NBR Transcripts - June 10, 2008
Tuesday, June 10, 2008Higher Interest Rates May Be On The Horizon
SUSIE GHARIB: There's a growing sense here on Wall Street that higher interest rates are just around the corner. Fueling that speculation -- comments from Federal Reserve Chairman Ben Bernanke and other Fed officials that inflation is now a primary concern. Fed policymakers meet in two weeks and many economists expect the central bank to formally acknowledge a change in policy, from stimulating growth to clamping down on rising prices. Scott Gurney reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: For some time, bond traders have been buying and selling on the belief the next interest rate move by the Federal Reserve will be up. Now, the rest of Wall Street is catching up, in a struggle to analyze a series of statements by Fed Chairman Ben Bernanke and other Fed officials. The central bankers are raising inflation fears and talking tough in the lead-up to their next policy meeting, June 24 and 25. But the chairman, while noting an increase in inflation expectations, also said a slowdown in growth will bring down prices. Economist Cary Leahey of Decision Economics says strong talk from the Fed may not necessarily lead to action.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: They're definitely hawkish, but obviously, talk is cheap and actual action is tough. And this is a political -- election year and just last Friday the unemployment rate went up A half a percent, so it sounds a little crazy that the Fed can talk hawkish if the labor market looks weak and it is weak. But this increase has been well anticipated by the Fed and other analysts. So, in some sense, Bernanke also said yesterday, well, this doesn't change our view.
GURVEY: The central bank is not expected to change interest rates at its June meeting. But Fed watchers do expect a significant change in the statement on economic conditions, indicating that the balance of economic risk has shifted from growth to inflation and preparing the markets for a rate hike later in the year. Larry Kantof, chief economist of Barclays Capital, sees rates rising from their current level of 2 percent to 3 or more, with most of the move coming next year.
LARRY KANTOR, CHIEF ECONOMIST, BARCLAYS CAPITAL: We've had more inflation hitting something like 5 percent or maybe higher, 2 percent does seem too low and I think it's going to be difficult for the Fed to hike rates aggressively, unless economic growth is pretty strong. That doesn't really look likely, in other words -- 2.5, 3 percent, maybe, but probably not much stronger than that.
GURVEY: Kantor says he does not expect to see a return to the stagflation conditions of the 1970s, as some have feared. In the '70s, he notes, both inflation and unemployment were at double digits, factors which are not in place today. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Spirit Airlines' CEO Shares His Company's Financial Flight Plan
PAUL KANGAS: Spirit Airlines today became the latest carrier to tack on additional baggage charges to cope with rising fuel prices. The privately-held airline, headquartered in Fort Lauderdale, warned workers last week it may be forced to close hubs in New York and Puerto Rico if oil prices move higher. Jeff Yastine looks at how Spirit is coping with the volatile energy markets.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 27-year-old carrier maintains a busy daily schedule: 185 flights to 36 cities in the U.S. and the Caribbean. But the cost of filling its planes with fuel, once 20 percent of the company's operating budget, is now 50 percent of that budget. That has the carrier searching for other ways to shave costs -- adding more seats to its fleet of Airbus a-319s; charging for heavier luggage, carrying less water on its planes; even switching to lighter-weight beverage carts. At the company's headquarters, they have even removed some of the light bulbs to cut utility costs. But Spirit's CEO Ben Baldanza, says the company will have to make other hard choices later this year, perhaps closing two of its three hubs.
BEN BALDANZA, CEO, SPIRIT AIRLINES: It's really important at Spirit that we plan for higher fuel prices and not just expect that oil prices will somehow come down. So we've looked at our network. We've looked at traffic demand through different times of year. We've looked at markets that we fly that will support higher pricing to cover the fuel costs and those that won't and we've made the decision that, if fuel prices rise to the $150, $160 level, then we're going to have to cut back a little bit. And if we do that, we need to be sure that we're prepared in terms of being able to relieve ourselves of the infrastructure costs that go along with that flying.
YASTINE: Is there a point at which you cannot continue to cut back on services or close more hubs and you start really looking at your key, core operations.
