NBR Transcripts July 17, 2008
Thursday, July 17, 2008The Stock Surge Continues
SUSIE GHARIB: Stocks on Wall Street rallied again today, as oil prices dropped below $130 a barrel, and financial stocks continued to rebound. The Dow jumped 207 points, lifting its way out of bear market territory, while the NASDAQ rose 27 points. Over at the New York Mercantile Exchange, August crude futures tumbled $5.31 to settle at $129.29. That's down almost $16 in just the past three days. Today's sell-off was sparked by news of a bigger-than-expected build-up in natural gas supplies. In New York trading, natural gas prices fell more than 7 percent. Well, the news was also bullish in the financial sector as strong bank earnings sent stocks soaring for the second straight day. But that euphoria came to a screeching halt after the closing bell, when Merrill Lynch reported a quarterly loss of nearly $5 billion and write-downs of almost $10 billion. Excluding charges, the giant brokerage firm lost $4.95 a share in the second quarter. Analysts were expecting the loss to be just $1.91. Merrill also confirmed the sale of its 20 percent stake in Bloomberg for about $4.5 billion. CEO John Thain described the quarter as, quote, "difficult and disappointing." Investors were also disappointed. Merrill shares tumbled 5 percent in after-hours trading. They had rallied almost 10 percent during the regular session.
PAUL KANGAS: That Merrill news came after J.P. Morgan, the largest U.S. bank, reported earnings of $0.54 a share. That represents a more than 50 percent drop from last year, but it was a dime better than expected. Erika Miller has more on whether the worst is finally over for the financial sector.
ERIKA MILLER, NBR CORRESPONDENT: Stock investors are hoping J.P. Morgan's better-than-expected earnings are a sign of a turnaround for the troubled financial sector. But S&P banking analyst Stuart Plesser warns it's too early to make that call.
STUART PLESSER, S&P BANKING ANALYST: I don't think that you can say just because J.P. Morgan's numbers were good, that that stands across the banking industry. And one can also say that their numbers were better than the low expectation number, yet there are certainly credit hazards out on the horizon still.
MILLER: He isn't the only analyst who is bearish on this sector. According to Thomson Reuters, a third of the S&P 500 financial firms have now reported second quarter earnings. Profits there are running 76 percent below last year. In addition, expectations for the third quarter have been falling sharply. Analysts are forecasting an 11 percent decline in earnings for that period. Some analysts do not expect earnings to improve dramatically until there is stabilization in the real estate market.
PLESSER: We believe that the house prices declines are at the root of all of these write-downs. And so, once that gets taken care of, then you'll see the credit markets starting to behave a lot better.
MILLER: At a media conference in Washington, Deutsche Bank's CEO conceded that the housing market is taking longer than expected to find its footing, but he does see some positive signs.
JOSEF ACKERMANN, CHAIRMAN, DEUTSCHE BANK: For the financial sector as a whole, if you differentiate between the markdowns on legacy positions and the ongoing new business, we are clearly seeing the end -- or the beginning of the end of the crisis.
MILLER: Investors also hope that's the case. They pushed the S&P financial stock index up sharply for the second straight day. But portfolio manager Brian Rauscher isn't among the buyers.
BRIAN RAUSCHER, DIRECTOR, PORTFOLIO STRATEGY, BROWN BROTHERS HARRIMAN: I still think these stocks still have considerable amount of downside risk right now. I don't need to bottom pick the stocks right here. In my opinion, when the financial crisis is over and the stocks start to heal, the stock will run from six months to a year, and I don't think I need to be in and catch the first 2 or 3 percent.
MILLER: Investors are now waiting for earnings from other financial firms to get a better sense of the health of the sector. Tomorrow, look for results from Citigroup (C), one of the banks hardest hit by the credit crisis. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices 2008"-Obama Economic Policy Director, Jason Furman Coments On The Oil Price Slide
SUSIE GHARIB: Now back to the big news of the day, the falling price of oil. As part of our continuing "Economic Choices '08" coverage, this afternoon Darren Gersh spoke with Obama economic policy director, Jason Furman. Obama and other Democrats blame speculators for driving up the price of crude. Now that the price is coming down, Darren asked Furman whether the oil markets are working. JASON FURMAN, OBAMA ECONOMIC POLICY DIRECTOR: My biggest worry when you look at these oil prices is that they are a reflection that the market thinks that economy is weakening right now, that that will lead to lower demand and lower prices. And that wouldn't be the most positive, optimistic note for us to view this news on.
