NBR Transcripts-June 2, 2008
Monday, June 02, 2008Big Bank Shake Ups
SUSIE GHARIB: Financial stocks got pounded today on news of the ouster of Wachovia's CEO and a downgrade by Standard & Poor's of three big Wall Street firms. S&P cut its debt ratings on Lehman Brothers, Merrill Lynch and Morgan Stanley, saying the outlook for large U.S. financial institutions remains negative and there could be more write-offs.
Meanwhile, Ken Thompson was forced out as CEO of Wachovia after eight years in that role. Thompson's duties will be assumed by Chairman Lanty Smith, while the bank searches for a permanent replacement. Wachovia more than tripled in size under Thompson's watch, including the purchase of Golden West Financial in 2006. That deal was a big factor in Thompson's departure, according to Morgan Keegan bank analyst Robert Patten.
ROBERT PATTEN, SR. BANK ANALYST, MORGAN KEEGAN: Well, if you look at when they bought out Golden West, since then, they've wrote out (ph) about $50 billion in market cap value. The stock's down 57 percent. Obviously they've leveraged heavily into the California economy, heavily into the mortgage business and with falling home prices and a recession, they're seeing charge-offs from the assets escalate at a much faster rate.
Recession or Recovery? Where Is The Economy?
SUSIE GHARIB: While the credit crunch has left the nation's banks in a mess, fresh data out today is raising new questions about the health of the U.S. economy. The Institute of Supply Management's index of manufacturing activity rose to 49.6 percent in May from 48.6 percent in April. It is the first major snapshot of the economy in May and a reading below 50 suggests the manufacturing sector is contracting. But is that true for the overall economy? Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Are we or aren't we in recession? That's the big question currently facing the U.S. economy. Even though some recent economic data has been a bit stronger, the majority of economists believe the U.S. is already in recession or soon will slip into one. A recession is generally defined as two consecutive quarters of negative growth. But it's a panel of experts at the National Bureau of Economic Research that ultimately decides whether the economy has fallen into recession. And it considers other factors, too, such as employment and income. IMF Chief economist Simon Johnson says for anyone pinpointing the start, it's a tough task.
SIMON JOHNSON, CHIEF ECONOMIST, IMF: It's always hard to know when it starts, when it doesn't start. You need quite a lot of hindsight to figure that out. It looks to us like you're very close to negative, the kind of negative growth that leads people calling it a recession, subsequently
PRATT: Johnson is in good company. Former Federal Reserve Chairman Alan Greenspan declared just last week that a recession was probable. His successor, Ben Bernanke, has been more sanguine, saying only that one was possible. On the other hand, President Bush has said the economy is not in recession, but in a slowdown. While that's the minority view, there are plenty of economists who predict the U.S. will skirt recession. Barclays Capital economist Julia Coronado says we will escape one because monetary and fiscal policy are providing tailwinds.
JULIA CORONADO, SR. ECONOMIST, BARCLAYS CAPITAL: There's the fiscal stimulus coming into play. We think that's going to help boost growth in the second half of the year and the Fed cut rates very early and very aggressively. And we think that's going to work its way into the economy in the second half of the year. So, the combination means that we will see a modest pickup going into the second half.
PRATT: But does it really matter whether 2008 will be labeled an official recession year or simply a period of prolonged anemic growth? Deutsche bank economist Joe Lavorgna says it only makes a difference if you're worrying about the direction of interest rates.
JOSEPH LAVORGNA, CHIEF ECONOMIST, DEUTSCHE BANK: If you believe that because we dodged a recession, the Fed now has to raise rates which some pockets of the market believe then that's a big deal. But we believe that whether it's recession or no recession, the period of growth is going to be extended and be weak for such a long time that the Fed will not be raising rates anytime soon.
