NBR Transcripts -July 25, 2008
Friday, July 25, 2008Durable Goods Do Some Good for the Economic Picture
JEFF YASTINE: The struggling U.S. economy is showing signs of life. A report out today suggests American businesses are increasing their spending as they plan for future growth. According to the Commerce Department, orders for long lasting, big ticket items jumped by 0.8 of a percentage point last month. That was a big improvement from May's nearly flat pace. Economist Julia Coronado at Barclays Capital says the pickup in durable goods orders could lead to a pickup in hiring.
JULIA CORONADO, SR. ECONOMIST, BARCLAYS CAPITAL: This is business investment spending, so this is significant because durable goods orders is one of the best leading indicators for private employment. So if we're seeing durable goods orders pickup, we may see the employment situation improve in the third quarter.
YASTINE: The Commerce Department also reported that sales of new homes fell a smaller than expected 0.6 of a percentage point last month.
FDIC Chairman Sheila Bair Forecasts the Future of Financials
PAUL KANGAS: While the Senate will likely pass a massive housing rescue bill this weekend, the troubles in the housing market continue to strain financial markets. From the Federal backstop for mortgage giants Fannie Mae and Freddie Mac, to the recent failure of IndyMac Bank, consumers are nervous. Stephanie Dhue spoke with FDIC Chairman Sheila Bair this afternoon and began by asking her if the nation's banks are in crisis situation.
SHEILA BAIR, CHAIRMAN, FDIC: Well, crisis is a strong word. We're certainly in a very challenging environment. And I do think the foreclosure crisis is a crisis. We've been expressing concerns for a long time about all these un-affordable loans that were made in recent years and the impact that would have on foreclosure activity, driving home prices down. And we're seeing that. So I think really stabilizing the housing market is the key. And once we get that stabilized I think other things will fall into place and we will see the light at the end of the tunnel.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: To what extent are the banks and thrifts at risk for the troubles at Fannie Mae and Freddie Mac?
BAIR: I think with this bill that has been passed, I think it somewhat makes explicit what was implicit before which is the Federal government will come in if need be. I think Secretary Paulson and the regulator have indicated they think it is a low probability that the government will need to come in. But if they do that should stabilize the situation. So I think any direct credit exposure that banks have to Fannie and Freddie have been addressed by that. I think from a more broader economic perspective, Fannie and Freddie as well as the FHA are obviously providing a lot of support (INAUDIBLE). The secondary market is not there any more so in terms of providing funding for mortgage lending, it is also very important to the banking sector.
DHUE: When Indymac bank failed, that really scared a lot of people.
BAIR: It really did, yes, it did.
DHUE: So how strong is the FDI insurance fund? Can it withstand the stress of a major bank failure?
BAIR: Yes, we really can and I was very concerned that people reacted as they did with the long lines, even insured depositors really unnecessarily inconveniencing themselves. And that saddened me greatly. And we really doubled our public education efforts about deposit insurance so people understand that their money is safe and the FDIC is there for them. We have never lost a penny of insured deposits and that will continue. We have an industry fund reserve at the end of the first quarter was about $53 billion. That will go down somewhat because of the Indymac failure, but we are also in the process of -- continuing the process of collecting premiums from the industry. And we will in the fall be instituting a new plan to make sure that the reserves stay adequate. And so I really based on the information I have now, I can't foresee really any scenario where those reserves would be insufficient to handle even worse case scenarios. Assuming we did have an Armageddon situation which I think is not going to happen, we are backed by the full faith and credit of the United States government. So if the resources were there, through our industry funded reserves or through our backup guarantee, for insured depositors to be covered so they really, really do not have anything to worry about.
DHUE: What makes you so confident there won't be Armageddon and there won't be a major bank failure? House prices continue to plummet.
BAIR: Well, there are some big challenges out there. But the U.S. economy has proven itself to be resilient. Banks went into this with very strong capital, very strong earnings. They were in a good position to weather it and we have cycles. We've been through cycles before and we've weathered them and they are difficult but we have weathered them and get through them. And certainly if you look historically from what kind of challenges the FDIC has looked at, has dealt with before, the S&L days, this is nothing like the S&L days. The level of the bank failure activity is very low. The (INAUDIBLE) is very low.
DHUE: Do you think that the FHA bill will be effective given that it's voluntary, the banks have to take big losses, it doesn't address the second liens?
