NBR Complete Transcripts-April 14, 2008
Monday, April 14, 2008Wachovia & Bear Stearns Deliver 1st Quarter Disappointment
SUSIE GHARIB: Two big banks kicked off the week with earnings that don't bode well for Wall Street. After the bell today, Bear Stearns released its delayed first quarter earnings. Bear's net income for the quarter fell to $0.86 a share. That's a penny shy of analysts' estimates and down 79 percent from the year ago $3.82 a share. The results predate Bear's fire sale purchase by JPMorgan Chase.
Separately, Wachovia startled Wall Street before the bell with an unexpected quarterly loss and a $7 billion capital infusion. The banking giant was forced to raise cash to offset huge losses tied to the nation's housing slump. Wachovia also announced it was 500 corporate and investment banking jobs and slashing its quarterly dividend. As Suzanne Pratt reports, analysts expect a nasty week for financial firms.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: A bad quarter for big U.S. bank stocks should not sneak up on anyone this week. After Wachovia's surprising first quarter loss today and Washington Mutual's pre- announcement last week of a write down and quarterly loss, analysts widely expect to see additional ugly write downs due to credit market turmoil. According to Thomson Financial, analysts are currently forecasting a 64 percent drop in first quarter profit growth for the financial sector. On January 1, only an 11 percent decline was anticipated. S&P strategist Alec Young says Wachovia's news and GE's earnings shortfall Friday, which the company blamed on the financial market crisis, have created new nervousness among equity investors.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: When you have companies that really were expected to do OK coming out with some pretty major misses, it just raises the anxiety level as to whether the problems are going to be more widespread than people had been thinking when it comes to first quarter earnings.
PRATT: In addition to Wachovia's loss and Wamu's red flag, Merrill Lynch and Citigroup are also expected to report losses this week. JPMorgan and Wells Fargo are likely to buck that trend and post gains. Experts say the market is most nervous about Citi and Merrill. Analysts are forecasting a double-digit billion-dollar write down for Citi, and single- digit billion-dollar write down for Merrill. Wall Street is mostly hoping for a sign, any type of indication the worst is over for financial firms, but Oppenheimer funds portfolio manager Michael Levine does not think the sector is out of the woods yet. He's looking for evidence that companies are staying ahead of potential problems
MICHAEL LEVINE, PORTFOLIO MGR., OPPENHEIMER FUNDS: We'd like to see them have realistic assumptions about home prices, about the deterioration in the other parts of their portfolio. If they need to raise capital, the sooner they do it, the better and the quicker. Wachovia raised $7 billion this morning. That's certainly a large amount.
PRATT: Experts say some financial firms may also slash their dividends when they report results. While not all companies need the cash, this could be a good opportunity to save some money. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Richard Bove, Banking Analyst at Punk, Ziegel and Company
SUSIE GHARIB: Back now to our top story, those disappointing quarterly numbers from Bear Stearns and Wachovia and a bleak outlook for the financial sector earnings. Despite that, our guest tonight says this is a good time to buy some bank stocks. Joining us now, Richard Bove, veteran banking analyst at Punk, Ziegel and Company. Hi, Dick. RICHARD BOVE, BANKING ANALYST, PUNK, ZIEGEL & CO.: Hi, Susie.
GHARIB: So why is it a good time to buy financial stocks?
BOVE: Well, I think that this is probably going to be the worst quarter of this particular cycle. I think that with the huge write-offs that we're taking in the fourth quarter and again sizable write-offs that will be taken in this quarter, that if you take a look at the second quarter, it will be better than the first quarter. The third will be better than the second and the fourth will be better than the third and so on up. I think for the next couple of years on a quarterly sequential basis, you'll see earnings stronger and stronger and stronger in this industry.
GHARIB: But not long ago many analysts, yourself included, were very down on financial stocks. I mean what has really changed?
BOVE: Well, I think what has changed is the recognition of what the potential losses could be. Because now we have had these huge write-offs, none of which are actually reducing the cash flows of these companies. So if you are taking the write-offs, if the stocks have gone down substantially, but the cash flows of the companies are continuing to rise, that creates real value which is not being recognized in the prices of these issues.
