NBR Transcripts-July 16, 2008
Wednesday, July 16, 2008Oil Prices Pump Stocks in the Right Direction
SUSIE GHARIB: A big bounce back on Wall Street, as better-than-expected earnings from Wells Fargo sparked an explosive rally in bank stocks. The Dow surged 276 points, the NASDAQ gained 69. The S&P financial index posted its biggest one-day gain ever. Every bank in that index rose at least 10 percent, with Wells Fargo skyrocketing 33 percent. Also boosting stocks, a big drop in oil prices for the second day running. August crude oil futures tumbled $4.14 to $134.40 a barrel. All that good news overshadowed bad news on inflation. The consumer price index jumped 1.1 percent last month. We have two reports this evening looking at that uptick in inflation and how Fed Chairman Ben Bernanke handled it as he testified on Capitol Hill. We begin with Suzanne Pratt.
SUZANNE PRATT, NBR CORRESPONDENT: For consumers, the latest inflation data shows exactly how painful it is to live in the U.S. The price of gasoline up more than 10 percent last month. Vegetables up about 6 percent, the biggest gain in seven years. Beyond food and energy, education costs rose 0.5 percent, and airfares soared 4.5 percent. Compared with a year ago, the consumer price index, which is the government's key inflation gauge, is up a hefty 5 percent, the biggest gain since 1991. The core rate is up 2.4 percent. Lehman Brothers economist Ethan Harris says there's more pain ahead for Americans.
ETHAN HARRIS, LEHMAN BROTHERS: I think inflation is going to get worse before it gets better. We expect the headline CPI to peak at 5.5 percent with the release of the August data. And even the core measure, which has been running in the low 2 percent range, should creep up by a few tenths from here going forward.
PRATT: Rising energy costs are largely responsible for the uptick in inflation. In the last two days, however, crude oil futures have fallen more than $10 dollars a barrel, suggesting there may soon be some relief for consumers. But oil trader Ray Carbone predicts any easing in energy prices will be short-lived.
RAY CARBONE, PRESIDENT, PARAMOUNT OPTIONS: I think this is a supply/demand issue still. I still believe in the emerging market demand, and I think eventually prices are heading back up. I would not be a seller here down at the bottom of the bracket.
PRATT: If Carbone is correct and oil prices rally higher in the coming months, experts say the U.S. economy will remain under pressure. Some economists say they are more concerned about the erosion of spending power for consumers and not the long-term effects of inflation.
HARRIS: If these scare stories about $200 oil are correct, then a significant recession in the U.S. is very likely. It's very, very troubling to see oil prices continue to rise with this much weakness in the U.S. economy, clear signs of weaker demand for oil, and a global economic slowdown.
PRATT: For now, experts say there's so much fear in financial markets that higher inflation does not mean higher interest rates. But most economists agree Federal Reserve policymakers are in a very tough spot. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NBR CORRESPONDENT: This is Darren Gersh in Washington. Shortly after that eye-popping CPI report, Fed Chairman Ben Bernanke responded to a question from Congressman Ron Paul, who asked whether inflation is taxing the wallets of American consumers.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I couldn't agree with you more that inflation is a tax, and that inflation currently is too high. And it's a top priority of the Federal Reserve to run a policy that's going to bring inflation to an acceptable level consistent with price stability as we go forward.
GERSH: But how to get there? The Fed chairman and his colleagues consider the outlook on growth considerably uncertain, but see the outlook on inflation as unusually uncertain. Having weighed the evidence, markets are putting even odds on a Fed rate hike by the October 29th meeting. Fed watcher Adam Posen thinks the Fed will move against inflation by the end of the year.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INST. FOR INTERNATIONAL ECONOMICS: We're in a situation where the inflation risks are real. There's still some risk to the real economy in terms of growth. But we've shifted to where the inflation risk are outweighing that. That is kind of good news, because it means the worst of it may be over.
GERSH: As for the stability of the financial system, Bernanke told Congress Freddie Mac and Fannie Mae are in, quote, "no danger of failing." But longer term, he suggested Congress will have many options for reform to consider.
BERNANKE: There are certainly a number of different possibilities ranging from outright nationalization to privatization to breaking them up. In the near term, thinking about the needs of the housing market, I think the right solution is to keep them in their current form, but to provide very strong oversight that will assure adequate capital going forward.
GERSH: Many members of Congress wanted the Fed chairman to know their constituents are hurting. Bernanke agreed, calling this a rough time for average families. But not all the news is bad. Productivity is still growing faster than almost any other industrialized country, and that was today's happy thought.
BERNANKE: We will work our way through these financial storms. We will work our way through this cyclical movement that we have. And the economy will return to good growth. But we just have a few things to work through on the way to doing that.