BAIR: It will help. There are some limitations that are generally acknowledged. But I think it will help. I think for a certain set of mortgages, especially those which are deeply underwater, I think FHA refinancing will make some sense. We had also suggested that Congress adopt a borrower loan program that would be run by Treasury too, which we think would have been a little more saleable to pay down principle, up to 20 percent to make the loans affordable. And those owns with have to be repaid. So it was not a bailout. In fact the repayment costs would have been shared by borrowers as well as the mortgage investors. That's still out there. We think if things deteriorate more, that perhaps Congress will take another look at doing a program like that.
DHUE: We've been speaking with Sheila Bair, chairman of the FDIC. Thanks for joining us.
The Gas Price Crisis Takes a Toll on Tobacco
JEFF YASTINE: The House of Representatives could vote next week to give the Food and Drug Administration the power to regulate tobacco. That would allow the FDA to restrict some ingredients used in cigarettes. But as Scott Gurvey reports, that's not the only burning issue facing cigarette makers.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2008 has been a tough year for big tobacco. Sales are down and so are tobacco stocks. Reynolds American shares, for example, have lost nearly a quarter of their value so far this year. Sales started to go up in smoke as gas prices soared. Analyst say about 70 percent of Americans buy cigarettes at convenience stores, many of which are located at gas stations. Sticker shock at the pump is hurting tobacco sales, according to Morningstar analyst Gregory Warren.
GREGORY WARREN, TOBACCO ANALYST, MORNINGSTAR: When you're pulling into the gas station and spending $100 to fill up your gas tank on your pickup truck, it's kind of hard to step in and pay $5, $6, $7 for a pack of cigarettes.
GURVEY: That has accelerated a long-term decline in cigarette sales. They are now less than half of what they were at their peak in 1981. To maintain margins, tobacco companies have steadily raised wholesale prices, which have tripled over the last 10 years. Additionally, many states and cities see tobacco as an easy source of revenue. UBS tobacco analyst Nik Modi says that's a serious issue for the industry.
NIK MODI, TOBACCO ANALYST, UBS: Litigation used to be the biggest threat and now it's really legislation. I see taxes at both the state and Federal level as being the biggest issues to think about.
GURVEY: Congress is considering raising the Federal excise tax to $1 a pack. It is now $0.39. State taxes currently average $1.18 a pack. But in some places they're much higher. Here in New York, city, state and local taxes total $4.25. As a result, a pack of cigarettes at this Manhattan newsstand costs more than $8, many brands costing nearly $10. New York state's health commissioner says as a result of the prices, 140,000 state residents will quit smoking. Many analysts agree.
WARREN: When a smoker has to pay $10 a pack and they're a pack a day smoker, we're talking about $3,600 a year that they're spending on cigarettes and if times are tight, they're probably going to look for ways to cut down or actually even quit.
GURVEY: That's one reason Warren is neutral on the outlook for the industry. But others are more bearish.
MODI: In this environment, I love tobacco just because they have really limited commodity cost inflation risk, unlike what you see with the household personal care companies or maybe even the food companies. And they have real pricing power.
GURVEY: Analysts say the real growth in the tobacco industry is in emerging markets like China. But that won't help U.S. tobacco companies. Reynolds and Lorillard sold the overseas rights to their brands more than two decades ago, while Altria spun off Philip Morris International earlier this year. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Market Monitor" -James Stack, President of Stack Financial Management
PAUL KANGAS: My guest "Market Monitor" this week is James Stack, president of Stack Financial Management and publisher of the "Investech Research Market Letter" based in Whitefish, Montana. Jim, welcome back to NIGHTLY BUSINESS REPORT.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: Thank you, Paul, it's great to be with you again.
KANGAS: When you were last with us in mid-February of this year, you said we were already in a bear market with most evidence pointing to a recession. Well, let's tackle the market first. Did last week's rally signal a bottom to the bear market or was it just a trap for the bulls?
STACK: Well, it's a little too early to say whether last week's low was the bear market bottom. And the average bear market in the past 80 years has lasted 15 months. This bear market is already nine months old, so it is not too early to look for a bottom. We also track a table of what we call sentiment extremes that tell us whether or not we are approaching one of those best buying opportunities. All of those blocks are in place. Unfortunately, we still don't have the confirmation of the market bottom yet.
KANGAS: What is the downside potential from here?
STACK: Well, it depends on which sector you are in. I think the financial sector and home building sector still are open-ended on the downside. The key point here is that we are seeing some encouraging signs. For example last week, the small cap Russell 2000 index did not hit a new bear market low. It did not drop under its March lows. If that Russell 2000 index stays above that March bottom over the next six to eight weeks, I think the last half of this year will present investors with a good profit opportunity.
KANGAS: Jim, now let's get to the economy and its major problem, the housing crisis. How close to a bottom are we in housing?
