NBR Transcripts- July 24, 2008
Thursday, July 24, 2008More Housing Data Drags Wall Street Down
JEFF YASTINE: Another gloomy report on the U.S. housing market took its toll on Wall Street today. The Dow plunged 283 points and the NASDAQ tumbled 45. That came as investors weighed the National Association of Realtors' June data which showed existing home sales hitting their lowest level in 10 years. Sales of previously owned homes fell 2.6 percent in June, double what economists had expected. The weakness in sales is also depressing home prices. The median price of an existing home sold last month was $215,000. That's down over 6 percent from June of last year. Economist Michelle Meyer of Lehman Brothers thinks the surge in foreclosures may actually help the housing market find its footing.
MICHELLE MEYER, ECONOMIST, LEHMAN BROTHERS: I think the trend is still down for existing home sales. We may find a bottom at some point in the fall and that's partly because foreclosures are becoming an increasing share of existing home sales and there's a faster turnover for foreclosures, so, that may be biasing the number a little bit higher and may actually get us to a bottom a little quicker.
YASTINE: As the news on housing worsened, the focus on Capitol Hill today turned to preventing a repeat of the near collapse of Bear Stearns and the Federal rescue of Fannie Mae and Freddie Mac. As Stephanie Dhue reports, congressional leaders are contemplating a regulatory overhaul.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lawmakers want a better solution to future financial crises. So House Financial Services Committee Chairman Barney Frank posed this question to the heads of the Securities and Exchange Commission and the Federal Reserve Bank of New York.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES: What new regulatory approaches should we be taking to make the crises less likely?
DHUE: SEC Chairman Christopher Cox had an answer, giving his agency the explicit authority to regulate investment banks. Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley now voluntarily submit capital and liquidity positions to the SEC. Cox wants that to be mandatory. He also wants the SEC, instead of bankruptcy courts, to liquidate failed investment banks.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: We don't need to start from scratch. Instead we can build on what we know has worked. At the same time, we can take lessons from what has not worked and modernize, rather than replace the current system.
DHUE: New York Fed President Timothy Geithner also had an answer: expanding powers for the central bank to regulate investment banks.
TIMOTHY GEITHNER, PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK: You will not have good judgments made by this central, this bank, this Federal Reserve in the future unless we have the direct knowledge that comes with supervision.
DHUE: And he suggested mortgage giants Fannie Mae and Freddie Mac need a more complete regulatory overhaul than House lawmakers passed just yesterday.
GEITHNER: I believe that there are going to have to be some very fundamental rethinking of the future of these institutions going forward. It is hard though to say today with confidence what the optimal role will be in the future. But, for the reasons you've said and many others, the current balance is probably untenable over the longer term.
DHUE: While lawmakers and regulators are looking for a longer term fix for the troubles in the housing and financial markets, they are more likely to keep putting out fires until those markets stabilize. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Southwest CEO, Gary Kelly Explains His Company's Profitable Flight Plan
JEFF YASTINE: Southwest Airlines today showed Wall Street something it doesn't normally see from an airline, black ink! The carrier earned $0.16 a share in the second quarter, helped by its fuel-price hedging program. Joining me to talk more about the carrier's outlook is CEO Gary Kelly, who joins us from Dallas. And Gary, welcome to NIGHTLY BUSINESS REPORT.
GARY KELLY, CEO, SOUTHWEST AIRLINES: Thanks, Jeff.
YASTINE: You know, tell us a little bit about the fuel price hedging program. How much did that contribute to Southwest's profits for this particular period, the second quarter?
KELLY: Well, it's just been an enormously successful program for us. We're close to 20 years with our hedging program and have the good fortune to report that we've actually never had a loss with it on an annual basis. But this year alone we're over 70 percent hedged. Now for the second half of the year, 80 percent hedged at around $58 to $60 a barrel. In the second quarter, it saved us $511 million in cash. And of course our net income without special items was $121 million. So without that, we would have lost money and for the full year we're looking at about a $2 billion savings in our fuel costs because of our hedging program.
YASTINE: Did you say around $70 a barrel is what the average price, what that works out to, with the hedging?
KELLY: We were about 70 percent hedged in the second quarter, around $51 a barrel. And that equated to a fuel hedging gain of about $511 million.
