the tech island's most aggressive startups, HTC. Its premium phones, built under contract to Sprint, Vodafone and T-Mobile, have become standard executive gear in the U.S. and around the globe. But now the Taiwan handset manufacturer has vowed to make itself as much a household name in prestige cell phones as Apple.
PETER CHOU, CEO & PRESIDENT, HTC CORPORATION: We think if we can do a really good job to combine the Internet computer and wireless experience all together, we can provide a device which can really deliver productivity, both for your work and your personal life and organize your life much better.
CRAFT: Its touch-activated handsets are Microsoft-based, but the firm has joined an alliance to adopt Google's android platform.
JOHN C. WANG, CHIEF INNOVATION WIZARD, HTC CORPORATION: The only way for a company like this to succeed is to become the BMW of the mobile phone industry.
CRAFT: John Wang, another executive, says the company is focused solely on cutting-edge, high-end products, like the German luxury car maker.
WANG: BMW is not the biggest, but it actually is the leader and earned the reputation of being one of the leaders of the industry. And HTC is not the biggest, but it needs to be an industry-leading innovator for it to succeed.
CRAFT: Ming-Kai Cheng of the brokerage CLSA is betting that HTC already the world's leading producer of smart phones, will hang on to its early-mover advantage.
MING-KAI CHENG, HEAD OF TECHNOLOGY RESEARCH, CLSA: The headline is always about iPhones. But HTC has been very, very successful, both pushing their own brand as well as maintaining a relationship with the telcos.
CRAFT: But most observers reckon HTC will hit brand gold mainly in emerging countries. As for the more competitive American market says Citigroup's Peter Kurz, HTC will be compelled to team up with U.S. partners in co- branding arrangements.
PETER KURZ, MANAGING DIR., HEAD TAIWAN COUNTRY RESEARCH, CITIGROUP GLOBAL MARKETS: We are seeing a number of handsets penetrating the U.S. through the carriers themselves, the telecom service providers themselves, who are either co- branding or simply distributing the Taiwanese brands into the U.S. market. So that may be one channel where we start seeing some brands again in the handset sector.
CRAFT: Smart phones are still in their infancy. But in a few years, they could end up accounting for a quarter of all handset sales. Smart phones, in other words, are where the smart money is nowadays, a situation the Taiwanese are well-situated to exploit. Lucy Craft, NIGHTLY BUSINESS REPORT, Taipei.
"Market Monitor" -Randall Eley, President, Edgar Lomax Company
PAUL KANGAS: My guest "Market Monitor" this week is Randall Eley, president of the Edgar Lomax Company, an investment advisory firm based in Springfield, Virginia. Welcome back to NIGHTLY BUSINESS REPORT, Randall.
RANDALL ELEY, PRESIDENT, THE EDGAR LOMAX COMPANY: Thank you for having me, again, Paul.
KANGAS: When you were last with us in August and the Dow was 1,000 points higher than it is now, you were correctly cautious, not so much because of the sub-prime mess, but because of debt in general. You were concerned about the huge government debt and the amount of debt consumers are carrying. Are things improving along this front?
ELEY: Actually, I hope on a temporary basis, it has gotten worse. The economic stimulus bill Congress just passed and the president signed is going to add about one and a quarter percent, by some calculations of GDP to government debt. That could increase government debt as much as two percent. So hopefully after the election, the Federal Reserve will be able to get back on a normal track.
KANGAS: So does this keep you cautious about the stock market generally?
ELEY: It does. Because I think differently from last time, I think the Federal Reserve may have succeeded in softening whatever slide we will see in stock prices. But I think this will only be a postponement in the bear market, not a true new bull market.
KANGAS: What are the indicators you are looking at to determine your investment strategy?
ELEY: Well, we actually - we're bottom up stock pickers which mean we look at specific companies, but we do look around generally at the environment and it is a fact of life that government debt, debt in general has been growing but you can see in the government debt statistics has been growing so rapidly that sooner or later as the government pulls back and consumers also spend less on credit cards, corporate earnings will slide and stock prices eventually will slide also.