DARREN GERSH, NBR CORRESPONDENT: Well, Democrats here on Capitol Hill and also Senator Obama have said speculators play a large role in this, and they are going after the speculators with legislation. Senator Obama has backed that. But did the speculators suddenly change their mind, or aren't they doing what they are supposed to do, which is react to the market and react to fundamentals?
FURMAN: There is no question that supply and demand have a lot to do with oil prices today. There is no question that markets have a lot of noise. On any given day, they go up and they go down. What the real question, though, is, is what role speculation is playing in propping up the price of oil. It is hard to explain how supply and demand have changed so much in the last six months to give us the prices we have today, and the problem is that top McCain economic adviser Phil Gramm inserted a provision in a bill in 2000 which basically took the regulators off the beat. So we regulate commodities futures, we look at the trades, we make sure there is no market manipulation. We are not doing that for energy futures. We need to start doing it again to really know what is going on in this market, make sure that everything is on the up and up, and potentially a result of that would be to bring oil prices down in the short run.
GERSH: But on the question of supply, Senator Obama said today that we can't drill our way to energy independence, but wouldn't it help? Doesn't it make sense to at least try to see how much oil we have in this country and wouldn't that help on prices and oil security?
FURMAN: He is basing his conclusion on the Bush administration's own Department of Energy, which says you are not going to get another drop of oil from that plan for another seven years. Even after 20 or 30 years, the impact on price and supply would be insignificant. What we have to do is recognize the reality that in the short run, there isn't a huge amount we can do to have a major guaranteed impact on lower oil prices, so what you can do that will have a major guaranteed impact on the pocketbooks of families is energy rebate checks. Give that to families, let them use it to help pay down their bills. At the same time, we want to put in place the speculation policy that we have just talked about, and also a set of other measures for conservation, investments in alternative fuels, improving fuel efficiency standards. And finally, yes, we should increase supply, but the place we should start, Senator Obama has said, is on 68 million acres that we have already leased to companies that they are not drilling on right now. Let's start there before we open up all this new water.
GERSH: More general economic question. The Tax Policy Center has looked at the Obama plan. Senator Obama criticized President Bush for fiscal irresponsibility, but the Tax Policy Center says Senator Obama's plan would basically raise the deficit as much as President Bush has. So where is the fiscal discipline there?
FURMAN: Well, Darren, first of all, the Tax Policy Center didn't score a lot of the spending reductions that Barack Obama is proposing, and they are an important part of his deficit reduction plan, along with his tax changes. But second of all, the Tax Policy Center shows two sets of numbers, and one set of numbers compares Barack Obama's plan to what would realistically happen if you continued on the policy course that George Bush has charted for this country. And relative to those sets of numbers, they confirm that Barack Obama's plan would lower the deficit, reduce it from where it is heading, and put us in better fiscal shape than a policy of more of the same, which is what we are getting from John McCain.
GERSH: Jason Furman, we are going to leave it at that, but we are going to have you back to continue the discussion. Jason Furman is an economic adviser to Senator Barack Obama. Thank you.
FURMAN: Thanks, Darren.
"Tech Talk"-What's Next for Google & Microsoft?
SUSIE GHARIB: Now that Microsoft and Google have issued their quarterly reports, the big question is, what is next for the two tech giants? As New York bureau chief Scott Gurvey reports in a special edition of "Tech Talk," both firms have some explaining to do.
