NBR Transcripts- May 28, 2008
Wednesday, May 28, 2008Crude Oil Prices Continue to Rise
SUSIE GHARIB: Oil prices bounced back over $130 a barrel today after a big Wall Street firm set a $150 target price for crude. In New York trading, July crude futures traded as low as $127 but rebounded to close at $131.03, up $2.18. Experts say those sky-high prices are not yet fully reflected at the gas pump. But as Washington bureau chief Darren Gersh reports, there are signs consumers are already changing their driving habits.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a $14 trillion economy with 150 million cars on the road, changing consumer demand for gasoline is not easy to do. But the latest surge in oil prices to over the $130 a barrel level has finally affected the way we drive. Then Energy Department says since the beginning of the year, U.S. oil demand is down 1 percent. Guy Caruso runs the Energy Information Administration and calls the drop a very big deal.
GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION: It is the first time we have seen U.S. motor gasoline demand decline year on year since 1991. So it's been 17 years and that was in the midst of a recession.
GERSH: Caruso adds that the $20 a barrel run up in oil over the last few weeks has not even shown up at the pump yet. He plans to update his summer energy outlook in a few weeks and he now says there's a high likelihood the average price of gasoline will crack $4 a gallon. Caruso thinks the price increase is market driven, with speculation taking a backseat to fundamentals.
CARUSO: In our view, speculation in futures market has really been following the market up, not leading it.
GERSH: Indeed, oil markets barely blinked today. Crude ended $131 a barrel, but that does not necessarily mean dire news for the economy and the stock market. Vanguard chief economist Joe Davis says there is a big economic difference between a disruption in oil supplies and strong global demand.
JOE DAVIS, CHIEF ECONOMIST, VANGUARD GROUP: If oil prices are rising truly because of global demand, then actually the return on the stock market is positive. In other words, the stock market reacts positively to oil price increases, and that is in large part because the revenue of many large cap and other companies is rising globally, despite the increase in input costs such as energy costs.
GERSH: But those energy input costs could be going up a lot more. Morgan Stanley today added to the predictions of sharply higher oil prices, warning limits on worldwide supply could easily lift the price of oil to $150 a barrel. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
AirTravel Is Losing Class
PAUL KANGAS: New figures show the number of international airline passengers traveling in first or business class fell sharply in March, the biggest drop since 2003. That's bad news for airlines which count on passengers in the front of the plane to pay premium prices. The sector is already struggling under the weight of high fuel prices. As Diane Eastabrook reports, some experts say the industry needs to take a fresh look at how it does business.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three decades of airline deregulation have brought U.S. consumers more airlines, more destinations and more discounted fares. Analysts say in this type of environment, carriers can only turn a profit if crude oil is cheap. But that's not the case now. Jet fuel prices are nearly $170 a barrel, more than double year ago levels. Fitch Ratings airline analyst William Warlick says airlines must raise fares substantially over the long haul to cover higher fuel costs. But even he admits that is something the industry has had difficulty doing in the past.
WILLIAM WARLICK, AIRLINE ANALYST, FITCH RATINGS: That's historically been a problem in this industry and it differentiates in many ways from other transportation industries such as rail and trucking, where you do have explicit fuel surcharges. That has not existed in this industry and it's a problem now. And obviously when you try to recover higher fuel costs through higher fares, it has a fairly dramatic effect on demand.
EASTABROOK: While consumers haven't been getting a free ride on airlines in recent years, it can be argued they've been getting a fairly inexpensive one. Since 1990 yields or the price passengers pay to fly one mile, have been relatively flat. Airlines have taken some measures to recoup costs in recent months. They've increased fares incrementally and some have tacked on baggage fees. Joseph Schwieterman studies the transportation industry for DePaul University's Chaddick Institute. He says a wholesale restructuring of fares is necessary. While government intervention might accomplish that, Schwieterman thinks regulating the airline industry again would be a bad idea.
JOSEPH SCHWIETERMAN, DIRECTOR, CHADDICK INSTITUTE: You can only imagine the red ink that would be generated if we have to wait two or three months for a decision from Washington to change fares. Let's hope we don't go in that direction.
