NBR Transcripts- June 23, 2008
Monday, June 23, 2008The Speculator's Role in the Oil Market
SUZANNE PRATT: Oil prices were on the move higher again today on disappointment over Saudi Arabia's modest increase in output. Crude oil futures settled at $136.74 a barrel, up $1.38, also spurred by production problems in Nigeria. At yesterday's energy summit, the Saudis pledged to pump more oil next month adding 200,000 extra barrels a day. But that didn't impress traders hoping for a larger increase. Meanwhile, surging oil prices took center stage in Washington. That's where, as Stephanie Dhue explains, regulators and lawmakers examined the role of speculators in the energy markets.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lawmakers worry speculators are driving oil prices higher. The House subcommittee on investigation and oversight found investors now account for the majority of holdings of oil futures contracts. In fact, just 30 percent of contracts are now held by firms that plan to take delivery of oil. That compares with 63 percent in 2000. That trend has Subcommittee Chairman Bart Stupak trying to connect the dots.
REP. BART STUPAK, (D) MICHIGAN: Is it a coincidence that investment banks have tripled the number of futures contracts they are buying at the same time that oil prices are skyrocketing?
DHUE: No coincidence, a panel of energy analysts told lawmakers. Oppenheimer's Fadel Gheit says without speculators, the price would be between $45 and $65 a barrel.
FADEL GHEIT, SR. OIL ANALYST, OPPENHEIMER & CO.: The world has not changed significantly over the last few years to justify $140 and then you have people predicting $200 oil. If we don't do anything about it, their prediction will come true.
DHUE: Hedge fund manager Michael Masters says limiting positions held by pension funds, investment banks and other speculative players could reduce prices by 30 to 50 percent.
MICHAEL MASTERS, PORTFOLIO MANAGER, MASTERS CAPITAL MANAGEMENT: What we're talking about here with speculation, the right terminology really isn't a bubble, it's really more like a tumor. And it grows and grows and grows and in this case, it's hurtful as it expands. So the time to act is before it gets any worse.
DHUE: The Bush administration rejects the argument that speculation is driving prices higher. Instead it says the problem is a supply-demand imbalance. Texas Republican Joe Barton agrees.
REP. JOE BARTON (R) TEXAS: Speculators are not the cause of high energy prices. We have high energy prices because there's less than a one or two percent margin of supply over demand in world markets today.
DHUE: The presidential candidates have also weighed in on speculation and oil prices. John McCain says speculators' role should be investigated. Barack Obama proposes closing loopholes that exempt some energy trading from U.S. regulation. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The Federal Reserve Prepares To Take On Rising Gas Prices
PAUL KANGAS: The Federal Reserve is also worried about rising gasoline prices. The central bank is worried they're getting under consumers' skins and pushing up inflation expectations. Tomorrow, the Fed begins a two-day meeting on interest rates, and energy will be on the agenda. Tonight, Darren Gersh looks at what the Fed can do about rising prices.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If it makes you feel better, economists have a name for the anxiety you feel when you pay to gas up: it's called a supply shock. And because oil markets are global and the supply of crude is fairly fixed, the traditional short-term domestic interest rate levers the Federal Reserve manipulates don't have much of an impact on the price per gallon. So former Fed staffer Douglas Elmendorf says, some patience is required.
DOUGLAS ELMENDORF, SR. FELLOW, BROOKINGS: The Federal Reserve can't reverse supply shocks directly. What it can do is to let the overall economy weaken enough that the disinflationary effects of a weak economy offset inflationary effects of supply shocks.
GERSH: That means, as we spend more money on our gas tanks, we have less money to spend at, say, a restaurant which means businesses like restaurants have a harder time raising their prices which also explains why the Fed really can't cut interest rates now to boost what is actually a pretty soft economy.
ELEMDORF: They are not going to try to push the economy back to fast growth right away because that would be too fast growth to keep inflation low.
GERSH: If the source of inflation were home grown, say an overheating U.S. job market, life would be easier for the Fed. It would simply raise interest rates to tamp down demand. But Lehman Brothers economist Ethan Harris does not recommend the Fed take the advice of inflation hard-liners and hike rates.
