NBR Transcripts-July 1, 2008
Tuesday, July 01, 2008Auto Sales Are Running Out of Gas
SUSIE GHARIB: Sales at U.S. automakers in June tumbled as more American consumers shifted from gas-guzzling SUVs to smaller, more fuel efficient cars. The nation's big automakers reported today sharp double digit declines, largely due to gas prices that topped $4 a gallon during the month. Sales at General Motors, the nation's largest automaker dropped 18 percent. GM said again today it's paying close attention to fuel efficiency. The story was even more dramatic at Ford. Total sales plunged almost 28 percent. SUVs were off 55 percent, but Ford's car sales actually gained ground, rising 3 percent. Chrysler also continued to struggle; sales there skidded 36 percent. The automaker is extending its $2.99 gas guarantee program through the end of August. Even Toyota felt the pain. While its small car sales were strong, overall June sales fell 11.5 percent and that's mainly due to a big drop in light trucks and SUVs. Well, our Midwest bureau chief Diane Eastabrook follows the U.S. auto industry and she joins us now. Diane, I understand you're just back from Detroit. Tell us, what was the mood in the motor city?
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well suffice it to say Susie, there is a lot of anxiety among the U.S. companies. Their big cash cows of sport utilities and pick ups have really fallen out of favor with American consumers because of these very high gas prices. And that is creating some challenges for the domestic manufacturers. In Detroit these days, U.S. auto companies are suffering from severe whiplash. In the past couple of months, $4 plus gasoline has spurred a dramatic consumer shift away from gas guzzling sport utilities and pickups to cars. It's part of the reason why Toyota with its broad assortment of small more fuel efficient cars has been outperforming the U.S. companies. Still, auto executives and experts are asking the same question: is this change in consumer preference permanent? Jeffrey Schuster, JD Power's head of automotive forecasting thinks it is.
JEFFREY SCHUSTER, EXEC. DIR., AUTOMOTIVE FORECASTING, J.D. POWER: This is not just a temporary shift because of gas prices alone. I think it has caused enough jitters with the consumer and enough of at least with the discretionary buyer that doesn't need the vehicle to say, I don't need this vehicle and I'm going to get out of it. I'm going to have something else.
EASTABROOK: Many auto executives agree demand for large sport utilities and pickups won't return to the peak sales levels they saw earlier in the decade. But they aren't sure U.S. consumers, who have enjoyed the roominess of trucks, will all want to switch to cars. Chrysler Vice Chairman James Press says car companies will have to carefully balance their portfolios and make larger vehicles more fuel efficient.
JAMES PRESS, VICE CHAIRMAN, CHRYSLER CORPORATION: What we want to do is we want to build small cars, mid size cars, full size cars, trucks, SUVs that are also responsible so you don't have to make a compromise. You shouldn't have to buy a small car if you don't want it just to get mileage. You should be able to get it in like a Journey crossover.
EASTABROOK: And many of the executives say (INAUDIBLE) next year's auto shows we're likely to see a lot more crossovers and concept cars, Susie.
GHARIB: So Diane, from all the people that you've been talking to, with gasoline now at $4 a gallon, is the era of big SUV's really over? What are you hearing? EASTABROOK: Well, not necessarily. Basically what they're saying is going forward people who buy SUVs are going to be buying them because they need them. These are the people that are hauling boats. They're hauling trailers and they're also business people that need them to haul things. What they're not going to see, what they don't think they'll see down the road are people who have been buying them in the past who like to sit above traffic were buying SUVs because they were cool. Those people are likely to go into crossovers or maybe even cars.
GHARIB: Now we know that these big automakers are really struggling. Look at their June sales numbers and each one has a turn around plan. Are they on the right track in this new environment? What is the sense that you get from talking to them? EASTABROOK: Well, the sense that I get is that they are on the right track. They are coming out with more not just sport utilities, but hybrid sports utilities. Those are the things that people may want to buy. By the end of the year, General Motors will have about eight hybrids out. Chrysler is coming out with its first hybrids in a couple of weeks or maybe even a few weeks down the road and those are things that people may be interested in buying. The other thing that they are doing is they're closing down under performing factories and they're becoming more nimble at those that they're keeping open. In other words, if they need to switch over to cars from trucks or trucks to cars, they'll be able to do that.
GHARIB: So really quickly, are they preparing then for a world where high gas prices are here to stay or are they a temporary problem?
