NBR Transcripts-April 15, 2008
Tuesday, April 15, 2008The Financial Chips Are Stacked in Intel's Favor
SUZANNE PRATT: Shares of Intel rose as much as 8 percent in after-hours trading after the chipmaker posted better-than- expected revenues. Intel's revenues jumped 9 percent to $9.7 billion, beating analyst forecasts. Intel matched Wall Street's profit target of $0.25 a share, after warning last month that a glut in flash-memory supplies could hurt earnings for the period. The company also issued an upbeat forecast. It now sees second-quarter revenues of as much as $9.6 billion, well above the $9.25 billion the Street is expecting.
Chief Financial Officer Stacy Smith says Intel's recent chip launches should continue to help sales.
STACY SMITH, CFO, INTEL: And by being able to bring those new products to the marketplace on time last year, and then take advantage of the ramping new process technology, that really gives us competitive advantage in the marketplace. And then looking forward, what we launched in the first quarter was the Atom processor, which is our low-cost, low-power processor. And that's part of what is driving the strength we see over the course of the rest of 2008.
PRATT: Smith also said Intel was raising its gross profit margin forecast, and says its improved outlook is aided by heavy exposure to markets outside the U.S.
The Delta-Northwest Merger Lands Makes Its First Successful Stop
PAUL KANGAS: They have made a deal. Delta, the nation's third largest airline, is buying the fifth largest, Northwest, in an all-stock transaction valued at $3.6 billion. The combined company will be called Delta, will be based in Atlanta, and would be the world's largest airline. But, as Scott Gurvey reports, it may have a bumpy ride getting to that point.
SCOTT GURVEY, NBR CORRESPONDENT: The combination of Delta and Northwest has been in the works for months, even years, and it still faces turbulence as the two strive to create the world's largest airline. At a news conference today, executives admitted the 77 percent increase in the cost of jet fuel over the last year added urgency to the deal. But Delta CEO Richard Anderson said globalization has made scale and scope the paramount concerns.
RICHARD ANDERSON, CEO, DELTA: As open skies progress around the world, we as a country have got to have a strong, stable airline industry, and this transaction creates that flag carrier for the United States around the world. So, strategically, particularly given our alliance connections, it makes a lot of sense.
GURVEY: CEO Douglas Steenland of Northwest agreed, noting his airline had to drop its Tokyo-to-New York route because it lacked the domestic service to feed into it.
DOUGLAS STEENLAND, CEO, NORTHWEST AIRLINES: Now, because of the strong presence that Delta has at JFK, we're going to be able to relaunch that service and get back into the non-stop JFK-Tokyo market, which is really going to be a plus for travelers, provide additional competition, and it's a good example where having larger scale domestically allows us to better use that very valuable resource that we have.
GURVEY: The companies took the unusual step of trying to get their pilots' OK before announcing the deal. Delta's said yes; Northwest's did not. Today, Northwest's pilots promised to aggressively oppose the merger. Delta VP Mike Campbell says talks with the unions will continue.
MIKE CAMPBELL, EXECUTIVE VP, DELTA: Now that we've announced, we still have eight or nine months during the regulatory process to bring them on board. And if we succeed in that, it will be revolutionary, and it will be a game changer.
GURVEY: The main issue concerns the combination of pilot seniority lists. The company can impose a procedure, but it will make for a difficult work environment. Regulators promise a tough review. Congressman Jim Oberstar, chairman of the House Committee on Transportation and Infrastructure, promised hearings, and said he thinks the deal is bad for consumers.
REP. JAMES OBERSTAR (D-MN), CHAIRMAN, TRANSPORTATION & INFRASTRUCTURE: The proposal offered yesterday by Delta and Northwest to merge will be probably the worst development in aviation history in the aftermath of deregulation in 1978.
GURVEY: But analyst Jim Corridore of Standard & Poor's says he still thinks the deal will be approved.
JIM CORRIDORE, S&P: There's not a lot of overlap between Delta and Northwest, so we're not looking at cutting out markets, cutting out flights, cutting out employees. Delta and Northwest are committed to maintaining their hubs, maintaining their routes. So I think that that will allow it to go through.
GURVEY: Analysts say today's deal makes others more likely. Most consider a combination of United and Continental may be the next one announced. Continental's chairman says his company is considering all possibilities. Scott Gurvey, Nightly Business Report, New York.
The Sub-Prime Mortgage Mess Threatens Student Loans
PAUL KANGAS: The problems in the subprime mortgage market have spilled over into the student loan business. Without access to credit, lenders are pulling out of that market. Now, lawmakers are scrambling to address the issue. And as Stephanie Dhue reports, colleges and universities around the nation are worried about the impact on students.
