NBR Transcripts June 13, 2008
Friday, June 13, 2008Gas Prices Pump Up Consumer Prices
JEFF YASTINE: Consumer prices increased at their fastest pace in months in May, thanks to a big jump in gasoline prices. But while those prices rose more than expected 0.6 of a percentage point last month, there were no alarm bells on Wall Street. That's because the core rate, which excludes the volatile food and energy sectors, inched up a tame 0.2 of a percent. Well that sparked a relief rally for stocks with the Dow adding 165 points and the NASDAQ rising 50. As Erika Miller explains, the core reading has economists more optimistic about the inflation picture.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Anyone who fills up a car or buys food at the supermarket probably is not surprised that consumer prices rose sharply last month. But if you strip out gas and groceries, economist David Resler says prices are stable, even falling.
DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES: Outside the food and energy block, price weakness has been evident. Car prices are lower than they were a year ago. Apparel prices lower than they were a year ago. Medical care costs not as - rising less rapidly than they were a few months ago.
MILLER: To him and others, that's proof that higher food and energy costs are not creeping into the broader economy. Citigroup's Robert Diclemente believes that trend can continue and he points to today's Reuters/University of Michigan's consumer sentiment data for support. The index fell in June to the lowest level since 1980, even though many consumers received Federal rebate checks during the month.
ROBERT DICLEMENTE, CHIEF US ECONOMIST, CITIGROUP: Sentiment obviously is quite downbeat, and that's part of the reason why I think inflation is going to have a very hard time regaining traction. People don't plan to buy large household goods. That creates enormous competitive pressure on businesses that are there.
MILLER: There is debate over how the Federal Reserve will interpret today's inflation data. Year over year, core consume prices are up 2.3 percent above the Fed's comfort zone, which tops out at 2 percent. That's part of the reason some economists think central bankers will ratchet up concern about inflation at their next policy meeting June 24 and 25. But most Fed watchers do not think policy makers will be worried enough to raise rates then or even later this summer.
DICLEMENTE: No, I don't think that's very likely. Certainly you can imagine a scenario in which, if inflation expectations continue to inch up, they could be forced into this.
MILLER: If the Fed does hike rates in the coming months, many economists believe it would be a grave mistake. They say the bigger threat to the economy is not inflation but recession and higher rates could make that worse. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Corn Prices Continue To Pop As Flood Waters Rise
JEFF YASTINE: It's been a week of record-breaking corn prices at the Chicago Board of Trade. Fears that damaging floods in the Midwest could wipe out much of the U.S. corn crop have sent corn futures prices to historic highs. As Diane Eastabrook reports, forecasts for dryer weather are shaking some, but not all of the volatility out of the market.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the corn (INAUDIBLE) this morning at the Chicago Board of Trade, business was frenzied, but at least more controlled. Corn futures were still above $7 a bushel, but price movements were less extreme than previous days. Traders say forecasts for dryer weather this weekend in the Midwest and a stronger dollar calmed the jittery corn futures market, rattled all week by flooding in the nation's heartland. Still, veteran corn trader Victor Lespinasse said the current flooding reminds him of the last devastating floods.
VICTOR LESPINASSE, CORN TRADER, ILLINOIS GRAIN: We're getting close to a repeat of '93 and we can't afford it this year.
EASTABROOK: In the past few weeks, heavy rains have soaked portions of the Midwest, turning many farm fields into lakes. The worst flooding has been in Iowa. Even in areas not under water, Indiana farmers like Russell Meade say corn that should be knee high is only ankle high.
RUSSELL MEADE, FARMER: To have corn this low, I haven't seen it this low since I started farming 10 years ago.
EASTABROOK: The flooding prompted the U.S. Department of Agriculture to revise downward its corn production forecast. This week, the U.S.D.A. estimated farmers wills harvest about 11.7 billion bushels of corn this fall. Just a month ago, it projected a 12 billion bushel harvest. The government also said inventories of corn have fallen by 90 million bushels. The meager projections come at a time when grain demand is at record highs. But analysts think some users of corn are beginning to reduce demand because of rising prices. They say farmers are liquidating more livestock herds and some ethanol plants are cutting back on production of the corn- based fuel. Still, Shaw McCambridge, senior grain analyst for Prudential Bache commodities, thinks it could be awhile before corn prices come off of their highs.
SHAWN MCCAMBRIDGE, SR. GRAIN ANALYST, PRUDENTIAL BACHE COMMODITIES: in order to push it back to prices down around the $5 level, we are probably going to wait until I think probably until next year and see how production goes, because right now we're focused on the supply side of the market. The supply side is really under a lot of stress right now.
