NBR Transcripts July 21, 2008
Monday, July 21, 2008Investors Were Leaving Home Without AMEX
SUSIE GHARIB: Disappointing earnings from two Dow components after the closing bell today. A big earnings miss from American Express, sending its shares tumbling almost 12 percent. The financial giant earned $0.56 a share in the second quarter, $0.27 cents below estimates. AmEx blamed the shortfall on a big rise in consumer credit card defaults, a trend it sees continuing at least through the rest of the year. Investors also sold shares of Merck, which fell more than 7 percent. The drug maker reported a second quarter profit of $0.82, $0.03 more than expected, but Merck said it will no longer provide financial forecast as it assesses the impact of another failed study for its popular cholesterol drug Vytorin. That report came earlier today, showing the drug did not help people suffering from heart valve disease. Merck's partner on Vytorin, Schering-Plough (SGP), saw its shares tumble more than 11 percent during the regular session and another 3.5 percent after hours. The slide came even though Schering-Plough reported quarterly earnings after the bell that were $0.03 better than estimates.
The Acquisition of America
PAUL KANGAS: In other drug news, Swiss drug maker Roche is buying 44 percent of Genentech (DNA) it doesn't already own. The $44 billion deal is the latest example of overseas firms targeting U.S. corporations, a big trend in recent merger and acquisition activity. Suzanne Pratt takes a look at why America seems to be "on sale."
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The weak U.S. dollar makes America an appealing vacation destination for foreign tourists. But for much of the world, the sagging greenback also puts U.S. companies on sale. Today, it was Roche Holdings multibillion-dollar bid for Genentech. Last week, Belgian brewer InBev struck a deal to buy the maker of Bud, Anheuser-Busch (BUD). Lehman Brothers M&A chief Mark Shafir says the dollar's decline is encouraging international marriages, but for many companies, the push to be a global player is paramount.
MARK SHAFIR, CO-HEAD OF M&A, LEHMAN BROTHERS: I think it's more fundamentally the strategic interests of these parties. And by that I mean globalization is really driving a lot of markets. This is still the biggest market for most companies, and as a result, you know, they are making moves here.
PRATT: According to Standard & Poor's, last year foreign buyers set a record by purchasing $422 billion of U.S. assets. Many of those deals involved sovereign wealth funds. So far this year, there have been more $200 billion in announced deals with foreign buyers, and seven of the top 20 U.S. mergers this year involve foreign buyers. M&A expert Rich Peterson says foreign players are helping to keep the takeover business alive.
RICHARD PETERSON, DIRECTOR, STANDARD & POOR'S: Here we are in a bear market, nine months into a bear market, and we're seeing strong M&A activity.
PRATT: Experts say the rattled U.S. stock market is also fueling the shopping spree, making publicly traded U.S. companies even more attractive to overseas buyers. Wachovia Securities market strategist Scott Wren says foreign companies are looking to better position themselves for when the U.S. economy recovers.
SCOTT WREN, SR. EQUITY STRATEGIST, WACHOVIA SECURITIES: I think what's really mainly driving foreign investment-- and they are certainly taking advantage of a weaker dollar-- is just that the growth prospects here in the United States are good. The United States still accounts for almost 25 percent of global GDP. We're a market that foreigners want to be in.
PRATT: Foreign buyers are expected to continue to take advantage of the opportunities provided in the U.S. marketplace. Some experts predict this year we could see a new record set for international purchases of American companies. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Joe Battipaglia, Chief Market Strategist for Stifel Nicolaus
SUSIE GHARIB: Joining us now to talk more about today's market developments, Joe Battipaglia, chief market strategist for the private client group at Stifel Nicolaus. Hi, Joe.
JOE BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS: Susie, hello.
GHARIB: What do you make of these sell-offs in after-hours trading of American Express, Apple Computer and Merck? Are these company-specific, or is there a bigger message here about what's going on in the market?
