NBR Transcripts-April 21, 2008
Monday, April 21, 2008What's Pumping The Oil Price Gusher?
SUSIE GHARIB: The record run in energy prices continued today, with crude oil now closing in on $118. In New York trading, the May contract for light sweet crude gained $0.79 to close at $117.48 a barrel. Supply worries intensified across the globe today, as rebel attacks in Nigeria cut production and a potential strike at a Scottish refinery threatened oil output in the North Sea. Meanwhile, OPEC officials said the market had plenty of oil and the cartel would not increase production. Suzanne Pratt takes a closer look at what's been driving the rally in energy prices.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Crude oil prices are up more than 20 percent this year and 500 percent in the last decade. While most analysts would concur the recent surge has been remarkable, there's less agreement on what's behind it. Many oil experts will tell you speculation is largely driving the rise in prices, but what is it that's drawing investors to energy and other commodities? Oil trader Anthony Grisanti says speculators now include hedge funds, pension funds and ETFs and they're buying oil contracts because the alternatives have been disappointing.
ANTHONY GRISANTI, OIL TRADER, GRZ ENERGY: Over the last six to eight months, they haven't made any money in the equities markets, the stock market, the bond market, real estate trusts, things like that. So what's happening is they realize that this is another investment vehicle for them and they've been pouring money into the commodities.
PRATT: Others say those same investors are currently interested in oil because of the weak U.S. dollar. Lehman Brothers economist Ed Morse says oil is working as a hedge against further dollar depreciation because it's priced in dollars.
EDWARD MORSE, CHIEF OIL ECONOMIST, LEHMAN BROTHERS: While over a 20 or 30 year period, there is no good correlation between oil prices and the value of the dollar, between last summer and today, there's an almost perfect negative correlation.
PRATT: Still others blame the sky-high energy prices on the fundamentally tight oil market, one where global demand could outpace supply. Experts say supply isn't growing and any supply shock in an oil producing nation from a geopolitical event or from Mother Nature in the form of a hurricane and prices will rally higher. The demand picture is a bit fuzzier. While some evidence suggests China and India's demand for oil is expanding, together they only consume about half of what the U.S. does. Morningstar analyst Justin Perucki says much of this year's global demand story hinges on the U.S. economy.
JUSTIN PERUCKI, OIL ANALYST, MORNINGSTAR: The U.S. consumes about 25 percent of the world's oil and so what happened to demand growth here in the United States, especially in a situation, are we in a recession or are we not, is obviously a key driver to where oil prices head from here.
PRATT: Many experts believe oil prices will easily head higher before they head significantly lower. They say momentum in the market is simply too powerful to the upside. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Alex Patelis, Head of International Economics at Merrill Lynch
SUSIE GHARIB: More now on Britain's credit crunch and other issues facing the global economy. Joining us with his analysis, Alex Patelis, head of international economics at Merrill Lynch. Hi Alex. ALEX PATELIS, HEAD OF INTL. ECONOMICS, MERRILL LYNCH: Hello.
GHARIB: Tell us --
PATELIS: Nice to be here.
GHARIB: Great to have you tonight. Alex, tell us how significant is it that the Bank of England is buying back these mortgage-backed securities? When the Federal Reserve did this in the United States, it was unprecedented.
PATELIS: That's correct. It is unprecedented for the Bank of England as well. It is particularly noteworthy given that the central bank a couple of months ago when the crisis first started, the governor wrote a letter arguing that moral hazards considerations should feature at the top of their agenda. And here we are a couple of months later and they are issuing a very aggressive plan. Of course that all reflects the seriousness of the situation in the UK. We've seen the number of mortgages available to consumers shrink notably. And credit availability has been tightened to a very large degree.
GHARIB: We've seen a lot of the growth forecast, economic forecasts for 2008 being flat. What are your forecasts for growth in both Britain and the euro zone countries?
