NBR Transcripts-June 11, 2008
Wednesday, June 11, 2008Stocks Slide As Oil Prices Rise
SUSIE GHARIB: Oil prices spiked more than $5 a barrel today on new supply concerns. In New York trading, July crude futures settled at $136.38, up $5.07. That surge came after the Energy Department reported that supplies of crude oil declined by almost 4.6 million barrels last week, triple what analysts had expected. As oil prices rallied, stock prices fell sharply. The Dow tumbled 205 points. The NASDAQ lost almost 55. Suzanne Pratt looks at the connection between the stock market and the oil market.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It seems almost counterintuitive -- oil prices are at record levels, yet oil supplies are declining. While gasoline at $4 a gallon is curbing U.S. demand, consumption in emerging markets is holding up. That's partly because many of those countries subsidize fuel purchases. As a result, there's still too much Chinese and Indian demand for oil to allow inventories any time to build up. Oil trader Randy Rothenberg predicts the oil sticker shock will continue.
RANDY ROTHENBERG, OIL TRADER, BATTALION CAPITAL MGMT: Is $150 possible? It's not out of the realm of the possible. Do I believe in that? I've been bearish at lower levels and yet I have to understand, as a global market, the supply/demand imbalance says prices have to move higher.
PRATT: While sky-high oil prices don't yet seem to be having a huge effect on global demand for energy, they are making investors nervous about the stock market. Since January, the Dow has dropped about 9 percent. In that same timeframe, oil prices have jumped more than 40 percent. While there's not exactly an inverse relationship, there is a connection. Citigroup market strategist Tobias Levkovich says there are two reasons why higher energy prices can hurt stock prices.
TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: One is in the form of could this be a leading indicator of inflation? At that point, interest rates go up, valuations come down. And then secondly, it affects consumption behavior. In other words, the money you would have spent in the store goes into the gas pump. And that's true across the world, but it's even more true outside the U.S.
PRATT: Levkovich thinks oil prices will decline later this year as a global economic slowdown ultimately curbs energy demand. If that happens, he predicts stocks as measured by the S&P 500, will recover some ground.
LEVKOVICH: We'd probably rally late in the year when we have more reasonable earnings expectations, because they are still too aggressive. Overall, we're looking for the market to close up modest single digits, in the 1,550 area from year-end last year. That would be up about 5 or 6 percent.
PRATT: To be sure, it's not just higher oil prices that are currently dogging stocks. Experts say investors are also battling an anemic U.S. economy, a housing market in recession and a weak U.S. dollar. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Bruce Kasman, Chief Economist of JPMorgan
SUSIE GHARIB: The Federal Reserve said today those high oil prices are squeezing consumers, causing the economy to weaken further. That was the conclusion of the Fed's latest beige book survey of regional economic conditions. Joining us now with more analysis, Bruce Kasman, chief economist of JPMorgan. Hi, Bruce.
BRUCE KASMAN, CHIEF ECONOMIST, JPMORGAN: Hi, Susie.
GHARIB: Well, the Fed's report described a shaky economy burdened by rising oil and food prices. How shaky is the economy?
KASMAN: Well I think the beige book is a pretty dark shade of gray right now, which is to say the economy is pretty weak across most sectors. It's pretty weak across most regions and there's only very few signs of real growth in the system right now. If there's any good news here, it's that the report that came out today didn't show conditions deteriorating from the last time the survey was taken in April.
GHARIB: So would you characterize it that the economy is in recession right now?
KASMAN: Well, I think the economy is in what I'd call a recession dynamic, which means that jobs are being cut, incomes are being squeezed by higher energy prices and there's a lot of weakness across sectors. We're not contrasting in terms of GDP and we're not seeing the kind of weakness in labor markets that we normally see in the midst of a recession so it's a clearly very weak and painful dynamic, but it's not nearly as painful in the broad sense as we've seen in the last three or four economic downturns.
GHARIB: All right. And this week we heard from Federal Reserve Chairman Ben Bernanke and other Fed officials talking a lot about their concerns about inflation and seem to be hinting of a change, a shift in policy towards the way that they are going to be handling interest rates. How do you think the Federal Reserve is going to respond to this current economic condition?
KASMAN: Well, the economy still remains weak and financial conditions are fragile. We don't believe the Fed is prepared here to raise rates in the near term, but the Fed I think is telling us that it's not seeing the kinds of downward dynamic in growth or the financial stresses that has moved it to lower interest rates to 2 percent. As a result of that and their concerns about inflation, they're shifting their assessment of risk. I think what that tells us is that we should be prepared for a rather early adjustment in rates. Keep in mind that when I say early, I mean something around the turn of this year or early 2009.