GERSH: Many Democrats aren't willing to wait. They're pressing for a second stimulus package to boost the economy. Bernanke called that effort premature. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with John Duffy, Chairman and CEO of Keefe, Bruyette & Woods
SUSIE GHARIB: And there`s a lot of anxiety about the outlook for the sector, despite today`s big rally in bank stocks. Earlier today, I talked with John Duffy, chairman and CEO of Keefe, Bruyette & Woods, a Wall Street investment firm that specializes in financials. And I began by asking him to describe the health of America`s banks.
JOHN DUFFY, CEO, KEEFE, BRUYETTE & WOODS: Overall, the banking system, which will raise a lot of capital I think in the coming year, is in OK shape. I think the market in some cases has overreacted. This is probably the most severe crisis we`ve had facing the banking industry since the depression, but it`s not the depression. I think the correction that we`re seeing is probably at least as severe as we saw in the early `90s.
GHARIB: Mr. Duffy, do you expect more bank failure?
DUFFY: Oh, without a doubt. If you go back to the period of the early `90s, coming out of the real estate recession of the late `08s, early `90s, I think we had over 800 failures. We`re not forecasting that many because we have many fewer banks today. We`re almost half the number of institutions that we had 15 and 20 years ago, but I wouldn`t be surprised if there were a couple of hundred failures in the next few years.
GHARIB: Everybody wants to know which bank is next.
DUFFY: Well, we`re not in the business of forecasting bank failures, but I think if you look at institutions` stock prices and if you look at their concentration of real estate by loan type, you can get a pretty good idea which banks are in trouble.
GHARIB: We`ve seen so many Americans withdrawing their funds from banks that they consider are on shaky ground. What advice can you give to people about the safety of their deposits and their savings?
DUFFY: Well, if there is an institution out there paying well above market rates, that institution may be having liquidity concerns. If you`re below the $100,000 limit, I think you`re very, very safe and there is no reason for concern. If you have individual deposits above the insurance limit -- and they are higher for IRA accounts -- I think it would be prudent to know something about the safety and soundness of the bank.
GHARIB: Do you think that Fannie Mae and Freddie Mac are out of the danger zone now that the government has a rescue plan?
DUFFY: No, I don`t. They are very levered institutions. Clearly, the real estate market is in very bad shape, so I think one would be foolhardy to say that they don`t have very serious issues. But I believe the government will do whatever it takes to make sure those institution stay viable.
GHARIB: Citigroup reports earnings this week, as you know, and it`s taken massive writeoffs in the past. Is the worst over for Citigroup?
DUFFY: I would expect an ugly second quarter because certainly the credit markets did not improve in the second quarter. So whether the worst is over, you know, I doubt it. They`ve had a lot of pain, and I think most of the people in the businesses that they`re in aren`t feeling overly optimistic, certainly over the next six or nine months.
GHARIB: JPMorgan is also reporting this week. Should we feel better about the results coming out of JPMorgan?
DUFFY: Yes, I think they`ve done a much better job managing the risk, and I would expect their results are better. And I think vis-a-vis some of the competition, JPMorgan Chase is in a relatively strong position.
GHARIB: Let`s talk a little bit about the investment banks. There is considerable concern about the outlook for Lehman Brothers. Do you think that it`s going to go private, or might it go the way of Bear Stearns?
DUFFY: I don`t think it will go the route of Bear Stearns, given the support mechanisms that the Fed has put in place. I think Lehman has got a very valuable franchise. I expect them to survive. Whether that`s in a public or private form, I don`t really know.
GHARIB: What about Merrill Lynch? What`s your analysis of its financial condition?
DUFFY: I think a lot of people would love to have Merrill`s footprint and franchise. That`s not easily duplicated. So while I`m sure it`s been very, very painful to go through what they`ve gone through in the last nine to 10 months, I don`t have much doubt that they`ll come through this. And, if you give me five years, I`m pretty confident that they`ll be back up on their feet well before then.
GHARIB: So what is it going to take to bring stability back to the financial sector? Is it going to be a wave of mergers? Is it going to be government intervention or something else?
DUFFY: I think it will be a combination of some government intervention, some increased regulation, and some commitments from the private markets in terms of capital, but there`s a lot of capital out there. I think the franchises that have a real value will be able to attract that capital and get through this storm.
GHARIB: Mr. Duffy, thanks so much for your time.
DUFFY: You`re very, very welcome, Susie. Nice to see you again.
"Street Critique"-Kevin Depew, Executive Editor Minyanville.com
PAUL KANGAS: Tonight's "Street Critique" guest thinks we've hit a near term low in the stock market. He's Kevin Depew, executive editor at the financial information website Minyanville.com. Kevin, good to see you again. Welcome.
KEVIN DEPEW, EXEC. DIRECTOR, MINYANVILLE.COM: Thank you, Paul.
