NBR Transcripts- June 17, 2008
Tuesday, June 17, 2008Inflation & The Producer Price Index
SUSIE GHARIB: Mixed news today about inflation as investors try to gauge the risks that rising prices pose to the U.S. economy. The Labor Department reported wholesale prices rose in May by a greater-than- expected 1.4 percent. But excluding volatile food and energy, prices were up by only 0.2 of a percent. Suzanne Pratt takes a look at how these inflation pressures are likely to impact the markets and Federal Reserve policy.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Surging energy costs were largely responsible for the big increase in wholesale inflation. The rising price of many food items, including fruit and beef, was also to blame for the huge jump in the producer price index which measures the costs of goods before they hit the stores. Excluding food and energy costs, the so-called core rate of PPI was less threatening. But Citigroup economist Steven Wieting says it's misleading to exclude the cost of basic items like food and energy when evaluating the U.S. inflation picture.
STEVEN WIETING, SR. ECONOMIST, CITIGROUP: It's a primary cost for consumers, if we were looking at final consumer prices and these are important input costs for many retailing firms. These are wholesale, domestically produced prices and there is a lot of cost pressure.
PRATT: In the past year, the producer price index has gained more than 7 percent, and the core rate is up 3 percent. That's now well above the 2 percent level, which is widely accepted as the Federal Reserve's comfort zone for core PPI. And with the Fed's next meeting on interest rates only a week away, the latest inflation data rises new questions about what might happen to monetary policy. Still, like most economists, Mike Moran of Daiwa Securities thinks policymakers will stay the course at the June meeting.
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES: I think Fed officials are concerned about inflation. I think they see upside risks on the inflation front, but I don't think they are quite prepared to tighten monetary policy just yet. We still have slow economic growth and you still have unsettled conditions in financial markets.
PRATT: The bond market continues to price in a hike in rates at the Fed's August or September meeting in an effort to rein in inflation. But some economists believe bond investors have gotten ahead of the Fed on that score.
MORAN: I think they might view it as a mistake to tighten monetary policy now and then have the economy slow later in the year when individuals are no longer receiving tax rebates. I think they'd like to wait until the latter part of this year or even early next year before they begin hiking interest rates.
PRATT: The near-term outlook for inflation is not good. In just the first half of June, crude oil prices are up more than 5 percent, putting more pressure on consumers and businesses. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with William Gross, Chief Investment Officer of Pimco
SUSIE GHARIB: Back now to our top story, inflation and the markets. Joining us for more analysis, William Gross, the founder and chief investment officer of Pimco, the world's largest bond fund. Hi, Bill.
BILL GROSS, FOUNDER & CHIEF INVESTMENT OFFICER, PIMCO: Hi, Susie.
GHARIB: I'd like to get your take on what the bond market is telling us. It seems like we've been getting mixed signals recently. A few days ago, it seemed that they were signaling that inflation is a real problem and that the Fed is going to raise interest rates, but today a different story. What's your take on that?
GROSS: I think it is a confusing market and a confusing economy, sort of a duality of (INAUDIBLE) the margin, if you will, in that there's two sides to the equation. In terms of what the Fed has to do, they have a dual mandate to contain inflation and to promote economic growth, but due to oil prices, which are going up and home prices which are going down, Chairman Bernanke doesn't know which way to look. He is sort of like trying to cross a busy street and caught in rush hour traffic. So there's a problem here. I sense that Chairman Bernanke will probably stay where he is. But no doubt he is very concerned.
GHARIB: You heard our story and the debate about what the Fed will do next. Majority of people seem to think that the Fed -- next week's meeting will probably stand pat on interest rates. But what about August or a looking further down the road into the fall? What do you think is going to happen with the Federal fund's interest rate?
GROSS: I think the Fed has to talk tough. I mean, inflation is a problem. There's this disparity between core inflation and headline inflation as you pointed out. Headline inflation whether it's PPI or CPI in the 4's and 5s, the core down around 2. The Fed prefers to look at core but people pay headline. And so there's no doubt that the Fed has to talk tough, but it's difficult to raise interest rates when the economy is near recession and when housing prices are going down at double digit levels. So I think the Fed stays where they are and continues to sound very, very tough.
