NBR Transcripts-March 20, 2008
Thursday, March 20, 2008The Commodities Crisis Continues
SUSIE GHARIB: Another big sell-off today for oil, gold and silver, wrapping up a dramatic week for commodities. Gold futures, which peaked on Tuesday at $1,017 an ounce, have since plunged almost $100 or 9.5 percent; silver plummeted 18.5 percent this week. And oil prices, which reached a record of nearly $112 a barrel on Monday, now stand at $101.84. Scott Gurvey takes a closer look at what's behind this sudden drop in commodity prices.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Prices for commodities from oil to gold to grain continued to fall today as speculators reassessed their view of the markets. Many had used commodities as an inflation hedge as the Federal Reserve rapidly cut interest rates. In the wake of this week's policy statement from the Fed, many believe the current round of rate cuts is nearing its end. The focus is now shifting to worldwide economic growth concerns. A sluggish global economy would dampen demand for commodities. George Gero of RBC Capital Markets says speculators are afraid of getting caught in a commodities bubble and are trying to reduce the amount of leverage in their portfolios.
GEORGE GERO, VP, GLOBAL FUTURES SALES, RBC CAPITAL MARKETS: You have these hedge funds that exist overseas in Asia and they exist in Europe and they all need to replenish their cash. And they do that by selling off futures contracts, which are easy, quick to sell, even though the price costs them in the sell-off. Because they can't sell their mortgages, they're selling futures contracts.
GURVEY: But according to James Steel of HSBC, there is another big factor in the recent run-up of commodity prices.
JAMES STEEL, METALS ANALYST, HSBC: Ultimately, the key impact on commodity prices, particularly precious metals prices, is going to be the value of the dollar. That's because commodities are produced in -- by- and-large, in non-dollar economies and sold outside, so the level -- but they're traded in dollars, so the level that the dollar is worth has an impact on the purchasing power of commodities abroad.
GURVEY: The Fed's recent actions to contain the credit crisis are being applauded on Wall Street, with analysts reporting the central bank's wide-ranging moves have a good chance of being successful. That has triggered a dollar rally in the last few trading sessions and a stronger dollar means lower commodity prices. Is this the top for commodities? Like most, George Gero doesn't know.
GERO: We can't tell. I cannot read tea leaves. I cannot tell you if this will continue. I can only say that, for the moment, we seem to have reached a temporary change in the economic environment.
GURVEY: Those worried more about the economy's health than inflation got further support today from the Conference Board. It released its leading indicators report, showing the fifth straight monthly decline. The business group says the U.S. economy may be grinding to a halt. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Bear Stearns Sale Is Under The Microscope
SUSIE GHARIB: Regulators are reportedly taking a closer look at JPMorgan's buyout of Bear Stearns. The Securities and Exchange Commission is said to be investigating the events leading up to the collapse of Bear Stearns. Specifically, the SEC is looking into last week's surge in put options that came due before the firms failed. Meanwhile, there are several attempts to stop the takeover. A pension fund sued Bear Stearns today, requesting a judge to halt the deal. And Joseph Lewis, the largest Bear Stearns shareholder, said he may pressure the firm to consider other alternatives.
PAUL KANGAS: The Federal Reserve's role in financing that Bear Stearns sale is coming under increased scrutiny on Capitol Hill. Iowa Senator Charles Grassley is looking into deal's details in tandem with the Bear bailout and the Fed opened a new line of credit to Wall Street banks. That window is being widely used, averaging $13 billion a day in loans this week. As Darren Gersh reports, all this raises the question of what happens if the Fed loses money on these deals.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Analysts say the Bear Stearns deal may be the riskiest action the Fed has ever taken to prop up financial markets. The Federal Reserve lent JPMorgan $30 billion to buy Bear Stearns, taking $30 billion in hard-to-trade assets off Bear's books. The key question says former Fed economist Douglas Elmendorf, is the quality of that collateral.
DOUGLAS ELMENDORF, ECONOMIST, BROOKINGS: If it had to sell that collateral, we don't know and the Fed doesn't know how much it could get for it. So there is a risk in that case that it won't end up with enough collateral to cover the loan.
GERSH: As of last week, the Fed held Treasury bonds worth more than $700 billion. The interest on those assets funds Fed operations. The surplus, $34.4 billion last year, was sent here, to the U.S Treasury, which is how this gets back to you, the taxpayer.
ELMENDORF: If the Fed loses money by lending without enough collateral, then it will have less to send over to the Treasury. That will reduce the receipts of the Federal government.
GERSH: Is that a risk worth taking? Economist Mark Zandi says the Fed is acting to offset a much larger and more costly meltdown.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: If they take a loss, they take a loss, because, at the end of the day, they are going to save a lot of us jobs and income and wealth.