KANGAS: What investments would you avoid like the plague right now?
ELEY: I think the whole small cap concept, which was being sold, so energetically pursued by many investors over the last seven years I think is likely to be cool for a time.
KANGAS: OK.
ELEY: And whether that is private equities, small cap stocks in general, many of the high yield bonds that hedge funds were buying, I think we are going into an environment that investment grade large companies are going to do the best.
KANGAS: Last August you gave our viewers three stocks to buy. Let's see how they have done since then. We have Pfizer (PFE), which is down six percent, American International Group (AIG), down 24.4 percent, are you still with these? Do you still like them?
ELEY: Pfizer I would hold, but I wouldn't buy anymore and I like the other two.
KANGAS: OK. American International Group, you are still with that and ExxonMobil (XOM).
ELEY: That's right.
KANGAS: Up 3.1 percent. So it has been a rough market indeed. So you didn't fare too badly. How about some new recommendations, Randall?
ELEY: Yes, this time I am going to give you four. I will start with Chevron (CVX) and I like it first because of the energy company, no matter what the economic environment, we don't have to worry about if they have a market, but it has a P/E ratio of 10 and this is with the S&P at 18.
KANGAS: It is also a member of the Dow 30.
ELEY: It sure is and it also has a dividend yield of two and a half percent, a little bit more, about 2.6.
KANGAS: Right.
ELEY: So we are being paid quite a bit more than the market.
KANGAS: OK, second choice?
ELEY: Another energy, ExxonMobil -- I have liked it for a long time.
KANGAS: You are going to stay in there with that, it has been pretty good to you, hasn't it?
ELEY: That's right and the P/E is only a little higher at 12, dividend yield a little lower but this is a company that has done a very good job of growing earnings over the years.
KANGAS: All right, a third choice.
ELEY: Next, Dow Chemical (DOW) and here we have a P/E of 13 but the big thing I like about Dow is its dividend percent, 4.2 percent. That is more than twice the S&P 500 so here is a company that no matter what the economy throws at us, we should get a good return.
KANGAS: And a choice number four?
ELEY: Finally I would give you American Express (AXP).
KANGAS: I can see why you like it. It's had a terrific fall, nobody wants it but you, right?
ELEY: That's right. That's right. People are concerned, because they are having higher delinquencies but the fact is their write offs have been nothing like many financials so I think they can grow their earnings next year and also grow their dividend.
KANGAS: All right. Interesting choice and we will check them out over the next few months. Do you personally own any of these securities you have mentioned Randall?
ELEY: I own them all.
KANGAS: Well, that is a vote of confidence, that is for sure. Any last minute thoughts? We have about 10 seconds.
ELEY: Just in general, good stocks are always appropriate to be held in a portfolio, but one should be careful in this environment, because a lot of debt has to be paid.
KANGAS: All right. It is always a pleasure to have you with us.
ELEY: And always a pleasure to be here.
KANGAS: My guest Randall Eley, president of the Edgar Lomax Company.
"Last Word"-Atlas Sized Economic Stimulus
PAUL KANGAS: And finally tonight, there's President Bush's stimulus plan and then there's the Atlas Park shopping center's stimulus plan. That's where a New York City mall is giving away $20,000 in cash, telling shoppers to spend or invest it. The mall's owner says it's meant to supplement the other stimulus package signed into law this month, but without having to wait for rebate checks. To emphasize the concept, the cash is being handed out by people dressed as Uncle Sam and the statue of liberty. It's estimated, if every shopping center in the country did the same thing, Paul, $340 million would be pumped into the economy.
KANGAS: I don't think I'll hold my breath waiting for that to happen Suzanne.
