NBR Transcripts-May 9, 2008
Friday, May 09, 2008What's Fueling Rising Oil Prices?
SUSIE GHARIB: Another day, another record high for oil prices. In New York trading, June crude futures settled just below $126 a barrel. That's after surging $2.27. Oil rose $10 this week mostly on concerns about supply, as well as renewed weakness in the U.S. dollar. Suzanne Pratt looks at why the sagging greenback has helped to ignite oil prices.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the last five trading days, the price of crude oil has hit a new record each and every day. Since last May, crude futures have nearly doubled and some experts now think $200 a barrel is a possibility within two years. Tight supplies of diesel are largely behind this week's surge in oil prices. Analyst Antoine Halff says continued weakness in the U.S. dollar has also fueled the rally.
ANTOINE HALFF, HEAD OF ENERGY RESEARCH, NEWEDGE: The idea is that commodities and oil, in particular have an intrinsic value that's solid, maybe even going up. So, if you invest in those assets, you hedge efficiently against currency depreciation, against inflation and so on.
PRATT: Since 2007, the dollar has lost about 14 percent versus the euro, while against the Japanese yen it's off nearly the same amount. Currency experts say America's anemic economy is behind the dollar's decline. The Federal Reserve has cut rates seven times since September to stave off recession and calm rattled markets. Those cuts have created a huge differential between rates in the U.S. and in Europe as the European central bank has left rates untouched. Societe Generale's Carl Forcheski says while it has gained in prominence, the euro is unlikely to replace the dollar as the world's premiere currency.
CARL FORCHESKI, HEAD OF CURRENCY TRADING, SOCIETE GENERALE: It's become a little more of a balance. Whether it's going to supercede the dollar, time will only tell. I don't think so, but it certainly has grown in its liquidity, availability, as well as attraction to a lot of multinational corporations here in the U.S. as well as in Europe.
PRATT: In recent days, there's been much talk of a rebound in the dollar. Even if that happens, experts believe oil prices will continue to rally. That's because they say the reverse correlation between oil and the dollar does not have a lengthy history.
HALFF: The fact is that that relationship is very tenuous; it's very fragile. In the last week, we've seen on some days the dollar go up against the euro and yet oil prices did go up.
PRATT: Surging oil prices continue to push gasoline prices higher. The national average for a gallon of gas climbed $0.33 in the past month and some now predict that national average could hit $4 next month. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"A Tale of Five Cities"-Cape Coral, Florida
PAUL KANGAS: All this week, we have been taking a close-up look at the nation's battered housing market in a series of stories we call "A Tale of Five Cities." Tonight, our tour around the nation wraps up in southern Florida. As Jeff Yastine reports, when it comes to looking for a recovery in that corner of the country, it's a case of east versus west.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: If the economic earthquake that's hit the U.S. residential real estate market has an epicenter, it's probably here -- Cape Coral, Florida, which lies on the state's west coast near Ft. Myers. In February, this city of 150,000 was tops in the nation for foreclosures after being one of the hottest areas for real estate speculators during the boom years. But sales of existing homes are beginning to rebound, up more than 30 percent from the lows seen in the middle of last year. Veteran realtor Jeff Miloff senses a bottom in the local market based on the number of showings his firm does for potential homebuyers.
JEFF MILOFF, PRINCIPAL, MILOFF AUBUCHON: We have a decent size real estate company and over the last couple of months, we noticed our showings went from where we were lucky to have maybe five or six showings a day to now we're hitting 30, 40 showings daily. So it just tells us that the people are realizing that the pricing is right and they're coming into the market.
YASTINE: Who's doing the buying? Speculators who survived the bust, out-of-state visitors and families beginning to take advantage of the sharply reduced home prices. The volume of builder liquidations, foreclosures and bank short sales in the Cape Coral area put heavy pressure on sellers to drop prices. As a result, median sale prices are off more than 25 percent in the past two years. Realtor and market analyst Annette Barbaccia says the discounts of many individual properties are even more extreme.
ANNETTE BARBACCIA, REALTOR & MKT. ANALYST, AMB PLANNING CONSULTANTS: We recently sold a house for $100,000 that is a year old. The owner paid $240,000 for it and the new owners got a great windfall. So the plus side is that there are some wonderful bargains out there and I think that most real estate agents since November have seen really a pickup in sales.
YASTINE: Optimism is harder to find in areas like Miami-Fort Lauderdale, where the beleaguered condo market remains on life support. Analysts say the main problem is the sheer volume of unsold units already on the market and the fact that more condo towers are still being built. Analyst Phil Biber of Watermark Valuation Services says that steady supply of new units continues to weigh on the market.
