NBR Transcripts August 5, 2008
Tuesday, August 05, 2008Interest Rates & Oil Prices Spark Wall Street Rally
SUSIE GHARIB: An explosive rally on Wall Street today as oil prices tumbled below $120 a barrel and the Federal Reserve decided to hold interest rates steady. The Dow surged 331 points and the NASDAQ jumped 64. Investors cheered the sharp drop in oil prices. September crude futures fell $2.24 to $119.17 a barrel in New York trading. Also fueling the rally, the Fed's announcement to keep its benchmark Federal funds rate unchanged at 2 percent. Fed policymakers were mostly united in the vote, with only one dissent. The president of the Dallas Federal Reserve Bank wanted to hike interest rates. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Members of the open market committee had been talking tough of late, leading some Fed watchers to believe they would raise rates or at least issue a strong inflation warning. But they left rates unchanged and while their statement did note inflation has been high, it balanced that with the committee expects inflation to moderate later this year and next year and also observed that labor markets have softened further and financial markets remain under considerable stress. Economist Stephen Gallagher of Societe Generale is disturbed by today's statement and concludes it means the Fed is on hold for the foreseeable future.
STEPHEN GALLAGHER, CHIEF U.S. ECONOMIST, SOCIETE GENERALE: The lack of any current guidance is a signal or a reflection of the fact that they're confused and they don't know themselves what's the greatest risks are in the economy. They see both growth risk and inflation risk and right now, they're not sure what policy should be responding to.
GURVEY: In all due respect to critics complaining that monetary policy is either too tight in light of the slowing economy or too loose in light of rising inflation, the Fed actually is facing the kind of insidious stagflation which resists an easy solution. High energy prices, the main inflationary force, appear to be coming down, while the housing slump and credit crisis are expected to continue well into next year. Economist Conrad Dequadros of RDQ Economics observes the Fed is, in effect, easing without easing.
CONRAD DEQUADROS, ECONOMIST, RDQ ECONOMICS: Philly Fed President Plosser has pointed out how negative the real rate is when you take into account the fact that overall CPI inflation is now running at 5 percent. So I think the Fed does judge policy to be accommodative at this point, but they probably think that accommodation is justified given the stresses in the financial system and in the economy. I do think though it risks more dire inflation in 2009.
GURVEY: The Fed isn't the only central bank setting policy this week. Both the European central bank and the Bank of England meet in the days ahead and both are expected to leave their interest rates unchanged. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Analysis of the Fed's Decision to Leave Interest Rates Unchanged
SUSIE GHARIB: Joining us now with more analysis, Michelle Girard, senior economist at RBC Greenwich Capital Management and James Awad, chairman of WP Stewart Asset Management. Hi, Michelle. Hi, Jim. Nice to see both of you.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
GHARIB: Michelle, let me begin with you. Did the Fed do the right thing?
GIRARD: Well, they did what they had to do. Even if there are inflation concerns, this economy is too fragile as are the financial markets for the Fed to address any of those concerns with rate hikes. And so they issued a statement that continued to suggest there are both downside risks to growth and upside risks to inflation and they're going to wait to see which one ultimately wins out. I don't think we're looking at the Fed changing interest rates over the balance of this year.
GHARIB: Jim, what do you think about what the Fed decided to do?
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: I think they did what they had to do, which is nothing, because they really don't know how long the economic strains are going to remain and they're not sure how long the inflationary pressures will persist or whether they'll subside. So they did what they had to do, which is to do nothing, make statements that there are risks on both sides. So it's very sensible.
GHARIB: Michelle, let's talk a little bit more about what the Fed said about inflation. It said it acknowledged that inflation is high, but it also said that it expects inflation to moderate later this year. So what's the Fed really saying about inflation? Is it a serious problem or not?
GIRARD: Well, they did say (inaudible) it is a significant concern. In June they actually said that the inflation risks had increased and they sort of backed away from that a little bit. So I think that's why the market thought maybe there was less urgency or concern. They clearly wanted to indicate that they are very watchful of it. And, of course, we did have one dissent. There was one member of the FOMC who wanted to actually raise interest rates today.
GHARIB: So what do you see as the next move, Michelle? You said nothing through this year, but is the next move a hike or a cut?
GIRARD: Yes. I think the next move is a hike. I think it won't come until the economy is on stronger footing. I think it probably won't be seen until the spring of 2009.
GHARIB: Jim, what about the market reaction today? We see this explosive reality. Was that more in reaction to the Fed decision or was it because the sharp drop in oil prices? What's your analysis about today and the outlook?