GERSH: In addition to the Bear Stearns deal, the Fed has also offered to lend up to $400 billion to banks and Wall Street firms. But there, the risk may be limited; those loans are short term, no more than 90 days. The Fed also insists borrowers take a haircut, putting up good quality collateral worth more than the loan taken out. In Bear Stearns' case, the collateral was valued at distressed market prices and as a senior Fed official puts it, the Fed will not sell at a fire sale. Former Fed Governor Susan Phillips says that patience is often rewarded.
SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: In other situations, when the Fed has taken on assets -- higher risk assets -- it turns out, if they hang in there long enough, they've made money on it. Now, not a lot of money, but they'll find a way, I think, to manage that.
GERSH: Even so, if financial conditions were to deteriorate sharply, the Fed could be on the hook for potentially huge losses, though at that point, the nation would have far bigger economic worries than the shape of the central bank's balance sheet. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: That Bear Stearns rescue plan also concerns Representative Barney Frank and today he renewed his call for tougher regulation of investment banks. Speaking at a town hall meeting in Boston, Frank said tackling the issue of increased regulation is a top priority. He proposes creating an agency that would have broad powers to regulate a wide range of financial institutions. Frank, who chairs the House Financial Services Committee, says the current record number of foreclosures can be traced to unregulated sectors of the financial system.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: The absence of sensible regulation has taken some parts of our economy hostage and, sometimes, you got to pay a ransom. Sensible regulation is pro-market because it can instill a degree of confidence in the people who've got the money and are sitting on it that we might not otherwise be able to get.
GHARIB: Frank also says Congress should consider improvements in investment bank reserve requirements and balance sheet disclosures. Currently, the Securities and Exchange Commission oversees investment banks.
Condo Conversions
SUSIE GHARIB: The housing market decline is not only hurting condo buyers, but also condo builders. For builders with projects still in the planning stages, they can build and hope or cancel their projects altogether. But as Jeff Yastine reports, there's a third path emerging -- redesigning condo towers for other uses.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Credit crisis or not, condominium construction continues to fill the Miami skyline. But the builders of one project, a twin tower development called Capital at Brickell, face a dilemma. One of the buildings is already sold out; work on the foundation is underway. But the other condo tower as yet un-built, remains largely unsold. For Capital at Brickell's Vice President of Development Misha Mladenovic, it means changing the building to suit the fast-changing real estate climate.
MIROSLAV MLADENOVIC, VP DEVELOPMENT, CABI DEVELOPERS: We are exploring now together with the hotel component a change in design that would contemplate a six-story assembly component that would essentially be right here on top of this cavity.
YASTINE: Rather than cancel the project, architects are now redesigning the 58-story tower to have fewer condos and more hotel rooms, retail space and offices.
MLADENOVIC: We thought that, in order not to keep a construction site idle -- which is bad for both perception in business and can be interpreted in many ways by many people -- a project that is done and is completed would be a better complement to the many projects that we do.
YASTINE: Architect John Fullerton says firms like his, which design large urban construction projects, are seeing a lot of redesign work from developers in once-hot condominium markets around the country.
JOHN FULLERTON, FOUNDING PARTNER, FULLERTON DIAZ ARCHITECTS: And that has a lot to do with the marketplace, obviously. And so he'll build more hotel rooms if he feels that the condominium market is not there for him. In that case, we've planned the floors so they work interchangeably; we can go from condo to hotel without too much trouble.
YASTINE: But others caution that such projects mean developers potentially take on more risk, since a condo builder may not have the same level of expertise at building retail or hotel spaces. Mike Cannon, executive director at the analysis firm Integra Realty Resources, says the concept, called mixed use, can work if it's done for the right reasons.
MICHAEL CANNON, EXECUTIVE DIRECTOR, INTEGRA REALTY RESOURCES: I would think so, if it's a long-term investment. But if it's a developer that's builds just to build to get out and sell, then the answer may not necessarily be so. There are so many extra requirements that are incorporated in a mixed-use development that may come into play. But the answer is, it should be.
YASTINE: Such efforts won't help developers with buildings already under construction, where large numbers of condo buyers have already walked away from contracts and deposits. But redesigning condo towers still on the drawing board may help other builders survive the slowdown. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
"Market Monitor"- John Dorfman, Chairman of Thunderstorm Capital
PAUL KANGAS: My guest "Market Monitor" this week is John Dorfman, manager of the Dorfman Value Fund and chairman of Thunderstorm Capital, an investment advisory firm based in Boston, Massachusetts. Welcome back to NIGHTLY BUSINESS REPORT John.
