NBR Transcripts-March 26, 2008
Wednesday, March 26, 2008The Pain at the Gas Pump Is About To Intensify
SUSIE GHARIB: A big spike in energy prices today. In New York trading, May crude futures jumped $4.68 or 4.6 percent to settle at $105.90 a barrel and gasoline futures rose more than 2 percent. The rally came after a government report showing that gasoline inventories fell much more than expected last week, even though oil supplies held steady. As Scott Gurvey reports, consumers can expect to pay more at the pump.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: A larger-than- expected decline in gasoline inventories led to record prices for gasoline futures contracts today. That's a bad omen for the summer driving season which officially begins on Memorial Day. The government reported that gasoline inventories fell by 3.3 million barrels in the last week, three times the expected decline. Analysts blame poor refinery utilization for the shortfall. Domestic refiners ran their plants at 82.2 percent of capacity according to today's report. That's the worst showing since October of 2005, when many plants were closed due to hurricane damage. Trader Mark Solazzo says he thinks this trend will continue in the near term and that will keep prices from falling.
MARK SOLAZZO, M. SOLAZZO TRADING COMPANY: I believe you're going to see higher gasoline prices over all. That seems to be what the market wants to do. But eventually the supply and demand will win out and prices should come off if people drive less.
GURVEY: There is evidence that people are driving less. Gasoline consumption over the last month was down 0.3 of 1 percent from a year ago. But lower gasoline demand is not leading to lower gas prices. The most recent government survey showed gasoline prices at the pump at $3.26 a gallon. Analysts say that's because the combination of lower demand and high crude oil prices is cutting into the refiners' profit margins. That leaves the refiners with little incentive to step up production. One thing that would lead to lower gas prices according to oil and gas analyst Fadel Gheit, would be a recession.
FADEL GHEIT, OIL & GAS ANALYST, OPPENHEIMER & CO.: If we have a recession, if we're not in one already, demand will continue to get weaker. There is a straight line correlation between demand for gasoline and economic growth. If we don't have economic growth, demand for gasoline will definitely come down.
GURVEY: Valero Energy, the nation's largest refinery, admitted this week it has cut production due to low margins. Today, the company said the cuts could be reversed if margins improve. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Treasury Secretar Henry Paulson Calls For Closer Investment Bank Regulation
PAUL KANGAS: If investment banks like Bear Stearns are to have access to taxpayer funds held at the Federal Reserve, Treasury Secretary Henry Paulson says those banks will come under more close regulation. As Darren Gersh reports, Paulson waded into the debate over regulatory reform in a speech in Washington today.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Treasury secretary praised Federal Reserve officials for stepping in to, as he put it, avoid a disorderly wind down of Bear Stearns. Investment banks like Bear Stearns, which back stock and bond offerings, are subject to less regulation than their deposit-taking counterparts. But if those investment banks are going to get cash from the Fed, Paulson said that will have to change.
HENRY PAULSON, TREASURY SECRETARY: Certainly, any regular access to the discount window should involve the same type of regulation and supervision.
GERSH: Paulson promises to release more details of his regulatory recommendations soon. But Barney Frank, the chairman of the House Financial Services Committee, is already pushing for the Fed to gain new and sweeping powers to patrol market risk. That raises concerns among conservatives like former Congressman Richard Baker.
RICHARD BAKER, CEO, MANAGED FUNDS ASSN.: For the government to assume the position of insulating everyone from risk is not a responsible role. That will kill innovation and kill business opportunity.
GERSH: At the American Bankers Association, Wayne Abernathy agrees there is no need for a sweeping regulatory overhaul. The credit crunch was not a regulatory failure, Abernathy says. It was a failure of basic financial wisdom.
WAYNE ABERNATHY, EXEC. VP REGULATION, AMERICAN BANKERS ASSN: Don't invest in something you don't understand. Don't trust the promises made by somebody who doesn't have a stake in the performance and diversify your risk.
GERSH: Some members of Congress think the Fed missed a chance to clamp down on sub-prime abuses. It's also not clear whether the Fed's regulatory record is really much better than anyone else's.
BAKER: I think there would be sufficient discussion on that point to keep Congress busy for quite a while.
GERSH: And since no regulator has covered itself in glory in recent months, banking consultant Bert Ely argues it doesn't make sense to give one the job of overseeing the entire financial system.