YASTINE: Now tell us briefly with your competitors, so many of them are hunkered down, just trying to get through this perfect storm. What is Southwest doing? What is your airline doing to sort of enable that competitive position that your airline has? How are you going to help to continue to grow despite this ongoing situation with fuel prices?
KELLY: Well, I'm very excited about Southwest Airlines future. It's a very treacherous time. And I guess that adds to the excitement, if you will. But we're prepared. And that's one of the hallmarks, one of the strengths of Southwest over the years. And the rest of the industry is not. So in our markets as an example, in the fourth quarter of this year, our competitors are reducing their seats by 15 percent. So without doing anything, we'll be gaining a very significant market share. But thinking about next year and 2010, we have a number of programs under way to improve our revenue production so that we too can overcome higher energy costs. And I would like to see the results of some of those initiatives before we expand aggressively. But the nice thing is, with all the shrinking going on in the market, we have a number of opportunities to expand. We'll just keep our powder dry here for the time being.
YASTINE: Gary, when you talk about increasing revenue, are ticket prices, an increase in ticket prices on that menu, because it sounds like some of the comments you've made elsewhere sort of hint that that is something that the company is contemplating?
KELLY: You know, I just think that's the inevitability that we'll have to find some way to raise revenues. Our total operating cost on a unit basis are up 30 percent over the last five years and destined to go higher as our hedged fuel costs continue to go higher over the next four to five years. So we're looking for over a billion dollars of incremental revenues through a variety of sources. Certainly raising fares will be one source. We are not charging surprise or hidden fees like the rest of the industry is doing. And of course I'm very proud of that. But we have opportunities with our frequent flier program, with our web site where we are the second largest travel site in the world and also co-chair relationships to tap into international markets for the first time. So the opportunities are there. It's just up to us to execute.
YASTINE: Well, we'll have to see how the company executes as we move forward here. Gary, thank you for being on the program.
KELLY: Thank you, Jeff.
YASTINE: Our guest, Gary Kelly, CEO of Southwest Airlines.
Microsoft CEO Steve Ballmer Addresses Google & Yahoo! Issues
JEFF YASTINE: Microsoft held its annual meeting with financial analysts in Redmond, Washington today. And in last week's tech talk, New York bureau chief Scott Gurvey said there were two overriding questions Wall Street wanted Microsoft CEO Steve Ballmer to answer. Scott monitored the meeting's webcast and spoke with some of the analysts who were there and has this report.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: There were two questions analysts expected Microsoft CEO Steve Ballmer to address in today's meeting and in his own fashion, he did. At the top of everybody's list: what is Microsoft's online strategy now that attempts to buy Yahoo! have ended? Just last night, Microsoft announced the executive behind that plan is leaving the company. That left Ballmer to explain how Microsoft will compete with Google. Ballmer made it clear he will continue an aggressive online strategy, a business segment now losing a billion dollars a year for Microsoft. Ballmer said Internet media, communications and advertising could eventually become a trillion dollar business.
STEVE BALLMER, CEO, MICROSOFT: If we want to create shareholder value, we need to run the businesses that we're in very well. But there's this huge, huge, huge new opportunity around the Internet and online and we have to embrace that opportunity and invest in that opportunity.
GURVEY: Along those lines, Microsoft is expanding its deal to provide web and search advertising to facebook, the social networking site. On the subject of Windows Vista, Microsoft's latest operating system, Ballmer insisted progress has been made in improving the product. He acknowledged that Apple is gaining market share but criticized its Macintosh computer.
BALLMER: We're kind of being attacked from a single competitor with a point of view that's much more closed and offers much less choice, that's much more narrow. And yet we have to tell our story and you'll hear more about that versus where Apple's coming from.