GHARIB: Now you're recommending Citigroup and also Bank of America. And we're expecting, you heard our report, we're expecting a loss from Citigroup on Friday and steep decline in earnings from Bank of America, so give us your analysis about why you are buying these stocks.
BOVE: The case of Citigroup, I doubt that anybody would be, you know, shocked by anything around a $12 to 15 billion write-off because for the last two to three months, people have been projecting that. So in essence one would think that that is in the stock. The company still does have the best franchise of any bank in the world. There is no bank in the world that is in 102 countries. There is no bank in the world that has a full array of products as Citigroup has. So it has everything everywhere. In addition to which it has something on the order of $5 billion a year, sorry, a quarter in free cash flow which is $20 billion a year. And I think that puts it in the top six in the world in terms of free cash flow. The company's management is doing a great job in my view in turning this thing around. So I think it's a cheap stock.
GHARIB: And Bank of America?
BOVE: In the case of Bank of America, it is America's bank. More than 10 percent of the deposits of this country are in that bank. And that bank is the largest lender in the small business market. It is the largest lender in the middle market. It is the largest credit card company. If Bank of America cannot do well, the United States economy cannot do well. Because basically it's a mirror image of what's going on in America. I don't think that we're looking at a recession which is so deep and so long that companies like Bank of America will not be able to continue to grow their earnings.
GHARIB: I want to run through a couple of other names. Your view on JPMorgan and Merrill.
BOVE: JPMorgan and Merrill are both heavily into the brokerage industry. JPMorgan because of its acquisition of Bear Stearns on top of what it already had and Merrill as a result of it being its core business. I don't like the brokerage industry. I think the brokerage industry has seen its best year and it will take two to three years to get back to where it was in 2006 or 7.
GHARIB: And how about companies like Wachovia and Washington Mutual?
BOVE: Wachovia and Washington Mutual both have a high housing input in terms of their operations. So in the case of Washington Mutual, I don't expect them to show a profit in any quarter this year. I don't even expect them to show a profit in the first half of 2009. So it's obviously a very high-risk investment and I would stay away from it. In the case of Wachovia, it made the mistake of buying Golden West and it's suffering as a result of that acquisition. And I think that is the reason that they are under such pressure at the present time. But fundamentally it is a good, sound bank and I would say I would be more positively oriented than negative on that stock.
GHARIB: Quick question, quick answer, what if there is a recession, a long recession and consumer spending really slows down? All bets off on investing in bank stocks?
BOVE: Yeah, I mean if there is a long recession and it is very deep, then obviously loan losses are going to be higher than I suspect they'll be and then I'm going to be wrong. But the fact is that I think there are a lot of factors that would suggest that the economy may not be as weak as people are currently suggesting.
GHARIB: All right. Dick, thank you so much. You always have good information for us. We really appreciate it.
BOVE: Thank you, Susie.
GHARIB: My guest tonight, Richard Bove, veteran banking analyst Punk Ziegel and Company.
GHARIB: A follow-up note to my interview with Dick Bove just a few moments ago. He does not own or have a financial relationship with any of the bank stocks that he recommended.
Delta & Northwest May Be Filing A Merger Flight Plan
JEFF YASTINE: President Bush got an update on the status of the U.S. airline industry's plane safety inspections. At the president's cabinet meeting today, Transportation Secretary Mary Peters said she will make sure flaws in the maintenance reporting system are fixed. American Airlines ran a normal schedule yesterday after canceling more than 3,000 flights last week to re-inspect and re-secure wiring.
SUSIE GHARIB: Passengers, pilots and investors are eagerly awaiting news of a merger between Delta and Northwest Airlines. The two companies have been in intense talks about a tie-up and an announcement could come as early as this week. With fuel costs rising, the industry is looking to consolidate. But as Darren Gersh reports, it's not clear a deal will fly with politicians or passengers.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In theory, airline mergers take seats out of the sky, helping airlines cut costs and raise ticket prices. In reality, politicians, powerful pilots unions and regulators aren't eager to see that happen. Unions at Delta and Northwest are trading elbows over seniority that determines flight schedules and pilot pay. Morningstar's senior airline analyst Brian Nelson, says Washington will have a say, too.