JOHN DORFMAN, CHAIRMAN, THUNDERSTORM CAPITAL: Thank you so much for having me Paul.
KANGAS: On your last visit with us this past October, you said stock market volatility will continue to pick up, but investors will just have to learn to live with it. So the Dow vaulted 420 points on Tuesday, tumbled nearly 300 yesterday and then jumped 261 today. Don't you think this is getting a little ridiculous?
DORFMAN: Last time I was on I said if you can't stand the heat, get out of the kitchen and we had just returned to normal volatility. So now the kitchen's getting pretty hot. I think some of us would wish to move to the dining room already.
KANGAS: Isn't there something that can done to curb these wild swings?
DORFMAN: No there's not much that can be done, but one of the great things about the stock market is that it does correct itself fairly rapidly, unlike the housing market, where houses will sit on the market for many months before the price is adjusted.
KANGAS: Is the bull market still alive in your opinion?
DORFMAN: I think that we clearly have at least a severe correct and that a was broken. You had asked me when I was on six months ago if it was over and I thought it had a little longer to run, but it actually ended three days before that. So we're in a severe correction or a bear market. But all bear markets pass, so (INAUDIBLE) get back to another bull.
KANGAS: Is all this market turmoil an indication that the economy is in a recession?
DORFMAN: I believe we are in one. I believe it started at the beginning of the year and I think it will be longer than normal, which means I think it will run all year and probably be over toward the end of 2008.
KANGAS: OK. Back in October --
DORFMAN: (INAUDIBLE) or sooner.
KANGAS: I understand. Back in October, you gave our viewers five recommendations. Let's see how they have done since then. And at the top of the board was Bear Stearns (BSC). Oh, boy. You're a veteran of Wall Street. I am sure you protected yourself with stop loss orders.
DORFMAN: Not in every account. We have some accounts where we took the full brunt of the Bear Stearns decline. All I can say is like Lloyd Bentsen said years ago in the vice presidential debate, I don't make too many mistakes, but when I make one, it is a beaut.
KANGAS: What do you think the outcome of this Bear Stearns takeover by JPMorgan will be?
DORFMAN: I hope the outcome will be a higher bid from another party that sees value in the prime brokerage operation there. I would like to see a bidding war.
KANGAS: All right. Let's have a look at some of those others that you mentioned. Commercial Metals (CMC) down almost 15 percent. Are you still with it?
DORFMAN: Yes, I am.
KANGAS: OK and then we had three other recommendations. Devon Energy (DVN) has been a real winner for you, up another 9.3 percent since October. Do you still like it?
DORFMAN: Yes. I still like it very much.
KANGAS: OK. How about Overseas Shipholding Group (OSG) down 4 1/2 percent?
DORFMAN: We still own Overseas Shipholding Group as well.
KANGAS: OK and there was one another that you went short on a short sell, Shuffle Master (SHFL) at 15, a very profitable all the way down to $5.38 today. Are you out of the short position or still in it?
DORFMAN: We have not covered it, but I have a new short recommendation for you today.
KANGAS: OK. Let's have a few of these new recommendations, first on the list, what is it?
DORFMAN: Let's start with Astrazeneca (AZN). It's a big British drug company. Everyone is concerned about the drug company pipelines, but this company has 10 drugs in phase three trials.
KANGAS: OK.
DORFMAN: And 12 drugs that sell more than $1 billion a year.
KANGAS: All right. Let's move along. We only have about a minute left, John. I see Columbia Sportswear (COLM) up there.
DORFMAN: Yes. I really like the management. They don't sugarcoat bad news. The next year should be tough with the recession but this is a debt free company and a good long-term recommendation.
KANGAS: OK, number three?
DORFMAN: Then I would reiterate Devon Energy (DVN). I think the U.S. has a secular (ph) shortage of natural gas. KANGAS: Stay with the winner. Go ahead.
DORFMAN: And then I will climb out on a limb. I don't think the whole brokerage industry is endangered, so in spite of my experience with Bear Stearns, I recommend Goldman Sachs (GS).
KANGAS: Very good, GS on the big board and then one final one, we just have 30 seconds left.
DORFMAN: OK. My new short sale is Vail Resorts (MTN), which runs a ski resort in Vail Colorado and I am shorting it partly because some of their revenue has come from land sales and I think it's going to be difficult for them to continue that at the same pace.
KANGAS: Trading symbol MTN.
DORFMAN: Correct.
KANGAS: OK, John, do you own any of the securities mentioned or have other disclosures to make about them?
DORFMAN: We are long all of the longs I mentioned, and we are short Vail.
KANGAS: All right. I want to thank you for sharing your views with us once again.