PRATT: The National Bureau of Economic Research typically does not announce a recession until it's well underway. For that reason, the recession debate is likely to carry on for many more months. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The Corporate Combat Surrounding the Climate Security Act
PAUL KANGAS: The climate change debate come to Capitol Hill today as Senate took up a wide-ranging bill that would cut greenhouse gas emissions by two- thirds by 2050. Under the Climate Security Act, companies would either purchase or be given the right to emit carbon pollution. As Stephanie Dhue reports, that has permitting system has ignited a battle in corporate America.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: To soften the economic blow of putting a price on carbon, Congress wants to give away hundreds of billions of dollars in free emissions permits. That plan has triggered a classic Washington power battle. Paul Bledsoe of the National Commission on Energy Policy says industries are already jockeying for position.
PAUL BLEDSOE, SPOKESMAN, NATIONAL COMMISSION ON ENERGY POLICY: At a certain point, it's every company for themselves. They are very concerned about getting what they see as their fair share of these emissions permits.
DHUE: Support for the bill is being influenced by who will profit from the sale of emissions permits. Some utilities like Exelon, FPL and NRG Energy that use cleaner burning natural gas or nuclear power, support the bill. Exelon, the largest nuclear operator in the U.S., would also like to see a cap on the cost of carbon.
JOHN ROWE, CEO, EXELON: We do hope to benefit, but we support a cost constraint mechanism precisely because we believe the economy can't manage people like us benefiting too much. In other words, we hope to do a little better because of this problem, but doing too much better and hurting the economy isn't good for us either.
DHUE: Utilities that rely more on coal like AEP and Duke Energy, say the Climate Security Act is too costly and will push energy prices even higher. The companies that produce coal, oil and natural gas are pitching for a longer phase-in time to reduce emissions and more subsidies to invest in clean technologies. The U.S. Chamber of Commerce opposes the bill. The Chamber's Bill Kovacs says the proposal amounts to a tax for the majority of energy producers.
BILL KOVACS, U.S. CHAMBER OF COMMERCE: Let's look at the oil companies. They get 2 percent of the allocations. But right now the oil is about 35 percent of the energy that we use in this country. So if they only get 2 percent, that means on day one, the day that this bill passes, they have to begin buying credits in order to sell gasoline.
DHUE: While the debate is heated, the prospects for the bill becoming law this year are dim. Still, the debate is seen as important since it will frame the issues for the next president and Congress to decide. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Dow Chemical CEO Andrew Liveris
SUSIE GHARIB: One company that could be impacted by that cap-and-trade proposal is Dow Chemical. The giant chemical company has felt the pressure of rising energy prices in a big way. Just last week, Dow raised its prices on all products by 20 percent to offset soaring energy costs. Earlier today, I talked with Dow Chemical CEO Andrew Liveris and asked him how customers are reacting to the sharp price hike.
ANDREW LIVERIS, CEO, DOW CHEMICAL: Their reaction has been that they're not surprised. They're not surprised. They have basically in the main come across and said we understand. And I think that's pretty powerful statement. You've got to understand we've actually had price increases now for the better part of four years since oil is down to $40 and natural gas is at $6. They've been seeing price increases as we see now hydrocarbon and energy costs can escalate in essence. As you know, we've had a quadrupling of our input costs, but this latest increase has been to meet the surge that we saw in the last several months on oil in particular. It's gotten to the point where unless we did these price increases, many many many more of our manufacturing facilities would have to be shut down.
GHARIB: Mr. Liveris, besides price increases, what else can Dow Chemical do to deal with high oil prices?
LIVERIS: One of the most significant has been these joint ventures we've established overseas with countries and nation states that own oil and gas that have understood the power of petro chemistry and chemistry in job creation. 120,000 jobs have been lost in the chemical industry the last four years here in the United States. Multiply that by five and you take indirect jobs, Susie, that's over 600,000 jobs. Those jobs are being recreated in nation states that have access to oil and gas resources that are saying come and joint venture with me. I'll give you a discount, a subsidy off the world price so I can bring those jobs to my country. That has earned us over a billion dollars of new income in the last several years that we didn't have four years ago.
GHARIB: Do you think that now that you've made this move today that other chemical companies are going to follow suit?
LIVERIS: We'll watch it. I mean we're not going to go out there and just hang ourselves out to dry. We'll work with our customers, different markets, different end segments have different competitors. We will obviously watch it very closely. We're having everyday meetings right now to (INAUDIBLE) these price increases against volume loss. Of course we'll watch it very closely. We expect some competitors who have already announced (INAUDIBLE) in fact do more than what we've announced.