EASTABROOK: Experts think market conditions will eventually resolve the fare issue. They say if crude oil remains high, one of more carriers are likely to file for bankruptcy. Schwieterman believes the liquidation of a large carrier could reduce capacity enough to put a floor under ticket prices.
SCHWIETERMAN: We are back to this discussion again, do we have one or two too many carriers and we saw that debate a few years ago. But right now the evidence is almost overwhelming that either the entire industry, assuming fuel prices don't come down, cuts back in double digit fashion or one carrier may be one carrier too many.
EASTABROOK: Analysts say if oil prices remain at their current levels into the fall, then the liquidation of a major U.S. carrier could come by early next year. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
Sales Tax Meets Cyber Sales
SUSIE GHARIB: If you live in New York State, get ready to pay more for your next online purchase. Starting Sunday, a new law will require web sellers to collect sales taxes on shipments into the Empire State. New York State expects the move will generate millions of dollars in new tax revenues. But online retailers oppose it. As Scott Gurvey reports, Internet giant amazon.com is challenging the new law in court.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: State and local governments have been collecting sales taxes since 1921, when West Virginia enacted the first one. Merchants are generally required to collect the taxes and compliance is good. But many states also require that residents report and pay taxes on purchases made from out of state sources. Few do. The issue now is not whether New York can require that its residents pay tax on out-of-state purchases. It is whether New York can force Amazon and other online retailers to collect that tax. Online retailers are concerned the law will set a costly precedent. Patti Freeman Evans of Jupiter Research says it would be a hardship for online retailers to work with 7,500 separate taxing jurisdictions nationwide.
PATTI FREEMAN EVANS, RESEARCH DIRECTOR, JUPITER RESEARCH: It is an increased expense to them to maintain the systems that are necessary to know and understand what taxes to collect in what instances for what amount for what locations.
GURVEY: New York's new law orders online retailers to collect state taxes on purchases shipped to the state. New York is concerned it is losing revenue as consumers switch from brick and mortar stores to shopping on the Internet. Amazon has a physical presence in some states, but not in New York. In a lawsuit filed last month in state court, Amazon says that makes the new law unconstitutional. Tax attorney Brian Andreoli says New York's argument is a stretch.
BRIAN ANDREOLI, PARTNER/TAX ATTORNEY, DLA PIPER: New York State is trying to clarify what the law should be, but technically yes, they are going beyond what has been the conventional wisdom because there is an exemption of taxation on the Internet by the Federal government.
GURVEY: The new law claims jurisdiction when a vendor solicits business and the state says that applies to members of Amazon's affiliates program, some of whom live in New York. Attorney Scott Clark says other states are watching.
SCOTT BRIAN CLARK, PARTNER/TAX ATTORNEY, SONNENSCHEIN NATH & ROSENTHAL: New York is being overly aggressive on this issue. I think unless somebody challenges New York State. other states and other jurisdictions might follow. So I do think there is merit in Amazon's position and it's quite a strong position.
GURVEY: New York has yet to file its answer to Amazon's complaint and this is the kind of case which can drag on for years. But the state is already counting on the new law to generate $50 million in revenue to help its balance the 2009 budget. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Street Critique"-Gene Marcial, "Inside Wall Street" Columnist at "BusinessWeek"
PAUL KANGAS: Tonight's "Street Critique" guest is Gene Marcial. He's the "Inside Wall Street" columnist at "BusinessWeek" and author of "Gene Marcial's Seven Commandments of Stock Investing." Gene, welcome to NIGHTLY BUSINESS REPORT.
GENE MARCIAL, "INSIDE WALL STREET" COLUMNIST, BUSINESSWEEK: Thank you very much, Paul.
KANGAS: I know from reading your column over the years Gene that you often take a contrarian view of the markets. Tell me more about your investing philosophy.
MARCIAL: That's right. Main thing to do is don't follow the crowd. Go against the crowd and you'll be OK.
KANGAS: OK. Can you give our viewers a crash course of your seven commandments? Let's start with the first, buy panic, what do you mean by that?
