NBR Transcripts- July 8, 2008
Tuesday, July 08, 2008Fed Chairman Ben Bernanke's Push for More Federal Reserve Power
SUSIE GHARIB: Ben Bernanke said today he wants Congress to give the Federal Reserve more power. Speaking at a mortgage lending conference in Washington, the Fed chairman said the U.S. financial markets need to be more resilient and stable. He proposed giving the central bank a bigger role in supervising the nation's investment firms. Bernanke also wants the government to create a new system to ensure that financial firms can fail without damaging the entire economy. And he said the Fed may extend its emergency loan program for Wall Street firms into next year. Well, at that same conference today, regulators also outlined new ways to fix the subprime mortgage mess. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The FDIC brought together a who's who of financial market leaders. The goal -- encourage lenders to make affordable mortgages to low-income borrowers now that the subprime market has imploded. FDIC Chairman Sheila Bair says the first step is restoring confidence in the mortgage market.
SHEILA BAIR, CHAIRMAN, FDIC: We need to bring the private investment community back in to support funding for mortgages for low and moderate income people. We need to make sure that lending is done the right way, it's done responsibly, it's affordable, it's sustainable, it helps people accumulate wealth, not strip wealth.
DHUE: Next week, the Federal Reserve will release new rules governing future subprime loans that could require lenders to be sure borrowers can repay the loans; hidden fees be disclosed; and escrow amounts for taxes and insurance payments be withheld. Fed Chairman Ben Bernanke says the new rules will apply to all lenders.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: These new rules will address some of the problems that have surfaced in recent years in mortgage lending, especially for high-cost mortgage lending.
DHUE: As for the next generation of subprime loans, other regulators would like to see an end to 100 percent financed loans; an emphasis on fixed-rate loans; and the use of 40-year mortgages to lower monthly payments without the payment shock of adjustable loans. The market has gone back to basic lending practices, requiring 20 percent downpayments and fully documented loans. JPMorgan Chase CEO Jamie Dimon says it will take some time for lenders and investors to take on more risk.
JAMIE DIMON, CHAIRMAN & CEO, JPMORGAN CHASE: When they say a cat who sits on a hot tin plate will never sit on a hot tin plate again, but it also won't sit on a cold tin plate. And that's the problem we have. People have been really badly burned.
DHUE: Many home buyers are also feeling burned. Affordable housing advocate Martin Eakes expects it to be another year or two before home prices stabilize.
MARTIN EAKES, CEO, CENTER FOR RESPONSIBLE LENDING: So, for me, right now, I advise many aspiring homeowners to wait a year, save their money, rent. But don't jump in when your entire life savings could be wiped out by just the natural force of the marketplace.
DHUE: What's unknown is how far home prices will fall and how bad the economy will get. That's likely to keep many buyers and investors on the sidelines for now. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The 2nd Quarter Earnings Season Isn't Expected To Earn Many Profits
PAUL KANGAS: Alcoa shares tacked on as much as 6 percent in after hours trading, as the Dow component kicked off earnings season with better than expected results. While Alcoa's second quarter earnings fell 24 percent from a year ago, the higher energy cost was part of it; at $0.66 a share still beat analyst expectations by $0.02. Revenues were also lower, but better than estimates, coming in at $7.6 billion. Morningstar equity analyst Scott Burns says Alcoa's new CEO, Klaus Kleinfeld, is turning things around, despite market challenges.
SCOTT BURNS, EQUITY ANALYST, MORNINGSTAR: I think the auto -- the difficulties in the auto sector, and presumably the difficulties in the airline sector, how that reflects in the aerospace sector, could cause some major disruptions for this company going forward. Even so, I think the new leadership at Alcoa has the company steering in the right direction and they're able to deal with these costs.