BALDANZA: We believe that Spirit is kind of uniquely well positioned in this environment, for a couple of reasons. We have the youngest fleet of airplanes in the Americas and having new airplanes makes us a more efficient users of fuel. We're also a very aggressive hedger of fuel. So, a good piece of our volume over the next 12 months is kind of protected from a big spike through a hedging program. We also have our non-fuel costs have gotten down to extremely low and we have initiatives to push them even lower. So if you think about half the cost of your airline trip is going to be fuel and the other half is going to be everything else, we keep our everything else really low and are making it even lower, which will allows us to keep low fares out there to the consumer base and that's really important for us.
YASTINE: Talk a little about what kind of demand for your flights you're seeing these days. Given the economy, given where fuel prices are, are you continuing to run planes reasonably full?
BALDANZA: We're not blind to the economic realities facing the country right now and facing individual consumers, but I'm happy to say that demand for our product is continuing to look quite strong. We had a very good first quarter. We're having a strong second quarter and as we look out into the third quarter and look at the summer travel demand, it's looking quite well for us.
YASTINE: When you have an airline that's continuing to add flights, as Spirit has in recent months, yet at the same time you continue to have these fares which are very low, how do you avoid not having the same sort of cash squeeze that's doomed so many large and small airlines over the past couple of decades?
BALDANZA: Cash is probably the most important thing every airline CEO and CFO are looking out right now. If you have $10 in cash and you burn a $1 a day, you have 10 days to live, right? But whatever your cash is, if you're actually generating cash out of your operations, then the amount you have at the beginning isn't quite so critical. And at Spirit, we're happy to say that the core operation of the airline is still generating cash. We're not using cash and that's really important that we keep it that way.
YASTINE: Ben Baldanza, CEO of Spirit Airlines, thanks.
Economic Choices 2008 - Obama & McCain & Taxes
SUSIE GHARIB: Jobs, taxes and the economy took center stage in the presidential campaign today. Senators Barack Obama and John McCain each accused the other of backing economic plans that would hurt the middle class and undermine growth. As the candidates focus on the economic choices facing voters this November, Darren Gersh takes a closer look at their tax plans.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is not very exciting to talk trash about the other guy's plan for business tax cuts, but the presidential candidates did their best today. Here's Senator John McCain telling a small business group that Senator Obama's plan to repeal much of the Bush tax cuts would amount to the largest tax hike since World War II.
SEN JOHN MCCAIN (R) PRESUMED PRESIDENTIAL NOMINEE: Under Senator Obama's tax plan, Americans of every background would see their taxes rise -- seniors, parents, small business owners and just about everyone who has even a modest investment in the market.
GERSH: After touring a hospital today, Senator Obama fired back. Obama charged McCain's call to cut the corporate income tax would add close to $300 billion to the deficit. As for his own plans, Obama cited support from the Oracle of Omaha.
SEN. BARACK OBAMA (D) PRESUMED PRESIDENTIAL NOMINEE: If we sent the capital gains rate up to 20 percent, my discussions with people like Warren Buffett indicate that it will probably not have any significant impact in terms of investment.
GERSH: Obama ruled out a return to capital gains tax rates of 40 percent or higher, saying nobody is talking about that. And he laid out the general theme of this tax plans.
OBAMA: What we're trying to do is restore some balance, put some money in the pockets of working families, in the pockets of consumers. That, actually, I believe will be good for business.
GERSH: McCain's pitch to business was more direct.
MCCAIN: I intend to keep the current low income investment tax rate. I intend to keep them, not repeal them.
GERSH: Deloitte tax analyst Clint Stretch says the most important thing for business owners and investors to understand about the candidates and their business tax plans is that they don't add up.
CLINTON STRETCH, MANAGING PRINCIPAL, TAX POLICY, DELOITTE: The problem with John McCain's business plan is that he hasn't said how he's going to pay for it. We have huge deficits going out in the future. He isn't telling you where the money for that big tax cut for business comes from. The problem with Obama's tax plan for corporations is that he says it's going to raise a lot of money. The corporate income tax just doesn't raise a lot of money to begin with.
GERSH: For now, Stretch recommends reading the candidates' tax proposals as political documents -- more like a good sign of the overall direction the next president intends to take the country, rather than a detailed map of how to get there. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest,"-Real Estate Mutual Funds
SUSIE GHARIB: The real estate market is in the doldrums. So you would probably think real estate mutual funds would be doing poorly this year. But as Erika Miller explains in tonight's "Of Mutual Interest," they're doing better than the overall stock market.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Given the weak housing market, most investors seeking big returns probably wouldn't think of real estate. But mutual funds that invest in real estate are actually the third best performing U.S. stock fund category this year, after natural resources and bear market funds. The average real estate fund has fallen 0.6 of a percent year to date, far less than the S&P 500's decline of 8 percent. Most real estate mutual funds invest primarily in REITs -- real estate investment trusts -- which own office buildings, rental apartments, malls and other commercial properties. Scott Westphal, portfolio manager of the Oppenheimer real estate fund, says this segment of the real estate market has held up relatively well, despite a slowing economy.
