NBR Transcripts- June 4, 2008
Wednesday, June 04, 2008Oil Prices... Peak or Pullback?
SUSIE GHARIB: Crude oil prices continued their slide today and are now down about 10 percent from their record high set two weeks ago. In New York trading, July crude futures closed at $122.30 a barrel, down just over $2. The sell-off came despite mixed news about U.S. energy supplies. The Department of Energy said crude oil stockpiles fell by nearly five million barrels last week, but gasoline and distillate inventories each rose by more than two million barrels. Suzanne Pratt looks at whether the outlook for oil prices is changing.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Is this it? Have crude oil prices finally reached a top? As is often the case with commodities markets, the answer depends on who you ask. Oil trader Ray Carbone says prices have not peaked yet.
RAYMOND CARBONE, OIL TRADER, PARAMOUNT OPTIONS: I think this is a pullback. Markets do not go straight up. This is a prime example of it. We've had pullbacks before and we've rallied. I'm looking for a place to buy. I am not a seller here.
PRATT: But Wachovia securities oil expert Bill O'Grady thinks the May high of $135 a barrel was a near-term top because it made American drivers change their behavior.
BILL O'GRADY, CHIEF INVESTMENT STRATEGIST, WACHOVIA SECURITIES: Americans are reacting to this. We've finally reached a price level where Americans, A, believe it's going to be permanent and B, are going to do something about it.
PRATT: According to the Department of Energy, gasoline consumption in the U.S. fell by 1.4 percent in the past four weeks. Those demand concerns, along with a stronger U.S. dollar, have helped knock more than $10 off the price of crude in the last two weeks. And now, there are signs that worldwide consumption may also decline, as India and Malaysia today raised their domestic fuel prices. Still, some experts predict global demand will stay strong no matter happens here in the U.S.
CARBONE: I still think any slowdown in the European market or the U.S. market is going to be snapped up by the emerging markets.
PRATT: Others expect crude prices to remain in a trading range this year and only move significantly higher if outside forces affect supply, such as a hurricane or increased tension in the Middle East.
O'GRADY: I suspect we're going to stay between this $100-$130 level most of this year, bouncing back and forth. And then as the economy picks up later this year, early next year, we will start to see those upper levels challenged again.
PRATT: While crude prices have pulled back some, the price of gasoline is still moving higher. Today, it reached a national average of $3.98 a gallon or about 27 percent higher than a year ago. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices-2008"-Business & Politics
SUSIE GHARIB: Democratic Party leaders moved today to put the long primary battle behind them, urging super delegates to rally around Senator Barack Obama. The long primary season now looks like it will turn into a long general election campaign, as both the Obama and McCain camps consider a series of pre- convention town hall meetings. As we continue our "Economic Choices '08" coverage, Darren Gersh looks at the themes markets will be watching in this two-man race.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the candidates prepare to jumpstart the general election campaign three months early, analyst Tom Gallagher says investors should understand the direction of change in this race is already set. The real question is the magnitude of that change.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: You think about even a McCain presidency with a Democratic Congress, which is a near certainty, is going to produce a more activist government on the range of issues that markets care about the most: taxes, health care, climate change.
GERSH: Gallagher points out McCain and Obama largely agree on climate change. McCain has already taken a tougher stand on regulation of health insurance companies, though Obama is on record pushing for more aggressive health care coverage. And no matter who wins, taxes are expected to go up under the larger Democratic congressional majority most analysts are predicting. The question, though, is how much taxes go up and analyst Charles Gabriel says the current 15 percent tax rate on capital gains and dividends is at greater risk if Obama wins in November.
CHARLES GABRIEL, MANAGING DIRECTOR, CAPITAL ALPHA PARTNERS: If you think that we are going to see higher dividend, corporate dividend and capital gains taxes, then those companies that really are very rich with dividends, like utilities, are going to be much more at risk and the value of their stocks is going to be discounted.
GERSH: Both McCain and Obama have made it clear they intend to run as agents of change in Washington. But one of the most immediate changes the next president gets to make, the leadership of the Federal Reserve, is not likely to get much attention in the election.