EASTABROOK: In a couple of weeks, the U.S.D.A. will report just how many acres of corn U.S. farmers were able to plant this spring. But traders here say that (INAUDIBLE) won't reflect the damage from the flooding, so prices for corn could remain volatile for several more weeks. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
Commuters Resort to the Rails As Gas Prices Rise
JEFF YASTINE: Just how far will Americans go to reduce their gasoline costs? Mass transit officials across the nation are hoping they'll go all the way on a train or a bus and leave the family car in the garage. As Scott Gurvey reports, when it comes to commuting, there's evidence many people are already making the switch.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even if endless rush hour traffic haven't coaxed you out of your car and onto mass transit, gasoline selling for more than $4 a gallon is probably making you give the idea some serious thought. Transit systems are reporting big increases in ridership as Americans park their cars and switch to trains, buses and light rail. Sean Weithers rides the rails to New York from Bloomfield, New Jersey.
SEAN WEITHERS, TRANSIT RIDER: I would see the price of gas every day coming back from New York changing. It would go up a dime, $0.02 here and there. So I look at that, I look at that trend on a daily basis, and then I said, you know what, maybe then I should start parking and hop on the light rail.
GURVEY: The American Public Transport Association says the biggest jump in commuter rail ridership in the first quarter was 28 percent in Seattle, followed by 17 percent in Harrisburg, 16 percent in Oakland, 13 percent in Pompano Beach and 10 percent in Philadelphia. New York operates the nation's largest transit system and has seen an increase in all categories of operation. It's funded by many sources, including gasoline taxes, now falling because people are driving less and property taxes, now falling because of the housing slump. New York Metropolitan Transit Authority CEO Eliot Sander says that's a big problem.
ELLIOT SANDER, CEO, NEW YORK METROPOLITAN TRANSPORTATION AUTHORITY: It puts the MTA and also other transit properties around the country as well in a very, very challenged place. The irony is, from a public policy standpoint, this is exactly what you want see. Having people ride public transport is terrific from an environmental standpoint, useful in terms of congestion. It's the right thing to do. On the other hand, our finances are about as weak as they've been in the last 20 years.
GURVEY: New Jersey Transit saw a 5 percent increase in train ridership in the first quarter. That is well ahead of the long-term trend, which has been rising as people working in Manhattan move to the garden state. That trend has already taxed all Hudson River crossings to capacity, including bridges, trains and ferries. To help meet demand, NJT is buying double- decker train cars which add seats without adding trains. But the ultimate solution, according to NJT Executive Director Richard Sarles, is much more ambitious.
RICHARD SARLES, EXECUTIVE DIRECTOR, NEW JERSEY TRANSIT: In the long- term, what we're doing is advancing a project to double the capacity into New York, adding two more tunnels, two more tracks. And so, instead of getting 23 trains an hour into -- during the peak period, we'll get 46 trains per hour.
GURVEY: If built, the tunnel will be the first new river crossing since 1937. Construction is expected to take 10 years and cost more than $7 billion. This kind of undertaking requires both regional and federal cooperation. Eliot Sander of New York's MTA says policymakers nationwide must understand the value of mass transit.
SANDER: When you look at the 40, 50 major regions in the United States, they won't be able to function without transit. And so, it's crucial from an economic standpoint. And then, in the context of global warming, you've got to get people into transportation systems that are more environmentally sustainable and transit is certainly in the lead on that.
GURVEY: Sander says what mass transit in the United States really needs is permanent change in the way people approach their travel. With the high price of gas, that may just happen. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Market Monitor"- John Hughes, President of Quantum Capital Management
PAUL KANGAS: My guest "Market Monitor" this week is John Hughes, president of Quantum Capital Management. Welcome back to NIGHTLY BUSINESS REPORT John.
JOHN HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: Hi Paul it's always good to be with you.
KANGAS: On your last visit with us in December, to your credit you expressed concern about inflation which just now the Federal Reserve is warning us about. Given today's rather sharp rise in May consumer prices are you more concerned about inflation now than before?
HUGHES: Well, yeah, I mean, we've been talking -- you and I have been talking about the debt to GDP imbalance for the last four years or so, and August of last year, I think that was the shot heard around the world with Bear Stearns and credit has certainly turned. Whether it's made an ethical turn or not, we don't know. But I think it has. I think it portends inflationary pressures in terms of rises in the price level and deflationary pressures. It depends on the Fed's response, but we certainly have economic headwinds going forward.