MARCIAL: Well, panic can be a problem for investors, but it could be your friend. Don't panic is the real situation. Buy when everybody else is panicking.
KANGAS: Then you say, concentrate, don't diversify. That's a little different.
MARCIAL: Yes. Diversification is for the mutual funds and big institutions. For individual investors, they should just concentrate on a few stocks and don't follow.
KANGAS: And then you say buy the losers. That seems a little strange.
MARCIAL: I mean by this not the losers but fallen angels. When these angels fall, pick them up because they are real winners.
KANGAS: OK and then, forget timing, I thought timing was everything.
MARCIAL: Not in the stock market. If your timing is off you, lose your shirt.
KANGAS: OK. Then you say, follow the insider, do you mean insider trading here?
MARCIAL: No, no. The insiders meaning executives, corporate CEOs, they have all the information about their company so follow what they're doing.
KANGAS: Then you say, don't fear the unknown.
MARCIAL: That's right. Like foreign markets, they're full of opportunities. You study these unknowns and you'll find a lot of gems.
KANGAS: And your seventh commandment is, always invest for the long term.
MARCIAL: That's the best strategy. You should always -- don't flip stocks. Don't trade if you're not the real trader. Just stick with what you know.
KANGAS: Very interesting. With those seven rules in mind, can you give our viewers one or two names that meet your criteria?
MARCIAL: Yes. One of them would be Apple. You know, Apple has proven itself to be a very innovative company.
KANGAS: AAPL on the NASDAQ, right?
MARCIAL: AAPL, yes. It's a real growth company. And Steve Jobs, the CEO, has proven that they can come up with simple but innovative and sophisticated devices like the iPhone.
KANGAS: We have time for a second selection.
MARCIAL: Yes. I just wrote about Yahoo! today at "BusinessWeek" because, according to my sources who are very familiar with what's going on between Yahoo! and Microsoft, they say that a deal is imminent. The most likely scenario is, Microsoft will end up buying Yahoo!
KANGAS: Right, the symbol is YHOO on the NASDAQ, correct? MARCIAL: That's right and according to people in the know, including the big stakeholders of Yahoo!, they have exerted their power on Yahoo! to convince them to do a deal. And that's very likely to happen very soon.
KANGAS: Likely to happen mostly with Microsoft, right? Not Google.
MARCIAL: Microsoft is -- the deal with Microsoft would be the most likely outcome. But Google, Google is in the wing.
KANGAS: Gene do you own these stocks personally or have any other discloses to make?
MARCIAL: No, I don't own any stock except McGraw Hill.
KANGAS: Because of the nature of your work.
MARCIAL: No conflicts of interest.
KANGAS: I want to thank you for being with us.
MARCIAL: Thank you very much, Paul.
KANGAS: My guest, Gene Marcial of "BusinessWeek" and author of "Gene Marcial's Seven Commandments of Stock Investing."
"Money File"-Growing A Teen Millionaire
SUSIE GHARIB: In the "Money File" tonight, making your teen a millionaire. Here's Harriet Johnson Brackey, personal finance columnist at the "South Florida Sun Sentinel."
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SO. FLORIDA SUN- SENTINEL: You can, this summer, start your teenager down the road to a well-funded retirement starting from that very first job, mowing lawns or scooping ice cream. It's no secret strategy here. It's a Roth IRA. Your teenager can contribute up to the amount he or she earns up to $5,000. And what a difference that will make. Talk about a 10-year savings plan. At 15, your teen puts $3,000 into a Roth and then contributes $2,000 a year through age 25. Then he or she stops contributing. If that money goes into a broadly diversified portfolio of 60 percent stocks and 40 percent bonds, it will grow substantially by the time your teenager retires, very substantially. According to a broad stock market simulation that the mutual fund company Vanguard produced, the median portfolio value would be more than $1 million. Your teenager, a millionaire or, a tax-free millionaire. Because the money's in a Roth, it is tax-free when it's taken out. So let your teenager roll her eyes when you talk about saving for retirement. There's a lot of power in starting to save early in life. Tell them, they can be millionaires. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: The durable goods report gave Wall Street an opening boost as did the early decline in oil futures. The Dow rose 30 points at the outset of trading while the NASDAQ gained just fractionally. Stocks faltered after oil staged a midday rebound. At noon the Dow posted a 36 point loss with the NASDAQ off 11 points. The financial sector sold off after Citigroup said AIG may have to raise more capital. Selling pressure eased late in the day though and buyers lifted the market into positive ground by the final bell. The Dow Industrial Average closed up 45.68 at 12,594.03. The NASDAQ Composite was up 5.46 ending at 2486.70, while the Standard & Poor's 500 Index rose 5.49 points to 1390.84. Over in the bond market, the 10-year note lost 21/32 to 98 31/32, putting the yield at 4 percent even.