KANGAS: Alcoa's profit report kicks off a flood of second quarter earnings, and Wall Street is not expecting the numbers to be good. As Suzanne Pratt reports, this earnings season will probably mark the longest stretch of profit declines for the nation's largest companies in six years.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street is bracing for dismal quarterly earnings from corporate America. Surging oil prices, the credit crunch, and a looming recession get the blame. Since January, second quarter earnings expectations for S&P 500 firms have fallen sharply, with analysts now anticipating a 13 percent decline in profits, or more.
ASHWANI KAUL, DIR. OF RESEARCH, THOMSON REUTERS: I anticipate that number to get worse as banks continue to do massive write-downs. I do see some positive numbers coming out of certain sectors. But, overall, I think it's going to be a tough quarter.
PRATT: Financial firms and auto makers are likely to lead the pullback with another disappointing quarter. Financial sector results are expected to decline nearly 70 percent. Profits for consumer discretionary stocks, which include Ford and GM, are expected to downshift 19 percent. Still, earnings season is likely to have some winners. Energy profits are expected to jump 30 percent, thanks to those higher oil prices. Analysts predict technology and healthcare firms will also post solid profit growth. Thomson Reuters analyst Ashwani Kaul is impressed by the tech sector's resilience.
KAUL: If you look at technology earnings, they've really held up. I look at it from the last six weeks. Technology estimates really haven't changed much, whereas almost every sector has gone to the downside.
PRATT: Merrill Lynch strategist Brian Belski agrees. He says investors have become too focused on the negative, particularly losses at financial and consumer discretionary firms.
BRIAN BELSKI, CHIEF U.S. SECTOR STRATEGIST, MERRILL LYNCH: If you strip those two sectors out of earnings, specifically for the second quarter, numbers are actually positive on a year-over-year basis for second quarter earnings. We believe that's a little known fact from investors.
PRATT: Friday, General Electric will report its quarterly results. Investors are particularly nervous about those numbers, because last quarter, GE missed and spooked the stock market. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with T. Boone Pickens, CEO of BP Capital
SUSIE GHARIB: Oil prices dropped sharply for a second consecutive session, as concerns eased over Hurricane Bertha and the strengthening of the dollar in currency markets. In New York trading, August crude futures fell $5.33, or nearly 4 percent, to $136.04 a barrel. Prices haven't been that low since June 26th. Despite the drop, the government said today it expects gasoline to remain above $4 a gallon for the rest of the year. The U.S. Energy Information Administration also predicted regular gasoline will average $4.06 next year. Those high energy prices are why legendary Texas oilman T. Boone Pickens announced today a national energy plan to reduce U.S. dependence on foreign oil. The so-called "Pickens plan" calls for investing in a network of wind farms providing power, and using natural gas as a transportation fuel. The billionaire investor is also bankrolling a huge multimedia ad campaign to get his message out to the American public. And joining us now, T. Boone Pickens, CEO of his own oil and gas investment firm, BP Capital. Mr. Pickens, welcome to NIGHTLY BUSINESS REPORT.
T. BOONE PICKENS, CEO, BP CAPITAL: Thank you, Susie.
GHARIB: You know, we hear about a lot of energy proposals and what to do so solve this energy crisis. Are your goals really reachable?
PICKENS: Well, I'm spending a lot of money to tell the story. I have spent a lot of time developing the plan, and the plan very clearly is to reduce the $700 billion that we are paying out for foreign oil. We can't do that for very long. We're going to break the country if we do. And...
GHARIB: Let's say ...
PICKENS: OK, one point. One point. We're importing almost 70 percent of the oil that we use now.
GHARIB: Let's say that the U.S. does adopt your plan to use compressed natural gas to power up cars and trucks. How much would it cost to transform gasoline stations to using compressed natural gas and how quickly could that be done?
PICKENS: Well, one plan I saw last week was to take 25,000 existing stations, add a natural gas fueling island in them at a cost of $400,000 each, which would be $10 billion to do 25,000 stations. Not a very big number when you are paying $700 billion for imported oil.