KANGAS: Well, we certainly saw a healthy move higher in the stock market today, but it has been downright scary for investors recently. And do you think that that really amounts to a major capitulation, that the worst is behind us?
DEPEW: Well, I think if you go back and look at 1998, when Long-Term Capital Management had their scare, this is a little bit similar. Some of the things we've written about on Minyanville is that unlike Long-Term Capital Management, in which that was the potential cause for dislocations, Fannie Mae and Freddie Mac were really the symptoms of dislocations that have been going on for quite some time. So we probably have seen some kind of capitulatory low, but I don't think it's the bottom by any means.
KANGAS: Well, the financial stocks have taking a real drubbing, and now they showed some real life on the upside. Is this the time for bottom fishing in that group?
DEPEW: Well, you know, if you're a short-term trader, you could do that. What I go back to is when you look at the Japan banking crisis in the early '90s, those stocks had an almost identical move down that we've seen in the Philadelphia bank index. After that, over the next 14 months, they rebounded by 80 percent. That would put the Philadelphia banking index somewhere around low 80s. But that's a traders' move, because ultimately, they went on to lose over the next decade 90 percent from there.
KANGAS: So it's just an interim thing on the upside for the financials?
DEPEW: That's what I take on it. If you're a short-term trader, that's fine. But for retail investors, it's better to leave that volatility to some kind of professional traders.
KANGAS: OK. What areas are you looking for, for good upside potential?
DEPEW: Well, Paul, we're getting close to the time when there is a seasonal move in biotech. It started a little bit earlier this year than usual. Normally, it's in August. But I think part of the rotation away from financials, the longer-term rotation away from energy stocks that have performed so well, some of that demand is creeping into biotech now.
KANGAS: Well, to that point, are there some specific stocks that you're keeping an eye on in the biotech sector?
DEPEW: Yes, the easiest way to play it is I think with the iShares Nasdaq Biotech index ETF, the symbol is IBB. I do own shares in that, by the way. I think that's the easiest way to play it. I'm not crazy about they're weighting in Amgen, but there are some other components there that I do like.
KANGAS: OK, how about another choice?
DEPEW: The other one in there that's in that ETF is Biomarin. The symbol is BMRN. I think that that's another way to play it. And the third way would be with Genzyme, symbol GENZ.
KANGAS: Let's have a chart on that. And we see it's been getting strong recently.
DEPEW: That's right. There is some demand creeping in. They are ahead of the seasonal patterns, and I think that that usually is a nice run up until the fall.
KANGAS: OK. Now you said you own the ETF. How about Biomarin and Genzyme? Are you personally an owner of those two stocks?
DEPEW: No, just through the ETF, Paul.
KANGAS: So biotech is your favorite in this market.
DEPEW: Biotech, and for the retail investor at home, you just have to stay away from financials for now.
KANGAS: OK. We got 20 seconds left for a last thought.
DEPEW: Well, the last thought is what I talked a little bit about on Minyanville, that there is a depression atmosphere going. Banks have lost $1 trillion. It's a huge amount, but that's not the end of the world, you know. We still will have to -- we'll have to send our kids to college and take care of the things that we take care of, and we'll get through this.
KANGAS: So, as they say, you're cautiously optimistic.
DEPEW: That's right. A defensive pessimist.
KANGAS: There you go. Thanks, Kevin, for sharing your insights with us.
DEPEW: Sure, Paul.
KANGAS: My guest, Kevin Depew of Minyanville.com.
"Money File"-The Legacy of Sir John Templeton
SUSIE GHARIB: In the "Money File" tonight, the wisdom of Sir John Templeton. Here's Chuck Jaffe, senior columnist at Marketwatch.
CHUCK JAFFE, SR. COLUMNIST, MARKETWATCH: Years ago, Sir John Templeton identified the four most dangerous words in investing as "this time, it's different." Well, for the investment world in the current, distressed market, this time it is different, because for the first time since the Great Depression, Templeton is not around to act as a reminder of the resiliency of markets. The legendary investor died last week at age 95, with the market appearing poised to reach the condition he was most famous for identifying -- the point of maximum pessimism. Templeton described maximum pessimism as the point where there were no buyers left -- except for him, of course. As an arch-contrarian, it was precisely the time he found things most attractive, the time to keep your head above market sentiment, the time when you someday look back and go, "that stretch, right there, that is where I made my money." Now, don't forget that Templeton began his investing career in the 1930s, when the Great Depression was still dampening market enthusiasm. In 1939, he famously bought $100 worth of every stock selling for a buck or less on the New York Stock Exchange, and in time, he made a killing. What's clear from everyone who knew the man is that he would have loved the current market environment. He would have preached international diversification, reminded people to go against the herd, and suggested that it's time to be calm and focused, and to leave the pessimism for others. And unless this time it really is different, it's likely that the market will prove him right, again, in time. I'm Chuck Jaffe.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened broadly higher as concerns about the rise in consumer prices were overcome by those falling oil prices and solid earnings from Wells Fargo bank. By 11:00 a.m., the Dow was showing a 110- point gain with the NASDAQ up 31 points. After a slight midday pullback, the market, led by the financial and airline sectors, came on strong again. Some frantic short covering added to the gains, and stocks soared to the day's best levels at the final bell. The Dow Industrial Average closed up 276.74 at 11,239.28. The NASDAQ composite vaulted 69.14 to 2,284.85, while the Standard & Poor's 500 index jumped 30.45 ending at 1,245.36. Over in the bond market, mounting inflation concerns drove treasuries lower across the board. The 10-year note tumbled 28/32 to 99 15/32, lifting the yield to 3.94 percent. Now-defunct IndyMac Bancorp is reportedly under investigation by the FBI for possible fraud in connection with home mortgages made to at-risk borrowers. The Associated Press says investigators are focusing on the company and not on IndyMac executives. IndyMac's assets were seized by federal regulators last Friday because they didn't think the bank could meet depositor demand. Since then, customers have been lining up outside IndyMac branches to withdraw their money.
