NBR Transcripts -May 21, 2008
Wednesday, May 21, 2008Oil Reaches A Crude New Recod High
SUSIE GHARIB: Oil prices skyrocketed today to $133 a barrel and that helped send the Dow tumbling more than 200 points. In New York trading July crude futures surged $4.19 or more than 3 percent to close at a record $133.17. In after-hours trading oil topped $134. Fueling the spike, a big drop in weekly oil inventories. The Energy Department said crude stocks plunged 5.4 million barrels last week, the first decline in five weeks. As Scott Gurvey reports, these record oil prices will mean even higher prices at the pump.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you're thinking of hitting the road this Memorial Day weekend, you might want to reconsider. Today crude oil futures headed north of $133 on the New York Mercantile Exchange after government numbers showed an unexpected drop in crude oil and gasoline stockpiles. Refineries did increase their production in the last week. But the fact that supplies seem to be meeting demand is not having any limiting effect on prices. The commodity markets themselves have come under criticism from those who say speculators are driving up prices. But there does not appear to have been a great increase in open contracts in recent weeks and trader Randall Rothenberg said speculators cannot drive the market without support from the fundamentals of supply and demand.
RANDALL ROTHENBERG, OIL & GAS TRADER, BATTALION CAPITAL MANAGEMENT: I believe speculators might have helped, jumping on the boat because of say Goldman's report looking for $150 within the next month or so. But prices go because they make economic sense. And I don't believe markets can misjudge economics so greatly for so long.
GURVEY: John Kilduff of MF Global says one other change which helps support prices is the fact that investors are now looking to energy as an important part of their portfolio.
JOHN KILDUFF, SR. VP, ENERGY, MF GLOBAL: Portfolio managers of all stripes are doing what they think is prudent, which is investing in energy to hedge themselves and their portfolios, their equity portfolios, their bond portfolios, against the likely economic dislocation that these high energy prices are going to produce.
GURVEY: Higher oil prices will also hit vacationers even if they leave their cars at home. Airlines are struggling to cope for higher prices for jet fuel and Amtrak is reporting increased demand for trains which are more fuel efficient than cars or planes. While Americans are complaining, overseas many are laughing. Gasoline prices in most countries have been far higher than American prices for years. Much of this is due to taxes which recently pushed the price of gas in France, Germany and the UK well above $8 a gallon. It is nearly $5 a gallon in Japan and Canada. There are some places where you can get really cheap gas. You just have to travel a bit. The recent price in Saudi Arabia, $0.45 a gallon. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Energy Crisis Fuels A Grilling On Capitol Hill
SUSIE GHARIB: The high price of energy fueled debate in Washington today. The House of Representatives passed a $54 billion tax package that includes incentives for renewable energy. Meanwhile, lawmakers in the Senate also talked energy, taking on the major oil companies in the wake of record gas prices. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two world views collided at the Senate Judiciary Committee today. Oil executives described a fierce global race to secure new crude supply to meet new demand in China and India. It's a race the executives complained, that is pushing into oil fields that are harder and more expensive to reach, even as the United States sharply restricts obvious areas of exploration at home. On top of that, ConocoPhillips Executive Vice President John Lowe said it made no sense for Congress to consider raising taxes to punish the very companies it's counting on to spend billions drilling new oil wells.
JOHN LOWE, EXECUTIVE VICE PRESIDENT, CONOCOPHILLIPS: U.S. oil companies should be viewed as the key to the energy solution, not as scapegoats, but as assets in this global energy race. We must be allowed to compete on level ground for the benefit of our country.
GERSH: Senators channeled the world view of constituents. Americans paying more at the pump, with families hard-pressed and small business owners worried about meeting payroll, senators like Diane Feinstein were not buying big oil's reasoning.
SEN. DIANNE FEINSTEIN (D) CALIFORNIA: As I listened to your opening comments, to me, it was just a litany of complaints that you are all just hapless victims of a system. You blame one thing or another. And yet, you rack up record profits -- record profits for any corporation in the United States of America -- quarter after quarter after quarter.
GERSH: But the industry says the marketplace, not the companies, set prices. A sagging dollar doesn't help, since oil is priced in dollars. Neither do speculators, which the executives blamed for helping driving up prices. At the refinery level, ExxonMobil's Stephen Simon said the rising costs are putting profits are under pressure.