SCOTT GURVEY, NBR CORRESPONDENT: For Microsoft, earnings are usually not a problem. The cash cows called Windows and Office throw out a remarkable amount of profit. But stock performance is another issue. Shares peaked almost a decade ago and have lost more than half their value since. That is because of concerns the company is not keeping up with technological change, especially the Internet, and the mobile computing and communication devices -- a world where everyone is connected all the time. Microsoft holds its annual financial analysts meeting next week, and the analysts I've talked to have two big questions for CEO Steve Ballmer. First, what's with Yahoo? The melodramatic attempt to buy or partner with the Internet portal has been dragging on all year. Analysts want to know what does Microsoft need that Yahoo! can supply, and what is plan B? Question two, what's next for Windows? Windows Vista, the latest version of Microsoft's ubiquitous operating system, has received mixed reviews. Vista was supposed to be more secure and more reliable than its predecessor, but in working toward those goals, Vista became unable to run some older programs and work with some older devices. That upset some customers. In the wake of all this, Apple has gained a little market share. "P.C." magazine editor Lance Ulanoff says Microsoft must address all of these issues.
LANCE ULANOFF, EDITOR IN CHIEF, PC MAGAZINE: They understand what users really want, but they're a very big company with very entrenched bureaucracies. So it really remains to be seen whether or not they can pull this off. And at the same time, they're trying to find more success on the desktop. They really have to come up with a winning online strategy. That hasn't happened, and people are wondering if the only way they can win or at least that they believe they can win is by acquiring Yahoo!.
GURVEY: It's a different story for shares of that other tech giant, Google. While they are off substantially from their highs, they still trade at more than six times their original offering price. The company dominates the business of Internet search, which means selling advertising targeted to match search terms. It has been trying to diversify into such areas as banner ads, but remains pretty much a fantastically successful one-trick pony. So analysts have questions for Google too. What can you do besides search? And how far will you go to stop Microsoft from buying Yahoo? When Google went public, its founders said they were not going to spend a lot of time answering questions from investors and analysts, and they've pretty much kept to their word. So it might be some time before we get any answers from them. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Commentary"-American Vs. European Corporate Management
SUSIE GHARIB: Tonight's commentator found some surprises when comparing American and European corporate management styles. He's Bill Baker, university professor at Fordham University and author of "Leading With Kindness: How Good People Consistently Get Good Results."
BILL BAKER, FORDHAM UNIVERSITY: I've been traveling and researching business practices for the last three months from my home base at the American Academy in Berlin, while working on a project to look at the differences in management styles between the U.S. and other places in the global economy. There may very well be differences. First, a couple of facts. The U.S. was almost half the world economy just after World War II. Today, it's only about 24 percent. So a great deal is taking place outside the U.S. borders. Second, in places like Germany, which has a reputation for high quality and engineering excellence, 90 percent of all the companies are small, employing less than 100 people. I expected to see a very top-down management style, but was very surprised and delighted to see a serious consensus-style approach in most places. Much of the psychological research supports this method as being the most successful way to get the best from your employees. It's interesting to note that European managers are on the consensus track. I saw it at companies like Roesch, Sennheiser and BMW. Meanwhile, many of America's most famous CEOs have a reputation of being imperial bosses. I believe this will change based on some initial feedback we are getting. The American Management Association will have a study of how employees feel about their bosses and their management styles. I'll be reporting on that in a few weeks. It might give us some insight as to where things stand and suggest where business should be going. I'm Bill Baker.
Paul Kangas' Stocks in the News
PAUL KANGAS: Strong rallies in overseas financial markets had bullish confidence up on Wall Street, with stocks extending yesterday's gains at the opening. Investors were encouraged by those better-than-expected results from J.P. Morgan, as well as strong results from United Technologies (UTX), Coca-Cola (KO) and Nokia (NOK). Buyers grew more aggressive as the day wore on, especially after oil prices continued to fall. The market went on to close at the day's best level. The Dow Jones Industrial Average surged 207.38 points to 11,446.66. The NASDAQ jumped 27.45 to 2,312.30. Standard & Poor's 500 index gained 14.96 ending at 1,260.32. In the bond market, the 10-year note lost 15/32 to 99 1/32, lifting the yield to an even 4 percent. Now let's take a look at some other stocks in the news tonight. New York Exchange volume leader on 40.25 million shares was Wachovia, moving up $2.90. As you heard, the company is being investigated regarding its auction rate securities business.