Big Board volume leader on 41.4 million shares, Bank of America (BAC). Big gain of $4.15, followed by Citigroup (C) with a nice gain of $1.88. Those gains in large part due to Wells Fargo (WFC), which was up $6.72 and reported second quarter earnings $0.03 better than expected, at $0.53 a share, and that was down from $0.67 a year ago, but the company also boosted its quarterly dividend 10 percent to $0.34 per share. A real booster shot for the banking sector was Wells Fargo.
Wachovia (WB) participated in the rally, up $1.46. Washington Mutual (WM) gaining $0.92.
Fannie Mae (FNM) did well, up $2.18. General Electric (GE) in there, with $1.03 gain, and JPMorgan Chase (JPM) up $4.92. Nice to see some good gains for a change.
Ford Motor (F) up $0.84. And Freddie Mac (FRE) had a good day rising $1.57.
Of course, the oils down for obvious reasons. Off $1.38 on Exxon Mobil (XOM). And the other Dow stock in the oil business, Chevron (CVX), fell $3.03, down to $86.39.
But what was bad for the oils was good for the airlines. AMR (AMR) up $1.41, huge percentage gains. The company reported a second quarter loss of $1.13, but the street was expecting a loss of up to $1.40. The company postponed the divestiture of American Eagle division because of the poor market conditions.
But let's have a look at some of the other airlines. They all did hugely well. Big gains. Delta (DAL) reported $0.35 in second quarter earnings, incidentally, and said it expects to merge with Northwest Air (NWA) by the end of the year. All nice gains on this board.
Alpha Natural Resources (ANR) up $10.01. Cleveland Cliffs (CLF) will acquire the company for $10 billion. It breaks down into $22.23 a share cash, and 0.95 a share of Cleveland Cliffs today. That's a value of about $121 a share for Alpha. Cleveland Cliffs tumbled $7.44 to $104.02.
CSX (CSX) up $3.60. Second quarter earnings rose to $0.93 from $0.71 last year and a 50 percent jump in revenue. Merrill Lynch upgraded it from neutral to buy.
Let's have a look at the other rails in concert. Burlington Northern (BNI), Kansas City Southern (KSU), Norfolk Southern (NSC), Union Pacific (UNP), all big gainers today.
Bluelinx Holdings (BXC) up $1.56. It's in the building products business, and it's expecting second quarter profit of $0.18 a share. It may be up to $0.24 cents, but Street was expecting a $0.23 loss. Standard & Poor's upgraded it hold to buy.
Chicago Bridge & Iron (CBI) tumbling $5.74. It will take a second quarter pre-tax charge of $2.38 a share on cost overruns due to -- that are going on in two major LNG projects in the United Kingdom.
And then we see Seagate (STX) down $2.68. Lower fourth quarter earnings $0.37 down from $0.96 a year ago, and sees the first quarter at only $0.22 to $0.26 a share.
Apple (AAPL) topped the NASDAQ actives, up $3.17, followed by Research in Motion (RIMM), up $5.15. Google (GOOG) had a big day, up $19.51. Microsoft, a $1.11 gain there. And then we see Intel (INTC) rising $0.20, helped along by yesterday's better-than-expected earnings.
$0.06 gain in Cisco (CSCO). Qualcomm (QCOM) an $0.08 rise. Baidu.com (BIDU) up $16.90. First Solar (FSLR) did well, up $11.60. And Amazon.com (AMZN) a gain of $4.81.
eBay (EBAY) up $1.21 in regular day trading. After the close, second quarter earnings, excluding items, came out at $0.43 versus $0.02 last year. Analysts estimates the company's third quarter outlook was a little disappointing, and the stock fell nearly $2 in after-hours trading.