STACK: Well, this bailout that has been passed by Congress and the $25 billion going to Freddie Mac and Fannie Mae is really trying to put a finger in the dike. This bailout will be, turn out to be much bigger before the smoke clears. And the problem is the inventory. We have a record inventory of unsold existing homes on the market. It's not coming down yet. And until it starts coming down, housing prices are going to continue to fall and we're going to see an increase in mortgage debt defaults. That means that we still have more downside risk in the housing over the next 18 months. But for investors it's important to keep in mind that does not necessarily mean 18 more months of bear market on Wall Street.
KANGAS: All right. Now what are your thoughts on oil, briefly?
STACK: On oil, we have been looking for the peak in oil really for the last eight weeks. And fortunately oil is now down $22. I think we've seen the highs globally. Economies are slowing. I think any surprises between now and election will be lower oil prices, not higher.
KANGAS: OK. Now on your February visit, you gave our viewers three stocks to buy. Let's see how they have done since then. We see Sysco (SYY) down 3 percent, not bad, very defensive issue and Johnson & Johnson (JNJ) more than making up for that, 9.7 percent gain. Are you still with those two stocks?
STACK: Yes, we certainly are.
KANGAS: OK. And you had a third recommendation at the time. That was Pepsico (PEP) which is down a little over 6 percent. Still with it?
STACK: Yes, we are. And they've held up much better than the broad indexes. The S&P is down over 7 percent since that point.
KANGAS: You're right. You're right. Do you have some new recommendations, Jim?
STACK: Yes, we do, Paul. And the focus right now is continue to stay defensive. Focus on those safe sectors. Don't go out and go bottom- fishing, look for value in this market. The technology sector is showing additional strength, resilience. I think one of the most attractive positions there is Microsoft.
KANGAS: We just saw a chart.
STACK: There is the chart, MSFT. It's seeing its revenues continue to grow at a 20 percent annual rate right through this recession. It's selling at the best valuation in 20 years.
KANGAS: We have less than a minute left. How about another choice?
STACK: Another one that we like in the financial sector is Schwab, Charles Schwab and Company (SCHW). Now their revenues are continuing to grow through this recession. It's a conservative financial stock. And historically once you get to a buying opportunity in the market, the brokerage stocks are one of the best performers. I think that has the best risk/reward, SCHW.
KANGAS: And quickly now, a third one?
STACK: Striker Corp. (SYK), manufacturers orthopedic products used in surgery. It's benefiting from the graying of America. And the fact the baby boomers want to stay more active. Price-to-earnings and price to cash flow, really has the best level in 15 years on that company.
KANGAS: Very good, Jim, do you personally own or have other disclosures regarding the stocks we just mentioned?
STACK: We own all three of those positions in our managed accounts. We also use Schwab institutional as a custodial firm for our managed accounts Paul.
KANGAS: As always Jim, it has been a pleasure to have you with us.
STACK: It's my pleasure, Paul.
KANGAS: My guest, James Stack of Investech Research.
"Commentary"-The American Dream Deferred
JEFF YASTINE: Well, from home ownership to cheap gas prices, tonight's commentator weighs in on the American dream. He's Rick Newman, chief business correspondent at U.S. News & World Report."
RICK NEWMAN, CORRESPONDENT, US NEWS & WORLD REPORT: If you haven't heard the news about the American dream, please sit down while I tell you because the American dream is dead. I keep reading the obituaries. In the old days, when the AD was thriving, people worked hard to improve their lives. They started small businesses that sometimes got bigger. They bought homes and cars and upgraded to nicer homes and cars once they had more money. They had savings accounts in case something went wrong. Now it's all ruined. And here's who did it: CEOs, for starters. Because they take most of the companies' money for themselves and there's hardly anything left for employees who used to get 5 percent raises every year as long as they didn't get fired. Bankers put a stake in the American dream, too, by giving mortgages to people who couldn't afford them. Even worse, now these bankers will only give loans to people who can prove they'll pay the money back. The Mexicans and Salvadorans and Indians and Chinese have robbed us, too, because they've taken a lot of jobs that Americans are fully capable of doing, for more money. What's the point of working hard, if somebody else is willing to work even harder, for less? The Saudis and Kuwaitis are part of the cabal, refusing to pump more oil so we can afford to fill our SUVs. And the biggest villain, of course, is our own government. Where are the gasoline subsidies or the tax breaks that will incentivize us to work harder? How about a bigger mortgage interest deduction, to make owning a home worth all the trouble? Come to think of it, why doesn't the government just send us all some more money, to help restore our work ethic and our quality of life? Now that's what we really need: an American dream backed by the full faith and credit of the United States government. I'm Rick Newman.