Once again topping the active list today on 20 million shares, Citigroup (C) losing $0.06 a share.
Followed by General Electric (GE) up $0.15. GE notes it had five non-U.S. bidders for its appliance unit.
Pfizer (PFE) in there with a $0.03 loss.
Bank of America (BAC) down $0.30.
Ford Motor Co (F) dropped $0.02. The company said it may cut 12 percent of its U.S. salaried workforce. That's according to the "Detroit Press."
Moving along in the actives, American International Group (AIG) hurting the Dow with the loss of $1.71. Citigroup said it's not clear if the company's capital position is sufficient despite last week's $20 billion capital infusion. Citigroup proceeded to cut the price target on AIG from $47 down to $41 a share.
Wells Fargo (WFC) dropped $0.09.
Regional banks weak today, Wachovia (WS) off $0.60.
JPMorgan Chase (JPM) dropped $0.15.
And then Co vale do Rio (RIO) up $1.02 and that was tenth in volume.
Deere & Co (DE) did well, up $2.72. The company's boosting its quarterly dividend by 12 percent. It'll go from $0.25 to $0.28 a share and the company also plans to buy back $5 billion of its own stock.
Archer Daniels Midland (ADM) losing $2.09. The company plans to offer 35 million equity units at $50 each. Proceeds will be used for general corporate purposes including repayment of short-term debt.
Coca Cola Enterprises (CCE) down $1.11. The company sees a high single digit decline percentage wise in its second quarter earnings, not good news there.
Polo Ralph Lauren (RL) did well, up $7.25. First quarter earnings, fourth quarter earnings, $1 even, up from $0.68 last year and $0.35 above the Street consensus. The company also plans to buy up to $250 million of its own stock.
American Eagle Outfitters (AEO) up $1.39. $0.21 in first quarter earnings versus $0.35 last year, but $0.02 above the Street estimate. The company sees second quarter rising to $0.28 to $0.30 a share.
United Parcel Service (UPS) up $2.14. The company will provide all air transportation for all U.S. package volume for DHL. Air Transport Services Corp., which had that contract, saw its stock tumble $1.73 to only $1.24 a share.
And Keycorp (KEY), one of the weak regional banks, down $2.29. The company sees elevated net loan charge offs this year. RBC Capital cut its price target from $18 to $15 a share. Standard & Poor's downgraded it from "buy" to "hold."
NASDAQ's most active, Apple (AAPL) moving up $0.58.
Followed by Research in Motion (RIMM) $2.67 gain.
Google (GOOG) up $7.34.
First Solar (FSLR) up $8.02.
Microsoft (MSFT) a $0.26 drop. Yahoo! CEO said after the close potential merger with Microsoft has a tremendous amount of power. We'll have more on the possible merger between Microsoft, Google and Yahoo! in an interview with Gene Marcial.
Intel (INTC) $0.13 drop there.
And Baidu.com (BIDU) up $8.44.
Cisco Systems (CSCO) a $0.05 drop.
Qualcomm (QCOM) $0.37 loss.
And then Dryships (DRYS) with a good gain of $8.36 a share.
Expedia (EXPE) up $1.01. Chairman Barry Diller dismissed new rumors that the company would be taken private.
And then finally Daktronics (DAKT) climbed $2.04 after reporting stronger than expected fourth quarter earnings of $0.14, up from $0.09 and that was $0.08 above Street estimates.
