NBR Transcripts-June 24, 2008
Tuesday, June 24, 2008Consumer Lack of Confidence in the Economy
SUZANNE PRATT: Wall Street was in watch and wait mode today, awaiting word tomorrow from the Federal Reserve on interest rates. As Fed policymakers began their two-day meeting, there was more troubling news on the economy. The Conference Board's consumer confidence index fell to 50.4 in June, from just over 58 in May. That puts confidence at its lowest level in 16 years. As Scott Gurvey reports, experts say the state of the economy has the Fed in a tough spot.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's big drop in consumer confidence is simply proof of something most of us have been feeling for some time, stuck between a rock and a very hard place. Today Dow Chemical announced price increases on all its products of as much as 25 percent, this on top of an increase of 20 percent less than a month ago. While you may not do business with it directly, Dow products could be in almost anything you buy from plastics to plant seed, paint to pharmaceuticals. Dow says its price increases are necessary to offset what it calls the continuing relentless rise in the cost of energy and hydrocarbons. Economist Kathleen Stephansen of Credit Suisse says these increase put pressure on the Federal Reserve.
KATHLEEN STEPHANSEN, ECONOMIST, CREDIT SUISSE: The rise in commodity price inflation which essentially pushes headline inflation up is really here, the core of the problem in the sense that the Fed is very worried about that headline inflation translating into much broader based type of inflation, so that core inflation will go up. And in order to prevent the second round effect if you will, the Fed has started to be somewhat more hawkish.
GURVEY: The problem for the central bank is that the traditional remedy for inflation, higher interest rates, could have a devastating impact on an economy already sluggish at best. With unemployment rising, wages have been stagnant and our sense of personal wealth is falling. Today the Case-Shiller home price index showed home values fell more than 15 percent in the past year. They are now at levels last seen in 2004. The Federal Reserve is required by law to encourage full employment. But it is also required to keep prices as stable as possible. Economist Michael Feroli of JPMorgan notes there are times, like the present, when these two goals conflict.
MICHAEL FEROLI, ECONOMIST, JPMORGAN: So far they've done a good job I think with a really challenging set of circumstances here in terms of the housing slowdown and rising energy prices sort of pulling at both ends of their mandate. I guess the question is going forward can they keep that balancing act maintained? Like I've said so far I think they've done a good job with a bad situation, but the deeper challenges I think lay ahead.
GURVEY: Fed watchers expect the open market committee to leave rates unchanged when it wraps up its two-day meeting tomorrow. But everyone is on edge waiting to see the statement which may give clues as to policy plans for the rest of the year. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Dow Chemical's CEO and Chairman Andrew Liveris Talks About His Company's Price Hike
SUZANNE PRATT: Dow Chemical is hiking prices for the second time in a month in response to soaring energy prices. Earlier today I spoke with Dow Chemical's CEO and Chairman Andrew Liveris. I began by asking him why Dow was raising rates again, so soon.
ANDREW LIVERIS, CEO, DOW CHEMICAL: This is and the surge in hydro carbons, of course, oil prices headline value since late May when we announced the previous increases has continued unabated not just in oil price but also in derivatives of oil which we use to make value added products. Naptha which is a very basic raw material for petro-chemistry and chemistry has surged continually since the late May time frame. So really what we're saying is that this surge has to be passed through and frankly part of that announcement today was to actually take some assets down and idle them because they cannot run at these feedstock costs.
PRATT: I imagine that you have discussed some of these price increases with your best customers ahead of time. And there were also some freight surcharges that you are bringing in about a month or so. What kind of feedback are you getting from these customers?
LIVERIS: Well, I guess second time around, it's yet again different. I mean, the first time around, may have had some shock value, although frankly, we have been raising prices for the last several years. You know, really, we're living in a world of surge. The late May price increases followed by these, this go-around the customers are -- let's call it they're not happy, but they understand the need for it and frankly, all the headline value on gasoline price and oil price, they understand. They're consumers as well. Now, it's not easy for them. But we're offering lots of things including going with them to their customers to explain why a reset in the value chain is so important. We're all in this together. I mean ultimately, this has to go through the consumer, to take into account this new level of oil and gas price that the world seems to be tolerating.