EASTABROOK: Basically the message they sent us was the days of $2 gasoline are long gone. We're going to be seeing higher prices in the long run and they really think that we're going to be on par with the rest of the world, so look to Asia as a clue. Asia and Europe are the clue.
GHARIB: All right. Thanks a lot Diane. We look forward to your series next week on the outlook for the auto industry and we've been speaking with Diane Eastabrook, our Midwest bureau chief.
Mark Serlin of Economic Strategies Prepares for the June Employment Report
PAUL KANGAS: While surging oil prices have grabbed much of Wall Street's attention, investors are also awaiting the release of the June employment report on Thursday. Joining us now to talk more about that report and what it could signal about the health of the economy is Mark Serlin, chief economist at the forecasting firm Economic Strategies. Mark, welcome back to NIGHTLY BUSINESS REPORT.
MARK SERLIN, CHIEF ECONOMIST, ECONOMIC STRATEGIES: Thank you, Paul.
KANGAS: There's been much gnashing of teeth about whether our economy is in recession. What are you seeing?
SERLIN: So far we've avoided a recession in the sense of negative quarters of GDP growth. In fact, my forecast for Q2 GDP is for a 1.5 increase, possibly even 2 percent. However, we got data today on construction spending that show Q4 GDP could be revised from up 0.6 percent possibly into negative territory. If Q4 is revised to negative GDP, a lot of people who have been calling for a recession are going to be seeing it being proven correct, but there's a lot of data that go into those GDP revisions. Today's construction spending number was only one small part.
KANGAS: Let's talk about the payroll data, 324,000 non-farms job have been lost since the beginning of the year. I know you brought along a chart comparing the current down cycle with the recession of 2001. What is this telling us?
SERLIN: So far just like we've avoided a negative GDP quarter, we've also avoided the job declines that tend to be about 200,000 jobs to 300,000 jobs that we usually see in a recession. So far the largest decline we've gotten this cycle I think is 88,000. So, so far the employment losses have been relatively small.
KANGAS: OK, now given that, where do you see June payrolls coming in?
SERLIN: A lot of the high frequency data have deteriorated recently so my forecast would be at the lower end of the recent range, which would put us at a decline of about 90,000. But there too, that's still much, much better than the 200,000 job loss to 300,000 job losses you usually see in a recession.
KANGAS: There were a lot of questions Mark about the May unemployment rate which surged to 5.5 percent. That was the biggest monthly increase in 22 years. Now I understand you have a chart that's showing the role that teens in the job market played in that surge.
SERLIN: Right. Every month teenagers have the potential to cause a lot of volatility in the unemployment rate. Because of that I tend to look at the adult unemployment rate which is for people 25 and older. It also moved up last month. It is turning decisively higher. So while we might see a little volatility in the overall rate due to teenagers, the underlying theme that the unemployment is increasing is still there and we see it with the adult unemployment rate which is the most important part.
KANGAS: Do you see the unemployment rate continuing to rise? We just have 30 seconds.
SERLIN: Overall yeah, we got additional data today from the manufactures that show their employment index hitting a new low for the cycle. So with the ISM employment index setting a new low, continued claims for unemployment insurance setting a new high, everything points toward a deteriorating labor market.
KANGAS: OK, Mark, I want to thank you very much for sharing your insights with us.
SERLIN: Thank you.
KANGAS: My guest, Mark Serlin, chief economist at Economic Strategies. If you would like to learn more about Mark Serlin's economic forecast, you can check out his contribution to our blog. His comments are posted on our website, NIGHTLY BUSINESS REPORT on pbs.org.
"Of Mutual Interest,"- Mid-Year Mutual Fund Review
SUSIE GHARIB: With the year now at the half-way point, many stock mutual fund investors are probably not pleased with their returns. But as Erika Miller reports in tonight's "Of Mutual Interest," many investors in commodity funds are in hog heaven.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Rising commodities prices have been a source of anxiety and trouble for consumers and businesses this year. After all, nearly every commodity group including oil, precious metals and farm products has been soaring in price. But those gains have been a boon for investors in commodity mutual funds. They're the top performing fund group this year. According to Lipper, which tracks mutual fund performance, commodities funds are up almost 30 percent for the year. They rose almost 20 percent in the second quarter. Lipper mutual fund analyst Jeff Tjornehoj says the funds are popular these days because they are an easy way to invest in real assets as protection against inflation. He says diversification is the other major appeal of the commodities sector.