GHARIB: Well, it's interesting you bring that up because usually when the Fed raises interest rates, it's because inflation is -- it's because the economy is overheating. We're not seeing the economy overheating right now, right?
GROSS: No, not at all. The problem, I think is that the domestic economy, the U.S. economy, is very, very slow, close to recessionary levels but the global economy in many cases is over heating. Asia and the emerging markets are doing very, very well. And so, their inflation rates which are 5 to 10 and in some cases double digit levels are influencing our inflation rates through oil prices and through commodity prices. So this is a globalized economy that we're not quite used to and so the Fed has problems in terms of balance both of those considerations.
GHARIB: Given that it is a very delicate balancing act, what is your outlook of - let's talk about interest rates. The yield on the 10-year bond for example, where do you see that going over the next couple of months? It's roughly 4.2 percent now. Where do you see it going?
GROSS: I think higher, Susie and I think those that buy it at 4.2 percent aren't getting value for their money. For the most part, 10-year Treasuries are bought by foreign entities, by foreign central banks with the money that they have in terms of surplus reserves, China, the middle eastern countries and so on. I don't think U.S. investors should be investing at 4.2 percent when inflation is 4 to 5 percent. So I think they should look elsewhere. The stocks are really typically inflation hedges and although the stock market has problems of its own in terms of de- levering, there's no doubt they have an ability to adjust to inflation much better than bonds do.
GHARIB: You say that the markets have -- the stock market has a better chance of adjusting to inflation. What impact do you think higher interest rates, if the Fed does go on the interest rate hiking scenario, what impact is it going to have on the stock market, which seems so fragile right now?
GROSS: Right. I think so, too and I think that's another consideration. You have to look at housing prices. They have to know that the financial markets are in the process of de-levering. That is, they're raising capital in terms of banks and selling assets in order to get down to more appropriate leverage ratios. And so the Fed has to be very careful because if they raise interest rates, they raise the cost of that leverage. That's another reason why 2 percent Fed funds is probably here not to stay, but similar to the rest of the year.
GHARIB: All right. Thank you so much Bill for your insights. You gave us interesting things to think about.
GROSS: Thank you, Susie.
GHARIB: My guest tonight, William Gross of Pimco.
The CFTC Heads To The Hill To Announce An Oil Agreement
PAUL KANGAS: The head of the Commodity Futures Trading Commission told Congress today that the tougher restrictions on oil speculators are now in the works. As Darren Gersh reports, the move comes as oil prices have soared and critics have pressed regulators to rein in offshore trading in crude futures.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: When a Senate hearing combines oil and financial markets, you get this -- a capacity crowd of Washington insiders. All of them were eager to learn whether lawmakers and regulators will crack down on speculative trading in oil futures markets. The first bit of news came from acting Commodity Futures Trading Commission Chairman Walter Lukken. He announced his agency has reached a deal to require traders on a key overseas exchange to follow the same rules as oil traders on the New York Mercantile Exchange. Lukken says U.S. regulators will also be getting more information about trading around the world.
WALTER LUKKEN, ACTING CHAIRMAN, CFTC: The benefit is not only do we get to see the U.S. participants on those markets, but we also get to see the foreign participants. It would be completely opaque to us.
GERSH: The CFTC agreement will require big traders to report crude oil positions they take on the intercontinental exchange, or ICE for short. Under a regulatory loophole, ICE is operated out of Atlanta, Georgia, but regulated by the British. Critics have charged speculative trading on ICE is driving up the price of oil, more specifically of west Texas intermediate crude, a key pricing benchmark. It's a charge ICE CEO Charles Vice denies.
CHARLES VICE, CEO, INTERCONTINENTALEXCHANGE: With a mere 15 percent share of global WTI open interest on a futures-equivalent basis, we feel it is highly unlikely that the ICE futures WTI market is the primary driver of WTI prices.
GERSH: For months, members of Congress have been pressing regulators to take a tougher look at oil trading. And with gas prices over $4 a gallon, senators like Illinois' Richard Durbin are clearly not ready to let up now.