PRATT: Now, you mentioned that you were going to be idling some plants because of the slowdown in economies in Europe and in the U.S. In your opinion, is the U.S. in recession? LIVERIS: Well, you know, I think everyone -- every economist out there and I'm not one of those -- I mean, as played with the "R" word a lot in the United States. I don't care what you call. I think demand is anemic in auto and housing and the consumer is starting to pull back. But just to clarify, the turn (ph) down in plants, the idling of plant capacity globally specifically in the United States and Europe is as much to do with the fact that we cannot run those plants at high input costs and make money at the current pricing. So yes, there is some weakness in demand in the U.S. and Europe and that weakness is accelerating. It's getting worse. But at these input costs, you can't run those assets and make positive cash margin. That's why we are turning the plants back, the ones we announced today.
PRATT: As you know, the Federal Reserve is meeting in Washington to discuss interest rate policy today and tomorrow and there's expected to be an announcement. Do you think a hike in interest rates if that were to come, maybe not at this meeting, but at a future meeting would help with the inflation problem in this country right now?
LIVERIS: Well, I think that's the only thing monetary policy can do whether it's here or overseas. Frankly, there's very few levers left and that's the only one. You really got to look at the whole interest rate thing as saying it went down all the way down to really help the financial crisis. Now that this energy crisis is affecting consumers and sheer wallet is affecting demand. People aren't spending. People aren't driving. Really, you need to look at ways to control what's happened in the inflationary world and really take the risk that by raising rates, you may actually cause some demand to go week weaker. I think it's back to where Paul Volcker was in the early '80s. There's a real risk here and we've got stagflation. You can only break out of it one way and you better take on inflation head-on.
PRATT: OK. I think we have to leave it there. Thank you for joining us.
LIVERIS: My pleasure, Suzanne, thank you.
PRATT: My guest, Andrew Liveris, chairman and CEO of Dow Chemical.
"Economic Choices 2008"-The TV Ad Boom
PAUL KANGAS: By now, we all know the primary election results are in and the real winners are television broadcasters. Political races from dog catcher to president have spent $650 million on media campaigns so far this year, most of it on TV commercials. As we continue our "Economic Choices '08" coverage, as Darren Gersh reports, there is more, much more, to come.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Call it D-day for the general election air campaign. John McCain has launched television ads in 11 states, Barack Obama in 18. At the Campaign Media Analysis Group, Evan Tracey tracks the electronic competition. Tracey figures political ad spending in this election will hit $3 billion.
EVAN TRACEY, COO, TNS MEDIA INTELLIGENCE/CMAG: You have industries pulling back like auto motives and airlines and nothing to fill in that gap right now except for politics and right now this is a big election year. There's a lot of competitive races in the country. Obviously, an historical presidential race, in turn there is going to be a lot of money sort of flowing to these TV stations, probably just in the nick of time in the third and fourth quarter of this year.
GERSH: In the primaries, stations in Iowa were the biggest winners, taking in more than $40 million, followed by $20 million in Massachusetts, $17 million in Pennsylvania and $16 million in Texas. By November, Tracey expects Iowa TV stations will have swept up more than $100 million in political spending, stations in California, which has active ballot initiatives, up to half a billion dollars. The Obama campaign is raising so much money, it may buy spots during the Olympics and still have money left over to buy more ads in all 50 states. Analyst Edward Atorino says station groups like Gannett will get up to 14 percent of their revenue this year from campaigns.
EDWARD ATORINO, MEDIA ANALYST, BENCHMARK COMPANY: Lots of money will be poured into these smaller markets. And for some of the smaller broadcasters, it's manna from heaven.
GERSH: While much of that manna has been raised over the Internet, the ad spending hasn't trickled down to websites. At Democratic think tank NDN, Simon Rosenberg estimates the campaigns will set aside less than 2 percent of their ad budget for the Internet.
SIMON ROSENBERG, PRESIDENT, NDN: It's too low, it should be higher, but politics tends to lag behind the commercial advertising trends.
GERSH: Control is a concern. No campaign wants to see the candidate's banner ad pop up next to something obscene. Even so, this campaign has proven the power of online social networks to raise voter interest and money.
ROSENBERG: It's exciting because what it's doing, more than anything else, is allowing average people to play a meaningful role in the life of their democracy. That's a healthy thing.