PHIL BIBER, ANALYST, WATERMARK VALUATION SERVICES: That inventory has got to be absorbed before the market can become back into equilibrium. I mean, typically, a pretty healthy market is a three to six-month supply of inventory, 90 to 180 days. And now we're looking at two to three years. And until that starts coming way down, I don't think we've hit the bottom, because you've got much more inventory than you have buyers.
YASTINE: Few analysts or realtors are willing to say there's a bottom in any of the state's regional housing markets, but there is a sense that the worst of the crisis is nearing an end. Buyers are becoming more interested now that prices have dropped sharply, but the huge supply of unsold homes and condos means that Florida will remain a buyers' market for some time to come. Jeff Yastine, NIGHTLY BUSINESS REPORT, Fort Lauderdale.
One on One with Susan Wachter, Real Estate Professor at the Wharton School of Business
SUSIE GHARIB: Joining us now for more analysis of the national housing picture, Susan Wachter, real estate professor at the Wharton School of Business. Hi, Susan.
SUSAN WACHTER, PROF. REAL ESTATE & FINANCIAL MGMT.: Hello Susie.
GHARIB: It's good to have you on our program as well. As you've seen this week, we featured five regions of the nation's housing market. We went to Washington, DC, Manhattan in New York, Detroit, Silicon Valley and as you just saw, in Miami. Each of them face different issues. If you were to step back though, and describe the state of the national housing market, what would you say at this point in time?
WACHTER: Well, this is a national crisis. It is playing out differently in local different markets and there is still a ways to go nationally for prices to fall. We are not at the bottom.
GHARIB: What would it take for you to know that when we're going to make the turn? What is it going to take to do the turn around? WACHTER: Well, first of all, we are going to see many more sales. We still see a slowdown in activity and for fundamentals we need a repricing, prices will need to drop maybe another five, 10 percent.
GHARIB: All right. And in terms of the prices, at what point will that turn become? I mean, how low do they have to go?
WACHTER: Well, prices, and of course it is absolutely market by market, every market differs, but what is true nationally is that buyers are standing by the side. They are not buying. They are waiting for prices to fall and sellers are not yet cutting their prices to where in fact, we will have this inventory over hang stop being a downward pressure.
GHARIB: There has been a lot of debate on that, whether this is a time for buyers to go in or are there concerns that prices are going to lower for sellers. Should they hold off because this isn't a good time to sell? Where are you in that debate? What is your view on what is the right time for buyers and for sellers?
WACHTER: Well, buyers, they are right, they are facing real uncertainty. Of course it is market by market. The real uncertainty is, are we in a recession? How deep is it going to go? That's going to affect housing prices.
GHARIB: Now, in Congress there are a number of bills that are being talked about and debated about improving this housing situation and to help it to recover. Do you think any of them will you know, be passed in the end and will they make a difference in turning around the housing sector?
WACHTER: Depending on how severe the slowdown and maybe recession is, we may very much need to embrace these and I think they have to be at the ready. The problem with our over all economy is really in the housing market and the solution has to be targeted to the housing market.
GHARIB: Do you think any of these bills that are currently being discussed in Congress will be passed and will they make a difference?
WACHTER: Well, can't do the political prognostication, but I think they have a chance from what I am hearing because Republicans and Democrats see the danger and see what is happening on Main Street. So there does seem to be buy in and the fundamentals of the market need support. There needs to be a bottom otherwise we could be in free fall and this bill, the Frank bill addresses that issue.
GHARIB: Now, in terms of the recovery, when that does happen, what will the nature of that recovery look like in the housing market based on your experience of looking at other downturns and recoveries?
WACHTER: Well, it is not going to be a bounce to the upside. This is going to be a sharp decline still to come, how sharp depends on the overall economy, and then the rise unfortunately will be slow. We could be two years out, three years out before we are back to the previous highs.
GHARIB: All right. Well, thank you very much for coming on our program. We appreciate it Susan.
WACHTER: Thank you.
GHARIB: My guest tonight, Susan Wachter, real estate professor at the Wharton School of Business.
"Market Monitor"-Al Goldman, Chief Market Strategist for Wachovia Securities
PAUL KANGAS: My "Market Monitor" guest this week is Al Goldman, chief market strategist for Wachovia Securities. Welcome back to NIGHTLY BUSINESS REPORT Al.
