NBR Transcripts- June 30, 2008
Monday, June 30, 2008Jittery June Ends Along With Optimism For The Third Quarter
SUSIE GHARIB: Investors say good riddance to June and to the second quarter. Despite eking out a small gain today, the Dow lost more than 7 percent in the second quarter and more than 10 percent this month. Concerns about record-high oil prices and struggling financial firms made for a jittery June. Now investors are hoping the third quarter will be better. But, as Suzanne Pratt reports, many experts are less optimistic.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was supposed to get much better for corporate America in the second half of this year. But, as Wall Street gears up to digest another bad quarter of corporate earnings, many investors are doubting that rosy outlook. Analysts predict second quarter earnings at S&P 500 companies dropped nearly 11 percent. If that's true, it will be the fourth straight quarter of declining profits for large cap U.S. firms. There are high hopes for a recovery in the second half, with analysts looking for S&P 500 profits to jump about 14 percent in the third quarter and nearly 60 percent in the fourth, partly because of easier comparisons. Still, Citigroup market strategist Tobias Levkovich says those numbers are simply too optimistic.
TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: Historically, there's been about a nine-month lag between credit condition changes and business condition changes. So if tight credit occurred starting last summer, it's going to be hitting us this summer and industrial companies aren't going to be fairing so well. Europe is slowing pretty significantly and that's going to have some impact.
PRATT: Experts say large cap U.S. firms are likely to face many of the same headwinds in the second half of this year that they experienced in the first half. Fallout from the sub-prime mortgage market crisis and the housing recession ranks at the top of the list. A look at expectations for financial earnings tells the story. That's because financials account for about a fifth of the companies in the S&P 500. At the beginning of April, analysts predicted a hefty 24 percent jump in third quarter profits for the financial sector. As the string of write-downs continued in the last few months, that number fell hard and fast. Today, analysts are looking for a meager 1 percent increase. The big fear among some investors is what happens to the broader market if those greatly reduced expectations fall even further. Wall Street veteran Jim Awad says it could create an excellent buying opportunity.
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: History would suggest that if you buy the stocks of quality companies during periods of distress, you'll make money over the ensuing years. And I think the same is true this time. It's going to be a rough summer. But if you look back two or three years from now and you bought quality stocks while they were under pressure, you'll end up making money.
PRATT: Even though hopes are fading for a earnings recovery in the third quarter, experts are more upbeat about the fourth quarter. That's because they say typically it's a seasonally strong quarter for the U.S. economy. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The Crop Report Harvests Good News For The Agriculture Markets
PAUL KANGAS: Jittery agriculture markets got some calming news today from the U.S. Department of Agriculture. The government's monthly crop report said the recent floods in the Midwest damaged fewer acres of corn than some experts had projected. But as Diane Eastabrook reports, many grain analysts are questioning the numbers.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At the opening bell this morning at the Chicago Board of Trade, corn futures prices tanked in a fast market on better than expected news about the crop and inventories. The U.S. Department of Agriculture said farmers planted a little more than 87 million acres of corn this spring. That is about 7 percent fewer acres than last year, but an improvement over what analysts were forecasting. The amount of grain stored in elevators was also better than expected. Newedge U.S.A. grain analyst Dan Cekander says the inventory number shows that corn buying has slowed because it's too expensive.
DAN CEKANDER, GRAIN ANALYST, NEWEDGE USA: It just tells you that demand rationing had begun during the March-May period on the feed side, so the livestock producers had slowed down their rate of corn feed.
EASTABROOK: Flooding throughout the Midwest has pushed corn prices towards $8 a bushel in the last week on fears that up to three million acres of farmland may be under water. But after surveying farmers last week, the U.S.D A. said the lost acreage may be about half that amount. Still, James Bower, president of Bower Trading, is skeptical of the government survey. Bower points out that only 1,200 farmers were polled and he thinks some information provided might be inaccurate.
JAMES BOWER, PRESIDENT, BOWER TRADING: Some of the people probably are stressed out trying to get their crops in, trying to take care of flood damage. They're trying to look at issues as far as getting seed. I mean, there are a lot of things that happened right in that timeframe which put that producer and that person being surveyed under stress.
EASTABROOK: Bower also cautions that the U.S. corn crop is so fragile now from the cold, wet spring that a hot, dry summer could cut yields this fall.