Bank of America did well, up $3.83. And then Citigroup, whose results are due out tomorrow, up $1.53.
Ace Limited (ACE) up $1.97, helped along by a Citigroup upgrade from hold to buy, although Ace's stock will be coming onto the Standard & Poor's 500, being replaced by MasterCard (MA).
Compania Vale (RIO) down $1.69. Weak commodities group.
JP Morgan Chase, there you see it, up $4.86. Those earnings of $0.54 were lower than last year, but $0.10 better than expected, and Standard & Poor's repeated a strong buy today.
Wells Fargo (WFC) edging up $0.60 after good earnings yesterday.
Washington Mutual (WM) $0.46 gain.
GE (GE) up $0.32.
And then Freddie Mac (FRE) gained $1.50. The company's offering of $3 billion in two-year notes was well received, and Fitch affirmed the company's long-term default rating of AAA. Did the same thing for Fannie Mae (FNM), whose stock was up $1.68.
IBM (IBM) closed up $0.58. After the close, company in with second quarter earnings of $1.98, $0.16 above the Street consensus, but the stock actually dropped nearly $1 in after-hours trading on the company's rather cautious outlook.
Coca-Cola down $2. Company in with second quarter earnings, $0.61 versus $0.80, but that includes an impairment charge. Without it, those earnings would have been $1.01 a share, $0.05 above the Wall Street estimate.
Another Dow stock, United Tech, moving up $3.59. Second quarter earnings $1.32, up from last year's $1.16, $0.02 above the Street consensus, and the company boosted its 2008 guidance by $0.10 a share to as much as $4.95 a share.
Nokia moved up $2.18. Second quarter earnings, 0.36 of a euro, versus 0.32 euros last year. Sales were up 4.5 percent, and the company is upbeat on its third quarter outlook.
Blackrock (BLK) moving up $29.31. Second quarter earnings $2.05, up from $1.69, on a 26 percent rise in revenues. And Goldman Sachs repeated a buy, and this action on Blackrock boosted the asset management group in general. Let's have a look at those stocks.
AllianceBernstein (AB), Franklin (BEN), Janus (JNS), Legg Mason (LM), PNC Financial (PNC) doing well. PNC had good earnings out today, second quarter $1.44, up from $1.22, and it does own 34 percent of Blackrock, incidentally.
Nucor (NUE), the steel company, plunging $7.45. Second quarter earnings $0.68, $1.94 up from $1.13, but the company's outlook was rather disappointing.
Textron (TXT) down $2.73, $1.03 in second quarter earnings, up from $0.85, but the company sees lower-than-expected $0.80 to $0.90 third quarter earnings.
Harley-Davidson (HOG) up $2.55. Second quarter earnings $0.95, down from $1.14 a year ago, but that was $0.20 above the Wall Street consensus.
MGIC Investment (MTG) a huge percentage gain, up $1.60. Company had a second quarter loss of $0.79 versus earnings last year, but the CEO sees a return to profits before long, because he's already seeing an improvement in the real estate market.
And Barr Pharmaceuticals (BRL), up $10.35. Teva Pharmaceuticals reportedly is in talks to acquire Barr.
NASDAQ's most active -- Apple (AAPL), down $1. Then Google, off $2.16, and it dropped 10 percent from there, as I mentioned. Microsoft moved up $0.26, but it was still lower after hours.
Research in Motion (RIMM) down $0.22.
And Intel (INTC) gained $1.08 per share.
eBay (EBAY) down $3.90 after the close yesterday, as we reported, better-than-expected earnings, but a disappointing outlook. And today, Deutsche Bank issued a sell on eBay.
Qualcomm (QCOM) down $1.42.
Cisco (CSCO) $0.42 gain.
Baidu.com (BIDU) up nearly $4.
And then Dell (DELL) $1.27 gain on that one.
Huge loss in Semgroup Energy Partners (SGLP), tumbling $11.80 or 51.75 percent. Moody's and Fitch both cut the company's debt ratings on concerns that it may not be able to meet margin calls due to recent volatility in the oil market.
And those are the stocks in the news.