ETHAN HARRIS, CHIEF U.S. ECONOMIST, LEHMAN BROTHERS: It is a little hard for the Fed to sell the public on the idea that we're going to stop that inflation that is hurting you so much by hurting you even more. The reality is that the economy is pretty weak already and I don't really think it's a good idea for the Fed to be hiking aggressively.
GERSH: If it sounds like the Fed is in a bit of a bind without an easy option, that's because it is. And Harris says that means Fed Chairman Ben Bernanke and his colleagues will risk appearing a bit weak.
HARRIS: They look a little bit like a 98-pound weakling here right now, but they are not powerless. We need to be kind of patient around this. The Fed can't turn a commodity driven inflation quickly.
GERSH: For this week though, Harris expects the Fed act like that 98- pound weakling, talking tough on inflation, hoping it won't have to back that up with action. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Ways Regional Banks Are Raising Capital
PAUL KANGAS: On Wall Street, financial stocks have been in the spotlight for their poor performance this year, and many regional banks have been hit especially hard. As Erika Miller reports, most analysts don't see a turnaround anytime soon for the regional players.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Troubles at big money center banks and brokerage firms have dominated headlines this year. But many smaller, regional banks are in even worse shape. The Standard & Poor's regional bank index has fallen nearly 40 percent since January 1. Though regional banks are scattered geographically, Morningstar analyst Jim Sinegal says they're facing a common problem.
JAMES SINEGAL, BANKING ANALYST, MORNINGSTAR: The fear is credit quality. It started out with the major banks that had exposure to sub- prime mortgages and now it's basically spread to all areas of credit, regional banks with exposure to home equity loans, home construction and even now commercial loans.
MILLER: Some regionals are raising capital by issuing more stock. Others are cutting dividend payouts. Most analysts expect an increasing number of regional banks will go bankrupt this year. Sandler O'Neill's Kevin Fitzsimmons predicts many others will merge.
KEVIN FITZSIMMONS, BANKING ANALYST, SANDLER O'NEILL: I think at some point, you are going to see that. We've had a real slowdown in M&A right now. And that's understandable because a lot of the buyers are looking to preserve their own capital and they're trying to get their arms around their own credit quality concerns.
MILLER: Analysts say there are a few regional banks that have not gotten caught in the market downdraft. New Jersey-based Hudson City Bancorp, for example, has seen its shares rise 14 percent this year because it specializes in jumbo loans to prime borrowers. But analysts warn most regional banks will continue to struggle.
FITZSIMMONS: At this point, it seems things are bad and they are getting worse. And I think when you look at a credit cycle, credit cycle historically tends to get measured in years, not necessarily in months. And so we're still potentially in the early innings of the credit cycle here.
MILLER: Although times are clearly tough for banks, analysts don't think it will be as bad as the late 1980s. Back then, over 1,600 Federally insured financial institutions failed as a result of the savings and loan crisis. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Get Your Finances Ready"-Staying Put, The Pros & Cons of Reverse Mortgage
SUZANNE PRATT: Many new or soon to be retirees want to stay in their homes. But they worry they won't have enough money to do so or wonder what will happen if they face a financial crisis. For some a reverse mortgage can be a viable option. But it's not for everyone. Tonight, as we continue our series "Get Your Finances Ready for Retirement," Connie Hicks looks at the pros and cons of reverse mortgages.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you love your family home, perhaps the last thing you want to do when you retire is to sell it and move away. But staying put on a fixed income may not be easy. And if it's a problem, Robin Talbert of the AARP Foundation says a reverse mortgage is often seen as a solution.
ROBIN TALBERT, EXEC. DIR., AARP FOUNDATION: Typically people take out a reverse mortgage because they need the additional income to stay in their home; they may be what we call house rich but cash poor.
HICKS: A reverse mortgage is a loan taken against the equity you -- the retired homeowner -- have in the home. The bank provides you with cash, either monthly or in a lump sum or as a line of credit that you can draw on as needed. However, you never have to make a mortgage payment. That's because the loan is usually paid back from the proceeds of the home sale after you die or move away. Two years ago, Diana and Peter Nicholson decided to get a reverse mortgage on their Washington, DC condo. They didn't need the money immediately, but they wanted a safety net. So they got a $260,000 line of credit.