AWAD: Right. Well, I think the first part of the day was oil, which was a continuation of what's been going on lately, which is there is an inverse correlation between the price of oil and the price of equities because oil going down reduces inflation and it's a tax cut. So it was a double positive. And in the afternoon, it was a reaction to the Fed. And I agree with Michelle that the Fed is probably on hold for the foreseeable future. They think their next move is up, but if you listened to Bill Gross today, there are others who think there is an equal chance that it might go down. And I think the markets were positive because the Fed said they expect lower inflation and better growth, but there the Fed I think is talking its book. It's talking about what it hopes the outcome will be, so I think the market probably overreacted a little bit too optimistically today. This is still a work in progress.
GHARIB: Jim, let's say that Michelle is right and the next move is a hike. What does that mean for the markets?
AWAD: Well, actually that would not be a negative because if they're hiking rates they have increased confidence on corporate profits and the strength of the economy and you're hiking from such a very low level, I think actually the markets are in better shape with a hike from here than if they have to lower because if they have to lower, that means we've got real problems in the financial system and that's not an outcome investors would be comfortable with.
GHARIB: Michelle, it's been a year now since this whole credit crisis began. When do you see it ending? Is it too soon to be talking about an end?
GIRARD: I think it is. I think the crisis in the sense of major financial firms that are struggling has probably crested. I think those big writeoffs are going to be beginning to diminish. But I think now the focus is shifting to the smaller banks and financial institutions across the country. They're just not going to be in a position to be making loans for a good while. I think that sort of lingering credit crunch is what's going to keep growth fairly subdued for the next six to nine months.
GHARIB: Do you think Michelle that the economy is in a recession?
GIRARD: It may ultimately get defined that way, but it's very mild. Normally we see payroll declines of near 200,000. We're nowhere near that this time, so it may definitionally be there, but it's very mild. It just feels --it's not an environment that feels very good, whether or not it ultimately gets called a recession.
GHARIB: Jim, what's your timetable on the credit crisis and also the bear market?
AWAD: Well, I think definitely the third quarter and probably the fourth we'll continue to be working our way through these financial problems when you have the issues with Merrill and Lehman and the banks and the contraction of the availability of lending and capital. I don't think you can get an acceleration in the economy this year, maybe next year with some additional stimulus. So I think you're in market with a lot of volatility, no major progress reacting to incoming data. I think there are certain -- it will be a bifurcated market. Companies that are doing well will go up in price. Companies that are struggling will go down in price. And I think the averages are going to stay roughly where they are over the next six months or so and then we'll take a look as we roll into '09.
GHARIB: All right. Thank you both for coming on the program, Michelle, Jim. Always interesting what you have to say.
AWAD: A pleasure.
GHARIB: My guest tonight, Michelle Girard, senior economist at RBC Greenwich Capital Management and James Awad, chairman of WP Stewart Asset Management.
Some Entrepreneurs Are Thriving in these Tough Times
PAUL KANGAS: The risks to growth the Fed talked about aren't scaring many would-be entrepreneurs. Even in a recession, experts say it's possible for a good, well-targeted business idea to take off. And as Darren Gersh reports, losing a job is sometimes good motivation to make the leap from employee to owner.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: For a young MBA, Manhattan has been the place to make a fast start in financial services. But last May, Daniel Kamen learned everyone is disposable in this economy. After losing his job, he decided to hire a new boss -- himself.
DANIEL KAMEN, ENTREPRENEUR: So, after a while of searching for opportunities, I said I'm going to make my own opportunity. I'm going to stop searching for it.
GERSH: Kamen is now trying to raise money for a new web site helping people find new and inexpensive ways to enjoy night life in New York. But is it really a good idea to start a business when the economy is not in the mood to party?
KAMEN: You're not the first person to pose that question to me. Everybody's talking about this quote/unquote recession. However, I find that there is a lot of good alternatives for new ideas and new businesses these days.
GERSH: With the credit crunch, finding a bank loan may not be easy, but at the University of Maryland business school, Asher Epstein says there are many ways for entrepreneurs to find the money they need to get up and running.
ASHER EPSTEIN, MANAGING DIR., DINGMAN CTR. FOR ENTREPRENEURSHIP: Oftentimes, the angel investment community, which are wealthy private individuals, have large amounts of money that they perhaps are looking for other alternatives, because the stock market is not performing well.
GERSH: Epstein says for entrepreneurs now, it's crucial to pick a business that does well in uncertain economic times, like donuts. Iraq veteran Ray Omar is scouting out locations to open a Dunkin' Donuts franchise at the new Navy Yard development in Washington, DC. This is not great economic times, whether you will call it a recession or not. Do you ever get second thoughts about starting businesses right now and opening a business?