GERSH: The old joke that imitation is the sincerest form of television also applies to politics where a successful campaign strategy is quickly copied, which is why campaign consultants expect Internet spending will get a much bigger share of the campaign cash in 2010 and 2012. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Made in America"-The Furniture Industry
SUZANNE PRATT: Well did you know only about half of the furniture sold in the U.S. last year was made in the U.S.? Increasingly, furniture manufacturing is moving to China and Vietnam where labor and materials are cheaper. But Wisconsin-based PM Bedroom Gallery has been ringing up profits by making furniture in its own back yard. Tonight, Diane Eastabrook profiles the firm to kick off an ongoing series we call "Made in America," looking at companies that manufacture right here at home.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a cramped workshop near Milwaukee, Bill Ludwig creates a chest of drawers from northern Wisconsin hard maple. Ludwig family members are among more than a dozen Wisconsin craftsmen who make furniture by hand for PM Bedroom Gallery. The Milwaukee area firm is one of the nation's largest sellers of American made furniture with eight showrooms in the Midwest. Arvid and Ben Huth, the middle sons of a dairy farmer, started PM Bedroom Gallery 15 years ago with money they raised by selling seven cows and a snowmobile. Arvid, who worked for a furniture store during college, saw a market for a product that would last a lifetime.
ARVID HUTH, CO-FOUNDER, PM BEDROOM GALLERY: Most of the stuff we sell is furniture that your grandchildren's grandchildren will be arguing about at the estate, divvying up of the estate when someone passes on. This is the kind of stuff that will be on "Antiques Road Show" someday.
EASTABROOK: PM Bedroom Gallery prides itself in its craftsmanship and customers pay for it. Bedroom sets can cost anywhere from $2,000 to $50,000. But with that price you get drawers with dove tail joints, secret compartments to stash money or jewelry and the builder's signature on every piece. Ben Huth says attention to detail and using better quality wood from Wisconsin and Michigan make a much sturdier product as he showed us.
BEN HUTH, CO-FOUNDER, PM BEDROOM GALLERY: The lumber being grown in a northern climate is a lot denser than lumber that gets grown in a tropical rainforest or gets grown in the southern climates. So, you start out with a whole lot better product as far as the basis to begin with.
EASTABROOK: Increasingly these days less of the wood furniture sold in the U.S. is actually made in the U.S. More than 60 percent of it comes from Asia where labor and materials are cheaper. But Morningstar analyst John Gabriel says rising transportation costs and quality issues are starting offset some of the advantages of offshore production.
JOHN GABRIEL, FURNITURE ANALYST, MORNINGSTAR: It's the returns. Controlling the returns is huge because if you order a customized piece of furniture and it comes scratched or damaged you know you are going to return it and that eats into the margins of the company.
EASTABROOK: The Huths say safeguards PM Bedroom Gallery has in place with its craftsmen and delivery people help prevent damaged furniture and returns.
ARVID HUTH: When we receive our furniture from our builders it is completely unboxed, so if there is a problem they see the problem when they put it on a truck, we see the problem when it comes off a truck. There are so many more eyes on a piece of furniture.
EASTABROOK: Despite a sour economy, PM Bedroom Gallery thinks sales will top $20 million this year. That's about a 20 percent increase over last year. The Huth brothers hope that one day the name PM Bedroom Gallery becomes as well known as competitor Ethan Allen. But they say they will never sacrifice quality in an effort to grow their business. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Naperville Illinois.
"Of Mutual Interest,"-John Waggoner, Mutual Fund Columnist at "USA Today"
SUZANNE PRATT: In tonight's "Of Mutual Interest," why buying a newly launched mutual fund could be a risky proposition. Here's John Waggoner, mutual fund columnist at "USA Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: You can do many silly things with your money. Buy a sculpture from a starving artist? Why not? Invest in an Australian bank CD? It could work. Invest in a new mutual fund? Are you crazy? There's almost never a good reason to buy a new fund. New mutual funds fall into two categories, the faddish and the superfluous. Faddish funds are probably the most dangerous. Fund companies roll out new funds mainly because they want you to invest in them. But people don't like to invest in fund categories with lousy performance, even if those are the areas most likely to increase in the future. The fund industry obliges people by rolling out new funds in areas that have seen red-hot growth, like commodity funds, for example. In the past 12 months, the fund industry has rolled out 43 exchange-traded natural resources funds, with specialties ranging from water to copper to cattle. Unfortunately, by the time a fund has spotted a trend, designed a fund and gotten clearance from the government to offer it to the public, the trend has not only slowed, but gone into reverse. If history is any guide, the plethora of new commodity funds means that commodity prices will soon be falling. In most cases, new, diversified funds aren't worth looking at, either. You can now choose from 555 large-company growth funds, many with fine records. Why buy one with no record at all? The one exception: sometimes, truly great fund managers move to other fund companies or start new funds. In that case, you have the opportunity to invest in a fund with a good manager and a relatively small asset base. That's a good deal, but one that's all too rare in the mutual fund industry these days. I'm John Waggoner.
