NBR Transcripts -Tuesday June 3, 2008
Tuesday, June 03, 2008New Concerns About Lehman Brothers' Liquidity
SUSIE GHARIB: The financial health of Lehman Brothers was in the spotlight on Wall Street today. Shares of the investment firm tumbled 9.5 percent on growing speculation Lehman needs to raise billions of dollars in additional capital and could report its first ever quarterly loss later this month. In response, Lehman denied rumors it had borrowed funds from the Federal Reserve recently and said it had $40 billion in cash on hand at the end of last month. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lehman Brothers and other investment banks have been trying to hedge against losses in mortgage-related securities. But according to Sanford Bernstein analyst Brad Hintz, a former Lehman CFO, many of those hedging strategies are failing.
BRAD HINTZ, BROKERAGE ANALYST, SANFORD C. BERNSTEIN: Lehman is probably going to take some losses related to their hedges. Ineffective hedges, these things happen. This time it's happening to Lehman. Last quarter it was Merrill Lynch. I think until we actually clear these mortgages off the balance sheet, all the brokerage firms are going to face this uncertainty. And Lehman happens to be the unlucky one this time.
MILLER: The prospect of more write-downs is a key reason Wall Street analysts have become more pessimistic about Lehman's second quarter earnings due out in a few weeks. According to Thomson Reuters, the Wall Street consensus forecast today is for a $0.07 a share profit. That's a huge drop from the $1.04 expected a month ago. However, some analysts think Lehman will actually report a quarterly loss for the first time in its 158-year history. Many industry experts think Lehman will have to raise about $4 billion in capital to shore up its balance sheet. The big question is how.
HINTZ: Whether they'll do that in the public market, in the U.S. market going to their stockholders or whether they'll do that by going to financial sponsors, the Saudis or a group like that. I think the question is still out on that.
MILLER: Investors were further rattled by comments today from Standard $ Poor's detailing yesterday's decision to lower ratings on Lehman, Merrill Lynch and Morgan Stanley. S&P debt analyst Scott Sprinzen does not expect overall credit conditions to improve dramatically this year.
SCOTT SPRINZEN, CREDIT ANALYST, STANDARD & POOR'S: We don't see that materializing. It's going to be very gradual. We think it could be well into next year before people start feeling that the markets are normal again. It could even be into 2010.
MILLER: However, most analysts do not think Lehman or any other major investment bank is in danger of collapsing, especially because the Federal Reserve now lends directly to those firms.
SPRINZEN: Certainly that is a supportive factor. If they need to, with certain assets, the companies are now able to go and borrow against those directly with the Fed, which isn't something they were able to do previously. So that mitigates some of the concerns that we have.
MILLER: But the fact that the Fed is involved in this at all suggests the magnitude of the problem. The Fed's lending plan officially ends in September although many people think the central bank will extend it. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Inflation Continues To Draw Strength From The Sagging Dollar
PAUL KANGAS: Investment banks aren't the only things the Federal Reserve is interested in supporting these days. Today, Fed Chairman Ben Bernanke talked up the value of the U.S. dollar. Since the sagging greenback raises the price of oil and other imports, that's a major inflation concern. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the Washington battle of the buildings, the Treasury has long held the franchise on speaking out about the dollar. So markets took note when the Federal Reserve stepped out front today and Chairman Ben Bernanke said the dollar's decline has led to what he called an unwelcome rise in inflation. Speaking by satellite to a monetary conference in Spain, Bernanke explained the Fed's mandate of promoting maximum employment with minimum inflation put the dollar on his agenda.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.
GERSH: Economist Fred Bergsten has argued for more than five years that the dollar needed to come down in order to bring the huge U.S. trade deficit under control. Bergsten now says Bernanke is right to try to head off another sharp drop in the dollar.
FRED BERGSTEN, DIR., PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: In terms of U.S. international competitiveness, the dollar still needs to come off, probably another 5 to 10 percent. Now having said that, it has come down by 30 percent over the last six years; most of the dollar's correction has taken place. Probably all of its need correction has taken place against the euro, the Canadian dollar and most of the currencies of our trading partners.
GERSH: Since lower interest rates weaken investor interest in the dollar, analysts like Josh Bivens read Bernanke's speech as a signal further interest rate moves by the Fed are on hold.