SEN. RICHARD DURBIN, (D) ILLINOIS: If the run-up in crude oil prices is being driven by large trader banks, pension banks and hedge funds, then speculators have more to do with high gasoline prices than Saudi sheiks.
GERSH: Over the last 10 years, Congress has tried to save money by slashing the CFTC's budget. Now, lawmakers say they want to hire 100 new CFTC investigators and put them to work policing trading in everything from corn to crude oil. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest" -Jason Zweig, Investing Columnist for "Money" Magazine
PAUL KANGAS: The calendar may say June, but in tonight's "Of Mutual Interest" segment, we have an idea about planning for January. Joining me now, Jason Zweig, investing columnist for "Money" magazine and author of "Your Money and Your Brain." Jason, welcome back to NIGHTLY BUSINESS REPORT.
JASON ZWEIG, INVESTING COLUMNIST, MONEY MAGAZINE: Thanks, Paul.
KANGAS: So, the idea here is for small investors to be able to hedge, hedge against rising prices for home heating oil.
ZWEIG: Yeah. I think this is an interesting -- this is an interesting thought, Paul because in the northeast where I live, and in other cold parts of the country, increasingly, the heating oil and natural gas suppliers are telling customers they may not be able to get the customary guarantee or cap against rising prices they have gotten in previous years. A lot of people are quite anxious about this and there is a technique that you can try, if you are feeling worried about it.
KANGAS: All right. Give us the details on how this works.
ZWEIG: Well, what would you do is you would take one of two exchange traded funds that both trade on the American Stock Exchange, the one we'll talk about first is called United States Heating Oil Fund. The ticker symbol is UHN. And what you would do is you would buy an amount of this fund roughly equal to what you spent on last winter's heating oil bill and if oil prices continue to go up, you will make money on the fund, which will compensate you for the extra amount of money you had to pay for the heating oil.
KANGAS: You'll make money on paper, but if you actually take a profit, you incur a tax liability, right
ZWEIG: Yes, that's correct. But of course, you could do worse things than making money.
KANGAS: That's true.
ZWEIG: You will owe a capital gains tax, very likely, a short term capital gains tax, but if oil prices go up rapidly, that's probably a penalty that you would be willing to incur, because you could take your gain and use it to pay part of your oil bill.
KANGAS: Now, this is a relatively new exchange traded fund, correct?
ZWEIG: Yeah, that's correct, Paul. It's only been out roughly since April, but as you can see, it's done approximately as well.
KANGAS: Mm-hmm.
ZWEIG: As the price of oil in general, namely it's gone up as we all know.
KANGAS: We have less than a minute left, Jason. Are there other ETFs that track similar energy issues?
ZWEIG: Yeah. The second one, which is kind of a sister fund to this one is the United States Natural Gas Fund and the ticker there is UNG. And you could do the same thing with this fund if you heat with natural gas. Buy a matching amount compared to your last winter's bill.
KANGAS: I see.
ZWEIG: And if goes up, then you can use some of the proceeds to pay your heating bill. If goes down, you at least have the --
KANGAS: OK.
ZWEIG: The pleasure of knowing your heating oil bill went down.
KANGAS: That's always very interesting from you, Jason, and thanks for being with us again.
ZWEIG: My pleasure, Paul. Thank you.
KANGAS: My guest, Jason Zweig, investing columnist for "Money" magazine, and author of "Your Money and Your Brain."
"Last Word"-Hershey Gets Sweet On Gas
SUSIE GHARIB: And finally, Hershey is looking to sweeten the pain at the pump. Today it kicked off a new cash for gas promotion. Consumers who purchase Payday bars and Score bars have a chance to win cash for more than a year's supply of gas or roughly $2,200. It's sort of like Willie Wonka but with gasoline. The special wrappers contain more than 5,500 cash prizes. Hershey kicked off the promotion today in Illinois by surprising nearly 400 drivers with more than 5000 gallon of free gas. Of course, they got lots of free Hershey's chocolate, Paul.
KANGAS: Who said that gasoline and sugar don't mix?