PRATT: It's not on my way home either.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks headed lower by mid-morning as investors reacted to an analyst "sell" recommendation on Freddie Mac and Fannie Mae. That downgrade sent the entire financial sector lower. By midday, the Dow was off 110 points; NASDAQ down 32. But stocks came alive late in the session on those rumors an Ambac rescue plan was imminent. The Dow Jones Industrial Average rebounded with a closing gain of 96.72 points, putting it at 12,381.02. In this four-day trading week, it rose twice, fell twice, had a net gain of 32.81. The NASDAQ Composite closed up 3.57 at 2,303.35. It rose twice and fell twice as well for an overall loss of 18.45 points on the week. Standard & Poor's 500 tacked on 10.58 today to close at 1,353.11 and for the week, it was up 3.12 points. Over in the bond market, the 10-year note fell 5/32 to 97 15/32, putting the yield at 3.81 percent.
Big board volume leader on nearly 25 million shares, Citigroup (C) down $0.07, traded as low as $24.26 this morning however, after an analyst at Oppenheimer said financial stocks could fall another 15 to 20 percent this year and said Citigroup could cut its dividend again soon. GE (GE) in there with a $0.14 loss.
And then came Bank of America (BAC) up $0.39.
JPMorgan Chase (JPM) an $0.86 gain.
AT&T (T) $0.51 advance there.
Pfizer (PFE) gained $0.10. The "Science" magazine had a rather negative editorial about the company's business tactics.
EMC Corp (EMC) a $0.14 loss there.
Ford Motor (F) edged $0.02 higher.
ExxonMobil (XOM) up $0.25.
And then SprintNextel (S) with a $0.40 gain.
Ambac Financial (ABK) up $1.47. It rose a few more cents in after hours trading. As you heard, some major banks reportedly have come up with a rescue plan, but there's been no confirmation on that by the banks or by Ambac at all.
Fannie Mae (FNM) down only $0.27 at the close, but it traded as low as $27.21 this morning after Merrill Lynch downgraded it from "neutral" to "sell."
And then Freddie Mac (FRE), same downgrade by Merrill Lynch, "neutral" to "sell." The stock traded as low as $25.13, made a little recovery from there.
CHC Helicopter (FLI) a high flyer there. The company provides helicopter services to offshore oil platforms and a unit of First Reserve Corp. will acquire this company for $32.68 a share in Canadian funds.
And believe it not, another helicopter provider, Bristow Group (BRS) up $3.99, probably in sympathy with the buyout of CHC, but there was also an upgrade by Credit Suisse from "under perform" to "neutral" on Bristow Group.
Calgon Carbon CP (CCC) up $1.26, turnaround there, fourth quarter earnings of $0.08, versus a loss of $0.21 last year and sales were up 21 percent in this fourth quarter period.
Omnicare (OCR) up $2.24. The company has appointed as a new director Jeffrey Ubban or Ubban, a founder of ValueAct Capital, which already owns a 9.7 percent stake in Omnicare, so he'll be a new director there.
Lifetime Fitness (LTM) plunging $7.10. Fourth quarter earnings, $0.48, up from $0.38 a year ago, but the company's 2008 earnings guidance of $2.08 at best was below the Street estimate of $2.19 a share in earnings.
And finally, Aircastle (AYR) down $2.72. The commercial jet leasing company had fourth quarter earnings higher, $0.44, versus $0.38, but that was $0.06 below the Wall Street consensus.
Apple (AAPL) topped the NASDAQ active list, down $2.08.
$0.42 loss in Microsoft (MSFT).
Google (GOOG) up $4.94.
Intel (INTC) $0.48 drop there.
Research in Motion (RIMM) was up $1.26.
Cisco Systems (CSCO)
$0.41 advance.
Baidu.com (BIDU) rose $1.69.
Oracle (ORCL) up a penny.
Qualcomm (QCOM) $1.05 gain.
And then Amazon.com (AMZN) up $2.18.
Intuit (INTU) up $2 - down $2.74. Second quarter earnings lower, $0.40 versus $0.44 a year ago and the company sees third quarter earnings of $1.26. That's $0.11 below the Wall Street consensus.
And finally Orthofix Intl (OFIX) which makes orthopedic products, plunging $15.49. A fourth quarter loss of $0.62 reported today versus earnings of $0.44 a year ago.
Those are the stocks in the news tonight.