JOSH BIVENS, ECONOMIST, ECONOMIC POLICY INSTITUTE: I definitely got the sense that it was a speech that was in large measure plowing ground to prepare people for don't expect big, aggressive rate cuts anytime soon.
GERSH: Although the Fed reserves the right to change with the economic winds, for now Bernanke said interest rates and monetary policy are well- positioned to keep the economy growing with moderate inflation. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SUV Drivers Looking To Downsize Are Hitting Financial Roadblocks
SUSIE GHARIB: General Motors said today it is shutting down four truck and SUV plants in North America. The factory closings in Ohio, Wisconsin, Canada and Mexico could result in 10,000 job cuts. They are expected to generate an additional $1 billion in cost savings. It's the latest restructuring move by the top-selling U.S. auto maker and once again a move away from big vehicles towards smaller, more fuel efficient ones. GM also announced plans to build a smaller Chevrolet car in Ohio and make the Chevy Volt electric vehicle in Detroit. GM Chief Executive Rick Wagoner said today's announcements are in response to general economic conditions in the U.S. and the unprecedented rise in oil prices.
RICK WAGONER, CEO, GENERAL MOTORS: These higher gasoline prices are changing consumer behavior and rapidly, significantly affecting the U.S. auto industry sales mix. We at GM don't think this is a spike or a temporary shift. We believe that it is by and large permanent.
GHARIB: High gasoline prices were the main reason GM and other U.S. auto makers reported a large drop in vehicle sales during May. Sales tumbled 28 percent last month at GM. And increases in fuel-efficient cars could not make up for soft demand for trucks. Ford sales were off 16 percent. Truck and SUV sales declined the most, with F-series trucks falling 31 percent. Chrysler was down 25 percent but the auto maker says its $2.99 gas promotion boosted showroom traffic. And Toyota sales slipped 4 percent, a reversal for the Japanese auto maker which posted a 3.5 percent increase in April.
PAUL KANGAS: Meanwhile, many consumers hoping to trade in big gas-guzzlers for more fuel efficient vehicles are running into a roadblock. Re-sale values on big sport utilities and pickups are plummeting. As Diane Eastabrook reports, those slumping values are creating yet another problem for the troubled auto industry.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mike Sweeney is caught in an upside down auto loan. Sweeney bought this 2005 Dodge Durango last summer when gas prices were in the $2 a gallon range. Now that prices are double that, he wants to trade in the sport utility for a more fuel efficient vehicle. The problem is, Sweeney owes $17,000 on the Durango, but it's worth a lot less.
MIKE SWEENEY, SPORT UTILITY OWNER: Today I think the last time I looked at my blue book it was like somewhere in the 12s.
EASTABROOK: Actually a check on the Kelly blue book website, which tracks vehicle values, indicates the Durango is worth closer to $10,000. Analysts say Sweeney's situation isn't unusual these days. Soaring gas prices are dramatically driving down demand for big sport utilities and pickups, therefore, driving down their residual or resale values. Manheim Auto Auctions says in April the average resale value of full-size SUVs dropped 17.5 percent compared to the same month last year. The average resale value of full-size pickups plunged 15 percent. Global Insight auto analyst John Wolkonowicz says this type of event is not unprecedented.
JOHN WOLKONOWICZ, AUTO ANALYST, GLOBAL INSIGHT: We saw this phenomenon to some extent back in the '70s with the two energy crises of '73 and '79. But, we certainly haven't seen anything of this magnitude in recent history.
EASTABROOK: In the showroom at Elmhurst Toyota, smaller, more fuel efficient vehicles are getting a lot more attention from potential buyers, while larger used sport utilities sit outside practically unnoticed. Elmhurst Auto Group Vice President Kurt Schiele admits the trade-in market for big trucks and SUVs is tough. But he says his dealership tries to help customers with upside down loans trade-in those vehicles.
KURT SCHIELE, V.P., ELMHURST AUTO GROUP: We can take a look, we can shop their vehicle to make sure we get the most we possibly can for it. In some cases they need to have an extra down payment to cover some of the negative equity that they have in their vehicle.
EASTABROOK: Meanwhile, as fuel for the Durango takes a bigger bite out his family's budget, Sweeney ponders his options. For now, trading in the sport utility isn't one of them.