BERT ELY, BANKING CONSULTANT, ELY & CO.: I am highly skeptical of an uber-regulator both in terms of the capacity of the uber-regulator to do the job as well as the politics of trying to create an uber-regulator.
GERSH: The Fed's actions in the Bear Stearns unwind are about to get a closer look. In an unusual move, the leaders of the powerful Senate Finance Committee are asking for all the names of all the people involved in the deal as well as all the key documents. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington, DC.
One on One with Michael Hume, Chief European Economist at Lehman Brothers
SUSIE GHARIB: The U.S. financial crisis is of course a concern in Europe, but today the president of the European central bank Jean-Claude Trichet continued to brush off calls for an interest rate cut. Fuche said the financial market turmoil has had no significant influence so far on the euro's own financing conditions or economy. Still not everyone agrees. This afternoon I talked with Michael Hume, chief European economist at Lehman Brothers. I began by asking him how vulnerable financial institutions in Britain and Europe are to risky mortgage investments.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROS.: Most people suspect -- and we tend to agree with this -- that banks and financial institutions in Europe haven't quite admitted to all of the sub-prime exposures. And certainly there are a number of reasons why we would expect European banks to have exposures and one is simply that we do know that there were lots of financial flows into the U.S. market over a number of years. And secondly, the opportunities for profit in the domestic market weren't so great or didn't seem to be so great and therefore we think there's quite a bit there still lurking in the background. But hopefully the market has more or less adjusted to that likelihood already.
GHARIB: So Michael, to what extent are European institutions pulling back from lending and pulling back from taking risks? And how does that factor into your economic outlook?
HUME: Well, the evidence on that so far is fairly mixed. I mean, if you look at the euro area, for example and look at the lending that banks are doing to firms, to corporations, there doesn't seem to be any sign of a pull back at all. That is something that the ECB president Jean Claude Fuche is really making a point of in many of his recent comments. But if you look elsewhere, if you dig a little bit deeper, you can see that banks are beginning to change the way they behave. They're charging more for loans that they're making. They're telling us that they're going to be tightening lending standards. If you look in the UK, there's definitely clear signs that mortgage rate abilities dried up. So I think they're at the beginning of the process. We should expect a softening of bank lending going forward and that's likely to have a negative impact on growth.
GHARIB: Well, when we last talked in January, you said that you expected the economies in Britain and Europe to go through a sharp slowdown. So how would you describe economic conditions currently?
HUME: Well, I would say that over the last month or so, the data have been OK. They've held up perhaps a little bit better than some people, including myself, feared. But at the same time it doesn't really provide much comfort. It's really a question of time, we think, before the European economies begin to show clearer signs of slowing down. Now some of that will come through the banking system, but you've got more traditional channels, high euro prices, the fact that the exchange rates are so strong particularly against the dollar. All of these things are going to trickle through into the economy over the next few months and we'd expect some softer data as a result.
GHARIB: Speaking of currency, with the euro at record highs against the U.S. dollar, what impact is that having on European businesses and the economy?
HUME: Well, so far the impact isn't obvious. I think there are signs there in some of the indicators, such as for example, the manufacturing orders. In surveys such as the purchasing managers' index, that's the equivalent of the U.S., so if you look at the orders numbers they are tailing off. We would expect the output indicates in that survey to follow suit soon. But at the moment, it's very (INAUDIBLE) but at these levels of the exchange rate, there's got to be some damage done to European exporters. It's being covered up a little bit by strong export markets in the emerging markets and in the commodities exporting economies, but we doubt it will be enough to compensate.
GHARIB: Do you expect the European central bank to cut rates this year?
HUME: Yes, we do. We're looking for the ECB to cut rates first of all in June by 25 basis points. And then on a three monthly cycle cut rates twice again, so 25 basis points in September and then again in December. So it's a very, very different picture from the Federal Reserve which has been cutting rates very, very rapidly recently. And it suggests and is consistent with the ECB's more inflation focused approach to setting policy.
GHARIB: Michael, thank you so much for your time. We appreciate your insights.
HUME: Thank you.
"Street Critique"-Kevin Depew, Executive Editor at MINYANVILLE.COM
PAUL KANGAS: While tonight's "Street Critique" guest sees some upside potential for stocks over the next six to eight weeks, he's still a long-term bear. He's Kevin Depew, executive editor at the financial commentary web site minyanville.com. And Kevin, welcome back to NBR.
KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: Thank you, Paul.
KANGAS: Let's talk about this market. We've seen some strong gains and some sharp sell-offs in recent trading sessions. A lot of people are saying we may have hit bottom. What are you seeing in the market that makes you so bearish longer term?
DEPEW: Longer term, if you go back about 10 years, we're right about where we were. So if you'd put money to work in 1998 and you're looking at your portfolio now, you're looking at essentially the same amount. You would have done better with much less risk in Treasuries. So given that fact I think sentiment has gotten a little bit overdone here in the near term. We're good for maybe a 10 percent move over the next six to eight weeks but longer-term, the issues are still with us.
KANGAS: The last time we spoke in mid February, you thought the economy was turning negative. You were right. Now you think we're in a recession. Is that true?
DEPEW: Well, sure. When we look at the data that's coming in, durable goods orders this morning showed capital expenditures by businesses had fallen almost 3 percent, back to back negative months of capital expenditures. Bulla have been touting that as one of the rescues for this economy when you have consumers pulling back, but that's not the case now.
KANGAS: You remember the old axiom on Wall Street. A market that ignores bad news, we've had nothing but bad news, is one destined to go higher. And we're still above 12,000 Dow.
DEPEW: Right, absolutely. I think part of the barrage of bad news has been baked into the pie here. But barring the next six to eight weeks where we're due for a little bit of a rally, all of these debt issues are still going to be with us and it's going to be back to reality by the second half of the year.
KANGAS: With your recession mindset, you liked consumer staples on your last visit with us in mid February. Your picks Sara Lee (SLE) and Fortune Brands (FO) are still trading around the same levels as then. Do you still like them?
DEPEW: I do. I own both of those as well.
KANGAS: You've brought our viewers some more of your so-called recession proof stocks. Tell us about your first pick.
DEPEW: The first pick is Campbell's Soup (CPB). This is the classic recessionary stock. What do people do when the economy turns negative? They trade down. Soup is one of the first items that start showing up on the shopping lists when you go out to protect yourself from a recession. So I think this company is one that stands to benefit this year.
KANGAS: OK. We have time for another pick.
DEPEW: Wal-Mart (WMT). Wal-Mart is another classic store where people will start trading down from even Target to Wal Mart and a lot of folks' opinions is a trade down. So I think that this is a company that they've streamlined, trimmed away some of the luxury goods they were trying to sell over a year ago. They're a little bit more, they're ready for a recession. I think that's a stock that benefits.
KANGAS: And you're well prepared to ride one out with stocks like that that are rather defensive in nature. Correct?
DEPEW: That's what it's all about is surviving.
KANGAS: Kevin, do you own any of the stocks you've mentioned or have other disclosures to make?
DEPEW: No, I don't know own those two.
KANGAS: OK. I want to thank you for being with us once again.
DEPEW: My pleasure.
KANGAS: My guest Kevin Depew of minyanville.com.
"Money File"-Building A Dream In A Nightmare Economy
SUSIE GHARIB: In tonight's money file, instead of worrying about the market, now could be the time to build your dream portfolio. Here's Chuck Jaffe, senior columnist at "Marketwatch."
CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: There was a moment, shortly before the Fed made its big rate cut and the stock market sighed with relief, when it looked like investors were about to reach the point of maximum pessimism. That's beyond gloom and doom. It's past the 16-year low on the University of Michigan/Reuters consumer confidence index or the one-year of dark, pessimistic thoughts revealed by "Investors Business Daily's" economic optimism index.
Maximum pessimism is an idea advanced by legendary investor Sir John Templeton, who said it was the point where all of the buyers have left the market and there are only sellers left. It's a theoretical idea, of course, because that is precisely when Sir John would swoop in for bargains. If the market has you down, you could be late to the pity party, recognizing trouble only after it had started, in which case any recovery - - and many observers see a rebound coming -- will be halfway over before you feel good about the market again.
That's a great reason to hang on. But hanging on doesn't mean sitting idly by. In conditions this bad, try to make a list of securities that would be in your ideal portfolio. Between stocks that have been beaten up and some great mutual funds that have reopened to new investors, this is actually a time when you might be able to build that ideal portfolio on the cheap. Building that portfolio, on sale now, will help you live out the adage that investors make money during bear markets. They just don't realize it until later. I'm Chuck Jaffe.