DIANA NICHOLSON, RETIREE: It provides us with money in case we have an accident or a crisis. We don't have to go into our savings.
HICKS: Financial planner Terry Savage thought a reverse mortgage was such a great idea, she helped her father get one.
TERRY SAVAGE, AUTHOR/FINANCE COLUMNIST: A reverse mortgage gives you a tax free check a month or a lump sum. It's your own equity that you're taking out and you can use it while you're there.
HICKS: But other financial planners, like Jonathan Pond, say reverse mortgages should only be used only as a last resort.
JONATHAN POND, AUTHOR, "YOU CAN DO IT!: I refer to them as a late in life trump card. When you have the house, you're desperate to stay in it, but you're running short of money, then a reverse mortgage makes sense.
HICKS: The experts we spoke to said reverse mortgages are not for everyone because they tend to carry high fees and interest rates. An AARP study found that on a $300,000 home, fees and charges on a typical reverse mortgage average almost $30,000 not counting interest. And those costs are magnified for those who take a reverse mortgage while still in their 60's. Sometimes retirees are told to take out a reverse mortgage in order to purchase an annuity. But even people like Peter Bell, who represents sellers of reverse mortgages, says that's probably not a good idea.
PETER BELL, PRES., NATIONAL REVERSE MORTGAGE LENDERS ASSOC.: Any prospective borrower who's talking to a salesperson who suggests that they get a reverse mortgage in order to purchase an investment product like an annuity, should really seek additional advice and not proceed just based on that sales person's advice.
HICKS: Because reverse mortgages can be complicated, independent web sites like AARP's offer calculators and guidance. And the Nicholson's agree comparison shopping is essential.
NICHOLSON: My advice is to find out as much as possible about them and to shop around as much as possible. And then if one feels that this is a good thing, then they should take a reverse mortgage.
HICKS: Just remember, while a reverse mortgage is one way to stay put in retirement, its up front and back-end costs need to be carefully considered, especially if you're concerned about leaving money for your heirs. Connie Hicks, NIGHTLY BUSINESS REPORT, Miami Shores, Florida.
PRATT: The web is a big part of our effort to help you get ready for retirement. On our web site NIGHTLY BUSINESS REPORT at pbs.org, you'll find an array of resources, information and tools you can use, including podcasts of our stories. So check out the "Get Your Finances Ready for Retirement" section of NIGHTLY BUSINESS REPORT at pbs.org.
"Commentary"-The Half Empty Economy
SUZANNE PRATT: In tonight's commentary, when it comes to the economy, why it feels to many like the glass is half empty. Here's Mark Zandi, chief economist at moody'seconomy.com.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: How bad is it, really? Nearly everyone, save for some economists and a few policymakers, believes we are in a recession. Surveys of consumer confidence show that people are as pessimistic as they have been since the early 1980s, when unemployment and inflation were well into the double digits. Today, unemployment is 5.5 percent and consumer price inflation is 4 percent. So why do people feel so crummy about the economy and should they? Part of the reason is probably Iraq. It colors our perceptions of everything. Conditions are seemingly getting better, but we all thought we would have been out of there by now. Part of the reason is the media. There is lots of it, from traditional newspapers to Internet blogs and the bad news gets amplified. The most important reason, for many of us our economic lives are indeed about as tough as we can remember. The average American household is worth much less given evaporating house prices and declining stock values. Millions of households are losing their homes in foreclosure. Debt loads, including payments on credit cards, auto loans and student loans, have never been weightier and the average American household's purchasing power is falling. Given $4 plus for a gallon of gasoline, inflation is rising faster than most peoples' incomes. There are very good reasons to not like the way things are going; they aren't going well. We must all buckle down in managing our own personal finances and we must demand that policymakers do the same with the nations' collective finances. This is Mark Zandi.
"Last Word"-The Lunch With Buffett Bidding War Begins
SUZANNE PRATT: And finally tonight, there's still no such thing as a free lunch especially when you're dining with Warren Buffett. EBay is auctioning off a lunch with the billionaire investor. As of this afternoon, the bidding stands at just over $40,000. The auction benefits the Glide Foundation, which provides services to the poor and homeless in San Francisco. Bidding ends Friday at 7:00 p.m. Pacific time. This is the sixth year of the auction. Last year, two investors paid more than $650,000 to dine with Buffett. And Paul, I can't imagine what's on the menu.