SCOTT WESTPHAL, PORTFOLIO MGR., OPPENHEIMER REAL ESTATE FUND: These companies' primary sources of cash flow are long-term leases for creditworthy tenants. So, even if the economy slows down a little bit, their sources of cash flow remain in place.
MILLER: He also says supplies of available commercial real estate space are fairly tight. That's because the cost of construction has risen dramatically over the past few years, due to higher commodities prices. Residential apartment buildings and self storage REITs have been especially strong performers this year. Morningstar's John Coumarianos explains that more Americans are renting homes instead of buying them.
JOHN COUMARIANOS, REIT ANALYST, MORNINGSTAR: We are coming off of a peak of about 70 percent home ownership in the United States, which is an all-time high and we seem to be declining back to the historic norm, which is about mid-60 to high-60 percent range. So, every percentage point loss in ownership represents about a million new renters.
MILLER: Many investors are also attracted to mutual funds that invest in REITs due to concerns about inflation. REITs are backed by hard assets, which can be a psychological comfort. In addition, many landlords have pricing power.
COUMARIANOS: As long as the economy stays reasonably stable, the theory is that landlords can keep boosting rents as their expenses go up.
MILLER: Some real estate experts do not believe REITs will continue to outperform the broader market, especially if economic growth rebounds. But others predict certain pockets will continue to do well, like prime downtown office space and community shopping centers.
WESTPHAL: Their tenants are primarily grocery stores and drug stores. And, no matter how the economy is doing at a given point in time, people still need to provide the basic necessities of life.
MILLER: Most experts agree the biggest risk to buying mutual funds that invest primarily in REITs is a sharp economic slowdown. If that happens, analysts warn those funds will likely take a hit, although not typically as much as other U.S. stock funds. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Commentary"-Ways to Repair Our Financial Regulatory System
SUSIE GHARIB: Tonight's commentator says, when it comes to the markets, we need smarter regulation. He's Harvey Pitt, former chairman of the Securities and Exchange Commission and CEO of Kalorama Partners.
HARVEY PITT, CEO, KALORAMA PARTNERS: The Bear Stearns meltdown and the sub-prime crisis make it clear our financial regulatory system is broken. Today, we have 51 insurance regulators, 57 for commercial banks, 53 for investment banks and that's just the tip of the regulatory iceberg. We have Federal regulators, state regulators, local regulators, foreign regulators and self-regulators, causing confusion, duplication and even gaps when a crisis hits. Our regulatory systems failed repeatedly over the last few decades, along with the consequences we've all suffered from a system that didn't catch or adequately prevent these crises. Four separate reports have concluded that U.S. capital markets are in danger of losing their preeminent positions in our global economy because our system is viewed as too wooden. The answer is neither more nor less regulation -- it's smarter regulation. Treasury's blueprint for a new regulatory system is the beginning of this analysis. Given the advent of technology that permits instant communications and even faster deal-making, we must start revamping our regulatory system. This won't be done easily or quickly, but it must begin now, before our antiquated regulatory system undermines the inherent vitality of America's capital markets. I'm Harvey Pitt.
"Last Word"-Presents For Dad
SUSIE GHARIB: And finally, it seems many dads will receive a gift card for Father's Day this year; at least, those who are getting a present will. Thirty six percent of adults plan to give gift certificates, according to a survey from Discover card. One surprising note: 52 percent of respondents are not planning to buy anything for their fathers. For those who are, most men plan to spend an average of $90 on a gift, while women will on average spend $50. Half of the father's polled feel 50 bucks or less is appropriate. And Paul, as with previous years, most fathers are hoping for a home-made present or dinner at a restaurant. KANGAS: How about a homemade dinner? GHARIB: That sounds very good. What happened to the barbeques?