BATTIPAGLIA: I think there is a bigger message. In the case of American Express, the consumer recession is spreading out now into the credit card arena. And even though American Express is supposed to have the best customers, they are seeing loss provisions rise as customers become more delinquent. In the case of Apple, in the case of Merck, too, particularly Apple though, the earnings for the fourth quarter, the next quarter up for them is going to be more difficult. And of course, profits now are what's sustaining investors' enthusiasm for stocks. And so, any disappointment like that is going to bring pressure to bear on these companies, and we still have the lingering effects of the credit meltdown that is far from over. And this is why we have the kind of volatility we're seeing.
GHARIB: There was a lot of hope in the markets last week that maybe the worst was over. What's your view on the outlook for the markets?
BATTIPAGLIA: Unfortunately, it's going to take a lot longer for the credit contraction to complete its course, for housing prices to stabilize, and for the consumer to gain their bearings. In the meantime, we're dealing with falling employment situation and an economy that's become quite sluggish, which puts the profit picture in jeopardy. And add to that mix the simple fact that policymakers are trying very hard to forestall market forces in every respect. It's made it much more difficult and dangerous for investors. So these rallies we're getting from false bottoms tend to feel very good, but they are also short lived. And I think we're going to continue that pattern for much of the rest of the year.
GHARIB: So should investors sell into the rally? It sounds to me like you're saying thec doesn't work in this kind of market.
BATTIPAGLIA: The good news to come out of this, of course, is that risk is returning to the marketplace and returns are rising. For example, high-yield bonds are now paying investors substantially more than they did a year ago. The same can be true of real estate investment trusts. As far as the stock market generally, the multiple against earnings and cash flow has been coming down as we've had the sell-off. And as all profit contractions go, somewhere out there, perhaps towards the latter part of this year into next year, investors will start to sniff out the next decent opportunity for equities and stocks will rise. So what you've got to do here is focus on quality growth names domestically and internationally. Stay away from the late cyclical companies. I think energies and industrials have had their move now, and now it's time to focus on growth companies, health care, defensives names, and ride this out.
GHARIB: And you mentioned overseas. Are the markets overseas better for investors at this juncture?
BATTIPAGLIA: No. Once again, it's a situation where you need to look region by region and country by country. Asia has enjoyed the growth of the United States as a net exporter. They are now suffering through the slowdown in the United States. So China is a place to stay away from for now. But Brazil, having a dynamic domestic economy, continues to show robust growth at reasonable valuations. And Germany, as a centerpiece for the European community, seems to have the right balance on a longer-term basis. So you want to pick your spots very carefully internationally.
GHARIB: You've got to be very selective. OK, Joe, thank you so much for coming on the program. We appreciate that.
BATTIPAGLIA: My pleasure.
GHARIB: My guest tonight, Joe Battipaglia, chief market strategist for the private client group at Stifel Nicolaus.
The Outlook for Oil Amid Hurricanes & Excessive Speculation
SUSIE GHARIB: Oil prices crept higher today, as traders kept an eye on Tropical Storm Dolly, the first storm of the year to enter the Gulf of Mexico. Shell Oil is pulling 185 workers from platforms in the region as a precaution. As a result, August crude futures rose $2.16 to $131.04 a barrel in New York trading. There's also a storm brewing on Capitol Hill, this one over the role of speculators in the oil market. As Stephanie Dhue reports, lawmakers are poised to crack down on what they call excessive speculation.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With gas prices above $4 a gallon, Congress is under pressure to do something about it. Senate Democratic leaders want to take up a bill to crack down on excessive speculation in the oil futures market. Minnesota Democrat Amy Klobuchar blames traders for the run-up in fuel prices.
SEN. AMY KLOBUCHAR, (D) MINNESOTA: Large hedge funds, investment banks are buying and selling oil contracts, not to fuel cars, not to run factories or fly airplanes, but to profit from the transactions themselves. These speculators have a vested interest in running up the price of oil so they can take the money and run.