GALLAGHER: The winner in November will pick four of the seven Fed governors and will have the opportunity to decide who the next chairman and vice chairman will be, probably all in the next year.
GERSH: While much of the country has been preoccupied with the elections, financial markets have been obsessed with the housing meltdown and resulting credit crunch. But if some analysts are right and those concerns are easing, Wall Street will have plenty of time to develop new jitters over the next president's agenda. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Weather & Risk Management
PAUL KANGAS: This is the first week of hurricane season. That means insurance companies are keeping a wary eye on the tropics. But it's a different story for firms involved with weather risk management. Energy companies and re-insurers have hedged against the weather for nearly a decade. But as Jeff Yastine reports, new online exchanges are now letting small businesses do the same thing.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This week, priceline.com announced an unusual deal. The company will refund money to buyers of its vacation packages if it rains more than a half an inch a day during half or more of the holiday. How's that possible, by using financial products that hedge against extremes in heat, cold, wind and rain. They're called weather derivatives. Think of them as futures contracts which pay off under specific weather conditions. It could be a powerful hurricane hitting the coast or a drought in the nation's corn belt. There are weather contracts that cover all possibilities. Hedge fund manager David Oliveira invests in weatherbill.com, a company that packages and sells weather derivative contracts.
DAVID OLIVEIRA, CO-PORTFOLIO MGR., NEPHILA CAPITAL: They can choose a term for which they would like to buy weather coverage. They can choose the trigger on which they want that coverage. So is it a half an inch of rainfall. Is it three days of maximum temperature above 85 degrees?
YASTINE: Weatherbill and competitor stormexchange.com are new entrants in the emerging field of weather risk management. Martin Malinow, president of the Weather Risk Management Association, which is meeting in Miami Beach this week, says companies now recognize weather as a financial risk, just like rising commodity prices or interest rates.
MARTIN MALINOW, CEO, GALILEO WEATHER RISK MGMT.: Twenty years ago, we saw the advent of interest rate hedging and interest rate derivatives and equity derivatives, commodity derivatives. And a natural offshoot of that would be to look for other risks in the corporate structure that are embedded that cause variations in earnings and cause people headaches if you are a financial manager. And it makes sense that the next generation of those products would deal with other variables like weather and insurance risks.
YASTINE: There are other weather derivative products, like the hurricane futures contract at the Chicago Merc. They work for large energy companies worried about storm damage. But John Cavanaugh, CEO of Carvill, an insurance intermediary, says even small businesses could use them to prepare for catastrophic weather.
JOHN CAVANAGH, CEO, CARVILL REINSURANCE INTERMEDIARY: I think a lot of retail interest will be developed -- like, for example, hotels on the coast, anybody with coastal exposure that has an impact on their business from hurricane risk.
YASTINE: Trading volumes of weather derivatives rose by more than 30 percent in the past year and experts see that number rising as more companies look for ways to hedge the weather. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
"Street Critique"-Kevin Depew, Executive Editor minyanville.com
PAUL KANGAS: Tonight's "Street Critique" guest is looking at technology staples, but not the Apples, Intels and Dells of the world. He's Kevin Depew, executive editor at the financial information web site minyanville.com and Kevin, welcome back the NIGHTLY BUSINESS REPORT.
KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: Thank you, Paul. Pleasure to be here.
KANGAS: First, give us your thoughts on the current market environment. What are you seeing as we head into the summer?
DEPEW: What we've seen in that energy and basic materials have been the market leaders, but I think those groups have started to top out and peak a little bit. The leadership is changing now and going more toward certain areas of technology.
KANGAS: Let's move on to those tech staples individually. First of all, what's your view that makes a company a tech staple or a bellwether in the group?
DEPEW: Right. Well, one of the themes that I've had for 2008 is that there are consumer discretionary stocks that you want to avoid and consumer staple stocks that you want to be involved in. The same thing applies with technology. I don't want to be involved in anything, the iPods of the world, those consumer discretionary tech plays. I want to be involved in technology staple plays, the companies that produce technology that we need.