Paul Kangas' Stocks in the News
PAUL KANGAS: That talk about inflation and higher interest rates did not sit well on Wall Street. The Dow fell nearly 50 points at the outset of trading, while the NASDAQ lost 20 points. Over the next few hours, stocks staged a choppy comeback as oil futures pulled back from early gains. At 1:30 this afternoon, the Dow was sporting a 77-point rise while the NASDAQ Index was up six points. That tech-laden index soon turned negative again and acted as a drag on the blue chips and the result was a mixed close. The Dow Industrial Average salvaged a closing gain of only 9.44 ending at 12,289.76. The NASDAQ Composite lost 10.52 ending at 2,448.94, while the Standard & Poor's 500 Index fell 3.32 to 1,358.44. In the bond market, the 10-year note fell 21/32 to 98 5/32, putting the yield at 4.10 percent.
New York exchange volume leader on 22 3/4 million shares, Citigroup (C) moving up $0.66. The financial sector shows some signs of a rebound today.
We see Washington Mutual (WM) rising $0.43.
And Wachovia (WB) up $0.87, not a big gain, but gains.
Bank of America (BAC) edged up a penny a share.
Lorillard (LO) first day of trading on the big board, this is a spin off from Lowes tobacco company. The stock is replacing Ambac in the S&P 500 Index. The stock opened at $74 and moved up from there to $76.63 on the close.
Lehman Brothers (LEH) down $1.98. Credit Suisse downgraded it from "out perform" to just a "neutral" rating.
General Electric (GE) $0.27 gain.
JPMorgan Chase (JPM) up $078.
And then Pfizer (PFE) down $0.08.
AT&T (T) tenth in volume, lost $0.34.
Coca-Cola Co (KO) up $2.15. Deutsche Bank upgraded it from "hold" to "buy" in the belief the company will benefit from strong international business, a weak dollar and of course from the Beijing Olympics coming up in August.
Then rival Pepsico (PEP) had a good day as well, up $2.21. The company confirmed its 2008 earnings guidance will be at least $3.72 a share.
And Kellogg Co (K) did well, up $1.69. JPMorgan upgraded it from "neutral" to "over weight" because of valuation, too low says JPMorgan.
Ford Motor Co (F) $0.24 loss. Kirk Kerkorian's Tracinda Corp. and its 20 million share cash tender offer was heavily over subscribed, so Tracinda will purchase less than 2 percent of the shares offered. The price will be $8.50 a share.
Companhia Vale do Rio (RIO) up $1 -- down $1.57. The company's proposing a $15 billion offering of common and preferred shares, denies it's in talks to acquire Freeport McMoran Anglo-American or Alcoa.
Now today, the Energy Information Administration predicted slow growth in electricity demand, limiting growth in gold consumption to only 0.9 percent this year. That's down from 1.9 percent growth in 2007 and the gains in the coal stocks were significant. Arch Coal (ACI), Consol Energy (CNX), Patriot Coal (PCX) and Peabody Energy (BTU) all down significantly.
Another group that was weak, the golds, Barrick Gold (ABX) losing $2.85. New York August gold contract down $26.40 at $871.20 the ounce.
Good gainer today was United Rental (URI) up $2.59. The board has approved a modified Dutch tender auction to buy up to 27.1 million shares. It'll pay somewhere between $22 and $25 a share.
Arvinmeritor (ARM) up $1.08. The automotive parts company got an upgrade from Goldman Sachs from "neutral" to "buy."
And then Pall Corp (PLL) which makes industrial filters, had higher third quarter earnings, $0.54 versus $0.45 last year. Sales were up 18 percent.
Topping the NASDAQ actives, Apple (AAPL) up $4.03. Lehman Brothers boosted its price target from $202 to $234 and Citigroup from $248 all the way up to $287.
Research in Motion (RIMM) an $0.83 gain.
Microsoft (MSFT) up $0.18.
Google (GOOG) fell $3.70.
Baidu.com (BIDU) off $5.66.
An $0.08 drop in Intel (INTC).
First Solar (FSLR) a $0.39 gain.
Cisco Systems (CSCO) $0.07 drop.
Qualcomm (QCOM) was up $0.31.
Tenth in volume Dell (DELL) losing $0.55.
Nvidia (NVDA) down $1.40 today. FTN Midwest securities downgraded the stock from "neutral" to "sell."
And then CMGI Inc (CMGI), a marketing technology company, plunging $3.71 after reporting a third quarter loss of $0.05 a share, versus earnings of $0.19 a year ago.
Those are the stocks in the news tonight.