ALFRED GOLDMAN, CHIEF MARKET STRATEGIST, WACHOVIA SECURITIES: Thank you, Paul. Always a pleasure.
KANGAS: When you were with us last in late December, and you were not your usual bullish self and that call turned out to be correct since stocks have had a rough ride this year. How do you stand on the outlook for the market now? Improving?
GOLDMAN: It is improving, Paul, I think we have been in a bear market that probably started in October when we made the market highs, but I think we saw the lows January the 22nd and I think we are in the bottoming process, we are transitioning from a bear to a bull.
KANGAS: It seems like oil is one of the most influential things on this market. What is your outlook for oil?
GOLDMAN: Well, you don't fight an 800 pound gorilla and you have to assume that the price of oil is going higher. I can't justify it on the supply, demand basis, but emotionally and speculators are helping to push it up and world problems so you have to assume that we haven't seen the highs yet in oil. Let's hope we see it very soon, though.
KANGAS: It would be nice if we could figure out a way to stop the ascent of the oil. Do you have any ideas along that line?
GOLDMAN: Yeah, everybody stop driving across the country.
KANGAS: All right.
GOLDMAN: No. I, unfortunately, have no ideas and we are going to be living with high gasoline prices.
KANGAS: OK. How about interest rates? Where are they headed?
GOLDMAN: Well, the Fed, I don't think is going to lower again, nor are they going to rise quickly. So I think Fed funds are going to stay at two percent probably the rest of this year. My guess is the Fed will probably be lifting interest rates next year, but no time sooner. I know a lot of people are afraid that they might, but I don't think that is in the cards. They are more concerned about the economy than they are about inflationary pressures.
KANGAS: What is your forecast for corporate profit for the second half of this year?
GOLDMAN: Not real good. I think profits for the year primarily due to the financial problem and the general recession which I believe we are in, will be down about five percent from last year. So I think that those who have been looking for 10, 12, 15 percent increase in earnings have been making a mistake, but I think the market has gotten around and has already cranked this into the general market mood.
KANGAS: So you see stocks higher at the end of the year than they are now?
GOLDMAN: Yeah. Something like seven percent from here, I think. You know, if the recession hits its trough in the fall as I think it will, we could start a new bull market and go modestly higher. Typically the market starts up about four months before the economy hits its stride which means maybe late spring, early summer we start a new bull.
KANGAS: So you have made a change. Now you are slightly bullish, we could call it, cautiously bullish?
GOLDMAN: Well, I think we saw the loss January 22nd. Those were the lows and I don't think we are going to retest them.
KANGAS: OK.
GOLDMAN: And I like the way the market has been acting since the first of March.
KANGAS: Well, in December, you gave our viewers three buy recommendations. Let's see how they have done. And at the top of the list is a real clinker, some stock that has really disappointed lot of people, American International Group (AIG) down almost 31 percent. What is your take on what is going to go on with that stock?
GOLDMAN: Yes, of course at the moment that was a terrible recommendation. At the time, I said only buy it if you a strong heart.
KANGAS: Yes, you did.
GOLDMAN: But I didn't think it was going to give us a heart attack but very disappointing. Let's hope that the worst is out of the way today.
KANGAS: OK. And you had two other recommendations. One was Costco (COST) which is up on that time, up nearly two percent.
GOLDMAN: Pleased with the action of Costco. The discounters, I think, in demand and are going to stay in demand because the consumer is strapped and I think that's going to continue.
KANGAS: And Intel (INTC) was your other one. It is down a bit, 13 percent. Do you stay with it?
GOLDMAN: I think so. I am optimistic on the economy. By year end, I think Intel will do fine.
KANGAS: Al we have less than a minute left. How about a couple of new recommendations?
GOLDMAN: OK. Well, I think economy is going to turn around, so I like Deere and Company (DE). It has been doing nothing for five months but the record is good and it is economy sensitive. I like Illinois Tool Works (ITW). It has been acting well, a good company, economy sensitive and I think it can be bought here. And then Oneok (OKE), a natural gas company, which has been acting quite well and offers an above average yield of 3.1 percent.
KANGAS: OK. We will be watching them. Al do you personally own any of those stocks or have other disclosures to make?
GOLDMAN: No, I do not and no other disclosures necessary.
KANGAS: All right. I want to thank you for being with us once again.
GOLDMAN: My pleasure, good to be with you, Paul.