PATELIS: We are somewhat concerned on the outlook for the UK. The UK is in the group of countries that we label the Anglo Saxon countries that have commonalities of a lot of consumer debt, low savings rate, a lot of dependency on the housing market, that the U.S., the UK, maybe Australia, New Zealand and Canada. And that is where we see a lot of down side growth threat. Now outside those key countries, I would say that the outlook remains relatively positive. In continental Europe and the euro area itself, we are optimistic. We think that the markets themselves are not that important in the financing process. But in addition we don't have too much debt.
GHARIB: We are seeing that inflation is becoming the big concern across the board. Why is inflation becoming such a concern given that most of these countries are experiencing somewhat slowing of economic growth?
PATELIS: That a very good question. Outside of these countries we don't find much slowing, particularly in the emerging market world. We have the economy still growing at a rapid rate. And keep in mind that for many commodities, food and energy, the emerging market countries remain the incremental demand. They are the ones that are demanding additional resources and they are the ones driving up the prices and causing the inflation.
GHARIB: Well, with inflation rising, I guess that rules out any interest rate cuts from the Bank of England and from the European Union.
PATELIS: We think that the Bank of England itself will have to cut rates, not by much, but a couple more times this year. They have their downside risks from housing, their upside risks from inflation. It is a very difficult balance they have to strike. In continental Europe, the European central bank we expected to remain on hold for the foreseeable future. There we have inflation, at a 13 year high in Europe and of course we have no signs yet that the credit crisis is having an effect on money growth. Money growth in Europe is still running at about 11.5 percent year-over-year.
GHARIB: And so this will continue to put pressure on the U.S. dollar pushing the dollar even lower if there are not going to be any interest rate cuts.
PATELIS: Yes. That is correct. And we have seen the downward decline in the dollar. I would highlight that it is particularly risky and particularly risky position against the emerging market currencies. That's because many of the emerging market central banks have actually now raising interest rates or tightening policy. Last week alone we had the big three, China, India and Brazil all tighten policy one way or the other. And so we think that the dollar is most at risk against those emerging market currencies.
GHARIB: All right, but is the silver lining here that with the weak dollar at least for U.S. exports, United States will be able to export more and is there demand for those U.S. products?
PATELIS: Absolutely. The U.S. export sector has really lagged other countries and the U.S. has lost a lot of its competitiveness. This is clearly going to reverse in the years to come. We are already seeing this in a lot of the earnings reports in the S&P 500. We expect this dynamic to continue. The dollar has been weak and that works with a lag. Growth elsewhere outside the United States remains strong. And so we do believe that investors should focus on companies that have good export prospect outside the U.S.
GHARIB: Alex, very interesting information. Thank you so much for coming on our program.
PATELIS: Great pleasure. Thanks for having me.
GHARIB: My guest tonight, Alex Patelis, head of international economics at Merrill Lynch.
Sallie Mae Needs Financial Aid From The Treasury Department
SUSIE GHARIB: The credit crunch has hit the market for student loans hard. Analysts say the cost to lenders to make those loans has soared since last summer and some lenders say they're even losing money making federally guaranteed loans. As Stephanie Dhue reports, Sallie Mae, the largest student lender, is lobbying the U.S. Treasury for help.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Many student loans already are guaranteed by the Federal government, but in this credit crunch the market for securities backed by student loans is under stress. So lenders that securitize student loans, like market leader Sallie Mae, want the Treasury Department to step in now and buy those securities. Specialty finance analyst Sameer Gokhale says Treasury could quickly thaw the market for Federally backed, or FFELP student loans.
SAMEER GOKHALE, SPECIALTY FINANCE ANALYST, KEEFE BRUYETTE & WOODS: By doing so Sallie Mae and other FFEL lenders like Nelnet and there are a whole host of other lenders that have recently either exited the market or have said they were going to cease originations in the near term. I think this is going to help all of those lenders and ultimately result in a smoother flow of capital back into the student loan system.