JEFF TJORNEHOJ, ANALYST, LIPPER RESEARCH: In mathematical terms, it has a low correlation with the other parts of your portfolio. So while stocks may be going down and bonds seem to be sideways these days, commodities are accelerating.
MILLER: Robert Baker, portfolio manager of the Oppenheimer Commodities Strategy Total Return Fund says strong global demand is another long term bullish factor.
ROBERT BAKER, PORTFOLIO MANAGER, OPPENHEIMER COMMODITIES STRATEGY TOTAL RETURN FUND: The demand has increased immensely over the last 10 years and supply has not been able to keep up. Ten years ago, there was sufficient inventories and they were rather large. They've dwindled to record, well not record lows, well, 60, 50 years low in some cases.
MILLER: However, investors should be aware that commodities funds differ greatly in the types of securities they can buy. Some portfolio managers use futures and options contracts. Others trade shares of commodity producers, like Exxon and Newmont Mining for example. One big concern is that commodities prices could be in a bubble, similar to technology stocks in the late 1990's.
TJORNEHOJ: This is quite a bit different in that there really is underlying value to commodities. For, instance, gold, it's never worth zero unlike a tech stock. However, I think there is also a lot of speculation built into this market, so I can't be certain any more than anyone else that commodities prices will continue to escalate.
MILLER: Like other sector funds, commodities funds tend to be volatile. This year, the volatility has been mainly to the upside. But, experts say that could change if stock and bond funds start to gain ground. Erika Miller, NIGHTLY BUSINESS REPORT, New York
College Lenders Get Back to Business Just in Time for the New School Year
SUSIE GHARIB: Well, the new academic year began today and the market for student loans is looking better for both lenders and students. That's a big improvement from earlier this year when the credit crunch took a toll on that market. But as Dana Greenspon reports, some analysts say it's unclear how long the optimism will last.
DANA GREENSPON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Students heading to college this fall, take note: lenders are in better financial shape now than they were just a few months ago. Peter Warren represents non-profit and state lenders. He says the worst may be over, at least in the Federal student loan market.
PETER WARREN, VP, GOVERNMENT RELATIONS, EDUCATION FINANCE COUNCIL: We're still closer to that bottom than we are to where things were before, but we're moving up from that abyss.
GREENSPON: Many of the lenders that withdrew or scaled back on the Federal loan program are now considering coming back into the market. And major lenders like Sallie Mae and Nel-Net say they will originate new loans for the coming school year. Analyst Sameer Gokhale says financing costs for those lenders are still high, but they're inching downward.
SAMEER GOKHALE, ANALYST, KEEFE, BRUYETTE & WOODS: There seems to be more of a sense of normalcy in some parts of the financing markets and I think that's manifesting itself in better funding costs for Federally guaranteed student loans.
GREENSPON: The new lending year also brings new benefits for students. The rate on subsidized Federal Stafford loans for undergraduates will go down from 6.8 to 6 percent. And students will be allowed to borrow an extra $2,000 in unsubsidized funds on top of their base loan. That change could drive more students away from private loans, which were used to top off their Federal funds. Gokhale says the private loan market is still reeling from tight credit conditions.
GOKHALE: You've seen a lot of different types of asset classes either seeing funding costs increase dramatically or funding not being available at all. And I would put the funding for private student loan securitizations in the latter category. Deals just aren't getting done.
GREENSPON: But deals are getting done in the Federal student loan market because the government is providing the funding. In April it offered to buy up loans that banks are unable to bundle and sell to investors. Still, the offer is only good for one year. After that, Warren isn't sure the math will add up.
WARREN: Once they step back from taking that special role, then the question becomes, OK, well how's it going to work next year? How's it going to work for the 09-10 academic year and the years after that?
GREENSPON: Analysts say the future of the student loan market will depend on the credit markets getting back to normal and that could take two to three years. Dana Greenspon, NIGHTLY BUSINESS REPORT, Washington
"Last Word"-Storage Unit Surprise
SUSIE GHARIB: And finally tonight, here's another sign of a sagging economy. In Michigan, there's a booming market for auctions of storage units. When people stop making rental payments, storage firms sell the contents of the units, sight unseen. So winning bidders never know what they're going to get and sometimes it's a big surprise. For example the guy who bid $700 and walked away with two cars or the one who paid $65 for a unit that contained $44,000 in cash. But Paul, in that case, there was a catch. Also in the unit was a printing press and the bucks were bogus.