STEPHANIE DHUE, NBR CORRESPONDENT: Trinity University in Washington, D.C., is preparing to welcome its largest freshman class in years. The majority of students here are low-income and rely heavily on federal student loans to pay tuition and living expenses. Trinity President Patricia McGuire told the Senate Banking Committee those students are at great risk in the credit crunch.
PATRICIA MCGUIRE, PRESIDENT, TRINITY UNIVERSITY: If there's any interruption of their ability to borrow, you know, the way they are borrowing right now, it could be devastating.
DHUE: The market for securities backed by student loans has dried up, and cuts in the federally guaranteed loan program make those loans unprofitable for lenders. Fifty-seven lenders have dropped out of the program, and 19 lenders have suspended private student loans. This has taken about $8 billion out of the $85 billion student loan market.
Sallie Mae is the largest student lender. CFO John Remondi says, without changes, loan demand will outstrip supply next school year.
JOHN REMONDI, CFO, SALLIE MAE: We can only lend to the extent of what we can borrow ourselves in the capital markets, and the situation as it's presenting itself today is one where our access to funding is severely limited.
DHUE: Political pressure is increasing to address the issue. Both Hillary Clinton and Barack Obama support expanding direct government student lending. Today, John McCain said students should not be denied an education because of reckless lending practices.
SEN. JOHN MCCAIN (R), ARIZONA: So, today, I propose that the Department of Education work with the governors to make sure that each state's guarantee agency has the means and manpower to meet its obligation as a lender of last resort for student loans.
DHUE: This week, the House will vote on legislation that would have the Department of Education guarantee loans. Senator Chris Dodd says that will take too long. He's urging the Treasury and the Federal Reserve to step in now to head off a potential crisis.
SEN. CHRISTOPHER DODD (D), CONNECTICUT: If the applications are up, you take out $8 billion already from that market, you don't have to have a Ph.D. in mathematics to know the kind of problems we're facing.
DHUE: The next four weeks are crunch time for college financial aid offices, as students make their plans for the fall. Key lawmakers are urging students not to panic, saying they'll ensure loans are available. Stephanie Dhue, Nightly Business Report, Washington.
P&G CEO A.G. Lafley on Inspiration & Innovation
SUZANNE PRATT: In the eight years under A.G. Lafley's leadership, Procter & Gamble has made solid progress, and now, the chairman and CEO of the consumer products giant has written a book detailing how he did it. Lafley's book is called "The Game-Changer: How You Can Drive Revenue and Profit Growth With Innovation." Earlier today, I spoke with him about it, and the economy. I began by asking him whether it's harder to innovate during a recession.
A.G. LAFLEY, CHAIRMAN & CEO, PROCTER & GAMBLE: I think it's more essential to innovate through a recession, and certainly what we're trying to do at P&G is to continue to bring sustaining and even disruptive new brands and products for our consumers, to make their lives better, to offer them a little more value.
PRATT: I see. I would like to get your observations about the state of the economy right now and the health of the U.S. consumer. Let me start off by asking you about today we got some additional news that inflation is a very serious problem in the economy. How is inflation and how are rise in commodity prices affecting P&G's business?
LAFLEY: Well, they are affecting our business. They have been affecting our business for now the fourth year in a row. And we believe they will continue to affect our business. We are trying to do three things in the face of rising energy and commodity costs. One, take out costs whenever and wherever we can, costs that the consumer doesn't want to pay for. Two, price where we have to and where we must. We try to keep our pricing fairly modest, 5 percent or so at a time, and appropriately frequent depending on the cost of the inputs. And thirdly, we keep trying to bring the consumer better products that sort of mix our lines up so they offer better value and they allow us to price a little bit more.
PRATT: What do you think about the health of the U.S. consumer now? Are you seeing evidence that the consumer is pulling back significantly in your business?
LAFLEY: I think there is no doubt that the U.S. consumer is under pressure. In our business, the consumer staples business, as we said, and as we have said, the growth is slowing, but our categories are still growing, albeit modestly. If you look at what consumers are really doing, they're reducing the number of shopping trips they make in a week or a month. They're trying to stay closer to home because of the price of gasoline. They're eating out a bit less. They will probably be taking fewer and more modest vacations. But when you turn to everyday household care products or personal care products -- I mean, we are brushing our teeth the same every day; we are bathing the same; we are washing our hair. So most of the basic products that we sell are still being purchased on a weekly basis and consumed on a daily basis.
PRATT: A few months ago, you announced some job cuts to help deal with rising costs. Would you anticipate additional job cuts, or other measures, similar measures in terms of cost cutting, to help deal with rising commodity prices?
LAFLEY: You know, actually, our employment and our hiring should be up this year in the U.S. We are always selectively reducing costs, including the size of our organizations and businesses that are under more pressure, or in businesses where we're trying to transform the business model. But I would say net this year, despite the slowdown, we'll be a net hirer.