DHUE: The Senate is expected to vote tomorrow on whether to debate what's called the Stop Excessive Energy Speculation Act of 2008. The bill would add 100 new regulators to the Commodity Futures Trading Commission. It would require firms report more information to the CFTC, and it would have the commission conduct a long-term study on possible manipulation in the energy trading market. The hedge fund industry is geared up to lobby against the bill. Richard Heller, who is a law partner at Thompson Hine and sits on the board of the Hedge Fund Association, says to blame speculators is naive.
RICHARD HELLER, PARTNER, THOMPSON HINE: To take one component of the overall issue and attempt to legislate it away will be ineffectual. DHUE: Senate Republicans support a competing bill, called the Gas Price Reduction Act, that addresses speculation, but also increases domestic oil drilling. Last week, President Bush lifted a presidential moratorium on offshore drilling. Senate Minority Leader Mitch McConnell says it's time for his Democratic colleges to roll back the congressional ban.
SEN. MITCH MCCONNELL, (R) KENTUCKY: They need to unlock the outer continental shelf and lift their ban on the development of vast oil shale deposits in Western states.
DHUE: Analysts say, given election year politics, it's unlikely Congress will pass legislation that either cracks down aggressively on oil speculators or opens up drilling in a substantial way. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Scott Rothbort, Founder, ThefinanceProfessor.com Explains The Potential Impact of the SEC's New Short Selling Rules
PAUL KANGAS: Speaking of speculators, the Securities and Exchange Commission's emergency order aimed at reigning in abusive or naked short selling in shares of Fannie Mae (FNM) and Freddie Mac (FRE) took effect today. It also covers 17 Wall Street financial firms, including Lehman Brothers (LEH) and Citigroup (C). Joining me now to talk about that order is Scott Rothbort, president of Lakeview Asset Management and founder of the web site thefinanceprofessor.com. And Scott, welcome to NBR.
SCOTT ROTHBORT, FOUNDER, THEFINANCEPROFESSOR.COM: Thanks for having me.
KANGAS: With over $1 trillion in equities estimated on loan right now, this is big business that short selling, is it not, and what impact will this order have?
ROTHBORT: Oh, it's a tremendously big business. I think they're being very narrow in their focus, because the financial stocks have certainly been under a lot of pressure. Look, my opinion is that we need short sellers in the marketplace. There is value to having them. However, there are a lot of abuse of short sellers. And we really need to go beyond just the Fannie and Freddie Mae problem and look at some of the issues that are in the marketplace vis-a-vis abusive short-selling techniques.
KANGAS: So you feel that there is some advantage to having the short sellers around, keeping a better market. Is that it?
ROTHBORT: Yes, I believe it does keep more orderly markets. I think it does keep some of the markets in check. It does create liquidity in the marketplace, which is necessary. I have no problem with short selling. On occasion, I do short sell. It's the abusive practices that I think really need to be outlawed. Let's understand the fact that what we need to do as a matter of public policy is that we need to protect shareholders. And when you have abusive short-selling techniques, the shareholders are the ones who are getting hurt.
KANGAS: When we talk about naked short selling, they just short a stock without finding anyone that they are going to borrow it from first?
ROTHBORT: They just go ahead and short it. They don't look for a borrow. They don't care about a barrow. They basically just do what we call is a bear rate on a stock. They just sell it and sell it down and they create a panic. They spread rumors. They do all those things.
KANGAS: The SEC's emergency order can last up to 30 days, and it only impacts a handful of stocks. Will it really help, or is more action needed, like the restoration of the uptick rule?
ROTHBORT: I think that we're going to go beyond this. I think there's going to be a full-scale investigation both in terms of the SEC, perhaps academically, also on Capitol Hill. I think we will see the uptick rule reinstituted.
KANGAS: Why was it ever.
ROTHBORT: ...in full or in part.
KANGAS: Scott, why was the uptick rule eliminated in the first place? Do you have any idea?
ROTHBORT: You know what, I think it was eliminated based upon some academic research that was performed. I'm not quite sure. I really think the reason that it was eliminated was because there are a lot of pressure being put upon the SEC by hedge funds and other short sellers to make it disappear. The reason we put this rule in place back in the early 1900s was to avoid the catastrophic effects of bear market rates.