KANGAS: Sort of like a game of real life is the price right.
GHARIB: What's behind the magic door?
Paul Kangas' Stocks in the News
PAUL KANGAS: Well investors didn't start the day on a positive note. Instead it was looking downright bearish. Stocks headed broader lower at the outset of trading with the Dow falling 56 points and the NASDAQ off 10 points on a further surge into record territory for oil prices. By midday, the Dow posted a 150-point deficit with the NASDAQ off 35 points. But buyers gradually and eventually came off the sidelines and lifted the market to a positive close. The Dow Industrial Average ended with a gain of 32 1/4 points exactly at 11,382.26. The NASDAQ Composite rose 11.99 at 2304.97, while the Standard & Poor's 500 Index gained 4.91, ending at 1284.91. Over in the bond market, the 10-year note fell 8/32 to 98 30/32, putting the yield at 4.01 percent.
No stranger at the top of the active list, Citigroup (C) trading 30.7 million shares, up $0.37 today.
Bank of America (BAC) down $0.06.
Ford Motor Co (F) on those poor sales, down a dime a share.
General Electric (GE) moved up $0.43.
And JPMorgan Chase (JPM) a $0.09 gainer there.
Moving along in the active list, Lehman Brothers (LEH) up $1.15. Morgan Stanley started covering Lehman with a "over weight" rating and a $31 a share price target.
Wachovia (WB) a $0.60 gain.
Pfizer (PFE) $0.26 advance there.
General Motors (GM) gained $0.25 on those better than expected sales, even though they were down.
Then Washington Mutual (WM), tenth in volume, was up $0.32.
Alcoa (AA) fell $1.18. Solei Bradford research notes that rising raw material costs could hurt profit margins at Alcoa, the stock down.
And then American Express (AXP) moved up $2.35. UBS financial upgraded it from "sell" to "neutral" and did the same thing for two other credit card issuers, namely - let's have a look at those, Capital One Financial (COF) which gained $2.13.
And Discover Financial (DFS) up $0.83.
Fortune Brands (FO) tumbling $8.28. After the close yesterday, as we reported, the company cut its second quarter and full year earnings outlook and today Wachovia downgraded it from "out perform" to just a "market perform" rating.
CIT Group (CIT) up $2.02, nice percentage gain. It's going to sell its home lending business to loan star funds for $1.5 billion in cash and the assumption of $4.4 billion in debt and liabilities. Standard & Poor's upgraded CIT from "hold" to a "buy."
Legg Mason (LM) down $2.32. The company will contribute $240 million to support three of one of its unit's money market funds.
Modine Manufacturing Co (MOD) up $1.03. Keybanc upgraded it from "hold" to a "buy" there.
On the downside, the car rental companies really had a rough day after Dollar Thrifty Automotive Group (DTG) fell $3.75 when it said it will not achieve its previous fiscal 2008 earnings guidance of $1 to $1.50.
Let's have a look at some other car rental stocks, Avis Budget (CAR) down $1.08.
$1.13 loss in Hertz Global Holdings (HTZ).
Resmed (RMD) up $2.57, up on rumors that Germany's Linde AG might make an offer to acquire the company, but Resmed had no comment on that.
VF Corp (VFC), apparel maker, up $4.07. Second quarter earnings the company says will exceed its previous earnings guidance of $0.80 a share by at least 10 to 12 percent.
And then Sherwin-Williams (SHW) had a good day, up $2.93. The Rhode Island supreme court reversed a 2006 verdict against the company, but now it cannot be held liable for the production of lead paint according to the court.
Apple (AAPL) topped the active list on NASDAQ, up $7.24.
Research in Motion (RIMM) up $6.37.
Then Microsoft (MSFT) $0.64 loss.
Google (GOOG) up $8.31.
Intel (INTC) a $0.09 gain there.
Qualcomm (QCOM) up $1.45.
Cisco Systems (CSCO) fell $0.11.
Baidu.com (BIDU) $4.73 gain.
Celgene (CELG) up $5.39. Its rival SuperGen blood disorder drug did no better in trials than Celgene's comparable drug.
And then Oracle (ORCL) $0.31 gain.
Elsewhere, Starbucks (SBUX) closed down $0.12, but after the close, the company announced plans to close 600 under performing restaurants as we touched on earlier. In after hours, that stock moved up a little over $1 from the price you see here.
And those are the stocks in the news tonight.
