NBR Transcripts-May 22, 2008
Thursday, May 22, 2008The Impact of Rising Oil Prices On All Aspects of the Economy
SUSIE GHARIB: Oil prices spiked to $135 a barrel today before pulling back. In New York trading, July crude futures closed at $130.81 a barrel, down $2.36. Those sky-high crude prices are translating into record high gas prices which now average $3.83 a gallon nationwide and more than $4 at many stations across the country. As Suzanne Pratt reports, there are growing concerns about the impact of rising energy costs on the U.S. economy.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: So far, the economic fallout from higher oil costs has been fairly mild. Still, with the recent record run up in crude prices, economists are growing more concerned about the effect on U.S. consumers and businesses. It used to be that $100-a-barrel oil invoked a doom and gloom scenario. Now, some economists say that threshold is more like $150 a barrel. Economist Bob Brusca thinks if oil prices remain at current levels, the U.S. will tip into recession.
ROBERT BRUSCA, CHIEF ECONOMIST FACT AND OPINION ECONOMICS: If we were lumberjacks, we'd be hollering timber. This is it for the economy. This is too high an oil price for the economy to deal with. The rebates that are coming through to people aren't going to be sufficient to deal with this.
PRATT: But not all economists agree with that thinking. Lehman Brothers' Ethan Harris says monetary and fiscal policy responses should offset rising energy costs.
ETHAN HARRIS, ECONOMIST, LEHMAN BROTHERS: I don't think we're going to get an outright recession because we've had these very aggressive moves from the Fed in terms of supplying credit and cutting interest rates and because we have these big tax rebates that are helping in a sense to pay people's gas money over the next six months.
PRATT: Part of the reason the economy so far has been able to weather sky-high crude prices is that gasoline prices have not climbed as quickly. While crude prices have doubled since last year, the average cost of unleaded gas is up only 19 percent. But, if crude oil hits $150 a barrel, gasoline prices are expected to top $4.50 in many areas of the country, particularly as demand heats up in the summer driving season. Experts say at that level consumers will curb spending even further. Others say another sharp spike in crude prices and the economy, which is also coping with other headwinds, will not recover in the second half.
HARRIS: I think with each successive round higher in oil, we get more downward pressure in the economy. I mean, at this stage we're looking at an economy that's just barely in positive growth territory. So, it doesn't take that much more to finish the job and drive us into recession.
PRATT: Higher oil prices are a problem for economies worldwide. Some experts say if prices head sharply higher, there will be a global recession, not just one here in the U.S. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Pain at the Pump"-The Impact on State & Local Government
PAUL KANGAS: The rising cost of fuel is showing up in more places than the corner gas station. It's starting to take a toll on state and county budgets. Virginia's Fairfax County has one of the largest vehicle fleets in the nation, using nearly 10 million gallons of fuel each year. As we wrap up our series "Pain at the Pump," Stephanie Dhue looks at how the county is coping with sky high gas and diesel prices.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fairfax County, Virginia maintains 1,600 school buses in a fleet of more than 6,000 vehicles. It takes a lot of fuel, mostly diesel, to keep things rolling. To cut consumption and control pollution, the county has already restricted idling, reduced the number of cars it uses and shifted schedules to optimize efficiency. David Duvall is with the county's department of vehicle services. He says the main focus now is on hybrid vehicles.
DAVID DUVALL, FAIRFAX COUNTY DEPARTMENT OF VEHICLE SERVICES: Our effort is in understanding and promoting the concept, because we see it as a very viable near-term means of drastically reducing fuel consumption.
DHUE: Conservation has reduced the county's fuel consumption. But its fuel budget has soared from $14 million in 2005 to more than $40 million for fiscal year 2009. In fact for this year, the county's fuel budget is $800,000 in the red. At the same time because of falling property values, there is less revenue coming in from real estate taxes. Supervisor Gerry Connolly says Fairfax is feeling the squeeze.
GERRY CONNOLLY, CHAIRMAN, FAIRFAX COUNTY BOARD OF SUPERVISORS: That double whammy is putting a huge crimp in our style. We had to cut the budget to the point where, on the county side of spending, we're actually going to contract. We're actually going to spend less this next fiscal year than we did this fiscal year.