DORFMAN: My pleasure Paul.
KANGAS: My guest John Dorfman, manager of the Dorfman Value Fund and chairman of Thunderstorm Capital.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened in a technical rebound from yesterday's steep sell-off with buyers getting encouragement from Nike's 30 percent jump in earnings, a brokerage upgrade on General Electric stock and those falling commodity prices. At 11:00 a.m., the Dow was sporting a 147-point gain, the NASDAQ up 22 points. After a mild mid-day pullback, a rally in the dollar and details from the Fed about next week's first leg of the $200 billion funding to the banking system, helped lift the market to a strong close. The Dow Industrial Average ended with a gain of 261.66 points at 12,361.32. In this four-day trading week, it fell just once and rose 410.23 points, overall. The NASDAQ Composite closed with a gain of 48.15 at 2,258.11 today and it was up twice and down twice for a gain of 45.62 points this week, overall. Standard & Poor's 500 up 31.09 at 1,329.51 today and it gained 41.37 points for the week. In the bond market, the 10- year note fell 3/32 to 101 11/32, putting the yield at 3.34 percent.
Familiar name up there at the top of the active board, Citigroup (C) on 73 3/4 million shares, rose $2.09. Reportedly the company plans to lay off another 2,000 investment bankers and traders by the end of this month. General Electric (GE) doing well, up $1.90. Merrill Lynch upgraded it from "neutral" to "buy." The company's NBC Universal unit plans to sell its owner and operated stations in Miami and Hartford, Connecticut.
JPMorgan Chase (JPM) moved up $3.50.
A similar rise in 0Bank of America (BAC) on that strong sector.
Ford Motor (F) edged up $0.17 a share.
ExxonMobil (XOM), $0.57 gain.
Merrill Lynch (MER) did very well, up $5.40. As you see, the investment bankers did well.
Pfizer (PFE) a $0.02 loss there.
SprintNextel (S) $0.74 gain.
And then CIT Group Inc. (CIT) plunging $2.01 and at one state today, it was as low as $6.61. The company said it's drawing on its $7.3 billion credit facilities and is seeking additional funding which Standard & Poor's sees as a difficult task and it issued a "sell" on CIT stock.
Wal-Mart Stores (WMT) up $2.45. That's partially in reaction to the pullback in oil prices, nice move there today.
And then Nike (NKE) $5.44 gain. After the close yesterday, third quarter earnings came in at $0.92 versus $0.68 a year ago. Revenues up 16 percent. The company said the weak dollar helped its sales considerably.
US Steel Corp. (X) up $4.68. Goldman Sachs upgraded it from "neutral" to a "buy" recommendation.
And as you might expect, Barrick Gold (ABX) down $3.25. April New York gold, $25.30 lower, closing at $920 an ounce, rough week for the gold.
Credit Suisse (CS), big brokerage, down $0.37, traded as low as $0.46 during the day. The company said after reviewing its securities positions, it warned that it could have its first quarterly loss in five years.
Book seller Barnes and Noble (BKS) up $2.27. Fourth quarter earnings down a bit from last year, $1.79 versus $1.83 but revenues were up 1.7 percent and the company's boosting its quarterly dividend from $0.15 to $0.25 a share.
Another book seller, Borders Group (BGP) didn't do so well, down $2.03. Fourth quarter earnings a penny below last year at $1.44. The company said it's reviewing strategic alternatives including the possible sale of all or part of the company.
Winnebago Industries (WGO), the RV maker, down $1.62. Second quarter earnings came in at only $0.09. The Street was expecting $0.23 and revenues dropped 18 percent.
Chipotle Mexican Grill (CMG) up $9.46. Raymond James financial brokerage upgraded it from "under perform" to "market perform" and that had a positive effect on a lot of the restaurant stocks today like Brinkers and Darden, which were nicely higher.
NASDAQ most active, Apple (AAPL) up $3.60.
And then Google (GOOG) up $1.55, even though RBC Capital cut its price target from $675 to $530 a share, mainly due to a drop in search volume.
Baidu.com (BIDU) down $12.31.
Research in Motion (RIMM) a gain of $3.82.
Microsoft (MSFT) edged up $0.56 a share.
Cisco Systems (CSCO) $0.30 gain there.
Intel (INTC) moved up $0.66. The company is boosting its quarterly dividend by 10 percent to $0.14 a share.
Qualcomm Inc (QCOM) $0.42 advance.
Oracle (ORCL) up $0.52.
And Amazon.com (AMZN) had a good day, up $3.02.
Children's Place (PLCE), the retailer of children's clothing, up $2.65. The company is selling its domestic Disney stores back to Disney.
And those are the stocks in the news tonight.