KANGAS: OK. Fair enough. Now let's get to those names and ticker symbols. Your first pick is Corning, symbol GLW, the maker of flat panel TV screens, right?
DEPEW: That's right. With NIGHTLY BUSINESS REPORT demographics, I'm, sure that a lot of viewers out there are watching us on an LCD TV. That screen was likely made by Corning. Now the interesting thing that Corning said in their investor conference a month ago was that in the 30 years, despite three recessions, TV sales don't go down. So apparently people need their TVs. That's a technology that people need.
KANGAS: Truly a staple.
DEPEW: That's right.
KANGAS: How about another name Kevin?
DEPEW: Perkinelmer, symbol PKI, Perkinelmer is a company that's involved in health sciences, genetic screening. They do neonatal screening, medical imaging, all things to help early detection of diseases and problems. That's a growing field and they're well positioned to provide again technology that we need.
KANGAS: Now finally you like Monsanto as a tech staple, MON on the big board. It's a fertilizer and seed company. That doesn't sound too techie to me. Explain if you would.
DEPEW: You're right. The reason I chose this as a technology company is because Monsanto is involved in genomics and engineering seeds to make them yield more crops. And if they can yield more and we feed more people with food inflation being such a problem, India and China growing, their population eating more food, that's a company that's right in that field.
KANGAS: The stock, as we saw by the chart that was just displayed, has gone almost through the roof. That doesn't scare you at all?
DEPEW: Well, it's gone up quite a bit, but I think there's still room. I would want to buy it on a pull-back, Paul.
KANGAS: I understand. Kevin do you own any of those stocks mentioned or have any other disclosures to make?
DEPEW: I own Corning.
KANGAS: You own those two?
DEPEW: Just Corning.
KANGAS: Just Corning, OK, all right, very good. It's great to see you once again, Kevin.
DEPEW: Thanks, Paul.
KANGAS: My guest, Kevin Depew, executive editor at minyanville.com.
"Money File"-Inflation Issues & Your Portfolio
SUSIE GHAIRB: In the "Money File" tonight, navigating inflation hedges. Here's Eric Schurenberg, managing editor at "Money" magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Inflation is back and inflation is poison for your portfolio. As consumer prices rise, interest rates do, too, dropping the prices of bonds and stocks alike. So it's no surprise that the hottest investments right now are inflation hedges. Let's start with the safest, Treasury inflation protected securities or TIPS. They're Treasury notes that adjust their pay-out to match the rise in consumer prices. Demand has driven up the price of TIPS, so returns will be low. Recently, the yield on five-year TIPS was just 1 percent, compared with 3.2 percent on regular five-year Treasuries. The TIPS do though beat regular notes if inflation exceeds 2.5 percent for five years, which seems plausible. So if you want to have money in Treasuries, it seems safe to have much of it in TIPS. But remember, TIPS won't make you rich. The inflation hedge that has made people rich is commodities. Since 2003, mutual funds linked to commodities have returned 32 percent a year, versus 11 percent for the whole stock market. In fact, commodities have been so strong that some experts believe they're the new bubble, so you probably shouldn't have more than 5 percent of your assets in them. Here's the bottom line. You generally don't make money by chasing hot investments. So think of these two key inflation hedges not as money making brainstorms, but as insurance. They'll protect you if inflation explodes. But for the long haul, most of your money belongs in good, old- fashioned blue chip stocks. I'm Eric Schurenberg.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street got an early boost from productivity news with falling oil futures another positive. Buyers were also motivated by a private survey showing a moderate increase in jobs during May. Just before noon, the Dow posted an 86-point gain, with the NASDAQ up 34 points. Then, the blue chips took a hit on renewed credit concerns after Moody's said it may cut credit ratings on bond insurers Ambac and MBIA. All this resulted in a mixed closing on Wall Street. The Dow Industrial Average ended down 12.37 points at 12,390.48. The NASDAQ Composite gained 22.66 ending at 2503.14, but the Standard & Poor's 500 Index lost a fraction, .45 down to 1377.20. In the bond market, the 10-year note fell 23/32 to 99 4/32, putting the yield to 3.98 percent.