DHUE: One of the cuts, plans to purchase a hybrid school bus, which cost twice as much as diesel. Fairfax is also raising the property tax rate, although receipts are still expected to be lower. Connolly worries that services could be hurt.
CONNOLLY: If we got it wrong and it goes beyond $4.00 a gallon, we're going to have to find money that we don't really have and that means some service will have to be cut back.
DHUE: It's a familiar story for state and local governments around the country. Bill Pound who represents state legislatures, says states are making budget trade-offs.
BILL POUND, EXECUTIVE DIRECTOR, NATIONAL CONFERENCE OF STATE LEGISLATURES: It may be in terms of transportation and infrastructure, that you postpone a project, that you say we were going to do this in 2008. Now we're going to do it in 2009 or 2010. We'll just let matters get worse a little bit. DHUE: There's been discussion about a holiday from gas taxes for the summer. But that would be costly for states, which depend on gas taxes to fund transportation projects.
POUND: It means if you're taking a situation where you've already got a problem and you're making the problem worse.
DHUE: With rising fuel costs and a slowing economy, state and local governments are tightening their belts. Many can draw on rainy day funds for now, but if the economy stays weak and gas prices stay high, they may be forced to cut spending or raise taxes. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Fairfax, Virginia.
"Bill of Health"-"Wii-hab"
SUSIE GHARIB: Video games have long been viewed as entertainment. But one in particular, the Nintendo wii is gaining ground as a serious tool for physical rehabilitation therapy. As Jeff Yastine reports in tonight's "Bill of Health" hospitals and clinics are a growing marketplace for Nintendo and its hot-selling wii.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's not the same as lifting weights or walking on a treadmill. But the Nintendo wii is part of the physical therapy regimen created for Pedro Raimundez. A stroke took away much of the use of his left hand and use of the muscles on that side of his body. Therapists at Baptist Hospital in Miami put the wii's wireless motion controller in his hand and let him loose on one of its games.
PEDRO RAIMUNDEZ, STROKE VICTIM: It's different than somebody else telling you what to do. It's good.
YASTINE: Physical therapist Carolina Godinez coordinates the brain injury program at Baptist and discovered the wii as a rehabilitation tool last year.
CAROLINE GODINEZ, PHYSICAL THERAPIST, BAPTIST HOSPITAL OF MIAMI: The wii controller itself incorporates a lot of movement with the upper extremities. It's not just using the thumbs and the fingers. It's also the wrist action, the arm action, the finger action. So you're getting a more roundabout and overall picture using the upper extremity. As well we can do it in sitting. We can do it standing. You're working on balance. You're working on trunk control. You're working on strengthening. There's a lot of areas that you can work on with one simple game.
YASTINE: Nintendo sold 19 million wii's worldwide last year. Analyst Michael Pachter of Wedbush Morgan sees bigger sales ahead as its use spreads outside the home.
MICHAEL PACHTER, ANALYST, WEDBUSH MORGAN SECURITIES: Rehab doctors saw that you could in fact run back and forth playing tennis or boxing people or really swinging at the air. And I think they looked at that and thought that was an opportunity to get patients to do something more physical than they were doing.
YASTINE: Baptist Hospital rehab facility manager Rebecca Mojica says her hospital is not marketing the wii to patients, but its novelty and usefulness in rehab are appreciated by them.
REBECCA MOJICA, MGR. INPATIENT/OUTPATIENT REHAB, BAPTIST HOSPITAL OF MIAMI: People are very in tune. The patients, they are very educated consumers. They're in the Internet. They read the paper and some times been advertised more and more. And by having the equipment, they know that you are up to date, that you're out there and keeping up with the new things available for the rehab patients.
YASTINE: Wedbush Morgan's Pachter says Nintendo's new wii accessory, the "fit" an $89 high-tech balancing board should be a similar hit with rehab clinics. He sees that helping push wii sales to as many as 25 million units worldwide this year. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
"Commentary"-Invaluable Wisdom
SUSIE GHARIB: Tonight's commentator says the most valuable business lessons he has learned came from his father. He's Bill Baker, executive in residence at Columbia University's school of business.
