NBR Transcript-May 16, 2008
Friday, May 16, 2008New Home Sales Are Up But That's Not Necessarily A Good Thing
SUSIE GHARIB: Some surprising news today from the struggling U.S. housing market. Construction of new homes increased by a HARIBstrong 8.2 percent in April. But the new building was mostly in multifamily units, not single-family homes, where construction is at a 17- year low. And as Suzanne Pratt reports, most experts say the worst is probably not over for the housing market.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: There are signs of life in the U.S. housing market. Builders broke ground on thousands of new apartments, condominiums and townhouses in April. But only multifamily dwellings experienced activity last month, with a 36 percent jump in new units. That followed a big decline the previous month. Construction in the larger and less volatile single-family sector fell 1.7 percent. And experts say building of single family homes is a better indicator of the health of the housing sector, which is experiencing the worst downturn in decades. Oppenheimer funds economist Brian Levitt says today's data does not suggest a turnaround in the housing market.
BRIAN LEVITT, ECONOMIST, OPPENHEIMER FUNDS: The U.S. housing market continues to be very sluggish. It continues to be a drag on the U.S. economy and it's going to be for a considerable time. You don't take away two million homes in inventories in a single day.
PRATT: Some consider a pickup in construction of multi-unit dwellings to be good news for the economy because it may mean more jobs and increased business activity. In addition, total permits for new construction of all dwellings increased nearly 5 percent in April, suggesting homebuilding may pick up in the future. But UBS economist Jim O'Sullivan says additional new building is bad news for the housing market, which is currently coping with a massive 11-month supply of unsold homes.
JIM O'SULLIVAN, SR. US ECONOMIST, UBS: We've the highest level of inventories of unsold homes on record. So, really, what we need now is fewer houses to stop the rate of decline in home prices, which is obviously causing such turmoil in financial markets.
PRATT: Experts point out that housing cycles are very long. While some believe we could see a bottom sometime next year, others don't expect to see a turnaround until at least 2010. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices 2008"-- John McCain's Economic Advisor Explains The Candidate's Energy Plans & Policies
JEFF YASTINE: President Bush didn't have much success pressing Saudi leaders to pump more oil. But Senator John McCain, the likely Republican presidential nominee, hopes to end U.S. dependence on foreign oil. As part of our "Economic Choices '08" coverage, Darren Gersh spoke with McCain adviser and Republican victory '08 Chairman Carly Fiorina today and began by asking if McCain would pressure the Saudis on oil production.
CARLY FIORINA, ECONOMIC ADVISOR, JOHN MCCAIN CAMPAIGN: Well, I don't think jawboning the Saudis is much of a solution. I think what's driving the price of oil right now is demand, first of all. And I think one of the reasons the price of oil shot up so much in the last couple of days is because we not only have supply problems in Nigeria, but I think there's great anticipation that demand out of China will go up even more, given the requirement for reconstruction after the earthquake. So I don't think jawboning really helps. I think what President John McCain would do is first of all, take measures in the short term to help the American people combat the high price of oil at the pump and he's proposed a summer gas tax holiday and I think he would focus on what does it take to lessen our dependence on foreign oil in the medium to long term, which is why he talks about nuclear power and green technologies and clean coal, et cetera.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Let me ask you about one thing, though. Phil Gramm is an adviser to John McCain. Phil Gramm is also the person who put in place the Enron exemption, which allows for unregulated trading of energy commodities. It's an exemption that the Senate just cracked down on and closed, with the argument being that speculation is causing a lot of the run-up in oil prices. Is that something John McCain believes or does he think that his fellow senators are just off base there, that it's not speculation, it's supply and demand?
FIORINA: Well, I think everyone agrees that speculation is some element of the price increase. But I think most experts would say, you know, you can hear some people say it's worth $20. You can hear other people say it's worth $10. I mean, it's real money, but it's not the bulk of the price increase.
GERSH: Can we expect John McCain to be tougher on speculators and the market impact on oil, though? Is he going to be more regulatory than the Bush administration?
FIORINA: Well, I think what John McCain has said for example, during this credit crunch and the housing crisis is that he expects accountability and transparency. And that's true of Wall Street, just as it's true of the government. So transparency means do people know what you're doing? Accountability means are you accountable to your shareholders and do they understand? I think those are the principles that he will focus on.
GERSH: Let me ask you, you were a CEO, quite prominent one. John McCain has said that CEO severance packages and pay packages were extravagant. Do you agree with him and do you think that President John McCain is likely to be tougher on CEO pay?