Paul Kangas' Stocks in the News
PAUL KANGAS: Weak reports on new home sales and durable goods orders raised recession fears and put Wall Street on the defensive this morning. After 90 minutes of trading, the Dow fell 145 points and the NASDAQ off 29 points. Several rally attempts were turned back by the sharp surge in oil futures, along with an analyst downgrade on earnings expectations for several major banks. Some late buying cut losses a bit, but the market still ended broadly lower. The Dow Industrial Average closed off 109.74 points at 12,422.86. The NASDAQ Composite lost 16.69 ending at 2324.36. Standard & Poor's 500 Index fell 11.86 points to close at 1341.13. Over in the bond market, the 10-year note gained 12/32 to par and 9/32, lowering the yield at 3.47 percent.
Once again topping the big board active list, Citigroup (C) today on 32.1 million shares, the stock down $1.37. An Oppenheimer analyst widen the company's first quarter loss estimate from minus $0.21 to a loss of $1.21.
Ford Motor (F) down $0.12. You just heard the story there.
GE (GE) a $0.14 loss there.
And Motorola (MOT) up $0.26 as I just mentioned.
SprintNextel (S) was a dime gainer and the story is, the company and Clearwire have gained today on reports that both are in talks with Comcast and Time Warner to build a $3 billion nationwide wireless company.
Moving along in the active list, JPMorgan Chase (JPM) down $1.95. Oppenheimer cut its first quarter earnings estimates.
And the same with Bank of America (BAC) which lost $1.13.
Wells Fargo (WFC) fell $1.25 on the weak banking group.
Pfizer (PFE) a $0.09 loss.
And Co Vale do Rio Doce (RIO) down or I should say up $1.67. The company's deal to buy Estrada apparently has fallen through. The stock reacted positively.
Clear Channel (CCU) losing $5.64. After the close yesterday as we reported, the "Wall Street Journal" said Bain Capital's $39.20 buyout bid to take the company private may be in jeopardy because of funding problems. Now late today, the company and a private equity (INAUDIBLE) buyers Bain Capital and Thomas Lee are suing the syndicate of banks involved to force funding of Clear Channel's $19 billion buyout or pay $26 billion in damages and the story goes on and on.
AMR (AMR), parent of American Airlines, down $1.02. The company voluntarily canceled about 300 flights to check aircraft wiring and of course, the airline stocks today as a group were weak because of the spike up in oil prices.
Let's have a look at some of the other major airlines. Continental (CAL), Delta (DAL) and (UAL) (UAUA) all major losses.
US Airways (LCC) down just $0.59, but pretty big percentage.
Alpha Natural Resources (ANR) up $3.02. Goldman Sachs upgraded the cold (ph) sector from "cautious" to "neutral" and issued a "buy" recommendation on Alpha, as it did on Consolidated Energy, which rose $2.33.
On the downside, Ameron Intl (AMN), which is involved with chemical fiberglass and steel products, first quarter earnings, $1.07, well above $0.94 last year, but $0.23 below the Wall Street consensus. Down went the stock.
Jabil Circuit (JBL) losing $2.09. Second quarter loss out today of $0.12 a share, versus earnings of $0.07 last year. The company cited restructuring charges. JPMorgan downgraded the stock from "over weight" to "under weight."
And then Cooper Tire & Rubber (CTB) off $1.76. Keybanc downgraded it from an "aggressive buy" to just a "hold" rating.
And the Pep Boys (PBY) off $1.28. Fourth quarter loss of $0.36 versus earnings of $0.15 last year.
NASDAQ's most active, Apple (AAPL) up $4.08.
Research in Motion (RIMM) gaining $2.20.
Google (GOOG) did well, up $7.41.
Cisco Systems (CSCO) $0.97 drop.
Baidu.com (BIDU) was up $5.89.
Oracle (ORCL) down $0.14. Just after the close, third quarter earnings for Oracle, $0.30, up from $0.20 last year, but just in line with estimates and revenues were below estimates. In after hours trading, I saw the stock down just about $19 a share.
Microsoft (MSFT) fell $0.58.
Intel (INTC) $0.41 drop there.
First Solar (FSLR) $0.46 gain.
And Rambus (RMBS) up $7.25, tenth in NASDAQ volume. The memory chip developer won a closely watched court battle with other memory chip makers regarding intellectual property rights and it could result in royalties of over $11 billion.