BILL BAKER, EXECUTIVE IN RESIDENCE, COLUMBIA UNIVERSITY SCHOOL OF BUSINESS: I've been in business for 40 years now, but my first lesson on being an effective leader came long before that when I was still in grade school. My dad, who was a sweet and gentle man, was a machine operator in a factory that made precision aircraft parts. Each night, he'd come home frustrated, because his supervisor wasn't interested in his ideas for making the factory more efficient. He was puzzled why when he wanted to give his heart and mind to his employer, they would only take his hands. Eventually my father was promoted to foreman and grew to be well-liked and respected by all those who worked under him. When I was a junior in college, I asked him his secret for being such a good leader. He told me that he just tried to give the best advice he could on how to get the job done and done right and to treat the people under him fairly. He died not long afterwards. His lesson has taken me a long way in the business world. And it's one that I've heard echoed by many of the best leaders I've studied for my new book about leadership. But in this new world of global business, simply expecting that you can hang on to your best employees because they are getting a paycheck is clearly a fallacy. So if America is to regain its luster as the place where the best minds in management are delivering for the shareholders, our shareholders had better think about how progressively these businesses are being led. I'm Bill Baker.
"Last Word"-The Chocolate Commodity
SUSIE GHARIB: And finally tonight, when it comes to making it in candy land bigger is better. That's the reasoning behind the recently proposed marriage of confection giants Mars and Wrigley. And it could be the factor that sugarcoats more pairings in the industry. As Diane Eastabrook reports from the all candy expo in Chicago, the urge to merge could be spurred by chocolate.
NEIL TURPIN, GENERAL MANAGER, GREEN & BLACK'S: Organic means that we don't use any pesticide. We don't use any herbicide.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Green and Black's is one of Cadbury Adams more recent additions. Buying the small organic company gave Cadbury better access to more upscale consumers with a taste for premium chocolate. Green and Black's general manager Neil Turpin says the deal gave his firm a bigger platform to grow its business.
TURPIN: They provided the additional infrastructure that we would struggle to deliver quickly if we were left as a totally independent, so things like route to market, market data and capital to invest in marketing programs.
EASTABROOK: At the all candy expo in Chicago this week, confection companies from around world are looking for ways to sell more product in a more challenging economic climate. Soaring commodity prices are pinching profit margins. At the same time, fewer big retail outlets make it harder for candy companies to raise prices. Morningstar confection analyst Mitchell Corwin says the name of the game going forward is gaining scale either through product innovation or acquisition. But Corwin admits finding good partners is getting harder.
MITCHELL CORWIN, CONFECTION ANALYST, MORNINGSTAR: I would say they are out there, but figuring out which ones you would be interested in as an acquisition candidate, that's a little bit more difficult.
EASTABROOK: In the highly fragmented and crowded candy industry, experts say premium chocolate is the sweet spot. Sales in the segment are expected to increase 30 percent this year over last. With growth in premium chocolate expected to continue at that pace over the next several years, candy makers are racing to expand into the category. Acquisitions are helping the Hershey Company. It now owns Dagoba, an organic chocolate company, and premium chocolate brands Scharffen Berger and Joseph Schmidt. Hershey spokeswoman Jodi Cook says the success of those brands helped spearhead a new line of Starbucks chocolates and other products.
JODI COOK, SPOKESWOMAN, THE HERSHEY COMPANY: We are also launching an extra dark product with pomegranate flavor in it for people who are looking for the antioxidants and the dark chocolate and really the more sophisticated tastes and offerings.
EASTABROOK: Acquisitions of premium lines can also help companies expand traditional ones. Mars snack foods U.S.A. used its Dove brand to help develop a new line of premium M&M chocolates. Sales Vice President Tim Lebel says Mars hopes to grow the premium chocolate category further either with new products or perhaps acquisitions.
TIMOTHY LEBEL, SALES V.P., MARS SNACKFOOD U.S.A.: If you look at it from an indulgence standpoint, people still want to take a moment and reward themselves and a premium chocolate or M&Ms premium is a great way to do that.
EASTABROOK: Analysts think premium chocolate is one way to keep candy in the hands and hearts of consumers, at any age. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
GHARIB: Well, my sweet tooth is craving some of that premium chocolate right now.