J. STEPHEN SIMON, SR. V.P EXXON MOBIL: Our profitability last year was $0.10 a gallon. That's now down around $0.04 a gallon. We are seeing the impact, because 90 percent of the raw materials that we use to make our products we buy on the open market. It's not our own production. We buy it on the open market and we're not able to pass that through.
GERSH: Having invested billions in new capacity, the oil executives are no longer telling Congress they need new refineries to produce enough gasoline. The industry's problem now is the new oil fields they have been able to find cost $70 or more per barrel to produce. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Pain at the Pump"-Impact on Small Businesses
SUSIE GHARIB: Airlines aren't the only business suffering from soaring energy costs. $4 a gallon gas is cutting into the bottom line at companies, big and small. While many larger firms like airlines can pass those costs onto consumers, small businesses are struggling to preserve profits. As we continue our series "Pain at the Pump," Erika Miller looks at the coping strategies of three different small businesses in New Jersey.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: When fuel prices started rising, Bernie Wilker got nervous about profits at his business, Alphagraphics of Paramus. The copy and printing franchise offers free pickup and delivery service for customers. Wilker knew that charging for those trips -- or raising prices on his services -- would not be a smart move.
BERNIE WILKER, OWNER, ALPHAGRAPHICS OF PARAMUS: I don't think our customers will stand for it. They might understand it, but they'll just go looking for someone who is more competitive, who will say to them, we're going to absorb the increase. So that's what we do. It's a cost of doing business. MILLER: So he opted to cut costs by swapping the firm's SUV for a Prius hybrid vehicle. Remarkably, the Prius easily fits 15 crates of paper in the back. Recently, the company also started using the car to pick up supplies from vendors.
WILKER: Vendors are now putting surcharges on to their bills for delivery. There used to be none. About six months ago, they went to a I think $4 a delivery surcharge. Last month, they went to a $6 a delivery. Well, that's a 33 percent increase.
MILLER: Just down the road, Anthony Franco's pizza is also feeling the pinch from higher gasoline prices. The restaurant says it has seen significant increases in the cost of ingredients like cheese and green peppers, all pushed up by rising transportation costs. Co-owner Greg Fila reluctantly raised his prices two months ago, rather than compromise on quality or freshness.
GREG FILA, CO-OWNER, ANTHONY FRANCO'S PIZZA: You can't start cutting corners, you know? You got to operate your business like you always have. Now you start cutting corners. People will realize that and you start losing customers.
MILLER: There's another way higher fuel prices have hurt Anthony Franco's pizza. The restaurant says it is harder to find drivers to make deliveries because they don't get reimbursed for their gasoline.
FILA: About it a year ago, give or take, I used to be able to hire 10 drivers a day if I wanted to. Right now, it takes a little time. It takes a little time. You can't do it right away.
MILLER: Delford Flowers in River Edge is trying to keep profits from wilting due to high fuel prices. Owner Randi Duffie says her wholesale prices for flowers have risen sharply the past few months because most come from overseas.
RANDI DUFFIE, OWNER, DELFORD FLOWERS & GIFTS: A typical flower, per se, would get trucked from the farm to the airport, from the airport then to the United States, from that airport to my wholesaler to me. And so, you can see, that fuel has been involved in that transportation all the way down the line.
MILLER: She says roughly 80 percent of her business is deliveries. In addition to raising her delivery fees, she has tried to conserve fuel.
DUFFIE: It used to be a customer would call. We'd make that delivery no matter what time of day. However, now because of the fuel impact, we've had to say we can only go north in the morning or we can only go south in the afternoon.
MILLER: But as she and other small business owners know, you sometimes have to go the extra mile to keep business blooming. Erika Miller, NIGHTLY BUSINESS REPORT, Paramus, New Jersey.
GHARIB: Tomorrow, we wrap up our series "Pain at the Pump" with a look at how record high energy costs are affecting state and local governments.
"Street Critique" -Hilary Kramer, Chief Market Strategist at Greentech Research and Author of "Ahead of the Curve"
PAUL KANGAS: Tonight's "Street Critique" guest likes growth stocks and right now she's seeing growth opportunities overseas. She's Hilary Kramer, chief market strategist at Greentech Research and author of "Ahead of the Curve." And Hilary, good to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Nice to see you, Paul. Thank you for having me.