SWEENEY: I'd like to buy a smaller car, but for me it's probably cheaper if I keep what I have and park it and get another car rather than trying to trade it in.
EASTABROOK: Analysts think if gasoline prices fall to around $3 range, then sales of large SUVs and pickups could rebound, taking resale values with them. But they doubt that sales will ever return to the robust volumes they were at just a few years ago. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Elmhurst, Illinois.
"Of Mutual Interest"-William Hench, Assistant Portfolio Manager, Royce Opportunity Fund
PAUL KANGAS: In tonight's "Of Mutual Interest" segment, we focus on a fund that concentrates on value plays in the small cap and micro cap sectors, Royce opportunity fund. While it's down for the year to date and full year, it is still ahead of its benchmark, the Russell 2000 index, for the five and 10 year periods. And since its inception, the fund has returned an average of 14.9 percent per year. William Hench is the assistant portfolio manager of Royce opportunity fund. Bill, welcome to NIGHTLY BUSINESS REPORT.
WILLIAM HENCH, ASST. PORTFOLIO MGR., ROYCE OPPORTUNITY FUND: Thank you Paul.
KANGAS: Your fund utilizes an opportunistic value approach. What does that mean?
HENCH: Right. Our funds are principle portfolio manager Bud Ano has been working with small companies for 30 years and what we're trying to do is buy stocks that are very cheap, perhaps have an issue in the short term, but over the longer term can really outperform and give us some performance that we think will help the fund do better than the Russell 2000.
KANGAS: Understood. After being closed for some time, your fund reopened to new investors earlier this year. Is that because you thought the market was a buy at that time and if so, would you say you were a little early?
HENCH: Well, this fund as well as some others at Royce and Associates opened up a little while ago after the market had taken on some pretty big losses. So, this fund as well as the others we thought presented some very good opportunity to buy some more stocks at very good prices.
KANGAS: In the past, you've had good results buying industrial stocks. Are you still doing that or there other sectors you like better in light of the slowing economy?
HENCH: We do like the industrials a lot. We think it's a global play. We think a lot of the smaller companies in the U.S. have terrific technology and terrific ability to produce goods that are needed for infrastructure, not only here but also in China, India and in the Arab world as well.
KANGAS: Of your current holdings though, are there some stocks you regard as good buys right now?
HENCH: Right. One that we like a lot is called Bottom Line Technology (EPAY).
KANGAS: We have a chart up there.
HENCH: They are a payment processor and they've got some excellent software for financial institutions as well as law firms and insurance companies. A great recurring revenue stream as well.
KANGAS: How about a second selection?
HENCH: Second one we like to Timkin (TKR), which is part of that industrial, global industrial play. It's one of our bigger holdings and it's also a name that has taken advantage of just being in a lot of -- they got 27 locations, 27 companies in different locations around the world and they have really taken advantage of strength overseas.
KANGAS: Symbol is TKR on the New York exchange.
HENCH: Right.
KANGAS: We have time for one more.
HENCH: Sure, last one we like is Penske Automotive Group (PAG) and it's a little controversial at this time. They are a large auto dealer that's got over 300 dealerships, but they've also got a little kicker in that they are the distributor in North America for the smart car, so a great managed company with --
KANGAS: PAG is the symbol on the big board. Do you own any of the stocks personally or have any other disclosures to make Bill?
HENCH: I don't own any of those, but the fund obviously owns them and I as well own the fund.
KANGAS: Thanks very much for your insights.
HENCH: Thank you, a Paul.
KANGAS: My guest, William Hench of the Royce opportunity fund.
"Last Word"-The Bubbly That Swims With The Fishes
SUSIE GHARIB: And finally tonight, when it comes to champagne, one French bubbly maker is making waves, literally. Louis Roderer has stashed dozens of bottles of champagne under 50 feet of seawater, off the coast of Normandy. The idea is to see if the water temperature in the area and the gentle rocking of the waves will help age the champagne properly. In a year, Roderer will taste test that wine against champagnes stored the usual way, in a wine cellar. And Paul, other firms have used the seawater-based method for still wines. This is the first time that a sparkling wine has been aged this way.
KANGAS: After rough waves that cork will come out of a bottle flying like a rocket.
GHARIB: And we'll toast you.