BRIAN NELSON, SR. AIRLINE ANALYST, MORNINGSTAR: This industry is very much politicized. I think that Congress is definitely going to be up in arms in terms of making sure that service to small communities is still intact and this could be -- present significant opposition to any large deal.
GERSH: A tie-up of Delta and Northwest would get an extra hard look because it would likely lead to a wave of other airline deals. Northwest now holds special golden shares, giving it the right to veto any merger done by rival Continental. A Northwest Delta deal would end that arrangement.
NELSON: A Northwest-Delta deal could then lead to a United- Continental accord. And basically, instead of having six legacy carriers, we would then be down to four across a domestic landscape.
GERSH: Analysts say the real goal here is not domestic. Long-haul routes to Asia are still closely regulated, which means business class travelers are paying thousands of dollars to do deals in the Far East. Delta, which offers many flights to Europe, is particularly keen to get access to Northwest's routes to China and Japan. Analyst Clifford Winston says all U.S. airlines are trying to find ways to add more flights over the Pacific.
CLIFFORD WINSTON, AIRLINE ANALYST, BROOKINGS INSTITUTION: They can be very lucrative and you don't have to worry about competition driving those fares down, as compared within the domestic U.S., where you do have competition from low-cost carriers.
GERSH: But most airline analysts agree mergers alone won't change the immediate competitive realities of the airline business. Jet fuel prices are up more than 50 percent this year and a sagging economy means passenger revenues are likely to be down for a while. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Kevin McCormally's Tax Tips" - Stepping Up Tax Basis on Inheritance
SUSIE GHARIB: Well, just one day to go until the Federal tax filing deadline and many Americans are still scrambling to get their returns finished. Our "tax tips" are here to help with a last-minute tip that could save you money. Tonight, Kevin McCormally, editorial director at "Kiplinger's Personal Finance," looks at a $52 billion tax saver.
KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tonight, I want to talk about a tax break that the will save taxpayers $52 billion on 2007 tax returns. It's a break you'll hear a lot about next year, when Congress gets serious about reforming the estate tax because some lawmakers want to eliminate it in the future. I'm talking about the provision in the law that allows people who inherit assets -- stocks, bonds, real estate, -- to step up the tax basis to the asset's value on the day their benefactor died.
Here's a simple example. Let's say your Uncle Joe invested $10,000 in a stock years ago and that the shares were worth $100,000 when he died and left them to you. Your tax basis is $100,000 and you owe tax only if you sell for more than that amount. This stepped-up basis rule wipes out the tax on the $90,000 of appreciation that built up while Uncle Joe was alive. When assets are jointly owned, the way husbands and wives often own investments, at least half the basis is stepped up on the death of the first owner. So if Uncle Joe and Aunt Mary owned the stock jointly, Aunt Mary's basis would jump to $55,000 when Uncle Joe died, her half of the original $10,000 basis plus $50,000, which is the value of Joe's half of the investment on his death. In community property states, the full basis can be stepped up.
Now, the step-up doesn't apply to U.S. savings bonds or retirement accounts, like IRAs and 401(k)s, but if, during 2007, you sold assets that you had inherited, be sure you get your share of this multibillion-dollar break. And if you've already filed without stepping up your basis, file an amended return using form 1040x to take advantage of the step up retroactively. I'm Kevin McCormally.
Editor's Note: The calculation of Mary's tax basis in Kevin McCormally's second example has been corrected. It was incorrectly reported in the originally broadcast Tax Tip.
Paul Kangas' Stocks in the News
JEFF YASTINE: Well, after Friday's washout and a parade of financial earnings expected this week, few investors wanted to be the first back in the pool. The Dow spent the session bouncing in and out of negative territory, from down 50 in the morning to up 40 by midday. But as oil prices ticked to that new high, buyers turned negative and the indexes finished near their lows of the day. So the Dow dropped 23.36 to end at 12,302.06. The NASDAQ Composite falling 14.42 to 2275.82. And the S&P 500 falling 4.51 to 1328.32. In the bond market, the 10-year note falling 11/32 to 99 27/32 and the yield at 3.52 percent.
And financials leading our list today, Wachovia (WB) dropping $2.26. As you heard, larger than expected losses forcing the banking giant's hand to cut its dividend and raise much-needed cash. General Electric (GE) losing $0.30 after Friday's big drop.