KANGAS: My guest, Al Goldman of Wachovia Securities.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's day began with a sharp sell-off triggered by AIG's huge loss reported after the bell yesterday and more weakness set in by those higher oil futures and the falling dollar. A half hour into trading, the Dow posted a 119-point loss. The NASDAQ was down 18. The market stabilized over the midday hours thanks to some cautious bargain hunting, but it wasn't enough to keep the Dow from posting a 150-point loss around 2:00 p.m. However, some late buying trimmed the loss a bit. The Dow Industrial Average closed down 120.90 at 12,745.88. This week, the Dow rose twice, fell three times, had an overall loss of 312.32 points or 2.4 percent. The NASDAQ Composite fell 5.72 ending at 2445.52 today. And like the Dow, the Index falling in three out of the last five sessions, had an overall loss of 31.47. Standard & Poor's 500 ended down 9.40 at 1388.28 today for the week overall, it was off 25.62. Over in the bond market, the 10-year note climbed 2/32 to par and 26/32, putting the yield at 3.78 percent.
Now let's take a look at some stocks in the news tonight. Most active big board issue on 25 3/4 million shares, Fannie Mae (FNM) moving up $0.18. Today the company priced $2 1/4 billion of common stock at $27.50 a share and also $2 1/4 billion of non-cumulative convertible preferred with a yield of 8 3/4 percent.
Citigroup (C) down $0.67. As you heard, it's selling off about $400 billion in assets.
Then American International Group (AIG) down $2.87. That accounted for over 30 points of the Dow's drop right there. After the close yesterday as we reported, the company had an expectedly large $7.8 billion first quarter loss and plans to raise $12 1/2 billion in capital. Today, Moody's placed the company's ratings on review for possible downgrade.
SprintNextel (S) up $0.40.
And then Pfizer (PFE) with a $0.18 loss.
Bank of America (BAC) down $0.68.
General Electric (GE) $0.32 drop there.
Ford Motor (F) off a dime.
And then Petrohawk Energy (HK) was down $0.23. The company's in the midst of selling 25 million of its common shares at $26.39 each.
And then Altria (MO), tenth in volume, was down $0.39.
Fedex Corp (FDX) down $2.84. After the close, the company cut its fourth quarter earnings guidance from a high of $1.80 to $1.50 a share at best. In after hours trading, the stock dropped about $3 a share after hours.
Bristol Myers Squibb (BMY) down $1.08 on upcoming competition in Europe for a generic version of the company's Plavix blood thinner.
Then moving along in the list of bigger movers, Mylan (MYL) off $1.04. First quarter earnings of only $0.09, down from $0.47 last year, higher operating expenses the reason.
American Reprographics (ARP) up $3 a share. First quarter earnings up 9.8 percent to $0.41 for $0.37 a year ago. That was $0.04 better than the Street estimate.
Systemax (SYX) gained $2.80. First quarter earnings jumped to $0.48 from $0.37 last year. Revenues were up 7 1/4 percent.
And then Medicis Pharmaceutical Corp (MRX) up $2.15. First quarter operating earnings, $0.38, way up $0.15 a year ago. Revenues jumped 38 percent. Standard & Poor's upgraded the stock from "strong sell" to a "hold."
FBL Financial Group (FFG) plunging $4.43. First quarter earnings fell to $0.50 from $0.73 last year, way below the Street estimate. The company sees earnings challenges ahead.
And then Pike Electric (PEC) off $1.65. Third quarter earnings, $0.13, down from last year's $0.18. Revenues dropped 15 percent.
And then we see Sotheby's (BID) down $2.56. First quarter loss of $0.19 versus $0.37 in earnings last year. Revenues dropped 12 percent.
Moving along to the active NASDAQ, Apple (AAPL) down $1.61.
Google (GOOG) fell $9.81.
Research in Motion (RIMM) up $1.59.
And then Microsoft (MSFT) with a $0.12 gain.
Baidu.com (BIDU) down $8.89 a share.
Nvidia Corp (NVDA) rose $0.58.
Followed by First Solar (FSLR) up $8.70.
Cisco Systems (CSCO) a $0.21 loss there.
Intel (INTC) a $0.03 drop.
And then Priceline (PCLN) with a huge gain of $14.85 after reporting first quarter earnings of $0.37 versus a loss of $0.44 a year ago. The company's international bookings doubled in this period of time.
And Activision (ATVI) up $3.94, nice move there, turnaround, fourth quarter earnings of $0.14 versus a loss of a nickel last year. Revenues jumped 93 percent thanks to Guitar Hero video game sales.
Those are the stocks in the news tonight.