FIORINA: Well see, John McCain is very careful about not making general statements. Some CEO packages are outrageous. Others are not. Again, going back it his principles, when he has called out specific CEOs by name and he has, as you know -- he's focus on the principles of transparency and accountability. What he would say is for example, CEO's pay packages ought to be accountable to shareholders and ought to be subjected to a shareholder vote. I agree with that. It's what we did at Hewlett-Packard.
GERSH: One of the reasons I wanted to talk to you about the CEO pay thing is because when you look at what some of the analysts who advise Wall Street are saying about President John McCain's policies, they're saying that there's as much reason for investors to be concerned about him being tough on corporate America, typically drug companies, on climate change, defense contractors, he'd be pretty tough on corporate America, they're saying. I'm wondering, you know, you talk to business leaders, are they saying to you, we're worried about John McCain?
FIORINA: No, I think what most business people that I talk to think is that, gee, John McCain believes that to get the economy growing, we have to lower the burden of taxation on businesses and the American family. John McCain believes that to get the economy growing, we have to encourage free trade. The Democrats believe just the opposite, whether it's Senator Obama or Senator Clinton. What they're proposing is higher taxes and curtailing free trade. But what I would say about John McCain is this -- John McCain has demonstrated that he will take on concentrations of power that are unaccountable wherever he finds them.
GERSH: Carly Fiorina, thank you very much for your time.
FIORINA: Thank you.
YASTINE: Just a note about our "Economic Choices '08" coverage. While we heard from the McCain camp tonight, we have interview requests out to both the Obama and Clinton campaigns.
"Green Options: Fuel"-Under the Sea
SUSIE GHARIB: With gas prices sky high, all this week we've been focusing on alternative fuel sources. Tonight we head to Japan, where scientists have found a trove of frozen methane gas deposits in the seas surrounding the country. As we wrap up our series "Green Options: Fuel," Lucy Craft says scientists are trying to figure out how to get the fuel out of the ground safely.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's been dubbed fire and ice. Rightly so. This burning chunk of ice is actually frozen gas, an unconventional energy source called methane hydrate. Sea beds across the planet are riddled with seams of methane hydrate, especially around the geologically unstable islands of Japan. It was a colony of snow crabs in the Sea of Japan which tipped off University of Tokyo scientist Ryo Matsumoto to a bubbling trove of methane hydrate. The gassy areas support bacteria upon which the shelled scavengers feed. Matsumoto says his modest find is just tip of the methane iceberg.
RYO MATSUMOTO, PROF., EARTH & PLANETARY SCIENCE, UNIV. OF TOKYO: This could be, literally become huge natural resources (INAUDIBLE) different government is (INAUDIBLE) They're leading this expeditions, this (INAUDIBLE).
CRAFT: Japan's richest trough of methane hydrate lies just south of its main island. Sadao Nagakubo, a spokesman for the state-funded methane research team reckons frozen gas could eventually supply as much as a fifth of Japan's energy needs.
TRANSLATION OF: SADAO NAGAKUBO, JAPAN OIL, GAS & METALS NATIONAL CORP.: Methane can replace our imports of regular natural gas. This won't solve all of our fuel problems, but the effect would be significant.
CRAFT: It's a tantalizing proposition for Japan, a country with virtually no natural resources. It's surrounded on all sides by the world's richest reserves of methane hydrate. But unlocking that gas from beneath the sea bed will not only be costly. It could trigger environmental catastrophe.
MATSUMOTO: Increasing the amount of methane in the atmosphere may cause the greenhouse, the global warming, because methane is a much stronger greenhouse gas.
CRAFT: A greater concern say scholars like Matsumoto is the potential for triggering landslides and tsunamis because of the disturbance to ocean sediments. But dazzled by the potential Eldorado just off its coast, the Japanese government is investing hundreds of millions of dollars to figure out how to safely extract frozen gas. For his part, government spokesman Nagakubo scoffs a theories that drilling for frozen gas could unleash environmental Armageddon.
NAGAKUBO: There's a lot of myth about possible catastrophes. Actually, our biggest hurdle isn't environmental, but financial. Since methane hydrate is a solid, unlike oil and gas. It resists melting, so lowering the pressure in the ice sheet is probably the most efficient extraction method.
CRAFT: The roadblocks are staggering. Japan is racing to commercialize methane hydrate production within a decade. It would be a dream come true for this energy-hungry, fuel-poor nation. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
"Market Monitor"-Chris Davis, Portfolio Manager of the Davis Selected American Shares
SUSIE GHARIB: Our market monitor guest says that this is not a time of optimism in the economy and the markets. Joining us now, Chris Davis, portfolio manager of the Davis New York venture fund and Selected American shares. Chris, welcome back to NIGHTLY BUSINESS REPORT.