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened on a mixed note with the Dow rising 20 points at the outset of trading, while the NASDAQ fell seven points. Try as they might, the bulls failed to find a following against that rather dismal news background of wholesale inflation and a slowing economy. By midday, the Dow was off 78 points. While the NASDAQ kept its losses rather modest, the blue chips wee undermined this afternoon by a very bearish report on the banking stocks by Goldman Sachs, saying the credit crisis won't peak until 2009. The Dow Jones Industrial Average fell to a closing loss of 108.78 points at 12,160.30. The NASDAQ Composite lost 17.05 ending at 2,457.73. Standard & Poor's 500 Index was down 9.21 closing at 1,350.93. In the bond market, the 10-year note gained 20/32 to 97 12/32, putting the yield at 4.20 percent.
Big board volume leader on 17.6 million shares, Citigroup (C) losing $0.37. An analyst at Goldman Sachs said U.S. banks must raise $65 billion in additional capital on top of the $120 billion already raised. The analyst predicted the credit crisis won't peak until 2009. Goldman Sachs also cut price targets and earnings estimates for a slew of bank stocks, so the sector was very weak today as you'll see in our active list alone.
General Electric (GE) in there with an $0.11 loss.
Bank of America (BAC) there you see down $1.08.
Wachovia (WB) fell $0.97.
Pfizer (PFE) fifth in volume, dropped $0.05 a share.
Ford Motor Co (F) bucked the trend, up a dime.
Wells Fargo & Co (WFC) though down $0.98.
And Keycorp (KEY) losing $0.40.
JPMorgan Chase (JPM) off $0.90.
And Time Warner (TWX) $0.17 loss there.
Morgan Stanley (MS) down $1.70. Second quarter results are due out tomorrow. The Wall Street estimate is for $0.92 a share in earnings.
Wyeth (WYE), the big drug pharmaceutical research firm, up $2.08. The company and its partner Elan said phase II study of their Alzheimer's drug showed some promise. Elan stock was up $2.89 to $30 a share even.
Best Buy Co (BBY) down $2.42 despite first quarter earnings, $0.43 up from $0.39 last year and $0.06 above the Street estimate, but management was very cautious about the outlook and that seemed to hurt the stock.
Chicago Merc Exchange Group (CME) up $22.41. Citigroup upgraded it from "hold" to "buy" today and after the close yesterday, the Chicago Merc and Nymex got Department of Justice clearance to complete their merger without conditions. Nymex stock up $2.87 to $92.45 today.
Distribucion y Servicio D&S (DYS), better known as D&S, this is a large Chilean supermarket chain. The company said it had no explanation for the stock jump, but there is speculation around that Wal-Mart might make a buyout bid and it might be eyeing the company.
And then Genco Shipping (GNK) up $5.16, positive reaction to the company's purchase of six new dry bulk ships for $530 million. That whole dry bulk carrier segment very strong today.
Dryships (DRY), Excel Maritime (EXM), Eagle Bulk Shipping (EGLE) and General Maritime (GME) nice gains on the day.
Worthington Industries (WOR) up $1.45. The steel processing company got an upgrade from Longbow Research from "neutral" to a "buy."
And Cinemark Holdings (CNK) losing $1.28. Morgan Stanley downgraded it from "over weight" to "equal weight" on concern over the earnings shortfall that might be a result from poor theater attendance.
NASDAQ's most active Apple (AAPL) up $4.59. Piper Jaffray brokerage thinks the company will ship as many as 11 million iPods in the June quarter alone.
Research in Motion (RIMM) up $1.18.
Google (GOOG) fell $3.35 today.
First Solar (FSLR) up $4.82 there.
Microsoft (MSFT) a $0.13 loss.
Baidu.com (BIDU) fell $3.27.
Cisco Systems (CSCO) a $0.30 drop.
Intel (INTC) $0.28 loss there.
Qualcomm (QCOM) down $0.91.
And Amazon.com (AMZN) up $1.27 a share.
Mentor Graphics (MENT) nice move today, up $2.65. The company said it rejected a $16 a share buyout bid from Cadence Design Systems, said that bid was too low.
And finally, Infinera (INFN) tumbled $3.53 after drastically cutting its full year revenue growth target from 25 percent to only 10 percent. Goldman Sachs blamed the shortfall on slowing chip sales from Level 3 Communications Corp.