KANGAS: Before we get into your international stock picks, let's talk about the U.S. market. The Dow off over 420 points in the last two sessions. Oil over $133 a barrel. What are you seeing here?
KRAMER: The real problem is that companies across the board from chemical companies, transportation, specifically airlines, they're all starting to whisper lower guidance. They haven't done it officially, but this is translating into stocks being sold off because stocks are all based on growth. That's what creates value and upside in the stock price and therefore money in a shareholder's pocket.
KANGAS: OK. Fair enough. Now on to your selections. You like Companhia Vale Do Rio Doce (RIO) or something like that.
KRAMER: Very well done Paul.
KANGAS: I call it Rio. KRAMER: I just call it Rio.
KANGAS: R-I-O on the big board. Tell me what they do and why you like it.
KRAMER: OK. Rio is a Brazilian company that produces iron ore, pellets, aluminum copper. They're one of the largest nickel producers in the world. Rio is the largest provider of iron ore to China. Iron ore is an ingredient in the making of steel. RIO -- I have a price target of $60 and some of the houses on the street including Goldman Sachs have a high $56 target in fact.
KANGAS: It's got a strong-looking chart. How about another selection?
KRAMER: OK, the same theme which is construction, growth, emerging markets. Chicago Bridge (CBI). I've talked about this stock before. I own Chicago Bridge. The ticker symbol is CBI. It's a Dutch company, not a Chicago-based company. The market here is inefficient because the stock is $43 because of misinterpretation of what they do. They are not just building bridges. They are not fixing roads. They are not building schools in poor municipalities across this country. They are absolutely winning because they are a supplier and a construction engineering company to oil and gas companies especially in the Middle East.
KANGAS: You look another Brazilian issue, Petrobras, PBR on the big board.
KRAMER: Yes. PRB is another company that I bought. I bought it a few months ago originally because Petrobras had a discovery that's the most important reserve discovery in the last 50 years in terms of supply. And Petrobras is buying up the oil rigs all over the country, leasing them out actually. I can see Petrobras, which is now $75, easily going to $100. I think it's a great way for anyone to play the rising price in oil and the demand in the emerging markets.
KANGAS: We just have 40 seconds left. Your final choice is a China play. Tell me quickly.
KRAMER: Aluminum Corporation of China, ACH is the ticker symbol here in the U.S. The stock is $44 right now. I believe that Aluminum Corporation of China will continue to grow because there's such demand for aluminum. It's the ingredient in everything from real estate to electronics and obviously being based in China, they have the market share and they have all the regulatory rulings on their side in terms of being able to supply and pricing power.
KANGAS: Hilary, do you own any of the stocks you've mentioned or have other disclosures?
KRAMER: Yes I own Chicago Bridge and I own Petrobras.
KANGAS: Very good. Great to see you once again.
KRAMER: Thank you, Paul.
KANGAS: My guest Hilary Kramer of Greentech Research.
"Money File"-Price Panic
SUSIE GHARIB: In the money file tonight, prices are rising at the pump and at the grocery checkout, but Chuck Jaffe says there's no need to panic. He's senior columnist at Marketwatch.
CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: American consumers were supposed to be cheered last week by news that consumer prices, excluding food and energy costs, barely went up in April. And that would be good news, if we didn't have to eat anything or drive anywhere. But in the real world, consumers are staggered by just how hard the economy is hitting their day-to-day budget. A recent AARP study showed that 81 percent of Americans aged 45 and up are now taking steps to ride out the economy's troubles, protective measures that include everything from cutting back on medications to shrinking retirement savings contributions, from postponing the payment of some bills to putting off retirement altogether. Some of those decisions could have disastrous consequences. Consumers need to avoid being caught in the disconnect between CPI numbers, which indicate that average inflation is not so bad and the gnawing feeling they get at the cash register, which says that they're not the average person and that their standard of living is about to start slipping. Rather than a knee-jerk reaction to feeling pinched, consumers need to re-examine their budget and their habits with an eye toward keeping their standards high while minimizing waste and inefficiency. No matter whether the news on the CPI is perceived as good or bad, consumers need to make sure that they don't turn ordinary inflation into personal desperation. Inflation should always be factored into savings and spending plans. It may be higher now than in recent history, but it's far from panic stage. That was last week's good news. I'm Chuck Jaffe.