BOWER: We have not gotten to the most critical part of the growing season, which will be July and August and as shallow-rooted as this crop is, I think the story in food and food prices is not over yet.
EASTABROOK: Analysts say August U.S.D.A. crop report will probably give traders a more accurate view of how much grain farmers will harvest this fall, so that could keep these markets volatile until then. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
One on One with John Kilduff, Energy Analyst at MF Global
SUSIE GHARIB: Mounting tensions between Israel and Iran pushed oil prices to a record high of $143 a barrel today. But by the close of New York trading, August crude futures settled at $140 a barrel, down $0.21. Joining us now for more analysis John Kilduff, energy analyst at MF Global. Hi John.
JOHN KILDUFF, ENERGY ANALYST, MF GLOBAL: Good evening, Susie.
GHARIB: All right. So what was driving oil prices today? Was it demand? Was it geopolitics? Was it speculation?
KILDUFF: Well, I think it's a combination of all those things. I mean certainly overnight we had the news you referenced about further escalation in the worries about a potential Israeli attack on Iran. That's been a developing upset for the oil market because it represents such a huge potential supply disruption that it's almost incalculable how high prices could go on such a strike. Beyond that though we had a real disruption of further oil out of Nigeria. And basically when you talk about speculation, it's speculation that these things may occur or could occur are becoming increasingly likely to occur so that these assets, the oil gets bid up really ahead of time on advanced worries about the possibility of what the future may bring.
GHARIB: Do you think these prices -- $143 a barrel -- are justified?
KILDUFF: I think you can make a compelling argument as to why we are where we are. Have the speculators and some of these worries advanced these prices much more quickly than we ever could have imagined? Yes. But basically world oil demand has grown 12 million barrels a day just since 2001 and those supplies have struggled to keep up. We are really in a consumption deficit right now. We're consuming more oil than is being produced. Oil supplies seem to be threatened almost on a daily basis and oil supply number news always seem to be bad, not good except in terms of the potential new fields that are being found out there, but those represent hope for years down the road, not today.
GHARIB: What about the news out of Iraq that it's opening up its oil fields to big western oil companies to develop? Will that help satisfy demand and will that bring down prices?
KILDUFF: It's one of the few real bright spots out there. Actually it's one of two. When you think about the huge discoveries that are being revealed to us in the country of Brazil and then look at Iran, some of the more recent seismic information that we have about Iraq that has just emerged in the past year or so tells us that their reserves may be almost as great as Saudi Arabia. They will leapfrog from the fourth spot to the second spot and they could easily get their production from today's 2.4 million to three million in about maybe six to eight months, but from there, their stated goal of going to 4.5 million that they announced today very realistic in the short term.
GHARIB: All right. In the short term though, what about prices? There are forecasts that are all over the map, $150 a barrel, $200 a barrel. Where do you see prices going short term?
KILDUFF: I think realistically, you know, some of those predictions obviously are counting on a significant supply disruption event. I think just on the numbers, we have more ahead of us to the up side in the very short term. I think $150 looks to certainly be in the cards over the next week or two. This is the peak driving week, the fourth of July. This is it. Whether or not people hit the road because of $4 and $5 gasoline is the big open question. I don't think they will. I think there's other issues going on particularly as they relate to China's stockpiling of massive quantities of refined products ahead of the Olympic games. I think after we get through this period and that Olympic period in August, you can look for prices to come down potentially considerably into the latter part of the year.
GHARIB: Are you saying that maybe even gasoline prices will come down because today they hit a new record high of $4.10. What's your forecast on gasoline?
KILDUFF: They're going to continue to go higher here over the next couple of weeks. But I think consumers should be seeing sub $4 a gallon gasoline come fall and potentially even lower. Unfortunately though, it's going to be in the back drop of a significantly poor economic back drop for the U.S. But beyond that, they should be able to come down considerably.
GHARIB: Interesting information as always, John. Thank you so much for coming on the program.
KILDUFF: Thank you Susie.
GHARIB: My guest tonight, John Kilduff, energy analyst at MF Global.
Second Quarter Wrap With Sam Stovall, Chief Investment Strategist at Standard & Poor's Equity Research
PAUL KANGAS: Joining us now to wrap up Wall Street's second quarter is Sam Stovall, chief investment strategist at Standard & Poor's equity research. Welcome back to the NBR.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Good to talk to you, Paul.