KANGAS: How do you think the Fed should respond, briefly?
HUGHES: My personal view is that the Fed should exist to regulate the banks and to clear checks, if necessary. But they should not be in the business of intermediating in the price discovery process.
KANGAS: I understand.
HUGHES: So I think they're between a rock and a hard place.
KANGAS: The driving force behind this inflationary move here seems to be skyrocketing oil prices. What are your thoughts on the outlook for oil?
HUGHES: I gave up a long time ago trying to determine the short run movements of the price of oil. It appears that the demand for oil is accelerating in the long term. The supply of oil is decelerating and monetary growth worldwide is growing at a faster rate than both. I think in the long run, we're talking about higher prices.
KANGAS: All right. Six months ago, you told our viewers that gold was a good hedge against inflation, and, indeed, the precious yellow has done well. Are you still in favor of gold or gold stocks and how high do you think gold can go?
HUGHES: Again, gold, we have no idea how high it can go, but we do know that it will be higher tomorrow than it is today and by tomorrow, I mean 10 years from now.
KANGAS: The figurative tomorrow.
HUGHES: The figurative tomorrow. And I think there are better hedges against inflation than gold, per se. But against a loss of faith in a faith-based currency system -- whether it's the U.S. dollar or whether it's any currency -- gold is durable. It's advisable and it's a medium of exchange that you can contract for future goods and services and is transportable. You can carry it in your pocket, Paul. You can't do with a barrel of oil.
KANGAS: But on that same visit you suggested buying the gold tracking stock GLD on the New York Stock Exchange. Let's see how it fared and you also had two other recommendations but the spyder gold trust up 9.2 percent, very good. Are you still with t?
HUGHES: We're still with it up or down like (INAUDIBLE) sometimes it goes down. Then we still keep it in the portfolio.
KANGAS: Then another recommendation was Copart (CPRT), which is in the auto salvaging business. It's done well, up over 14 percent. Still with that?
HUGHES: We're still with it. It's the largest processor of total loss vehicles for the insurance industry. We jokingly say that it is a quasi-monopolistic technology company that only masquerades as a junk yard.
KANGAS: OK, you had a third choice, too, which didn't fare too well, Epicor Software (EPIC). You still with it?
HUGHES: We're out of it. It seems like right after we recommend it, we tend to buy companies with pricing power, with low debt loads. They acquired a heavy debt load, a company in a comprise there.
KANGAS: We just have about 40 seconds left, new recommendations.
HUGHES: Cohen & Steers (CNS), it's an asset manager of income- producing investments primarily real estate..
KANGAS: CNS on the big board.
HUGHES: It's an A-level asset manager run by two seasoned managers and you're getting it for a B-level price.
KANGAS: Second choice.
HUGHES: Autodesk, (ADSK). It's a software developer in the architectural construction and engineering industry.
KANGAS: ADSK on the NASDAQ.
HUGHES: ADSK. We believe that it trades at a significant discount to its intrinsic value.
KANGAS: John, do you personally own these securities we've mentioned or have any other disclosure to make?
HUGHES: We only recommend them if we own them and 100 percent of our assets are invested in Qauntum.
KANGAS: OK. we've run out of time but I want to thank you for being with us once again.
HUGHES: Thanks Paul. It's always good to see you.
KANGAS: My guest, John Hughes, president of Quantum Capital Management.
"Commentary"-The Rules Of Doing Business Overseas
JEFF YASTINE: Tonight's commentator says companies doing business overseas could learn a thing or two from a situation playing out in the Russian oil market. She's Chrystia Freeland, U.S. managing editor at the "Financial Times."
CHRYSTIA FREELAND, US MANAGING EDITOR, FINANCIAL TIMES: Especially away from home, CEOs tend to be more concerned with profits than with pluralism and the stability of dictatorships can often seem a safer bet than the chaos of young democracies. But the struggle between Russian and British shareholders at TNK-BP (ph), once the flagship western joint venture in the Russian oil sector, is a powerful reminder that the security authoritarian regimes offer is often illusory. Recently, British oil company BP has been under severe pressure from its Russian partners, possibly acting in concert with the Kremlin. The end result could well be a significant dilution of BP's stake in the Russian company in favor of the Russian shareholders and the Russian state. BP looks to be the injured party in his episode, but it is no innocent abroad. The company triumphantly sealed its deal with TNK in 2003, the year Russian oil baron and oligarch Mikhail Khodorkovsky lost his company and was jailed on politically motivated charges. But BP was confident its Kremlin ties and savvy local comrades would allow it to avoid a similar fate. Now, that no longer seems to be the case and BP is crying foul. Other western oilmen are joining the chorus, like Exxon's Rex Tillerson, who told a St. Petersburg conference a few days ago that there is no confidence in the rule of law in Russia today. That's what Russia's beleaguered political opposition has been warning for the past eight years. It's high time for western investors to understand that authoritarianism can imperil their rights, too. I'm Chrystia Freeland.