GHARIB: What do you have to do to get American consumers onboard with this? Because Honda, for example, does make a version of a Civic car that uses compressed natural gas, but there isn't exactly a waiting list to buy the car. What has to be done to get American consumers to...
PICKENS: I think you have got to get -- you have got to get leadership into it. And I think if the American people know what we're paying for imported oil, and realizes that the imported oil is one of the reasons -- probably the most important reason why the economy is now going down, and I think that you would find that the American people would like to be a part of that. And I see it almost like, you know, we are at war. And that we have to get away from this stranglehold on the economy and on our country. So, we join together, and we can -- we can rally. The American people can rally when they have a leader and they know what the cause is, and they believe the cause is worth rallying for.
GHARIB: All right. When you say that we have to get together, today you offered up your plan. But do you think it's going to take multiple plans to get the U.S. independent of foreign oil? Do you support other plans to solve the energy crisis?
PICKENS: This plan is the only one that I have seen that actually will get into it with big numbers. And what I'm proposing to do is that you develop your wind power, which is so important to the nation, and we have tremendous -- tremendous wind resource in the middle part of the United States, from Texas to Canada. And you could develop the wind power there. And take the natural gas off of power generation, use it for transportation fuel, and reduce the -- you could reduce our imports by 38 percent.
GHARIB: You've been in the oil business for a long time, so I do have to ask you what your forecast is for oil prices. Where -- how high do you see oil prices going? How high do you see gasoline prices going?
PICKENS: Well, gasoline prices have now gone to the point where we have killed some demand in the United States, about a million barrels a day. The unfortunate part of that, the reason why you don't see gasoline prices go down is because a million barrels that we killed with price has been picked up by the Chinese. So, you're in a global market that has 85 million barrels a day in it. Demand is 86.4 million barrels. So, supply does not cover demand. And until the price goes higher and kills more demand, you're going to see oil prices go up. I think you will see $150 a barrel before the first of the year, and it will go up even further in '09, unless we have a global recession. And that very well could happen with oil prices where they are.
GHARIB: All right. Well, we're going to have to leave it there. Thank you so much, Mr. Pickens, for coming on our program. We really, really appreciate it.
PICKENS: Thank you.
GHARIB: My guest tonight, T. Boone Pickens, CEO of BP Capital. And coming up a little later in the program, a look at how higher oil prices are impacting what vehicles U.S. automakers are rolling out this year.
"The Road Ahead"-Auto Showroom Sneak Preview
SUSIE GHARIB: American auto makers are bracing for what may be the worst fall season for auto sales in more than a decade. Rising gasoline prices and the credit crunch have delayed the launch of some vehicles and canceled future designs. Over the next two nights, we'll take a look at how the auto industry is confronting its future in our series, "The Road Ahead." Tonight, Diane Eastabrook takes us to Detroit for a preview of what auto makers are putting in their dealer showrooms this year.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At Chrysler's test track near Detroit, reporters recently got a chance to snap pictures, rev engines and test-drive new products rolling into Chrysler and Dodge showrooms in the coming months. While smaller, fuel-efficient cars are all the rage this summer, Chrysler has two new muscle cars hitting dealer lots this fall -- the Dodge Challenger SE, with a V-6 engine, and the Challenger RT, with a more powerful hemi V-8 engine. Both were in the pipeline for a few years before fuel economy became an issue. But Chrysler is casting an eye toward fuel economy as its first hybrids hit the roads this fall. I got behind the wheel of the aspen hybrid and checked out the Dodge Durango hybrid with Glenn Denomme, chief engineer for Chrysler's hybrid power train program. Both the Aspen and Durango are powered by two-mode hybrid engines. The engines use electric power at low speeds, and a combination of gas and electric power at high speeds. Denomme says the two-mode system helps extend mileage for larger hybrids.
GLENN DENOMME, CHIEF ENGINEER, HYBRIDS, CHRYSLER: In the city, we get 46 percent improvement in the city fuel economy, and we get an 11 percent improvement in the highway, and overall combined is about a 26 percent improvement in fuel economy.