KANGAS: Well, I tell you, if the gratuity wasn't included I would volunteer to wait on the table.
PRATT: Absolutely.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street tried to stage an opening technical rebound from last week`s steep losses, but higher oil futures precluded any decent rally. The Dow and the NASDAQ see-sawed narrowly between plus and minus during the morning. Bearish analyst reports on the financial and auto sectors kept the market under pressure for the rest of the day, as did a late sell-off in tech stocks. So the Dow Industrial Average closed off just a third of a point at 11,842.36. The NASDAQ Composite fell 20.35 ending at 2385.74. Standard & Poor`s 500 managed to edge up a fraction, 0.07 at 1318 even. Over in the bond market, the 10-year note rose 1/32 to 97 21/32, putting the yield at 4.17 percent.
Most active big board issue on 16 million shares, Citigroup (C) down $0.75. The "Wall Street Journal" reports the company will lay off about 10 percent of the 65,000 people in its investment banking division.
Then came Ford Motor Co (F) down $0.53. Lehman is widening its 2008 loss estimate from $0.63 in the red to minus $1.59 a share.
Pfizer (PFE) moved up $0.05, bucking the trend.
But Bank of America (BAC) down $1.22. Ladenburg Thalmann brokerage cut its price target on Bank America from $48 down to $39 a share.
General Electric (GE) in there, fifth in volume with a $0.02 gain.
Motorola (MOT) fell a half a dollar after Piper Jaffray brokerage downgraded it from "neutral" to "sell."
And there you see General Motors (GM) down $0.88, hitting a 33-year low in that weak auto group.
American International Group (AIG) off $1.80. An article in this week's "Barron's" financial magazine says the stock is likely to be dead money for some time to come.
AT&T (T) a nickel loss.
And then JPMorgan Chase (JPM) losing nearly $1.
United Parcel Service (UPS) closed down $0.11 in regular trading. After the close, the company cut its second quarter earnings estimate from a high of $1.04 down to $0.88 a share at best. More damage caused by high fuel costs. In after hours trading incidentally, UPS was down almost $3 from the price you see there.
CME Group (CME), the Chicago Merc, up $7.69. The company said it will pay a special $5 a share dividend and buy back up to $1.1 billion in stock following resolution of the pending merger with Nymex. Nymex stock fell $0.28 incidentally.
BCE (BCE), the old Bell Canada, up $1.94 a share. That's after Friday's Canadian supreme court decision to allow the $34 billion Canadian leveraged buyout of the firm by an investor group.
Halliburton Co (HAL) up $2.98. The company has terminated talks to acquire its British rival Expro International.
And a positive reaction by Goodrich Petroleum (GDP) up $9.59 to the company's plan to acquire additional Haynesville oil shale acreage in the state of Louisiana.
Circuit City Stores (CC) losing 21 percent of its value on investor doubts that the Blockbuster Corporation will be able to close on its $1 billion takeover bid of Circuit City.
Capitalsource (CSE), this is a real estate investment trust, down $1.96. The firm sold $1.5 billion in mortgage-backed securities and took a $36 million loss. The company may cut its dividend is the speculation.
Continental Airlines (CAL) in that very weak group, down $2.27, a 15, almost 16 percent loss.
Apple (AAPL) topped the active list on NASDAQ, losing $2.11.
Followed by Research in Motion (RIMM) down $1.50.
Then Google (GOOG) off $1.22.
Microsoft (MSFT) a $0.26 drop there.
But First Solar (FSLR) up $19.78. Lehman Brothers upgraded its price target from $280 to $335 a share.
Cisco Systems (CSCO) $0.09 drop there.
A penny loss in Intel (INTC).
Qualcomm (QCOM) fell $0.72.
Baidu.com (BIDU) off $4.03.
And tenth in volume was Oracle (ORCL) with a $0.02 loss.
Elsewhere, Barrier Therapeutics (BTRX), look at that percentage gain, almost 129 percent. The news, Stiffel (ph) labs, a private firm, will acquire the company for $4.15 a share in cash.
And those are the stocks in the news tonight.