GURVEY: Ballmer also addressed the issue of Microsoft's share price, which has been stagnant for eight years, by defending the company's earnings growth rate as something most companies would envy. He suggested to the analysts present that Microsoft deserved a better multiple. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Bill of Health"-Medical Tourism
JEFF YASTINE: The high cost of health insurance is driving more Americans overseas for treatment. And that's catching the eye of large companies hoping to capitalize on the trend. In tonight's
"Bill of Health," we look at how the medical tourism marketplace is maturing from a cottage industry into a big business. In the latest sign of medical tourism's growing popularity. Intercontinental Hotel Group recently struck a deal to sell hotel rooms and other services to Americans venturing to Latin American hospitals. The arrangement opens Intercontinental's brands in Mexico, Brazil, Panama and Costa Rica to travelers seeking surgeries and other medical treatments. Industry consultant Michael Horowitz says such programs are becoming popular as large companies recognize the growth of medical tourists.
DR. MICHAEL HOROWITZ, PRESIDENT, MEDICAL INSIGHTS INTERNATIONAL: They spend a night or two in the hotel before their procedure. They have hospitalization and then they need to spend more time in the country recovering. The Intercontinental Hotel Group wants to provide services to those patients within the realm of what they usually do, that's hospitality services, a familiar brand, a familiar setting, food, lodging.
YASTINE: Large healthcare companies like Aetna are also taking a closer look at overseas healthcare. Hannaford Brothers, one of New England's largest grocery chains, struck a deal with Aetna to offer care in Singapore for employees seeking hip surgeries and other expensive procedures. Blue Cross Blue Shield of South Carolina has also set up a subsidiary, Companion Global Healthcare, linking eight accredited foreign hospitals with the 1.5 million members of its health plan. The trend has caught the attention of the U.S. medical establishment. The American Medical Association recently issued its first medical tourism guidelines for employers and insurers, while adding that it was quote, unclear at this time whether the risks outweigh the benefits. Bridge Health International advises companies and insurers on medical tourism. CEO Vic Lazzaro sees several factors at play as companies look for lower healthcare costs.
VIC LAZZARO, CEO, BRIDGEHEALTH INTERNATIONAL: They're finding and discovering that quality, significantly, excellent quality, is available abroad. For example, Wockhardt Hospital in Bangalore, India is affiliated with Harvard. Punta Pacifica in Panama is affiliated with Johns Hopkins. And secondarily the driver on this is they can save 30 to 80 percent on existing U.S. medical costs for the procedures that lend themselves to this sort of travel.
YASTINE: A recent report from consulting firm McKinsey and Company called much of the attention on medical tourism a quote, enormous amount of hype. But it also said medical travel is a highly relevant market which could eventually dispel the notion that healthcare is a purely local service.
"Commentary"-Patience Vs. Timing When Tracking The Markets
JEFF YASTINE: Tonight's commentator says trying to time the market is a fool's game. He's Myron Kandel, founding financial editor at CNN.
MYRON KANDEL, FOUNDING FINANCIAL EDITOR, CNN: A year ago last spring, I said here I was worried that a stock market bubble was developing. The Dow Industrials were at 12,300 and heading above 14,000. But housing prices were softening, economic reports were spotty, Internet-related companies were rushing to go public and forecasters were saying it's up, up and away. I smelled a bubble. So I was right, but six months early. And I certainly wasn't prescient enough to predict that credit would crunch, oil prices would skyrocket, banks would take huge , high-flying hedge funds would come down to earth with a thud, and the Dow would tumble so low. I said then, I didn't know when a bubble would peak, and I say now, I don't know when the market will hit bottom. My guess though, just a guess, is that it will go lower from here. But despite this gloomy outlook, I have a warning for long-term investors who may be thinking about dumping quality stocks now. Don't sell stocks in a panic, hoping to buy them back at lower prices later on. Trying to time the market is a foolish game, especially so if you already missed most of the drop. I think the best strategy right now in both buying and selling is just plain patience. I'm Myron Kandel.
Paul Kangas' Stocks in the News
PAUL KANGAS: The continuing decline in home sales combined with an $8.8 billion second quarter loss at Ford Motor to set a very bearish tone for trading on Wall Street this morning. A much larger than expected 34,000 rise in new weekly jobless benefit claims added to the market's woes. By 11:00 a.m., 11:30 a.m., the Dow was off 148 points, NASDAQ down 29. The sell off gained momentum this afternoon on the growing belief that the recent market recovery was not a major bottom. So stocks closed at their worst levels of the day. The Dow Industrial Average tumbled 283.10 points at 11,349.28. The NASDAQ Composite was down 45.77 at 2280.11, while the Standard & Poor's 500 fell 29.65 points to 12,052.54. Over in the bond market, the 10-year note rose 30/32 to 99 even, putting the yield at 4 percent even. New York exchange volume leader on 50 million shares was Washington Mutual (WM) down $0.62. It fell as low as $3.56 on growing concern about the bank's credit quality. Reportedly some creditors have been pulling funds out of the bank.