Now let's see what else was flying on Wall Street as we take a look at some stocks in the news tonight. Most active big board issue, familiar name, Citigroup (C) trading 21 1/4 million shares today, stock down $0.34.
Followed by Bank of America (BAC) down $0.68.
Lehman Brothers (LEH) moved up $0.79 and traded as high as $32.99. "Wall Street Journal" reported the company may seek foreign capital to bolster its balance sheet. Meanwhile, Merrill Lynch upgraded it from "under perform" to a "buy" in the belief the stock, which is now below its $38.65 a share book value, has over corrected. It's in the value they say at this level.
Then came General Electric (GE) with a penny loss.
And Pfizer (PFE), tenth in volume, down $0.21 a share. That was fifth in volume I should say.
Ford Motor Co (F) was down $0.22.
State Street (STT) a $0.53 loss there. After the close yesterday, the company priced an offering of 35.7 million shares at $70. Standard & Poor's today cut its price target on State Street from $81 down to $79 a share.
Wachovia (WS) a $0.34 loss there.
ExxonMobil (XOM) edged up $0.04.
Wells Fargo & Co (WFC) $0.14 loss. That was tenth in volume.
American Express (AXP) moved up $1.33. The chief exec said the company's still on target for 2008 earnings growth of 4 to 6 percent as previously estimated. The stock had a nice move today.
Disney (DIS) up $1.17. The company's ABC unit will televise the NBA finals.
Verizon Communications (VZ) down $0.38. The company apparently is in advanced talks to acquire Alltel for about $27 billion, at least according to Reuters.
Procter & Gamble (PG) gained $1.04. The company will sell its Folgers coffee business to JM Smucker for about $3 billion in Smucker stock, which incidentally moved up $0.12 to $53.87 today.
Ambac Financial (ABK) and MBIA (MBI) both losers today. Moody's has placed their financial strength rating for both of these on review for a possible downgrade and down went the stocks on that news.
The oil refining stocks very weak today because of that unexpected build up in crude product inventories and a drop in oil futures. It sent these refining stocks all down significantly from Holly (HOC), Sunoco (SUN), Tesoro (TSO), Valero Energy (VLO) and Western Refining (WNR), major percentage losers there.
Guess (GES) the apparel retailer, doing well, up $5.24. First quarter earnings came in at $0.51, up from $0.38 a year ago and a nickel above the Street estimate. The company boosted its 2009 earnings guidance to as much as $2.48 a share.
Koppers Holdings (KOP) which is involved in carbon products, up nearly $5 today. UBS financial upgraded it from "neutral" to a "buy."
And then McGraw-Hill (MHP), which owns Standard & Poor's and Moody's (MCO), another rating service, both nice gainers. Reportedly the two firms are near a settlement with the New York Attorney General Cuomo as to how these rating agencies can collect fees.
Honda Motor Co (HMC) up $2.15 or 6 percent. The company's May sales were up 11.3 percent, while Ford, General Motors and Chrysler had significant sales declines as we reported yesterday.
NASDAQ's most active, Apple (AAPL) $0.18 loss.
Microsoft (MSFT) up $0.23.
Research in Motion (RIMM) gained $0.78.
Google (GOOG) a $4.92 advance.
Cisco Systems (CSCO) was up $0.42 a share.
Intel (INTC) $0.54 gain.
But First Solar (FSLR) losing $14.44.
Qualcomm (QCOM) $1.46 gain there.
Baidu.com (BIDU) did well, up $2.43.
And then Dell (DELL) tenth in volume, a $0.42 advance.
Indevus Pharmaceuticals (IDEV) I believe it's pronounced, down $2.85 on concern the FDA will ask for additional safety study before approving the company's testosterone drug called Niebedo (ph).
And on the upside we see Bob Evans Farms (BOBB) rising $5 after posting stronger than expected fourth quarter profits of $0.52 a share, up from the Street estimates of $0.40 a share.