Citigroup (C) losing $0.85. Analysts expecting Citi to post a loss of $0.95 a share when it reports first (ph) quarter results on Friday and more write offs too.
Bank of America (BAC) down $1.36, down in sympathy with Wachovia and those weak financials and there's JPMorgan Chase (JPM) losing $1.03.
Pfizer (PFE) gaining $0.11.
But shares of Petrobras (PBR) gaining nearly $10, over $9. Brazil's national petroleum minister commenting on reports of a huge new oil field discovery upwards of 33 billion barrels in a deep offshore area from Sao Paolo. The company isn't commenting yet on the discovery, but one industry magazine in December said that field if proven, would be the world's third largest.
And that news, coupled with supply disruptions in the U.S. and Nigeria fueling a broad rally in oil stocks. There's Apache (APA), Hess (HES) and Repsol YPF (REP). Both are seen benefiting from their interest in that oil field discovery in Brazil from Petrobras and Murphy Oil (MUR), Transocean (RIG) all seeing decent gains as well.
Ford Motor Co (F) edged up a fraction.
Wells Fargo (WFC) slipping $0.77.
Circuit City (CC) gaining $1.07 on news about retailer turning heads and some analysts scratching their heads over its proposed $1.3 billion buyout by the struggling video chain Blockbuster.
IBM (IBM) climbing $1.28. Goldman Sachs voicing confidence in big blue's ability to deliver double digit earnings growth in the first quarter. That despite weakness in tech spending.
And then Trina Solar Ltd (TSL) jumping almost $6. The solar products maker will not build a $1 billion poly silicon factory. The company says it has plenty of supply to meet its (INAUDIBLE).
Agrium (AGU) perked up nearly $5. CIBC boosting its price target to $110 a share. The fertilizer producer last week announcing expansion efforts in China.
Then Capitalsource (CSE) rising $1.44. The company will buy 22 branches from Fremont General which is under pressure from bank regulators to boost capital reserves and sell of some assets.
Carpenter Technology (CRS) sliding over $9. That's a disappointing third quarter forecast which the specialty (INAUDIBLE) producer seeing third quarter earnings peaking at $1.05 a share, well below forecasts.
Perini (PCR) ending off nearly $4. BMO Capital downgrading the construction firm. Some concerns about earnings forecasts by the company which may be too ambitious.
On the NASDAQ, Apple (AAPL) rising $0.64.
But Google (GOOG) dropping nearly $6. Some experts think Yahoo!'s idea of outsourcing much of its search business to Google will be shot down by antitrust lawyers of the Justice Department.
Research in Motion (RIMM) off $0.38.
Microsoft (MSFT) down for the day.
Baidu.com (BIDU) up by nearly $5. They report results on April 24th.
Intel (INTC) losing $0.55.
First Solar (FSLR) up nearly $6.
Millennium Pharmaceuticals (MLNM) gaining a fraction.
Cisco Systems (CSCO) down by nearly the same amount.
Intuitive Surgical (ISRG) down by nearly $9, but no news.
Crocs (CROX) ending off $0.16 but tumbled more than $5 after hours. The footwear maker drastically cutting its first quarter guidance, warning it may post a loss to cover costs of shutting down a Canadian plant.
Then Nutrisystem (NTRI) rising $1.31. The stock goes into the S&P small cap 600 tomorrow at the close of trading and Tuesday, it replaces the bankrupt Frontier Airlines.
"Last Word"-Tax Toll
Those are our stocks in the news tonight.
SUSIE GHARIB: And finally tonight, tax season is increasingly becoming a little more taxing. According to the National Taxpayers Union, the average person spent 26.5 hours in record keeping, calculations and sending out forms for the 2006 tax year. That's the latest data available. The average out-of-pocket cost, including those taxpayers who did their own taxes, was $207. That's up from $185 three years ago. The Internal Revenue Service expects to process nearly 140 million individual returns this year. And Jeff, about 23.5 million of them will be filed today or tomorrow.
YASTINE: There is always room for one more procrastinator, right.
GHARIB: I finished my taxes, weeks ago.
YASTINE: Still working on mine.