DHUE: But not everyone is convinced the move is needed. Experts say there are still plenty of loans available for students now. Higher education advocate Luke Swarthout doubts lenders need more Federal subsidies.
LUKE SWARTHOUT, HIGHER EDUCATION ADVOCATE, U.S. PUBLIC INTEREST RESEARCH GROUP: The question with a regulated market like this or any marketplace is, you know, what's an appropriate level of loss for a company in the short term or in the medium term in an overall profitable business and how do you balance that with the concerns of students?
DHUE: Sallie Mae was created as a government sponsored entity or GSE in the 1970s to make a market for student loan securities. It became a fully independent company in 2005. Student loan expert Tom Stanton says the firm shouldn't need the government's help now.
TOM STANTON, ATTORNEY: In its last year as a government sponsored enterprise, Sallie Mae made something like 73 percent return on equity, a very generous return. There's no need at this point to go back to the government and get support.
DHUE: Lawmakers are considering other ways to ease the credit crunch in student loans. Last week, the House passed legislation to let the Department of Education purchase loans and act as the lender of last resort. But that would take longer to set up than an immediate cash infusion from the U.S. Treasury. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-What's Good About The Housing Crisis
SUSIE GHARIB: Tonight's commentator says there's a silver lining of sorts in the housing crisis. She's Alice Rivlin, former vice chair of the Federal Reserve and senior fellow at Brookings.
ALICE RIVLIN, SENIOR FELLOW, BROOKINGS: If you think the bursting housing bubble is an unmitigated disaster, think again. A seller's loss is a buyer's gain. Many urban areas with strong housing markets have become unaffordable to ordinary working people. Workers in stores, offices, restaurants and construction endure exhausting commutes to far suburbs to find an affordable home. Teachers, police, firefighters, nurses and medical technicians live long distances from the communities they serve and the skyrocketing price of gas has made their commutes increasingly costly.
The housing slump, painful as it is for many current homeowners, will have two positive effects. First, it will slow the sprawl of cities into the far exurbs that adds to congestion, pollution and time on the road. Second, it will make living closer to work more affordable for millions of families. The market will accomplish most of the change without public intervention. But community land trusts also have a chance with state and Federal help to buy distressed properties at bargain prices. They can fix up homes, save neighborhoods from the blight of vacant and vandalized dwellings and rent or sell them to low and moderate income workers. This ill wind could blow many families into more convenient, affordable housing. I'm Alice Rivlin.
"Last Word"-Green Monopoly
SUSIE GHARIB: And finally tonight, Monopoly is going green, and not by using the bank. Just in time for earth day tomorrow, the board game is replacing its old-style utilities "water works" and "electric company" with more environmentally-friendly wind and solar energy. Hasbro Games says the change reflects the increasing importance of renewable energy sources all around the world. The latest version of the iconic game called "Monopoly Here and Now: The World Edition" will be available this fall. And Paul, more than 250 million copies of Monopoly have been sold since the game was launched back in 1935.
KANGAS: And I understand over 750 million people have played the game. And you and I are amongst them I'm sure.
GHARIB: Absolutely, I love playing that game.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened lower on profit taking from last week's big gains with additional selling prompted by that sharp drop in Bank of America's results and of course another surge in oil futures. An hour into trading, the Dow posted an 86 point loss. The NASDAQ was off 12 points. Stock prices stabilized over the next few hours as buyers were encouraged by the low volume and modest losses in the early downturn. A late day comeback in the tech sector helped the market close on a mixed note. The Dow Jones Industrial Average ended down only 24.34 at 12,825.02, while the NASDAQ actually managed to gain 5.07 ending at 2408.04. Standard & Poor's 500 Index fell 2.16 points to 1388.17. In the bond market, the 10-year note fell 6/32 to 98 4/32 putting the yield at 3.73 percent.