EASTABROOK: Still, with gasoline prices topping $4 a gallon, "Motor Trend's" Todd Lassa questions if hybrids are enough to jumpstart sluggish sport utility sales.
TODD LASSA, DETROIT EDITOR, MOTOR TREND: I think this is kind of almost a last gasp. The hybrid will help extend their life a little bit, and that hybrid is important also in perhaps extending the life of the Chrysler 300 and the Dodge Charger.
EASTABROOK: Domestic and foreign auto makers count on new products to drive sales. But the new vehicles heading to showrooms could be a tough sell to consumers in a tough economy where credit is tight. Still, Ford is hoping for a home run with its Flex. The new crossover could appeal to consumers who want the roominess of a sport utility, but not the high fuel costs. The boxy vehicle, arriving at dealerships now, seats up to seven people. Ford says it will get about 30 percent better fuel economy than full-size SUVs. Competing with the Flex is Toyota's Venza. It hits showrooms this fall. The Venza is slicker than the Flex, but smaller. General Motors has perhaps the broadest assortment of new products coming out between now and the end of the year -- 12 new vehicles, including hybrids, a crossover, and even a muscle car, will be rolling into dealer showrooms. Look for the Corvette ZR-1 later this summer. In the fall comes a high performance Cadillac, the CTS V sedan. The fall will also bring another crossover to showrooms, Chevrolet's Traverse. At the end of the year or early next year comes the GMC Sierra pickup. It's powered by a two-mode hybrid engine, like Chrysler's new hybrids. Mark Laneve, VP of General Motors North America, says he's optimistic about GM's entire vehicle line-up, but admits to some reservations.
MARK LANEVE, V.P NORTH AMERICA OF SALES, GENERAL MOTORS: What is more volatile right now and hard to pin down is what is going on in the truck market. It's still a big part of the market -- full-size pickups, full- size utilities -- but it has certainly been under a lot of pressure, and what can we expect from that market moving forward.
EASTABROOK: Many industry watchers are disappointed there aren't more fuel-efficient, smaller cars coming out this year. But Jeff Schuster, head of automotive forecasting for JD Power and Associates, thinks more are in the works.
JEFFREY SCHUSTER, EXEC. DIR., AUTO FORECASTING, J.D. POWER & ASSOC.: When you look at some of the planning going on, some of the discussions, everyone is scrambling to get small cars here and get enough volume here if it's not built here. And I think if you tie that into future trends, such as new CAFE standards, this is a good start or a good indication of what's more to come.
EASTABROOK: Tomorrow, we'll look at how U.S. auto companies are racing to get consumers behind the wheels of smaller, more energy-efficient vehicles. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Detroit.
Remebering Sir John Templeton
PAUL KANGAS: And finally tonight, we say goodbye to a friend of NIGHTLY BUSINESS REPORT and one of my mentors, Sir John Templeton. He passed away today at the age of 95 near his home in the Bahamas. Sir John was a pioneer in the field of global fund investing and a huge philanthropist. During one of my last interviews with Sir John in 1999, he offered this advice, still as good today as it was almost a decade ago. SIR JOHN TEMPLETON: So many people think they're wiser than they are, and they take risks. They buy on borrowed money, not thinking they're ever going to be called to pay it back. So, I believe the most dangerous thing you can do, business-wise, is to be excessively optimistic and use borrowed money or base your whole career on any one concept or asset.
GHARIB: Paul, I know you interviewed Sir John many times. What impressed you the most about him? KANGAS: His sincerity, his desire to educate, and his plain old, good old, down-to-earth common sense. And not only that, but I can't think of a single person in modern times that has had such a productive career as Sir John Templeton. We have lost a giant.
GHARIB: I think you're certainly right about that.