Paul Kangas' Stocks in the News
PAUL KANGAS: Better than expected durable goods orders help put stocks in the rebound mode at the outset on Wall Street. The Dow posted an 82- point gain after a half hour of trading with the NASDAQ up 24 points. The market pulled back a bit during mid-session, but a further decline in oil prices this afternoon helped stocks end the day with modest gains. The Dow Industrial Average closed up 21.41 at 11, 370.69. This week it fell twice and rose three times, had a net loss of 125.88 points. The NASDAQ Composite gained 30.42 points to 2310.53 today. It also fell twice and rose three times this week, but it gained 27 3/4 points overall. Standard & Poor's 500 Index climbed 5.22 to 1257.76 today, but this week it dipped 2.92 points overall. Over in the bond market, the 10-year note fell 26/32 to 98 6/32, putting the yield at 4.10 percent.
Most active New York exchange issue, Washington Mutual (WM) trading 28 1/2 million shares, stock down $0.19.
Followed by Wachovia (WB) down $1.19. Chief Financial Officer Thomas Wurst (ph) plans to leave the company. Standard & Poor's today downgraded the stock from "sell" to "strong sell," Morgan Keegan from "outperform" to market perform" on a valuation basis.
Bank of America (BAC) in the weak financial group, down $1.06.
And then Citigroup (C) losing $0.21.
Ford Motor Co (F) a $0.06 loss there.
Moving along in the actives, General Electric (GE) showed no change. The company is restructuring. It'll reduce six units to four units and then after the close, the company said the SEC issued a Wells notice to its funding unit regarding bidding on municipal securities.
Pfizer (PFE) $0.08 gain.
JPMorgan Chase (JPM) $0.38 advance.
Wells Fargo & Co (WFC) lost $0.06.
And Co Vale do Rio (RIO) down $0.13, up $0.13 I should say.
Arch Coal (ACI) up $4.70, big second quarter earnings out today, $0.78, up from last year's $0.26. Revenues jumped 31 percent. Those earnings $0.14 above the Street estimate and all of this had a very positive impact on the coal stocks in general.
Let's look at a few nice gainers. Consol Energy (CNX), Massey Energy (MEE), Patriot Coal (PCX) and Peabody Energy (BTU) all doing well on the upside.
ITT (ITT) up $4.01. Second quarter earnings, $1.19, up from last year's $1.08 and $0.08 above the Street estimate. Revenue up 38 percent.
Reliance Steel (RS) up $5.59. The company has decided not to proceed with the previously planned $6.75 million public offering of common stock. The company said that's due to market conditions.
And Triumph Group (TGI) up $4.57. First quarter earnings, $1.54, up from $1.04 last year. Sales were up 17 percent. The company's in aircraft parts.
Western Digital (WDC) losing $2.68. Fourth quarter earnings, $0.94, same as last year and despite its 46 percent jump in revenues. Needham Securities downgraded "strong buy" to "buy." The company sees first quarter guidance at $0.89 a share at best. That's $0.10 below the Wall Street estimate.
Abercrombie & Fitch (ANF) down $4.52. Vice President and CFO Michael Kramer plans to resign next month.
City National (CYN) fell $1.36 on lower second quarter earnings of $0.73, down from $1.19 last year. The company also cut full year guidance.
BMC Software (BMC) losing $2.70. First quarter earnings of only $0.01 versus $0.27 last year, but that does include the acquisition charges for Blade Logic.
And kidney dialysis company Davita (DVA) up $3.15. That stock will be added to the Standard & Poor's 500 after the close next Wednesday. It'll replace Clear Channel Corp., which is being acquired.
Apple (AAPL) topped the NASDAQ actives up $3.09.
Qualcomm (QCOM) $2.02 gain.
And then Research in Motion (RIMM) up $2.88.
Google (GOOG) did well, up $16.36.
Microsoft (MSFT) $0.72 advance there.
Cisco Systems (CSCO) a $0.67 gain.
Juniper Networks (JNPR) up exactly $4. Second quarter earnings rose to $0.28 versus $0.20 a year ago. Revenues up 32 percent.
Intel (INTC) $0.34 gain.
Baidu.com (BIDU) after a huge run up yesterday, down $2.68.
And a 41 percent loss in Amazon.com (AMZN).
Crocs (CROX) down $4. After the close yesterday, the company cut its second quarter earnings estimate from $0.42 to $0.47 all the way down to just $0.03 to $0.07 a share.
And Cepheid (CPHD) down $9.54. The company does genetic analysis and its second quarter loss of $0.13 a share was worse than expected. The Street thought a loss of only about $0.06.
Those are the stocks in the news tonight.
