NBR Transcripts June 6, 2008
Friday, June 06, 2008Oil Prices & Unemployment Rock Wall Street
SUSIE GHARIB: Stocks tumbled today on the one-two punch of surging oil prices and a big jump in the nation's unemployment rate. The Dow plunged almost 400 points and the NASDAQ dropped 75. Those moves came as July light sweet crude futures soared nearly $11 a barrel, the biggest one-day price spike ever. Oil in New York trading settled at $138.54 a barrel, a new record. Fueling today's historic move, an escalating war of words between Israel and Iran. Israel's transport minister said that an attack on Iran's nuclear sites looked unavoidable. Against that backdrop, Wall Street also had to contend with the biggest one month increase in the unemployment rate since 1986. The Labor Department said the nation's jobless rate climbed to 5.5 percent in May from 5 percent in April. And the U.S. economy lost another 49,000 jobs in May, the fifth consecutive month of employment declines. As Scott Gurvey reports, today's data painted an unclear picture of the economy.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The half-point jump in the unemployment rate in May caught Wall Street and most economists by surprise. It was the biggest one month increase in 22 years. There was a big rise in the number of people looking for work and an unusually large number of those were young people. Economists noted the survey was taken later in the month than usual and speculated that students expected to enter the workforce in June were included in the May survey. Deutsche Asset Management's economist Joshua Feinman says he expects this to be accounted for when the unemployment rate is reported for June. But Feinman says this should not detract from the message of the overall trend.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: We had a trough in the unemployment rate of about 4.5 a year ago, so we've clearly moved up from that. Even if we're going to reverse a little bit of this month's, we're still notably higher than that and the reason is simple. The economy's not generating any jobs. And then so trend growth in the labor force is not being accommodated with job creation.
GURVEY: In fact, the number of jobs has fallen in each of the last five months -- 49,000 in May; 324,000 since the beginning of the year. The trouble spots remain construction and other sectors aligned with the housing market. Health care industries continued to add workers to their payrolls. While the labor market is acting as if the economy is in recession, other indicators seem to be signaling a slowdown short of actual negative growth. And economist Bruce Kasman of JPMorgan notes the job losses, while painful, have been steady and modest when compared to the numbers seen in previous recessions.
BRUCE KASMAN, CHIEF ECONOMIST, JPMORGAN: If there is any good news in the report it comes from the sense that the weakness isn't magnifying. It's basically been about the same as we've seen in recent months and I think from the perspective of the Fed, there's some comfort that softer labor markets are bringing unemployment rates to a position that may actually reduce inflation pressures down the road and perhaps allow them to stay in an accommodative position for somewhat longer.
GURVEY: Barney Frank, chairman of the House Financial Services Committee, said today he thinks a second economic stimulus package might be in order to, as he put it, alleviate the suffering of individuals. The White House says it is studying all options. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
John Kilduff, Energy Analyst at MF Global Offers An Outlook on Oil
SUZANNE PRATT: Joining me now to talk about that huge move in oil prices today is John Kilduff, energy analyst at MF Global. John, welcome back to the program. JOHN KILDUFF, SR. VP, ENERGY, MF GLOBAL: Thank you Suzanne.
PRATT: So it was a crazy day in the energy market. Tell us what happened. KILDUFF: Well, it was really one for the record books. We had never been lock limit up. Futures rose as much as they possibly could today and the commodity markets are still a little old-fashioned with our circuit breakers and we reacted strongly to several of the things that you've been speaking about in this broadcast so far. I think chief among them though was the shutter that was sent through the market from Israel and the comments from their transportation minister, who isn't just some transportation minister. This gentleman was a former defense minister, is seeking to succeed Ehud Olmert because of the scandal that's going on embroiling his administration and he also made a comment that U.S. military had approved of this plan. So the oil traders didn't really want to stick around too long to get the details on that. They just bought with both hands because of the potentialities that exist and the repercussions that would come from such an attack.
PRATT: So is geopolitical risk now back on the table? It was sort of missing from the marketplace for a little while.
KILDUFF: We were, for a while, really just dealing with the economics of everything. From the -- from watching the value of the dollar closely, watching interest rate moves very closely, even hanging each day on the various data points to see if the economy was slowing or not, which would dictate future energy demand and whether or not prices were justified at the ever-higher levels. But, yes, this brought the geopolitical worries front and center once again.
PRATT: About a month ago I think I believe you were saying that you thought the top for oil prices would be somewhere in the $130s range. Now we're almost approaching $140. Are all bets off for you? What do you think? Where are we going in terms of prices?
KILDUFF: We're at a crossroads. I have to say the bias is towards the upside still now. We had called for $138 to be the top and when we hit $135 at the end of May, we thought that it might have been over. A lot of things are certainly coming together to argue for that. The dollar had stabilized and was rebounding. Some of the economic data points were sufficiently down to say that energy demand was heavy, not the least of which was U.S. motorists driving about 6 percent less and diesel fuel consumption down about 8 percent. But now that is all out the window. I think you have to say it's going to go higher still before it can crack and go back lower.