Paul Kangas' Stocks in the News
PAUL KANGAS: A big drop in oil prices helped set the direction on Wall Street today, sending the Dow and the NASDAQ higher at the open. We'll have more about oil's decline in a moment. Stocks turned flat around midday as earnings jitters heated up and investors weighed a weak report on pending home sales. But buyers came back strongly as oil continued to fall. The financial and tech stocks led the way higher, with the market closing at its best levels of the day. Dow Industrial Average closed up 152.25 at 11,384.21. The NASDAQ composite jumped 51.12 ending at 2,294.44. Standard & Poor's 500 gained 21.39 to 1,273.70. In the bond market, the 10-year note climbed 6/32 to 99 29/32, putting the yield at 3.89 percent.
Big Board volume leader on 28 million shares, Citigroup (C), up $0.99, an indication of a little rally in the financial sector, as was Bank of America's gain of $2.01. EMC (EMC) down $1.75. Major casualty. EMC owns 85 percent of VMWare (VMW), whose stock took a tumble today. Let's have a look at it. Down $13. The chairman of VM issued an earnings warning because of the weak economy, and the company's board fired CEO Diane Greene, because it wanted a CEO with more experience in running a large company. The board did name Paul Maritz as the new CEO. A major casualty in VMWare.
Back to the active list. General Electric (GE), up $0.96. Wachovia (WB) and that strong bank group up $1.65. Nice rebound there.
Pfizer (PFE) an $0.80 gainer, and Ford Motor (F) $0.43 advance.
Another strong bank stock, JPMorgan (JPM), up $1.73.
Washington Mutual (WM) moved up $0.86. And then came Wells-Fargo (WFC), with a decent gain of $1.15. Of course, these stocks have been hard hit recently.
The oil stocks notably weak today as you might imagine. Apache (APA), Cabot Oil (COG), Chevron (CVX), Exxon Mobil (XOM), Schlumberger (SLB), all down significantly, but they did recover quite a bit from their lows of the session.
Another weak group -- metals and mining stocks today. The materials down. Cleveland Cliffs (CLF), Freeport-McMoRan (FCX) in cooper and gold, and Nucor (NUE), the big steel. Steel Dynamics (STLD), U.S. Steel (X), all casualties today.
Office Depot (ODP) down $3.29. The company says second quarter same- store sales dropped almost 10 percent from last year, and gave, as you might expect, an earnings warning as a result.
Marsh & McLennan, the big insurance company, up $2.24. Citigroup upgraded it from hold to a buy.
And UPS had a decent day, up $2.5 a share. The Stiffel Nicholas brokerage upgraded it from hold to buy on a valuation basis.
AbitibiBowater (ABH) up $1.30. Credit Suisse upgraded the U.S. paper sector to overweight, and that helped that whole group.
Stage Stores (SSI) up nearly $2 a share. June same-store sales rose 1.2 percent. The company sees second quarter earnings at or above its previous $0.23 per share estimate.
And Goodrich Petroleum (GDP) down $5.78. The company began a public offering of 3 million of its common shares. A little earnings dilution there.
Orient Express Hotels (OEH) down $2.79. Standard & Poor's downgraded it from hold to sell. Merrill Lynch downgraded it from neutral to underperform.
Apple (AAPL) topped the Nasdaq actives, up $4.39, its iPhone introduction due this Friday.
Research in Motion (RIMM) up $6.38.
Google (GOOG) had a good day, up $10.62. Sasquehanna Securities put a $635 target on Google's stock in the belief second quarter earnings will top estimates. Results are due out July 17th.
Microsoft (MSFT) down $0.18.
And then Qualcomm (QCOM) with a gain of $2.19.
Baidu.com (BIDU) up $6.67.
Intel (INTC) rose $0.21, while Cisco (CSCO) rose $0.31. Oracle (ORCL) a $0.49 gain, and Yahoo! (YHOO) up $0.73 a share.
InterDigital (IDCC) plunging $5.72. The company had a setback in its patent infringement case with Samsung.
Those are the stocks in the news tonight.