GHARIB: Now you've been very critical of Washington policy makers for creating what you call a true energy crisis. What would you like to see Washington do?
LIVERIS: Well, I'd start firstly by putting in place all the enactments of the energy act of 2005. Over 70 of those provisions have not been put into place. Some of them have just lapsed due to a lack of funding. These are efficiency measures like building standards. These are actually funding of renewables, funding of clean coal technology. We keep talking about all this but putting in place in '05, none of that is being done. How about increasing supply of natural gas and oil locally? We're sitting on 15 years of oil and 30 years of gas. We can't drill. Eighty five percent of it is off limits because it's on Federal land or OCS. I would do those two things straight away. And (INAUDIBLE) about funding clean coal technology and (INAUDIBLE) biofuels and biorenewables, all the alternatives as well as nuclear. I'd put them all on the table from a Federal funding point of view. In fact, I'd increase oil and gas supply locally, use that as tax revenues to fund these programs. Those three things alone will solve this crisis within two or three years.
GHARIB: As you know, Congress is debating the Climate Security Act. Do you favor that?
LIVERIS: Well, we're members of (INAUDIBLE) yes, we do. We do believe cap and trade. This is a very important problem for humankind. It needs to be solved, needs to be solved with a balance of economics and environment. Clearly cap-and-trade is a good way to incent us all to do it. The devil's in the detail. The Lieberman-Warner bill is mostly (INAUDIBLE) cost containment wise. U.S. cap (ph) supports it. We see the issues that this first five or six years if that bill was to go through in how to make it affordable. You can't just add a new cost burden own the American consumer.
GHARIB: Mr. Liveris, I understand that Dow Chemical is going to be selling its plastics business for $9.5 billion to a Kuwaiti joint venture. What are you going to do with all of that cash when you get it?
LIVERIS: Well, that deal with close later this year and we as you indicated, cashed up (ph). We have a strong balance sheet. When that cash arrives, we'll have no debt. Obviously we won't leave that be the case. Right now we're very, very oriented to a large share buy-back program short of any acquisition targets. We're been looking for acquisitions for the better part of three or four years. None fit us. All the criteria we have out there both financial and strategic. So the likelihood is that we'll just deploy it and invest it in the best chemical company out there, ourselves.
GHARIB: Mr. Liveris, thank you so much for talking to NIGHTLY BUSINESS REPORT. We really appreciate your time.
LIVERIS: Thank you, Susie. Appreciate being with you.
"Commentary"-Oil & Digital Technology
SUSIE GHARIB: In tonight's commentary, oil prices and the digital economy. Here's Michael Mandel, chief economist at "BusinessWeek."
MICHAEL MANDEL, CHIEF ECONOMIST, BUSINESSWEEK: More and more we live our lives online. This digital economy is a culture of abundance. Google, Microsoft and Yahoo! compete to attract customers to their free offerings. By contrast, today's high oil prices reflect a culture of scarcity. Experts have to try and figure out just how much crude is left in the world. Until recently, the digital economy was far more important. Spending on information technology was much higher than spending on crude oil. But that's changed. In the first quarter, U.S. refineries spent $500 billion at an annual rate on crude. That comes close to the amount businesses spent on info tech investment. If oil remains high, we will see if the culture of abundance can survive a battle with the culture of scarcity. One possibility is that the high cost of oil will accelerate the shift into the virtual world. Managers will use video instead of flying across the country. And newspapers, faced with rising energy costs for production and delivery, will drop their print versions and go completely online. Or the culture of abundance could falter under the weight of energy costs. The data centers which power the digital economy are big users of electricity. If oil prices stay high, electricity should soon follow and then data centers could come expensive drains on corporate profits. The eventual outcome can't be known until we see whether oil prices are going up or down. But here's one thing we do know. Oil matters even in the digital economy. I'm Mike Mandel.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street began June with a broad sell off triggered by those top management shakeups at Wachovia and Washington Mutual. With the financial sector leading the way down, the Dow tumbled to a 200-point loss by 1:00 p.m. with the NASDAQ off 50 points. Notable strength in the energy-related stocks gave the market some stability this afternoon and that helped stocks come off their lows of the day, although they still closed sharply lower The Dow Industrial Average ended down 134.50 at 12,503.82. The NASDAQ lost 31.13 to 2491.53. Standard & Poor's 500 Index fell 14.71 points, ending at 1385.67. In the bond market, the 10-year note gained 26/32 to 99 8/32, putting the yield at 3.97 percent.