Paul Kangas' Stocks in the News
PAUL KANGAS: While those Fed minutes guiding trading in the back half of the day, Wall Street's open was all about surging oil prices. Airline stocks led the way lower pulling the Dow to an 88-point loss by 11:00 a.m. while the NASDAQ was off just five points. A fresh wave of heavy selling was set off by the release of those Fed minutes at 2:00 p.m. as investors mulled over word that inflation and unemployment would like rise and rate cuts are likely over. The Dow Jones Industrial Average plummeted 227.49 points to close at 12,601.19. The NASDAQ was down 43.99 to 2448.27. Standard & Poor's 500 Index tumbled 22.69 points ending at 1390.71. In the bond market, the 10-year note fell 9/32 to par and 17/32, putting the yield up to 3.81 percent.
Big board volume leader on 27.4 million shares, Citigroup (C) losing $1.05 in that weak financial group.
And then General Electric (GE) off $0.73. The company said it's gotten many inquiries from foreign potential buyers for its appliances unit, but it said it's also seriously considering a spin off of that unit. Pfizer (PFE) lost $0.04.
And there you see AMR (AMR) dropping $1.98 as you heard, cutting back on its domestic operations and on top of that, Soleil Securities and Lehman Brothers brokerages cut target prices on a host of airline stocks and downgraded a host of them. Let's have a look at some of the damage here.
Continental Air (CAL), Delta Air (DAL), Northwest Air (NWA), UAL Corp (UAUA) and US Airways (LCC) all significant losses on the day.
And then we see Bank of America (BAC) losing $0.76 in the weak financial sector.
JPMorgan Chase (JPM) a weak financial, off $1.28.
ExxonMobil (XOM) lost $0.89, despite the higher oil prices.
Ford Motor Co (F) a $0.20 drop.
And then Time Warner (TWX) with a $0.09 gain. The company plans to spin off its cable division, which in the fourth quarter will pay a special $10.27 per share dividend.
Rounding out the active list, Wells Fargo (WFC) with a $0.35 loss.
The housing stocks, particularly hard hit today because the Fed's latest minutes suggested they'll be no more rate cuts or at least they won't be likely. Centex (CTX), Lennar (LEN), KB Home (KBH), MDC Holdings (MDC), Ryland Group (RYL) all major losses on that sector of the market.
Hewlett-Packard (HPQ) dropped $1.66. After the close yesterday, as we reported, second quarter earnings were high, $0.87 versus $0.70 last year, better than expected but today, Bank of America cut the price target on HP stock from $57 down to $53 a share.
SLM Corp (SLM) that's Sallie Mae, down $1 or up $1.22. The Bush administration said it's planning to pump liquidity into the shaky student loan market and that helped that stock.
National Fuel Gas Co (NFG) up $3.19. Standard & Poor's boosted its earnings estimate, repeated a "buy." UBS financial upgraded it from "neutral" to a "buy."
And then Lehman Brothers (LEH) down $2.44. Credit Suisse predicts the company will have a second quarter loss of $0.60 a share.
NASDAQ's most active, Apple (AAPL) down $7.71.
And then Google (GOOG) tumbling $28.61. Microsoft hopes to gain on Google through a new service on the Internet called live search cash back which pays consumers who buy items they find through Microsoft's search service.
Research in Motion (RIMM) down $5.71.
Baidu.com (BIDU) tumbled $17.14.
Microsoft (MSFT) $0.51 loss itself.
Intel (INTC) fell $0.43, although the company said its microchip packaging plant in Chengdu, China returned to full production today after a shutdown after the recent powerful May 12th earthquake. No shipments were missed from the factory.
Then we see First Solar (FSLR) tumbling over $19. The Friedman Billings brokerage downgraded it from "market perform" to "under perform."
Cisco Systems (CSCO) a $0.48 drop there.
And Yahoo! (YHOO) $0.15 loss.
Qualcomm (QCOM) a $0.12 gain.
And then over on the American exchange, finally we see Mexco Energy (MXC) soaring $5.97 on news the oil and gas company has completed a very promising well in Loving County, Texas. The stock began trading this month at a price of $8.70.