PRATT: And what about evidence in markets outside the U.S.? What are you seeing in those business areas? Are you seeing evidence that the U.S. recession, if in fact we are in a recession, is affecting global markets as well?
LAFLEY: Not yet. In fact, our engine of growth for most of this decade has been emerging markets. They now represent about 28 percent of our total business. In fact, 60 percent of our business is outside the U.S. today. And for us at least, developing markets continue to grow at a healthy rate, and we continue to generate sales and profits from those markets at double digits or better.
PRATT: Is that where you expect to see the best opportunities for growth looking ahead?
LAFLEY: Yes, it is.
PRATT: OK. Let's leave it there. Thank you for joining us.
LAFLEY: Thank you very much.
PRATT: My guest A.G. Lafley, CEO and chairman of Procter & Gamble.
"Of Mutual Interest," -Tracking Bear Market Funds
SUZANNE PRATT: So far this year, bear market funds are the best performing mutual fund category -- up over 9 percent. It may be tempting to chase those returns, but as Erika Miller explains in tonight's "Of Mutual Interest," the funds aren't recommended for most investors.
ERIKA MILLER, NBR CORRESPONDENT: With all the worries about recession, the credit crunch, and the housing market, it's no surprise that investors are nervous, and many are buying bear market funds. Those funds are dominating the list of top performing mutual funds so far this year.
They have different strategies, but all seek to do well when the stock market is down.
The vast majority are passively managed, designed to move in the opposite direction of a particular market benchmark. For example, if the S&P 500 falls 1 percent, an inverse S&P 500 fund should gain 1 percent.
Some funds also use financial leverage to magnify both gains and losses. Steve Sachs is director of trading at Rydex Investments, which introduced the first inverse index mutual fund 14 years ago. He says, nowadays, most of them use complex investment tools.
STEVE SACHS, DIRECTOR OF TRADING, RYDEX: The portfolio is designed and uses instruments that effectively increase in value when the market declines. And those instruments are generally futures contracts, derivatives contracts, such as swaps or options, and there is some shorting that takes place.
MILLER: David Tice runs one of the few actively managed bear market funds, the Prudent Bear. Unlike most of the others, he also tries to eke out gains in bull markets. Over the past five years, the Prudent Bear fund has returned an average of 1.5 percent a year. That compares to almost 12 percent for the S&P 500.
Morningstar analyst David Kathman says Prudent Bear uses an unusual investment strategy.
DAVID KATHMAN, MUTUAL FUND ANALYST, MORNINGSTAR: He shorts certain indexes like the S&P 500, but he also shorts individual stocks that he thinks are particularly overvalued. But he also has long positions in things like gold stocks, and that has actually helped him lately, when gold has been rising.
MILLER: Experts say bear funds are often used by sophisticated investors, who are trying to time the market or hedge risk.
SACHS: They think that there's a decline coming in U.S. markets or they've got gains they just want to protect. They don't want to sell those particular investments for whatever reason -- typically, it's tax reasons - - so they can purchase an inverse fund to hedge against that.
MILLER: But mutual fund analysts advise average investors to be extremely careful about buying these funds.
KATHMAN: Use it as a hedge, use it in the right way, like they're intended to be used, and not trying -- as a market call, trying to time the market, because you're certain to get burned.
MILLER: Bear market funds don't just hedge against U.S. stocks these days. You can also find funds that inversely track foreign markets, bonds, oil, currencies, even precious metals. Erika Miller, Nightly Business Report, New York.
"Kevin McCormally's Tax Tips"-Deadline Day
SUZANNE PRATT: The day that many Americans dread is finally here -- your 2007 federal tax return or an extension form needs to be postmarked by midnight tonight. As we wrap up this year's tax tips, our tax guru, Kevin McCormally of Kiplinger's Personal Finance, says now's the time to start thinking about next year.
KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: This is the day Lincoln died, the day the Titanic sank, the day your tax return is due. But there's good news for those of you burning the midnight oil to finish the forms -- there's a very good chance you don't have to kill yourself to get to the post office by midnight.
Remember, if you have a refund coming, which 75 percent of all taxpayers do, there is no penalty for filing late. So if you've got money coming back, it's fine to drop your return in the mail tomorrow.
Now, another reminder -- today is not the end of the tax season. It's closer to the beginning. Between now and the end of the year, you'll have many opportunities to cut your tax bill for 2008. Are you maxing out your 401(k)? Have you considered whether using a ROTH 401(k) offers you a better deal? And when you rebalance your portfolio this year, be tax- smart, harvesting losses to hold down the tax on profits.
Are you planning a significant contribution to charity this year? Remember that giving appreciated securities can be really generous to you.