Citigroup (C), Bank of America (BAC) weak in that group.
XTO Energy (XTO) bucked the trend, up $0.54. Last night, the company priced 26 million share offering at 48.
Wachovia (WB) down almost $2.
And then looking elsewhere on the active list, Ford Motor (F) a $0.92 drop there. Second quarter loss of $3.88 a share on a 6.1 percent drop in revenues and the company said it sees a challenging second half.
Co Vale do Rio (RIO) down $1.20.
General Electric (GE), Wells Fargo (WFC), Fannie Mae (FNM) all on the downside in that weak financial group.
Boeing (BA) off $4.19. Citigroup cut earnings estimates for Boeing and also cut its price target from $69 down to $62 a share and also put out a "sell" on the stock.
Mechel OAO (MTL) or Mechel, this is a big Russian mining and steel company, down $13.77 after Russian Prime Minister Putin criticized the company's pricing policies, saying it's selling raw materials in domestic markets for double the price of what it's charging for exports.
Radioshack (RSH) up $1.93. Second quarter earnings were $0.32, down from $0.34 a year ago, but $0.06 above the Street estimate. Same store sales rose 7 percent and the company will buy back up to $200 million of its own stock.
Varian Medical (VAR) up $5.25. Third quarter earnings jumped to $0.58 from $0.39 a year ago. Revenues were up 15 percent.
Amerisource Bergen (ABC), the drug distributor, a $3.15 gain, $0.70 in third quarter earnings, up $0.03 from last year. Revenues up 10 percent. The company boosted its 2008 earnings guidance.
Benchmark Elect (BHE) down $4.34. Third quarter earnings fell to $0.33 from $0.35 last year on about a 1 percent drop in revenues.
And then home builder Ryland Group (RYL) off $5.07. The company had a huge second quarter loss of $5.70, much bigger than last year. Revenues tumbled 34 percent from last year.
MEMC Electronics (WFR) down $11.57. Second quarter earnings, $0.92, up from $0.70 last year, but $0.08 below the Street estimate and the company however did set an additional $500 million stock buyback.
Chipotle Mexican Grill (CMG) down $16.50. Second quarter earnings were up $0.74 versus $0.60 but a penny below the Street consensus. Standard & Poor's downgraded it from "hold" to "sell," Jefferies from "buy" down to a "hold."
And then the Starwood Hotels (HOT) stock down $4.56. Second quarter earnings, $0.56. That's down from $0.67 a year ago despite nearly a 10 percent rise in revenues. Standard & Poor's downgraded its "sell" to a "strong sell."
And then Gardner Denver (GDI) down $9.83. Second quarter earnings higher, $0.93 versus $0.83 a year ago, but it warned second half is already showing weakness in its businesses.
Qualcomm (QCOM) topped the NASDAQ active list up $7.61. The company and Nokia have settled their patent litigation problems.
Apple (AAPL) in there with a big loss.
Amazon.com (AMZN) however, up $8.18. Better than expected second quarter earnings out yesterday. Today Sanford Bernstein brokerage boosted its price target from $90 to $97 a share.
Baidu.com (BIDU) up $46.38. Second quarter earnings came in at $1.23. That was $0.26 better than the Wall Street estimate.
Microsoft (MSFT) in there with about $1 loss.
Google (GOOG) down $13.16.
Research in Motion (RIMM), Intel (INTC), Cisco Systems (CSCO) all on the downside.
And Broadcom (BRCM) fell $2.53.
Crocs (CROX), look at that loss of $0.93 in regular day trading, but after the close, the stock tumbled to around $4.50 after the company cut its second quarter earnings guidance to only $0.03 to $0.07 from its previous estimate of $0.42 to $0.47 a share.
And those are the stocks in the news.