KANGAS: Just quickly, do you think that the uptick rule will be restored, yes, or no?
ROTHBORT: Yes, I believe it will. Perhaps not to the same extent that it used to be in place, but certainly will to some extent.
KANGAS: Very good. Scott, I want to thank you for sharing your insights with our viewers.
ROTHBORT: My pleasure.
KANGAS: My guest Scott Rothbort of Lakeview Asset Management and thefinanceprofessor.com. SUSIE GHARIB: Tonight's commentator weighs in on the government's moves to back-stop Fannie Mae and Freddie Mac. Here's Justin Fox, business and economics columnist at "Time." JUSTIN FOX, BUSINESS & ECONOMICS COLUMNIST, TIME: I don't know about you, but as a U.S. taxpayer, I'm kind of excited about my new role as sugar daddy to our nation's two biggest mortgage lenders, Fannie Mae and Freddie Mac -- almost as thrilled as I was when I got to bankroll the takeover of Bear Stearns by JPMorgan (JPM) back in March. These bailouts make clear that I'm a very important person. In fact, I'm essential to the continued functioning of my country's financial system. So are you. We taxpayers are, as a group, far more important than Wall Street CEOs making millions of dollars a year or hedge fund managers making billions. That's because the financial sector in which these people reap their giant rewards isn't really a free-market business like, say, selling ice cream. Sure, it looks one most of the time, but every once in a while comes a crisis in which a complete financial collapse seemingly can't be averted without government intervention. With depository institutions like banks, this reality has been acknowledged since the 1930s, and we've developed a reasonable, if far from perfect, system for avoiding trouble and managing the inevitable breakdowns. But over the past three decades, more and more of the financial action has moved outside the traditional banking system. Now we're finding out that it's prone to the same risk of panic and collapse that banks are. What comes next? I'm not sure. I just know that as one of the guys who bailed all these ninnies out, I and you should get a pretty big say in the future structure and regulation of their industry, don't you think? I'm Justin Fox.
"Commentary"- The Fannie Mae/ Freddie Mac Bailout
SUSIE GHARIB: Tonight's commentator weighs in on the government's moves to back-stop Fannie Mae and Freddie Mac. Here's Justin Fox, business and economics columnist at "Time."
JUSTIN FOX, BUSINESS & ECONOMICS COLUMNIST, TIME: I don't know about you, but as a U.S. taxpayer, I'm kind of excited about my new role as sugar daddy to our nation's two biggest mortgage lenders, Fannie Mae and Freddie Mac -- almost as thrilled as I was when I got to bankroll the takeover of Bear Stearns by JPMorgan (JPM) back in March. These bailouts make clear that I'm a very important person. In fact, I'm essential to the continued functioning of my country's financial system. So are you. We taxpayers are, as a group, far more important than Wall Street CEOs making millions of dollars a year or hedge fund managers making billions. That's because the financial sector in which these people reap their giant rewards isn't really a free-market business like, say, selling ice cream. Sure, it looks one most of the time, but every once in a while comes a crisis in which a complete financial collapse seemingly can't be averted without government intervention. With depository institutions like banks, this reality has been acknowledged since the 1930s, and we've developed a reasonable, if far from perfect, system for avoiding trouble and managing the inevitable breakdowns. But over the past three decades, more and more of the financial action has moved outside the traditional banking system. Now we're finding out that it's prone to the same risk of panic and collapse that banks are. What comes next? I'm not sure. I just know that as one of the guys who bailed all these ninnies out, I and you should get a pretty big say in the future structure and regulation of their industry, don't you think? I'm Justin Fox.