GHARIB: All right. Do you think that the economy can do better as long as oil prices keep going up? Is there a breaking point?
KASMAN: I think in the past what we've seen is that oil by itself is damaging, but oil really does a lot of damage to the economy when it generates inflation and it causes higher interest rates. The fear we should have right now is there's a whiff of that in the picture in terms of what we've been seeing in recent weeks. And I think the real issue here is can we break the cycle, either oil comes down or the interest rate picture changes because people lose the concern that oil will feed into higher inflation. But right now we're seeing a very dangerous dynamic of oil going up alongside interest rates going up. That in the past has been the recipe for the breaking point. If that would continue for any meaningful length of time here, I think the risk to the economy would magnify.
GHARIB: Bruce, is there any silver lining in all of this?
KASMAN: The silver lining if there is one is that we haven't done nearly as badly as people had feared at the start of the year that the global environment, while it's helping to push oil prices higher, is also supporting us in a number of different ways: exports, corporate profits and the like. While this is a very painful environment, we are grinding through it without having lost any real momentum over the last two or three months.
GHARIB: Bruce, thank you so much. Thanks for putting it in perspective for us.
KASMAN: Thank you.
GHARIB: My guest tonight, Bruce Kasman, chief economist of JPMorgan.
The SEC Takes Aim At Credit Rating Agencies
SUSIE GHARIB: The Securities and Exchange Commission proposed new rules today for the nation's credit rating agencies to crack down on conflicts of interest. As Stephanie Dhue reports, the SEC's aim is to change business practices at Standard & Poor's, Moody's Investors Service and Fitch Ratings.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: When the market for real estate and mortgage-backed securities was hot, credit rating agencies were paid not just to rate the securities, but also to structure them. The Securities and Exchange Commission now wants to ban that practice. SEC Chairman Christopher Cox calls it a triple-A conflict of interest.
CHRISTOPHER COX, CHAIRMAN, SEC: The structured products were specifically designed for each tranche to achieve a particular credit rating and the ratings agencies then made a lucrative business of consulting with issuers on exactly how to go about getting those ratings.
DHUE: The SEC also wants to ban raters from receiving gifts worth more than $25 from the issuer and require greater disclosure about how a rating is determined. It is also considering having credit rating agencies create a new designation, like .sf to distinguish structured finance products from other debt products. SEC Commissioner Paul Atkins worries that could have unintended consequences.
PAUL ATKINS, COMMISSIONER, SEC: If the .sf becomes a scarlet letter, how long will it take for smart lawyers, accountants and investment bankers to design products around it? Will that further skew that marketplace and confuse investors?
DHUE: Consumer advocates call the proposals a step in the right direction. Still, David Berenbaum of the National Community Reinvestment Coalition says the SEC needs to do more to ensure rater independence.
DAVID BERENBAUM, EXEC. VP, NATIONAL COMMUNITY REINVESTMENT COALITION: Consumers and investors alike have an expectation that rating agencies are objective third parties; that's not the reality right now.
DHUE: The proposed rules will be open for public comment for 30 days. A vote on the final rules could come in the fall. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Economic Choices 2008"-The Great Tax Divide
PAUL KANGAS: You've heard presidential hopefuls Barack Obama and John McCain talking about changing Washington. But what does that change mean for your bottom line? A new analysis by the Tax Policy Center shows there's a big difference, depending on how much money you make. Darren Gersh explains as we continue our "Economic Choices '08" coverage.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: On taxes, you can call John McCain Mr. 10 percent. Mr. 7 percent would be Barack Obama. That's how much each man wants to cut Federal income tax revenues over the next 10 years. The Tax Policy Center's Len Burman crunched the numbers and says, while there are big differences between the two candidates, they both embrace deficit-spending.
LEN BURMAN, DIRECTOR, TAX POLICY CENTER: Senator Obama's plan is $2.7 trillion of tax cuts. It would add about $3.5 trillion to the debt over the next 10 years, when you add in the interest cost. Senator McCain's plan, $3.7 trillion in tax cuts and it would add about $4.5 trillion to the debt.
GERSH: You can see the real dividing line between Obama and McCain when you consider who gains and who loses under their plans. Consider the very wealthiest Americans, those with a pre-tax income of close to $3 million. The Tax Policy Center estimates Senator Obama would raise their taxes by more than $700,000. Senator McCain would cut taxes in that bracket by almost $270,000. What if you're in the middle, making between $37,000 and $66,000? Obama wants to cut your taxes by about $1,000, Senator McCain by around $300. Burman cautions the tax cuts are being promised just as the Federal budget is straining to support the retirement of the baby boom generation.