CHRIS DAVIS, PORTFOLIO MANAGER, DAVIS SELECTED AMERICAN SHARES: Thanks, Susie. It's good to be here.
GHARIB: Let's begin by getting your view on economic conditions. How would you describe them and how are they shaping your investment strategy?
DAVIS: Well, I'm not an economist and you know, I think there's so much time spent trying to predict things that are very difficult to predict. But based on talking to our companies, I would say that the economy is weak and probably in a recession and there's lots of reasons to think that it could be a little bit longer and more severe than people expect.
GHARIB: Now, you like these bumpy times. You say there's opportunities for investing. How is this difficult economic environment shaping your investment strategy?
DAVIS: Well, because, of course, where there's an enormous amount of pessimism. Consumer confidence, all of the statistics indicate so much pessimism and Warren Buffett famously said that he wants to invest in times of pessimism, not because he likes pessimism, but because he likes the prices it produces. We think we're seeing reasonably attractive prices on all sorts of businesses today.
GHARIB: Now that you've brought up Warren Buffett's names, I know Berkshire Hathaway (BRKA) is one of your big holdings and you say that you like to invest in it because it's one of the stalwarts in your portfolio. Tell us a little bit about your Berkshire Hathaway investment and why you like the stock.
DAVIS: I always say I'm reluctant to talk about any individual company, but if somebody was going to buy just one company, then Berkshire would be the one. It's got unmatched stewardship. It's got a business that's designed to be durable and sustained in all sorts of different environments. It's run with first-class stewardship and it's the only business I know that gets more valuable in times of dislocation because Warren can put some of that cash to work in an opportunistic way.
GHARIB: And it doesn't bother you that Berkshire Hathaway stock has been down most of 2008?
DAVIS: No, I would say that's just what attracts us. Low prices ought to make people more interested in buying companies rather than less.
GHARIB: Now what about General Electric (GE)? You say it also falls into that category of being a stalwart and that stock has also been stuck in a trading range for many years now.
DAVIS: Well, Susie, I use GE as an example. I could just as easily as picked a company like Johnson & Johnson. I think the idea is buying global leaders when they're attractively valued. If I think about GE in particular, what you've had is years of growing earnings and years of a falling valuation. I would say today the earnings quality is higher. I think we have a first-class manager running it. I think we've got a better underlying growth rate of the business and yet it trades at the lowest multiple almost that it's traded at in 20 years and you get a 4 percent, almost a 4 percent dividend while you wait.
GHARIB: Tell us about Costco (COST). That's another one on your list.
DAVIS: Costco is a wonderfully well-run company and there are so many reasons to admire them in terms of the value that they create for their customers, their view, the way they treat their employees, their competitive advantages and low-cost structure. But I think in particular it's a reminder about the importance of patience because Costco has been a wonderful company for 15 years. Nothing has changed there. It's been run by the same management team. They keep executing. And yet for 10 years of those 15 years, the stock under performed. It's had a wonderful move in the last five and if you owned it for the entire period you did well. But it's an important reminder that sometimes the market is slow to recognize great companies.
GHARIB: We just have a little bit of time left. Tell us about Merrill Lynch (MER). Why do you find that attractive? Its stock has been sliced in half this past year. DAVIS: Well, we always say you want to look where the headlines are worst for opportunities. And nowhere is there more blood in the streets than in the investment banking sector with the panic that surrounded the collapse of Bear Stearns. Merrill Lynch has a first-class new CEO, a durable, global franchise, that means something, 14,000 FAs (ph) and the ability to raise capital if they need it. So we think that it was time to put a marker on the table in that very controversial sector.
GHARIB: All right. Chris, do you own any of these stocks or do you have any other disclosures that you want to tell us about?
DAVIS: Well, we're large shareholders in the funds that we manage, so we eat our own cooking, so we own all of these companies.
GHARIB: All right, great. Chris, thank you so much for coming on the program. We really appreciate it.
DAVIS: Thank you, Susie.
GHARIB: Our market monitor guest, Chris Davis, portfolio manager of the Davis New York Venture fund and Selected American shares.
"Last Word"-National Bike To Work Day
JEFF YASTINE: And finally, today is "national bike to work day." It's designed to raise awareness of the cost effectiveness of cycling as a mode of transportation. Record-high gas prices may prompt more people to pedal to work this year. Cities from coast to coast took part in today's energy- friendly event. Studies have shown more than half of all Americans live less than five miles from their place of work, a reasonable distance to travel by bicycle. And Susie, next week as part of our series "Pain at the Pump," I'll introduce you to a man who says soaring gas prices drove him to make the switch to two wheels altogether.