New York exchange volume leader on 14.6 million shares, General Electric (GE) down $0.31.
Followed by Citigroup (C) off $0.43. Standard & Poor's downgraded the outlook for Citigroup to negative.
Wachovia (WS) down $0.40. As you heard, top management shake up there and Standard & Poor's said it may cut the company's ratings.
Pfizer (PFE) $0.18 loss there.
Bank of America (BAC) fell $0.43. Standard & Poor's revised its outlook to negative for Bank of America. After the close today incidentally, the CEO said no dividend is forthcoming.
Ford Motor Co (F) down $0.16.
AT&T (T) dropped $0.55.
JPMorgan Chase (JPM) in that weak banking group, down $0.85.
The lone gainer in the 10 most actives, General Motors (GM) up $0.34. This week's "Barron's" financial magazine highlights GM, saying the turnaround in the company could accelerate over the next two years and the stock could rise to at least $30 and maybe go as high as $45 a share.
Lehman Brothers (LEH) down $2.98. Standard & Poor's rating services lowered the rating from A plus to A on Lehman with a negative outlook.
Also cut in the ratings were Merrill Lynch (MER). Let's have a look and see what that did, down $1.30.
And also had its ratings cut by Standard & Poor's was Morgan Stanley (MS) off $1.13.
FedEx (FDX) down $1.06. As we touched on, after the close the company is boosting its quarterly dividend 10 percent from $0.10 to $0.11 and also will change the name of FedEx Kinko's to FedEx Office.
Then came the energy stocks, the strongest part of the market by far today. Massey Energy (MEE) up $6.22. Friedman Billings upgraded it from "market perform" to "outperform" and also named its top picks to a coal company, Patriot Coal (PCX) and Consol Energy (CNX) both nice gainers.
And a lot of the price targets were moved higher by Friedman Billings including Arch Coal (ACI), Peabody Energy (BTU) and Foundation Coal (FDL), all with nice closing gains.
Even the refiners were strong today, Holly (HOC) up $4.95. Deutsche Bank upgraded it from "sell" to "hold," did the same upgrade on Tesoro (TSO) which moved up $2.71. Deutsche Bank upgraded "hold" to "buy" on Frontier Oil (FT) which had a nice up move.
Goodrich Petroleum (GDP), the nat gas exploration company, up $2.71. Raymond James financial upgraded it "out perform" to a "buy." Apparently the company has an interest in an east Texas natural gas discovery.
Harris (HRS), the big loser of the day, plunging $10.18. The company, although it's been approached by suitors regarding a takeover or a merger, it has decided to remain independent.
And the Chicago Mercantile Exchange (CME) down $18.20. "Financial Times" reports the company's attempt to acquire Nymex likely to be derailed by shareholder opposition. Nymex stock fell $4.12.
Apple (AAPL) topped the NASDAQ active list, down $2.65.
Microsoft (MSFT) $0.52.
Google (GOOG) losing $10.80.
Cisco Systems (CSCO) a $0.37 drop.
Research in Motion (RIMM) off $1.85.
First Solar (FSLR) off $11.58.
Intel (INTC) the lone gainer in the actives up $0.02 a share.
Baidu.com (BIDU) down $7.31.
$0.84 loss in Qualcomm (QCOM).
And then Dell (DELL) off $0.27.
Elsewhere, Acorda Therapeutics (ACOR) up $6.74 on the prospect it might get FDA approval for its multiple sclerosis treatment.
And another therapeutic company which was a big gain, Avant Immunotherapeutics (AVAN) up $3.97. Researchers say the company's treatment for brain cancer doubled the survival rate according to a recent study. Those are the stocks in the news tonight.