BURMAN: You know, if you borrow the money to pay for tax cuts and you end up having to pay it back with interest in the future, you could end up with much higher tax rates than we've ever experienced.
GERSH: There's more detail on the Obama and McCain plans and what they might mean for your bottom line on the NBR web site on pbs.org. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Hilary Kramer, Chief Market Strategist at Greentech Research
PAUL KANGAS: Returns on alternative energy stocks have been mediocre to poor in recent months but tonight's "Street Critique" guest says that just makes them more attractive. She's Hilary Kramer, chief market strategist at Greentech Research and author of "Ahead of the Curve." Hilary, great to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Thank you, Paul, very nice to be here.
KANGAS: You're a market strategist. So before we get to your stock picks, let's talk about this market. Is the ugliness going to continue?
KRAMER: In the short term, we are going to see more down days like we have Friday and a day like today. Again the problem is that there's fear and uncertainty in the market. It's not just in terms of individual investors, but institutional leaders fear across Wall Street. There's fear as well. Are prices of oil going to go up? Is there going to be increased unemployment and what's the value of my house or my commercial property? So all of these are contributing to the market going down but eventually the market always goes back up.
KANGAS: All right. Well let's get to your selections tonight. Shares of alternative energy companies especially the solar stocks have been very volatile. Why do you like this sector?
KRAMER: I look for growth. Growth is what drives stock prices upwards so alternative energy is in very strong demand right now. There's a lot of regulatory winds that will eventually make it a better situation and cheaper for companies to utilize alternative energy techniques.
KANGAS: Let's get to some of your specific favorites. What's your first choice and its ticker symbol?
KRAMER: Enernoc and its symbol is ENOC. This is a company in the $13 range that has been as high as $50. Enernoc serves the utility industry and helps them conserve energy. It's called demand response and what they do to an operations center is they control the amount of electricity that's distributed. It's a great company to prevent blackouts and brownouts.
KANGAS: The stock's had quite a tumble hasn't it, so you think it's attractive at this level.
KRAMER: Yes, absolutely. As a matter of fact, I was buying Enernoc. I've been buying Enernoc and I can see Enernoc going back into the mid 20s.
KANGAS: OK, your next choice.
KRAMER: SunPower Corporation, SPWR. This is a solar power company that's both midstream and downstream, meaning that they do everything from put together solar panels to install them. SunPower is very well positioned because the utilities are starting on these projects to build very, very large solar projects, solar thermal is what they call it. And SunPower is positioned to get those contracts. The stock is off, what, almost 50 percent from its high at the end of December.
KANGAS: Quickly, one more here.
KRAMER: MEMC Electronics, the ticker is wafer, WFR. This is a poly silicon maker. This is a company that went from being a semiconductor play to being a solar play.
KANGAS: And we have time for an exchange trade fund that you like.
KRAMER: Anyone who wants to diversify their risk, who wants to be careful the PBW, it's Powershares Wilderhill, but the ticker symbol is PBW. This had SunPower in its (INAUDIBLE) for solar, Sun Tech and you can't go wrong. It's been beaten down. It's a well managed ETF.
KANGAS: All right, do you Hilary own any of these stocks individually?
KRAMER: Yes. I own Enernoc, Sun Power and MEMC. I don't own PBW because I don't do EFTs, but the other three companies I own.
KANGAS: Great to see you again Hilary. Thanks for being with us. KRAMER: Thank you, Paul.
KANGAS: My guest Hilary Kramer of Greentech Research.
"Money File" -Gas Budgeting
SUSIE GHARIB: Tonight's "Money File" guest says with gas over $4 a gallon, now's the time to adjust the rest of your spending. Here's Chuck Jaffe, senior columnist at "Marketwatch."
CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: I recently found the ledger from my late father-in-law's first car, purchased right after his wedding in 1950. The most he paid for a tank of gasoline that year was $4.25, roughly what I paid for one single gallon while driving to his upstate New York home. There was an interesting lesson buried in those spending records from a half-century ago. When he spent more for gasoline, it was noted in the records and paid for by other budget cuts. The $30 fund my in-laws established as newlyweds -- roughly a dollar of daily savings set aside for discretionary fun -- well, it paid the price whenever a tank of gas cost $4. That's a great model for modern consumers, who appear to miss the point. A study released last week by Access America said that roughly three-quarters of Americans will change their driving habits when fuel costs hit the $4 per gallon level. Since that price has been breached in many parts of the country, it can be assumed that a majority of Americans are cutting back on non-essential driving, consolidating or reducing their errands, buying more fuel-economic cars and so on. That's great, but the response missing from the study was the second step, meshing driving habits with spending habits. If you can't hold the budgeted gasoline dollars steady and still drive all of the miles necessary in your life, then you need to cut back someplace else. Gas prices are more than 10 times higher than they were in the '50s, but some things, like sound budgeting and thrift, never change. I'm Chuck Jaffe.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's bulls were no match for the bad news blanketing the market this morning. That surge in oil prices had investors fretting about inflation and heightened concerns about a rise in interest rates. By late morning, the Dow had lost 181 points and the NASDAQ was off 36 points. Any attempt to rebound this afternoon was precluded by the Fed's weak beige book survey of the economy, suggesting a possible recession. So, stocks went on to close near the day's worst levels. The Dow Industrial Average dropped 205.99 points at 12,083.77. The NASDAQ Composite fell 54.93 points ending at 2,394.01, while the Standard & Poor's 500 Index lost 22.95 points to 1,335.49. Over in the bond market, the 10- year note gained 5/32 to 98 11/32, putting the yield at 4.08 percent.
Big board volume leader on 23.8 million shares, Citigroup (C) losing $1.05 in a very weak financial group.
Then Washington Mutual (WM) down $0.62 on fears over the extent of its losses.
Pfizer (PFE) fell $0.39.
Bank of America (BAC) $0.77 drop there. The CEO still is confident about the Bank America's takeover of Countrywide Financial.
General Electric (GE) fell a half a dollar a share and that was fifth in volume.
Lehman Brothers (LEH) $3.75 drop there. "Financial Times" reported the company may need more capital on top of the $6 billion it's already raised.
JPMorgan Chase (JPM) another weak bank, down $1.16.
Wachovia (WB) off $0.79.
Wells Fargo & Co (WFC) down $0.36.
And Co Vale do Rio (RIO) down $0.81, tenth in volume.
Anheuser-Busch Cos (BUD) up $1.20 in regular weight trading and after the close as we touched on, ImBev made an unsolicited $65 a share cash buyout bid. In after hours trading, Anheuser stock was very close to $63 a share. The company said it will evaluate that bid from ImBev.
Alcoa (AA) down $3.40. Disruption of gas supplies to the company's western Australian facilities will cut second quarter earnings by $0.02 to $0.03. On top of that, JPMorgan today downgraded the stock from "over weight" to just a "neutral" rating.
Merrill Lynch (MER) losing $2.49. CEO John Thane told investors at a conference he favors selling Merrill's stake in Bloomberg, rather than raising capital through equity sales.
Big gainer, Agrium (AGU) up $7.97. The company boosted its second quarter guidance of as much as $2.22 to now a high of $3 a share because of strong demand for its fertilizers.
And speaking of fertilizers, Mosaic Co (MOS) which is in that business, up $5.72. Goldman Sachs boosted its price target on Mosaic from $1.65 to $1.95, $195 a share I should say.
And Potash, Saskatchewan (POT) up $2.54. Goldman Sachs boosted its price target from $235 to $285 a share.
On the downside, Burlington Northern Santa Fe (BNI), the big rail, down $7.79. UBS financial issued a "short-term sell" in the belief the company might miss its second quarter earnings guidance.
Major loss in US Shipping Partners Lp (USS) tumbling $2.74 or 37 percent after the company said high crude oil prices and reduced demand for shipping are hurting its results. It is in negotiations with its lenders to amend loan covenants.
FirstFed Financial (FED) tumbling $1.31. That company's stock caught in the downdraft of the weak financial sector.
And then we see Amerigroup (AGP) losing $3.82. The company suspended its 2008 earnings guidance of $2.35 to $2.45, pending completion of medical cost negotiations with the state of Tennessee.
And then on the upside, Nortel Networks (NT) rising $1.09 on positive prospects for its efforts in the next generation wireless phone standard.
NASDAQ's most active, Apple (AAPL) down $4.83. It's in a pact with Spain Telefonica to sell new iPhones in 16 Latin American countries.
Google (GOOG) down $8.97.
Research in Motion (RIMM) off $3.16.
Microsoft (MSFT) fell $0.77.
Cisco Systems (CSCO) down $0.71 a share.
Intel (INTC) lost $0.87.
What's this, a gainer, First Solar (FSLR) up $8.04.
Qualcomm (QCOM) down $1.11.
Baidu.com (BIDU) fell $7.36.
And Applied Materials (AMAT) down $0.24.
And finally, Staples (SPLS) rose $1.23 on news it will acquire Corporate Express for its sweetened buyout bid of 9.25 euros per share cash.