Now, let me close by going back to the beginning, to those 75 percent of taxpayers who get refunds. This year, the average refund hit another record -- over $2,300 -- and that's not a good thing. On average, taxpayers let the government take nearly $200 a month more out of our paychecks than the IRS deserves. Sure we love our springtime refunds, but doesn't it make more sense to get your money when you earn it? And you can do just that by filing a new W-4 with your employer. If you claim more withholding allowances on that form, you'll get an instant boost in take- home pay. I like to call it giving yourself a raise, or starting to collect next year's refund next pay day. I'm Kevin McCormally.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street had to contend with a larger-than-expected 1.1 percent jump in March producer prices early today. But stocks managed gains nevertheless early on, with the help of solid earnings from Johnson & Johnson and banks like Regions Financial and M&T. The Dow rose 60 points at the outset of trading, with the NASDAQ index up 7 points.
That surge in oil prices turned stocks lower at midday, but then a report detailing a rebound in New York regional manufacturing activity helped the market rebound itself to a positive close. The Dow Industrial Average ended up 60.41 points higher, at 12,362.47. The NASDAQ composite gained 10.22, ending at 2,286.04. Standard & Poor's 500 index rose 6.11, ending at 1,334.43.
In the bond market, the 10-year note fell 23/32 to 99 5/32, putting the yield at 3.60 percent.
Most active New York Exchange issue -- General Electric (GE), moving up $0.23 on 20.5 million shares. Then came Citigroup (C), with a $0.29 gain, followed by Ford Motor (F), up $0.10.
Bank of America (BAC) held steady. And then Wachovia (WB) down $0.13, was fifth in volume.
Pfizer (PFE) a $0.15 gainer. Freddie Mac (FRE), $0.85 advance there. The government's housing oversight agency said Freddie Mac and Fannie Mae (FNM) still need supervision, despite their efforts to build liquidity in the mortgage market. Fannie Mae stock, incidentally, moved up $0.61 to $25.95.
JP Morgan (JPM), $0.62 gain. Delta Air Line (DAL) losing $1.32. You heard the details. Northwest (NWA) fell $0.94. Shareholders there get one and a quarter shares of Delta, and today that would have been worth $11.45 to Northwest holders.
EMC Corp (EMC), a $0.47 drop there.
Moving along to other movers. Johnson & Johnson (JNJ), not much of a mover, only $0.09 loss, but traded as high as $66.02. The company said a weak dollar helped its first-quarter earnings go to $1.26, $0.06 above the Street estimate, and well up from $0.88 a year ago. Not much movement in the stock.
Washington Mutual (WM), $0.31 gain after the close. Company in with a first-quarter loss of $1.40. The Street was expecting a loss of only $1.05, and that's versus $0.86 in earnings last year. In after-hours trading, the stock didn't do much. Maybe up $0.02.
M&T Bank (MTB) had a good day, up $5.11. First-quarter earnings jumped to $1.94 from only what the Street thought, which was $1.55. But $0.26 of those earnings due to Visa's strong March initial public offering.
Regions Financial (RF) up $1.26. Higher earnings there first quarter, $0.48 up from $0.45 last year. And Standard & Poor's upgraded the stock from a sell to a hold.
RehabCare Group (RHB) up $2.24. The Stifel Nicholas brokerage upgraded it from a hold to a buy rating.
Avnet (AVT) down $3.95. Company sees third-quarter results excluding restructuring charges at $0.74 to $0.76, well down from the Street estimate of $0.87 a share. The company says all of this is due to some big customer orders which have been delayed. And also, Raymond James downgraded the stock from strong buy to outperform.
Norhtrop Grumman (NOC) down $5.27. The company will take a first- quarter pre-tax charge of $0.61 to $0.69 a share due to delays in one of its ship building programs.
Apple (AAPL) topped the active list on NASDAQ, with a $0.60 gain.
First Solar (FSLR) up $13.22. Broadpoint brokerage boosted its price target from $270 to $315 a share.
Google (GOOG) down $4.82.
Research in Motion (RIMM) an $0.18 gain.
Intel (INTC) up $0.22 in after-hours on the better-than-expected revenues. It traded (ph) as high at $22.66 and made a nice move.
Baidu.com (BIDU), $0.78 loss.
Cisco (CSCO), $0.20 drop.
Microsoft (MSFT), $0.19 gain.
Crocs (CROX), the footwear company, down $7.68. It cut its first- quarter guidance from $0.46 to as much as $0.05 per share loss.
And then Oracle (ORCL) was up $0.32.
Charles Schwab (SCHW) gained $1.64. First-quarter earnings, $0.26 up from $0.19 a year ago, in line with estimates, but the company said it opened 113,000 new accounts in the first quarter. Pretty good pace there.
And those are the stocks in the news tonight.