NBR Transcripts -Tuesday June 3, 2008
PAUL KANGAS: Fed chief Bernanke's speech gave stocks an opening lift as the dollar firmed up while oil futures headed lower on Wall Street. In choppy morning trading, the Dow managed to post a 31-point gain at noon with the NASDAQ up 20 points. The upturn didn't attract a following because of those concerns we told you about that Lehman may need to raise more capital. By 2:30 this after, the Dow had fallen to a 150-point loss. Late buying however did trim the losses a bit by the final bell. So the Dow Industrial Average closed off 100.97 points at 12,402.85. The NASDAQ Composite down 11.05 at 2480.48. Standard & Poor's 500 Index lost 8.02 points to 1377.65. In the bond market, the 10-year note rose 19/32 to 99 27/32, putting the yield at 3.89 percent. Big board volume leader on 23.4 million shares, Lehman Brothers (LEH) losing $3.22 and traded as low as $29.02. As you heard, it's considering raising billions of dollars in fresh capital to shore up its balance sheet. Wachovia (WS) down $1.48. The bearish talk on Lehman undermined the financial sector in general today.
Citigroup (C) lost $0.04.
General Electric (GE) bucking the trend, up a nickel a share.
And then Pfizer (PFE) down $0.17.
Moving along in the active list, Bank of America (BAC) down $0.27.
AT&T (T) lost $0.57.
There you see Ford Motor Co (F) edging $0.04 higher even though its May sales were down 16 percent as you heard.
General Motors (GM) edged up $0.14, cutting truck and SUV production and it's even considering selling its Hummer division. Its May overall sales down 28 percent.
ExxonMobil (XOM) dropped $2.10, a little profit taking in the oils.
McDonald's (MCD) lost nearly $1 a share. JPMorgan made cautious comments about fast food stocks because of high fuel and high meat prices.
Monsanto (MON) up $4.59, traded as high as $136.97. BB&T capital brokerage boosted earnings estimates in reaction to skyrocketing phosphate rock prices.
CSX Corp (CSX), the big rail, down $3 a share. UBS financial downgraded it to "neutral" from "buy" despite the company's predictions for 18 to 21 percent annual earnings growth from now to the end of 2010.
Big steel, US Steel (X) up $4.70 after Deutsche Bank boosted its price target from $165 to $220 a share.
WH Energy Services (WHO) jumping $7.68. Smith International will acquire the company for $56.10 in cash plus about a half a share of Smith International stock. The whole deal works out to $93 a share for WH holders and Smith stock was down $1.18 on that acquisition news.
NCI Building (NCS) up $3.25. It's a non-residential construction firm. Second quarter earnings jumped to $0.76 from $0.31 last year. The Street estimate was only $0.32 so a lot better than expected.
American Axle & Manufacturing (AXL) down $1.54. One of its biggest customers is General Motors which is closing those four big truck and SUV plants, not good for American Axle business obviously.
Then Tyson Foods (TSN) down $1.47. South Korea will delay resumption of U.S. beef imports due to a negative public reaction. Also, Tyson is going to eradicate a flock of about 15,000 chickens in northwest Arkansas that had been exposed to a mild strain of the bird flu.
NASDAQ's most active, Apple (AAPL) down $0.73.
Followed by Google (GOOG) down $7.70.
Research in Motion (RIMM) fell $3.51.
Microsoft (MSFT) $0.49 loss there.
Intel (INTC) down $0.26 a share.
Cisco Systems (CSCO) dropped a penny.
Oracle (ORCL) up $0.23.
First Solar (FSLR) gained $1.36.
Qualcomm (QCOM) $0.71 loss.
Baidu.com (BIDU) up $4.34.
Yahoo! (YHOO) dropped $0.25. "Wall Street Journal" reports Carl Icahn will seek to remove Jerry Yang as CEO if the deal with Microsoft fails. After the close, Yahoo! pushed back its July 3rd annual shareholders' meeting to August 1st.
Then New Frontier (NOOF) down $1.54. The company had higher fourth quarter earnings, $0.08 versus $0.07 last year, but a penny below the Street estimate and it's suspending its cash dividend.
And finally, Layne Christensen (LAYN) tumbled $7.05 after posting higher first quarter profits but said poor weather hurt results at its water infrastructure unit.