KANGAS: When we closed out the first quarter of trading, you described it as volatile and downright ugly. The quarter certainly didn't get any better, did it? STOVALL: No it didn't and certainly ended on a down note with June for the S&P 500 experiencing more than an 8 percent decline which was the worst June since 1930.
KANGAS: Wow. Let's look at some of the individual averages, the majors, the Dow off 7.4 percent and the S&P 500 down 3.2 percent. Not too bad there, the NASDAQ up actually.
STOVALL: That's right. Actually I think it's because we had good performances in April and May that it ended up taking away most of the swoon in June.
KANGAS: Let's move right on to the Dow's best performers in the second quarter. Not surprisingly Chevron (CVX), big oil, topped the list up 16 percent.
STOVALL: That's right. Chevron is a likely beneficiary should we see the lifting on the moratorium in drilling in the Gulf of Mexico.
KANGAS: Wal-Mart (WMT) made it in there. Why was that?.
STOVALL: Well, I think because investors believe it will benefit from the tax rebate checks as well as cash-strapped consumers that are moving to discount retailers.
KANGAS: And of course ExxonMobil (XOM) who know the reason the same as Chevron for the big gain or the moderate gain. On the down side GM (GM) by far the big loser.
STOVALL: That's right. Basically everything is hurting demand for vehicles right now, so probably continued weakness along the way.
KANGAS: American International Group (AIG), Bank of America (BAC) reflecting the weakness in financials.
STOVALL: That's right. GE experiencing securities write downs as well as management upheaval and Bank of America continued concerns about U.S. consumer credit and they're going ahead with a companywide acquisition.
KANGAS: Let's take a brighter side look and see some good gainers and certainly Massey Energy (MEE) qualified there. What's the story with Massey?
STOVALL: It's basically a coal company. And here it's good to have some coal in your stocking. In fact three of the top five performers were coal companies.
KANGAS: And Jabil Circuit (JBL), that's a high-techie.
STOVALL: High-tech company that delivered results and guidance that were better than expected.
KANGAS: OK, let's look at the losers, downside Standard & Poor's MBIA (MBI), no question why that's down.
STOVALL: Absolutely. Well, rating agencies calling into question the ability of the company to pay their obligations. And that could inhibit it, inhibit future writing of business.
KANGAS: And Washington Mutual (WM) another financial caught in the downdraft.
STOVALL: Exactly. Investors have become increasingly concerned of the company's exposure to option arm and home equity loans.
KANGAS: Let's have a look at the NASDAQ 100 winners. Marvel Technology Group (MRV), nice gain there. Why was that?
STOVALL: Again, well, here's a situation that the company recently reported results that exceeded expectations across the business lines, in particular wireless and storage.
KANGAS: And NII Holdings (NIHO). Tell us about that.
STOVALL: Well, this is a wireless services company that's focused primarily in South America and they posted better than expected recent results.
KANGAS: On the downside, the big NASDAQ 100 losers UAL (UAUA), parent of United Airlines, no question why that is down.
STOVALL: That's right. Actually the top 10 airlines in the U.S. earned about $3 billion in 2007, but are expected to post a $5 billion loss in 2008.
KANGAS: And Sirius Satellite Radio (SIRI) got in there with a 33 percent loss.
STOVALL: It sure did. And the shares are near a five-year low on continued challenging fundamentals.
KANGAS: Sam, with such a terrible quarter behind us, where do you see the markets going in the second half and which sectors might be leading it higher?
STOVALL: Paul, I think we're in a period called range-bound optimism. We have the optimism that possibly the 1270 low on the S&P 500 will be maintained, but unless we get some better catalysts to move us away from concerns surrounding oil, the economy and corporate earnings, we're probably going to be stuck in a trading range. However, if we do end up coming to a conclusion with the Santa Claus rally, it's probably because investors are breathing a sigh of relief over the recently elected new president.
KANGAS: OK, so it's not all bad news there.
STOVALL: Not all bad news, but you might have to wait a little while.
KANGAS: OK, thanks once again for being with us Sam, a pleasure.
STOVALL: As always, thanks, Paul.
KANGAS: My guest, Sam Stovall of Standard & Poor's.