It certainly wasn't the volume leader, National City (NCC) down $2.30, trading as low as $5.90 today, traded almost 38 million shares after reporting a first quarter loss of $0.27 a share. The company is cutting its quarterly dividend from $0.21 to a mere penny and it plans to raise $7 billion through the sale of stock, namely 126 million shares priced at $5 each. Citigroup (C) down $0.08. An Oppenheimer analyst says the company's lack of earnings power could cause it to cut or eliminate its dividend.
Then came Pfizer (PFE) $0.27 drop.
Ford Motor Co (F) moved up $0.28.
General Electric (GE) $0.23 drop.
Moving along in the active list, Bank of America (BAC) down $0.95. As you heard, first quarter earnings tumbled 77 percent to only $0.23 a share. Standard & Poor's today downgraded the stock from "buy" to just a "hold."
EMC Corp (EMC) up $0.37.
Wells Fargo (WFC) down $1.13. Oppenheimer cut it from "perform" to "under perform" as a market performer.
And then JPMorgan Chase (JPM) down $0.53.
AT&T (T), tenth in volume, moved up $0.08.
Texas Instruments (TXN) closed with a gain of $0.99. After the close, the company reported first quarter earnings of $0.43 a share. That was in line with the Street estimate. The company sees second quarter anywhere from $0.42 to $0.48. $0.48 is the Wall Street estimate. In after hours trading, TXN stock would drop to about $29.87.
Merck & Co (MRK) lost $0.13. First quarter earnings excluding one-time items, $0.89 and that was $0.03 above the Street estimate, but the company's revenues were below expectations and that's what hurt the stock a bit.
Another giant drug company, Eli Lilly (LLY) down $2.48. First quarter earnings excluding one-time items, $0.92 a share. That was $0.04 below the Street consensus.
Then Hasbro (HAS) up $3.10. The company in with first quarter earnings of $0.25 a share, $0.11 above the Street estimate and up from $0.19 last year. Revenues were up 13 percent.
Another toy maker, Mattel (MAT) didn't fare so well, off $1.78. The company reported a first quarter loss of $0.13 a share, versus earnings of $0.03 last year. Sales dropped 2.2 percent. Standard & Poor's downgraded the stock from "buy" to just a "hold" rating.
Arch Coal (ACI) did very well, up $3.81. First quarter earnings jumped to $0.56 from only $0.20 last year. Revenues soared 22 percent and keep in mind, coal prices have nearly doubled in the last year.
Circor Intl (CIR), which is involved with thermal fluid controls, boosted its first quarter earnings guidance from about $0.56 a share to as much as $0.77 a share. The company cited better profit margins.
And then Aladdin Knowledge (ALDN) tumbling $5.95. This is a software security firm. First quarter earnings excluding items, $0.29, $0.03 below the Street estimate and the company cut its 2008 earnings guidance as well.
Quest Diagnostics (DGX) up $3.50 a share, $0.72 in first quarter earnings out today, well up from $0.55 last year. Revenues rose 17 percent.
Eaton (ETN), the big manufacturing firm, down $2.69. It plans a 17 1/2 million share common stock offering and use the proceeds to pay down debt.
And then finally we see China Petro & Chemical (SNP) up $9.36. The Chinese government will subsidize the company to offset its losses stemming from refining imported oil.
Apple (AAPL) topped the NASDAQ active list, up $7.12. Earnings due out tomorrow.
Google (GOOG) down $1.62.
Baidu.com (BIDU) up $16.51.
Research in Motion (RIMM) up nearly $3.
Microsoft (MSFT) gained $0.42.
Moving along in the active list on NASDAQ, Cisco Systems (CSCO) up $0.38.
$0.09 loss in Intel (INTC).
First Solar (FSLR) was up $6.06.
Amazon.com (AMZN) edged $0.08 higher.
And Qualcomm (QCOM) a $0.07 winner.
Ebay (EBAY) down $1.08 on a report that its auction listings fell 9 percent in Britain last week compared to the week before.
Those are the stocks in the news tonight.