KANGAS: Mine too.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street began the day with a technical rebound after two straight sessions of steep losses. An hour into trading, the Dow posted a 56 point gain and the NASDAQ Composite was up 18 points. The pullback in oil futures prompted some of the buying and an unexpected drop in weekly jobless claims by 9,000 claims, helped keep the market in modestly positive ground. But as the day wore on, many investors took to the sidelines ahead of the long holiday weekend coming up and that prevented any major rally. So the Dow Jones Industrial Average closed up a modest 24.43 points at 12,625.62. The NASDAQ Composite was up 16.31 at 2464.58, while the Standard & Poor's 500 Index rose 3.64 points to 1394.35. In the bond market, the 10- year note fell 28/32 to 99 22/32, putting the yield up to 3.91 percent. Big board volume leader on 23 million shares, Ford Motor Co (F) down $0.64. As you heard, it's cutting back on production of the gas guzzlers and just sees a break even 2009.
Then came Citigroup (C) up $0.66.
Pfizer (PFE) down $0.23. Apparently hundreds of people taking the company's anti-smoking product called Chantix are reporting heart problems, vision effects and depression among other things.
General Electric (GE) a $0.02 gain.
Rite Aid (RAD) $0.27 drop there.
Then we see Bank of America (BAC) rising a dime.
Followed by JPMorgan Chase (JPM) up $0.63.
ExxonMobil (XOM) on the drop of oil futures today, down $1.16.
Wells Fargo (WFC) fell or gained $0.21.
And Electronic Data Systems (EDS) up $0.06. Of course, it's being acquired by Hewlett-Packard.
Lehman Brothers (LEH) lost $1.06. Ladenburg analyst Richard Bove is recommending selling this one as well as Goldman Sachs and Merrill Lynch and the other two had modest closing losses today.
Moody's (MOO) down another $2.40. The company hired law firm Sullivan and Cromwell to review its debt rating mistakes due to a computer error that overrated billions of dollars in debt obligations. Yesterday, the stock tumbled about $7 on news of that computer glitch.
BCE Inc (BCE), the big Canadian telecom, up $4, down $4.73. The Quebec court of appeals has rejected the company's buyout by a private equity group. It ruled in favor of bond holders who say they aren't being treated fairly in that buyout deal.
Longs Drug Store (LDG) up $3.48. Preliminary first quarter earnings, nicely higher, $0.63, up from $0.42 last year. Standard & Poor's repeated a "buy" recommendation today. Zales (ZLC) the jewelry chain, up $2.53. Third quarter loss of $0.40 but the Street was expecting a $0.42 loss so a little bit better than expected. The stock reacted positively.
Salesforce.com (CRM) up $3.65. After the close yesterday, first quarter earnings out, $0.08 a share, way up from a penny the year before. Sales soared 52 percent and today, Jefferies brokerage upgraded it from "hold" to a "buy."
Flowers Foods (FLO), famous for its bakery products, up $1.61. First quarter earnings, $0.39, up from $0.31 last year on an 11 percent rise in sales and the company boosted its 2008 earnings forecast to as much as $1.23 a share.
Dicks Sporting (DKE) down $4.29. First quarter earnings dropped to $0.18 from $0.19 a year ago. Same store sales were down 3.8 percent and the company cut its 2008 earnings outlook.
Apple (AAPL) topped the NASDAQ active list, down $1.14.
Followed by Google (GOOG) $0.53 loss there.
Research in Motion (RIMM) down $2.40.
Baidu.com (BIDU) tumbling nearly $20 a share.
Microsoft (MSFT) a $0.22 gain.
Intel (INTC) $0.22 gain as well.
First Solar (FSLR) was down $8.02.
And Cisco Systems (CSCO) rose $0.21.
Dryships (DRYS) down $10.23.
Qualcomm (QCOM), tenth in NASDAQ volume, down $0.31.
Evergreen Solar (ESLR) sun rise today, up $1.82. The company got a long-term contract for $750 million of solar panels to be sold to a German firm.
And it was kind of a sun down for Solarfun Power Holdings (SOLF), off $5.85. Goldman Sachs issued a downgrade from "neutral" to "sell."
Those are the stocks in the news tonight.