Paul Kangas' Stocks In The News
PAUL KANGAS: Judging by Wall Street's strong opening, investors took today's data on consumer prices in stride and focused on the tame core rate. Another plus was a slump in oil futures. By midday, the Dow surged to a 138-point gain and the NASDAQ was up 44 points. A decline in the University of Michigan's consumer sentiment index led to an early afternoon pullback in stocks, but continuing strength in the dollar helped the market make a solid late comeback. The Dow Industrial Average closed up 165.77 points at 12,307.35. This week it fell just once, advancing 97.54 points overall. The NASDAQ Composite jumped 50.15 to 2454.50 today. It rose twice and fell three times this week, losing 20.06 points overall. Standard & Poor's 500 Index gained 20.16 today, but for the week it fell 0.65 overall. Over in the bond market, the 10-year note fell 12/32 to 96 28/32, putting the yield at 4.26 percent.
New York exchange volume leader on 32.6 million shares, Keycorp (KEY) down another $0.25 after tumbling $3.73 a share yesterday when the company said it's cutting its annual dividend 50 percent, going from $1.50 down to $0.75 a share, also said it plans to raise $1.65 billion in new equity capital.
General Electric (GE) managed to gain $0.10.
And then Citigroup (C) up $0.59.
But Wachovia (WB) down $1.12. The story here, Lehman Brothers analyst said he expects the company to cut its dividend again.
Bank of America (BAC) moved up $0.34 a share, fifth in big board volume.
Pfizer (PFE) $0.26 gain. The company might make a bid for 65 percent of Indian drug maker Rambaxi (ph) Laboratories.
Lehman Brothers (LEH) bouncing back $3.11. That's a rebound after five straight days of losses.
Ford Motor Co (F) moved up $0.27.
JPMorgan Chase (JPM) $1.57 gainer.
And Coca-Cola Co (KO) down $1.72. Now that is in sympathy with Coca- Cola Hellenic Bottling (CCH) over in Greece, which tumbled $8.76 after the company cut its 2008 earnings guidance from growth of 12 percent to only growth now estimated by the company at 6 percent. Down went that stock.
And another rival, Pepsi Bottling Group (PBG) down in sympathy as well, off $0.77.
Massey Energy (MEE) up $5.77. The coal company's stock will be added to the Standard & Poor's 500 Index on June 20th, replacing Office Max which will replace Massey in the Standard & Poor's small cap 600 index, musical chairs there.
We see LDK Solar Co (LDK), $2.55 gain. It signed a five-year contract to supply solar wafers to a large Chinese company.
On the downside, Brasil Telecom (BRF) down $6.15. JPMorgan downgraded the stock from "neutral" to "under weight" rating.
Allied Waste (AW) rising $1.08. Late today, Republic Services said it's in merger talks to take over Allied Waste for cash and stock worth about $15.23 a share for Allied.
Lindsay Corp (LNM) up $11.51. Third quarter earnings due this coming Wednesday and analysts see better than expected results than the Wall Street estimate of $1.22. Strong demand for corn and other crops has boosted demand for this company's irrigation system.
NASDAQ's most active, Apple (AAPL) down $0.89.
Microsoft (MSFT) $0.83 gain.
Google (GOOG) you heard the story there between Google and Yahoo! up $18.56, but Yahoo! (YHOO) down a nickel.
Research in Motion (RIMM) a $3.37 advance.
Qualcomm (QCOM) gained $1.01.
$0.41 advance for Cisco Systems (CSCO).
Intel (INTC) up $0.61.
Baidu.com (BIDU) gained $11.42.
And First Solar (FSLR) up $12.59 on that one.
Then we see RF Industries (RFL), a radio frequency communications product company, up $1.54, big percentage move. Third quarter earnings tripled to $0.15 from a nickel a year ago on record sales of $4.5 million.
On the downside, Maxygen (MAXY), this is a biotech research firm, off $1.36 on fears that Amgen might just sue for patent infringement regarding the company's cancer drug.
And those are the stocks in the news tonight.