PRATT: So today we had Morgan Stanley analysts saying $150. Weight in on this. Where do you think we're going?
KILDUFF: At this point obviously setting a new high. We are looking now at the next target is $142. You're going to need some help, some events of some import to get to that $150. The Israeli worry here today was one of those that needed to emerge. And, to be honest, to the extent that we see climb down from this by Israel and talking it down by the U.S. military, some of this worry could quickly come out of this market. So I think we will get a $140 print next week, but I would look for these prices to come down. I just cannot see how they're sustainable given the demand response that we are in fact seeing at least here in the U.S. and more and more globally.
PRATT: What about speculators, everybody has been talking about speculators in the market. Do you think they were a huge factor in the market today?
KILDUFF: There was a lot of buying that went through and there was certainly capitulation of all sorts. My point about the speculation is that it will stop - speculation will stop once it stops making sense to speculate on these various issues. The consequences of an attack in Iran are that we could see 25 percent of the world's oil knocked off line because of the blocking of the Strait of Hormuz just off Iran's shores. And that would argue for $300 oil, if I can even put a price on it. So I think, again, the demand deterioration continues. Some of these geopolitical worries get pushed back again. Some of the speculation will come out of the market, but there is no room for error. We cannot make up any lost supply at this point. So that's what is driving these things. There is a rationale behind the speculation.
PRATT: Some very interesting comments. Thank you for joining us.
KILDUFF: Thank you.
PRATT: My guest this evening, John Kilduff of MF Global.
"Market Monitor"-Derwood Chase, President of Chase Investment Counsel
PAUL KANGAS: My guest "Market Monitor" this week is Derwood Chase, president of Chase Investment Counsel based in Charlottesville, Virginia. Welcome back to NIGHTLY BUSINESS REPORT, Derwood. Good to see you.
DERWOOD CHASE, PRESIDENT, CHASE INVESTMENT COUNSEL: Glad to be back.
KANGAS: Today's news couldn't have been much worse for Wall Street, with the large jump in unemployment, surging oil prices, a weak dollar. Do you think that the steep sell off in stocks today pretty well discounted all these negatives or will the market go lower, a lot lower from here?
CHASE: It looks to us as though the January lows ought to hold. But that doesn't mean they won't be tested again, Paul. And it's hard to imagine that all the negatives have been fully discounted by the market, but so far it looks that way.
KANGAS: Now, on your last visit with us in August, you correctly predicted the housing slump still had a long way to go. How do you see it now?
CHASE: Well, I think it has a way to go in terms of the financial institutions and write offs, but we've made a lot of progress in terms of getting house prices back to affordable levels. When we spoke back in August, I think they were more than two standard deviations above the median income growth and now we're getting back to affordable levels. So the problem on that side ought to start correcting itself.
KANGAS: So you see a little light at the end of the tunnel there?
CHASE: Indeed.
KANGAS: OK. What are your thoughts on the outlook for oil? That has been the major news story all week, especially today.
CHASE: Well, for two years we've been in the Boone Pickens Matt Simmons camp of being very bullish on prices. I think it's mostly a supply- demand problem, although it gets exacerbated by some hedging and speculation from time to time, but we're still bullish on prices.
KANGAS: There was a prediction today, $150 a barrel oil. Do you think it is going there?
CHASE: Yes. It's just a question of how soon.
KANGAS: OK. Also last August you recommended four stocks. Let's see how they've done since then. We see EMC Corp (EMC) down 6.4 percent. Not a bad move considering what is going on these days. Hewlett-Packard (HPQ) is up 1 percent. Are you still with these?
CHASE: We've sold both of those. We took profits in EMC and after it was up a bit from our last meeting.
KANGAS: Yes, it was.
CHASE: And sold at about the price of Hewlett-Packard, where it was.
KANGAS: Let's see what your other recommendations did. The oil patch, National Oilwell (NOV) up almost 54 percent. That's a great winner. I congratulate you on that one. Are you still with it?
CHASE: We held it for quite a while after the last meeting, but we did switch it into some exploration companies.
KANGAS: OK and Schlumberger has had a decent rise too. Those two have done very well. Are you still with SLB?
CHASE: We switched it as well. We actually increased our energy emphasis but switched those stocks. We're combining quantitative and technical work and some of those stocks went up and then back down a bit and went out under our process.
KANGAS: Derwood, how about some new recommendations for our viewers? What's your first pick and the ticker symbol?
CHASE: Burlington Northern, BNI.
KANGAS: The big rail? CHASE: Yeah, 50,000 miles of track, eight seaports that they service. And, you know, rail is becoming recognized for being much more efficient carrier as fuel prices go way up.
KANGAS: And we need that in a slowing economy, more efficiency, correct? CHASE: Indeed.
KANGAS: Yeah. How about a second selection?
CHASE: Encana (ECA). They just recently announced they're going to split into two parts. We primarily bought Encana because after the split, it will be the second largest natural gas producer in North America. And they've got about 16 million acres to explore. So it has a huge position for further increasing.