Paul Kangas Stocks in the News
PAUL KANGAS: With those declines in home prices and consumer confidence, Wall Street's bears had plenty to feed on this morning and the result was a steep opening sell off. The Dow tumbled about 100 points at the outset, down to this year's low at the 11,740 level. The NASDAQ fell 24 points early on. The blue chips found buying support at that low and that triggered a nice rally which lifted the Dow to a 56 point gain at mid-day. But the market then slumped on caution ahead of tomorrow's Fed meeting. So the Dow Industrial Average closed off 34.93 at 11,807.43, while the NASDAQ fell 17.46 to 2368.28. Standard & Poor's 500 lost 3.71, ending at 1314.29. In the bond market, the 10-year note rose 18/32 to 98 8/32, putting the yield at 4.09 percent.
Ford Motor Co (F) wasn't one of them.
But Bank of America (BAC) was. It looks like a little bottom fishing going on in the group.
Pfizer (PFE) in there with a $0.31 gain.
And General Electric (GE) up $0.19, all gainers on the first five actives.
Wachovia (WB) moved up $0.94. The company is hiring Goldman Sachs to evaluate its loan portfolio just as Wachovia is seeking a new CEO.
Washington Mutual (WM) down $0.16.
But JPMorgan Chase (JPM) rose $0.85.
Wells Fargo & Co (WFC) $0.94 gain there.
AT&T (T) down $0.11, tenth in volume.
Caterpillar (CAT) down $3.36, a little bit of a negative reaction to the company's acquisition of the Brazilian locomotive and train car manufacturer which is privately held. It's called MGE Equipment. No price was disclosed by Caterpillar.
Eastman Kodak (EK) the star of the day, up $1.69. It's going to buy back up to $1 billion of its own stock and it's definitely with the help of the IRS, which is giving the company a tax refund of $581 million as we touched on earlier.
Kroger Co (KR), the big grocery chain, up $1.82. First quarter earnings nicely higher, $0.58 versus $0.47 a year ago. Sales were up 12 percent and the company boosted its 2009 earnings and sales guidance.
UBS Ag (UBS), the big financial firm, up $1.43. Dow Jones news wire reported that HSBC might be eyeing the company as an $80 billion buyout bid.
United Parcel (UPS) down $4. After the close last night as we reported, the company cut its second quarter earnings guidance from a high of $1.04 a share down to $0.88 a share at best and today the Baird brokerage downgraded the stock from "out perform" to "neutral." And incidentally, UPS closed near a five-year low today.
Centurytel (CTL) had a great day, up $5.53. The company declared a one-time special dividend of $0.6325 per share and is boosting the annual dividend - get this from only $0.27 to $2.80 a share annually. That's a 10- fold increase.
Centex (CTX) up $1.05. Credit Suisse began covering the home building group with an "overweight" rating in the belief that inventory levels will peak out next spring, little bottom fishing going on in that group today.
Emerson Electric (EMR) down $2.66. Credit Suisse downgraded it from "out perform" to a "neutral" rating.
And then Marvel Entertainment (MVL) - well we missed Marvel, but news in there with a $1.52 gain on an RBC upgrade.
Apple (AAPL) topped the active list on NASDAQ, edging $0.09 higher.
Google (GOOG) down $2.91.
Research in Motion (RIMM) down $2.58. Incidentally, earnings for RIMM due tomorrow. The Street's expecting $0.85 a share.
Yahoo! (YHOO) was up $0.59.
And Microsoft (MSFT) down $0.24. Both companies declined comment on rumors some form of alliance between Yahoo! and Microsoft is imminent. No comment from either.
Qualcomm (QCOM) down $1.54.
Baidu.com (BIDU) fell $12.14.
Intel (INTC) edge up a nickel a share.
Cisco Systems (CSCO) $0.07 loss.
And then First Solar (FSLR) was up $0.22 a share.
Kewaunee Scientific (KECU) plunging $6.21, losing 35 percent of its value on lower fourth quarter earnings of $0.17 versus $0.21 a year ago. The company had disappointing sales of its laboratory products.
Those are the stocks in the news tonight.