Paul Kangas' Stocks in the News
JEFF YASTINE: The housing data did little to inspire market traders. The Dow lost nearly 100 points in the first half of the session as oil climbed to new highs. We'll have more on the oil story a bit later. Adding to the early selling, a report showing consumer sentiment in mid-May hit its lowest level since 1980. Buyers came back after Treasury Secretary Henry Paulson said he sees the pace of U.S. economic growth picking up before the end of the year. That helped the major averages recover most of their early losses. The Dow finished down 5.86 to 12,986.8 and this week, the index fell twice and rose three times for an over gain of 240.92 points. The NASDAQ dropped 4.88 to 2528.85. And it rose in four out of the last five sessions for a gain of 83.33 and the S&P 500 jumping 1.78 points to 1425.35 and the index advanced 37.07 points overall on the week. In the bond market, the 10-year note fell 9/32s to 100 6/32 and the yield at 3.85 percent.
General Electric (GE) topping our list, losing $0.24.
Citigroup (C) fell $0.61.
Prizer (PFE) dropping $0.05.
EMC Corp (EMC) lost $0.08.
Ford Motor Co (F) losing a fraction as well.
Bank of America (BAC) dropped $0.54.
AT&T (T) gaining $0.21.
ExxonMobil (XOM) jumping $1.37. Oil prices set another new record high as you heard, rising to over $126 a barrel today and there is a look at the rest of the group.
BP Plc (BP), Chevron (CVX), ConocoPhillips (COP), Marathon (MRO) all doing very nicely into the closing bell.
Wells Fargo (WFC) losing $0.65.
SprintNextel (S) dropping $0.23.
Genentech (DNA) dropped $1.36. A recent study shows the Avastin treatment improving survival rates in brain cancer patients. The drug maker will also present more encouraging results on other forms of cancer treated with Avastin later this month.
BMC Software (BMC) gaining $1. - excuse me, $2.22. Fourth quarter net income rose over 50 percent thanks to the growing popularity of the company's networking software.
Advanced Auto Parts (AAP) kicked into overdrive. The stock revved over $4 higher. First quarter profits came to $0.86 a share. That was $0.12 above Wall Street estimates. The retailer's new CEO getting high marks from analysts for his efforts to improve profit margins.
And the big percentage gainer of the day was Noah Education Holdings (NED). The stock rose $1.16 to a four-month high. Third quarter profits quadrupled to $0.21 a share, shattering analyst estimates. The company offers interactive educational products through digital learning devices in China.
On the downside, Flagstar Bancorp (FBO) slid $1.10. Investors do not like the bank's plan to sell at a deep discount, more than 11 million shares in a private placement to about a half dozen institutions. Flagstar, a savings and loan based in Michigan, is trying to rebuild its capital after posting a $11 million loss last month.
Kohl's (KSS) getting bagged for a loss of $1.22. The retailer with a weak outlook on its sales after posting same store sales declines of nearly 7 percent. That hurt first quarter profits. And Goldman Sachs was also cautious on the entire department store sector because of the impact of higher oil prices on consumer spending.
Dillard's (DDS), JC Penney Co (JCP), Sears Holdings (SHLD), see that one down $1.92, all settling near their lows of the day.
Now onto the NASDAQ where we have Apple (AAPL) dropping $2.11.
Microsoft (MSFT) lost $0.46.
Google (GOOG) off $0.93.
Research in Motion (RIMM) down $0.35.
Cisco Systems (CSCO) gaining a fraction.
Intel (INTC) edged up a fraction as well.
Yahoo! (YHOO) losing $0.09. In a letter to the "Wall Street Journal," Yahoo! says its board remains quote the best and most qualified group to maximize value for all Yahoo! shareholders.
Qualcomm (QCOM) gained $1.95.
Baidu.com (BIDU) advanced $0.32.
First Solar (FSLR) up more than $4.
China Precision Steel (CPSL) jumped $1.63. Third quarter profits more than double what analysts expected. Revenues more than tripled.
Pharmacopeia (PCOP) gained $0.86. Its blood pressure treatment showing positive results in mid-stage clinical trials.
Astea Intl (ATEA) slid nearly $2, a negative reaction to the company's disappointing first quarter loss of $0.12 a share.
And finally Meta Financial Group (CASH) soaring $5.85. The bank earned a profit in its fiscal second quarter of $1.16 a share and record revenues, not bad for a company that was nearly delisted in April.
And those are our stocks in the news tonight.