KANGAS: OK, we only have less than a minute now, but how about a final pick. And I think it is going to be a familiar name, correct?
CHASE: Yeah. Wal-Mart (WMT), a good defensive growth stock. Recently, their same store sales have been up and the 24 percent that's international is growing much faster than domestic.
KANGAS: Understood. Do you own any of these issues we've talked about or have any other disclosure to make?
CHASE: I own all of them through Chase growth fund, which is diversified over 35, 40 stocks and a better way to invest unless you've got a big portfolio.
KANGAS: Understood, very interesting. Derwood, I want to thank you for being with us once again.
CHASE: My pleasure.
KANGAS: My guest, Derwood Chase, president and chief investment officer at Chase Investment Counsel.
Paul Kangas' Stocks in the News
PAUL KANGAS: Between the surging oil prices and the bleak employment report, the direction for Wall Street was straight down from the open. Also feeding the bears was a weak dollar and word from the European central bank that it might raise interest rates. By mid-day, the Dow posted a 281- point loss, with the NASDAQ off 45 points. Oil moved still higher this afternoon and stocks plunged lower on word from Israel that it would attack Iran if that country did not stop its nuclear weapons program. So at the final bell, the Dow Industrial Average was off a hefty 394.64 points at 12,209.81. It fell in four of this week's five sessions for a net loss of 428.51 points. The NASDAQ Composite tumbled 75.38 points today at 2,474.56. It rose twice, fell three times this week, losing 48.10 points overall. Standard & Poor's 500 plunged 43.37 ending at 1,360.68 today and it lost 39.70 points for the week overall.
In the bond market, the 10-year note gained 30/32 to 99 19/32, putting the yield at 3.93 percent.
Volume leader on the big board on nearly 27 million shares, Citigroup (C) down $1.16. The company has received the first round of bids for its Primerica financial services unit. Some say it could bring as much as $7 billion.
Bank of America (BAC) down $1.49 on a weak financial sector.
Pfizer (PFE) $0.71 loss.
General Electric (GE) dropped $1.04.
And Washington Mutual (WM), another weak financial, off $1.08.
Wells Fargo (WFC) lost $1.78.
Ford Motor Co (F) dropping $0.36.
Wachovia (WS) a loss of $1.46.
National City (NCC) down $0.40. Federal regulators put the company on probation according to the "Wall Street Journal" and other medium sized banks are also being watched very closely.
JPMorgan Chase (JPM) still another weak financial, down $2.01.
American Intl Group (AIG) down $2.48. "Wall Street Journal" reports the SEC is investigating if the company overstated the value of contracts linked to sub-prime mortgages.
And then MGIC Investment (MTG) off $1.44, big percentage drop. After the close yesterday, Fitch cut the company's ratings to the mortgage insurer and Fitch cut in the belief that the company will face big profit pressures for two more years.
Lehman Brothers (LEH) off $1.56. "New York Post" reports the company may release second quarter results a week early and at that time announce a plan to raise some $5 billion through a rights offering.
Best Buy Co (BBY) losing $3.14. Deutsche Bank cut its rating on the stock from "buy" to just a "hold" on concern the company has an oversupply of flat panel TVs.
National Semiconductor (NSM) bucking the trend with $1.08 gain. Fourth quarter earnings higher, $0.34 versus $0.28 a year ago, $0.07 better than the Street was expecting.
And then Concho Resources (CXO) up $3.58. The company is going to buy all the general and limited partner shares of Henry Petroleum, positive reaction to that news.
Chesapeake Energy (CHK) up $1.97. In the past month, the company had successfully completed two additional horizontal wells in its Haynesville shale discovery in Louisiana and Texas.
Entravision Communications (EVC) losing $1.07 or about 18.5 percent of its value. Citigroup downgraded it from "buy" to just a "hold" rating.
And Cascade (CAE), which makes (INAUDIBLE) and things like that, down almost $6 a share. First quarter earnings, $0.98, down from last year's $1.10 and the DA Davidson brokerage downgraded the stock from "buy" to just "neutral."
Apple (AAPL) topped the NASDAQ active list, down $3.79.
Google (GOOG) lost $19.30
Microsoft (MSFT) $0.81 drop there.
Cisco Systems (CSCO) off $1.
Research in Motion (RIMM) dropping $4.18.
Intel (INTC) off $0.97. You heard the company is being investigated about anti-competitive nature possibilities.
$2.25 loss in Qualcomm (QCOM).
Baidu.com (BIDU) off $16.77.
Yahoo! (YHOO) bucked the trend, up $0.08 a share.
And then came Oracle (ORCL) down $0.72.
Inspire Pharmaceuticals (ISPH) doing well, up $1.34. Late stage trials of the company's cystic fibrosis treatment improved breathing significantly. Stock did well on that news.
Focus Media Holdings (FMCN) however plunging $5.70. The company had a first quarter loss of $0.42 a share, versus earnings of $0.13 last year. It's a digital ad company based in China and that massive earthquake disrupted the company's operations and hurt results.
Those are the stocks in the news tonight.