Paul Kangas' Stocks in the News
PAUL KANGAS: Better than expected results from Bank of America (BAC) this morning gave Wall Street an opening lift. After 30 minutes of trading, the Dow was up 15 points and the NASDAQ rose 17. The early upturn fell apart as oil prices rose and the dollar fell, sending the Dow to a 63-point loss at noon time, with the NASDAQ off 12 points. Growing caution ahead of the flood of forthcoming earnings reports kept stocks lower for the rest of the day. The Dow Industrial Average closed off 29.23 at 11,467.34. The NASDAQ composite was down 3.25 exactly, at 2,279.53, while the Standard & Poor's 500 index fell .68 to 1,260.00. In the bond market, the 10-year note rose 11/32 to 98 20/32, putting the yield at 4.05 percent.
Big Board volume leader on 26.25 million shares, Bank of America, moving up $1.07. Traded as high as $30.90 after reporting second quarter earnings of $0.72, way down from $1.28 a year ago, but $0.19 better than expected. And the company will maintain its $0.64 quarterly dividend.
Citigroup up $0.34.
Wachovia rose $0.21.
But Schering-Plough down $2.49, as concerns over Vytorin overrode the company's better-than-expected earnings, as you heard.
Fannie Mae up $0.73. Traded as high as $18.49 today. This is the first day of that rule limiting naked short sells in effect. Some figured there was a lot of short covering also.
Washington Mutual (WM) down $0.44.
Merck & Co losing $2.49. After the close, we heard second quarter earnings of $0.82, a penny below the street estimate. I saw the stock as high as $36 in after-hours trading, however.
Wells Fargo (WFC) lost $0.32.
American International Group (AIG), up $1.46, getting a boost from Bank of America, which upgraded it from neutral to a buy.
Pfizer (PFE), 10th in volume, was down $0.23 a share.
American Express down $1.29. After the close, as you heard, $0.56 in second quarter earnings, $0.27 below the street consensus, and I saw the stock as low as $36 in after-hours trading. It was hit in after hours.
Genentech moving up $12.06. Roche Holdings is bidding $89 a share cash for the 44 percent of the outstanding shares that it doesn't already own.
And Texas Instruments (TXN) closed down $0.30. Second quarter earnings after the close, $0.44 versus $0.42, but $0.02 below the street estimate, and in after-hours trading, the stock fell to around $25.
Timken & Co (TKR) up $6.18, now sees third quarter earnings of $0.96 a share, up from its previous guidance of $0.73 to $0.83. And BB&T Capital brokerage upgraded it from hold to a buy.
Transalta (TAC) Corporation up $4.93. The wholesale power generation company has received a possible acquisition bid of 39 dollars a share Canadian from LS Power Equity Partners.
And then UnionBanCal Corp (UB) up $3.31. Second quarter earnings $0.97, down from $1.19 last year, but a nickel above the street estimate. The company sees third quarter up around $1.15 a share.
Nautilus Group (NLS) down $0.96. Traded as low as $4.44 today after Wedbush Morgan brokerage downgraded it from buy to just a hold.
Sherwin-Williams (SHW) down $3.67. Goldman Sachs downgraded it from neutral to sell.
And Stanley Works (SWK) down $1.81. Deutsche Bank downgraded it from buy to just a hold. Goldman Sachs said today this is the time to buy the recently depressed oils, and look how they did. Apache (APA), Cabot (COG), Conoco (COP), EOG Resources (EOG) and Hess (HES), all nice gains.
Apple topped the active list on NASDAQ, up $1.14 after the close. As you heard, good earnings, but they didn't - the investors did not like the outlook on the stock. I saw it as low as $149 in after-hours.
Google (GOOG) down $12.52.
Microsoft (MSFT) a $0.22 loss.
Research in Motion (RIMM) moved up $2.18.
Cisco (CSCO) an $0.18 gain itself.
Moving along, Intel (INTC) showed no change.
Gilead Sciences (GILD) up $0.11.
Qualcomm (QCOM) a $0.09 advance.
baidu.com (BIDU) up $5.46.
And Teva Pharmaceuticals (TEVA) up $0.83. Of course, it's acquiring Barr Pharmaceutical.
Elsewhere, Yahoo! (YHOO) down $0.78. Carl Icahn and two of his backers have won seats on the board of governors, promising no proxy fight.
And those are the stocks in the news tonight.