Paul Kangas' Stocks in the News
PAUL KANGAS: After last week's drubbing, Wall Street's hopes for a technical rebound this morning were thwarted by an early spike in oil futures to the $143 a barrel level. The Dow fell 25 points at the outset of trading while the NASDAQ lost eight points. Stocks improved as bargain hunters were emboldened by an easing in oil futures and a better than expected report on business activity from the Chicago area. By noon the Dow posted a 90-point gain, but most of that evaporated this afternoon on low volume and tech sector weakness. The Dow Industrial Average closed up only 3.50 points at 11,350.01. The NASDAQ lost 22.65 ending at 2292.98. Standard & Poor's 500 rose 1.62 at 1280 even. In the bond market, the 10- year note ended the day unchanged at 99 8/32 with a yield at 3.97 percent.
New York exchange volume leader on 35.1 million shares, Citigroup (C) losing $0.49.
Followed by Bank of America (BAC) down $0.72, that sector still weak.
General Electric (GE) bucked the trend, up $0.43.
Wachovia (WB) down $0.69. The "New York Post" reports Wachovia could be forced to buy back Prudential Financial's 23 percent stake in their joint brokerage venture which is valued at about $5 billion.
Countrywide Financial (CFC) down $0.17. It came out of the Standard & Poor's 500 Index today.
Ford Motor Co (F) a $0.17 loss. Sales figures due tomorrow.
Pfizer (PFE) up $0.19.
AK Steel Holdings (AKS) up $0.79. It was added to the Standard & Poor's 500 Index today.
Washington Mutual (WM) up $0.13.
And JPMorgan Chase (JPM) was down $0.74, tenth in volume.
Fortune Brands (FO) closed with a $0.04 gain. After the close however, the company cut its second quarter earnings outlook and full year as well due to the slow economy. In after hours trading, the stock fell to just below $60 a share.
Fannie Mae (FNM) losing $1.29. The company will be selling $3 billion in three month benchmark bills on Wednesday and it will sell $2 billion in six month bills on Wednesday as well. Those would be Dutch auctions.
Sprint Nextel (S) up $0.59. "Wall Street Journal" reports the company's new high-end handset is selling quite well in some of the retail markets.
Robbins & Myers (RBN) a gain of $8.79, big earnings, third quarter, $0.62, up from $0.39 a year ago, boosted its 2008 guidance from a high of $2.03 to now a high of $2.31 a share.
Petrohawk Energy (HK) up $3.35. The company's Haynesville oil shale operations are doing very well in natural gas output and other companies have an interest in that Haynesville thing, did well today, look at that.
Chesapeake Energy (CHK), Comstock Resources (CRK), Encana Corp (ECA), Goodrich Petroleum (GDP), Penn Virginia (PVA) all on the plus side very nicely.
Cleveland Cliffs (CLF) up $7.87. Deutsche Bank brokerage upgraded its price target from $115 all the way up to $150 a share.
Campbell Soup Co (CPB) up $1.28. As we touched on, the company's going to buy back $1.2 billion of its own stock, sees fiscal 2008 earnings at the high end of its growth estimate for 5 to 7 percent, nice day for Campbell.
H&R Block (HRB) up $0.58, traded as high as $22.85 this morning. Fourth quarter earnings, $2.11, well above $1.81 last year. Revenues up 11 percent. The company's going to buy back up to $2 billion of its own stock and it's boosting the dividend by 5.3 percent on top of that.
Red Lion Hotels (RLH) up $0.92 after trading as high as $8.66 today. The company said it received a preliminary non-binding indication of interest to acquire the company from Columbia Pacific, but no specific terms announced.
NASDAQ's most active, Apple (AAPL) down $2.65.
Research in Motion (RIMM) fell $4.08.
Google (GOOG) $1.65 loss there.
Microsoft (MSFT) fell $0.12.
And then Cisco Systems (CSCO) $0.35 loss.
Intel (INTC) dropped a penny.
Qualcomm (QCOM) off $1.28.
But a gainer, First Solar (FSLR) up $6.57.
Oracle (ORCL) $0.29 loss there.
And Baidu.com (BIDU) down $0.28 a share.
Myriad Genetics (MYGN) down $2.41 on disappointing trial results on an Alzheimer's drug that it's jointly developing with Lundbeck.
And gainer in NASDAQ, NDS Group (NNDS) nice rise of $9.50. The company said it received a $60 a share takeover bid from a group led by News Corporation.
Those are the stocks in the news tonight.