ROY OMAR, MANAGING PARTNER, D.C. COFFEE KINGS: No. If I was a Starbucks, I might have second thoughts, but with the Dunkin' Donuts, it's a proven concept. I think if you laid back on the couch and pondered about when the economy is going to recover, you might lose that opportunity that is really there for you to take grasp of.
GERSH: Omar sees a bonus in the soft economy. Rents are down, making it easier to get started. And, the experts add, if you've been unsatisfied in your career and it's now gone away, you have less to lose in picking out a business that better suits your taste. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest"-Bradford Evans of the Heartland Value Plus Fund
PAUL KANGAS: In tonight's of mutual interest segment, we'll look at a fund that's managed to handily beat its benchmark in the small cap value category for the past five years. That fund is Heartland Value Plus and its winning streak is still going strong with a gain of better than 7.5 percent for the year to date and close to that for the past year. By contrast the Russell 2000 value index shows losses for both those periods. Bradford Evans is the lead portfolio manager of Heartland Value Plus and he joins us now from Chicago. Welcome to NIGHTLY BUSINESS REPORT Brad.
BRADFORD EVANS, PORTFOLIO MANAGER, HEARTLAND VALUE PLUS FUND: Hey, Paul, thanks for having me.
KANGAS: First, a lot of value managers have been burned in this market. How has your team been able to find stocks that have outperformed?
EVANS: Paul, it's really a function of the Heartland process, which is a disciplined, valuation-driven process where we focus on bargain hunting, looking for companies that are undervalued based on our metrics of low P/E, low price to cash flow, low price to book value, looking for companies with strong balance sheets with a (INAUDIBLE), looking for companies that have a reason for which we think the market will rediscover a company for improving prospects into the future.
KANGAS: Now you've had a high proportion of energy stocks in your portfolio. With oil's price moving so sharply lower lately, are you thinking of reducing your position in energy?
EVANS: Paul, we still remain with energy at this point. The group has been punished as you have rightly noted with commodity prices falling. Frankly, I think the group is oversold at this point. When you look at what's happening in the space today, the group looks very attractive based on long-term commodity prices for oil. Oil of say roughly $80 to $85 a barrel and from natural gas roughly $8 to $8.50 per million cubic foot.
KANGAS: All right. Now you've been very negative on the financial group saying that you don't expect it to stabilize for at least six months. Would that include the smaller regional and community banks?
EVANS: Paul, right now it looks as though the group has had a decent bounce off of its lows. What we're very concerned about right now is most of the credit quality concerns surrounding the community banks are centered in residential construction, land development and lot loans. We have not seen any -- at this point any proliferation of credit trends into what will likely become credit issues in C and I loans, commercial and industrial loans, commercial real estate and perhaps even prime mortgage.
KANGAS: OK. I do understand that you like one financial stock, Asset Capital Corporation because it benefits from an increase in loan delinquencies. We have less than a minute left. Explain that.
EVANS: Paul, Asset acceptance is a buyer of defaults (INAUDIBLE) consumer (INAUDIBLE) from credit card companies like American Express and Capital One. The company basically acquires the portfolios at deep discounts and then goes about their business by collecting upon those defaulted securities. Right now there is a huge supply of those defaulted portfolios on the market and that's driving prices down and returns up for asset acceptance over the next year or two.
KANGAS: Do you own AACC, which is the trading symbol?
EVANS: We own it in the fund, but I do not own it personally.
KANGAS: So indirectly you do.
EVANS: Yes, sir.
KANGAS: Brad, I want to thank you very much for sharing your insights with us. My guest, Bradford Evans of the Heartland Value Plus Fund.
Paul Kangas' Stocks in the News
PAUL KANGAS: The combination of bargain hunting and lower oil prices helped stocks on Wall Street push sharply higher at the open. An hour into trading, the Dow had jumped 155 points and the NASDAQ was up 29. The sheer strength of that rally bolstered bullish conviction and had the bears running to cover short positions. Then, when as expected, the Fed announced no rate change, buyers stampeded and sent the market into a massive late surge. The Dow Industrial Average vaulted 331.62 points closing at 11,615.77. The NASDAQ soared 64.24, I should say .27 to 2,349.83, while the Standard & Poor's 500 jumped 35.87 closing at 1,284.88. Over in the bond market, the 10-year note fell 14/32 to 98 26/32, lifting the yield to 4.02 percent.
New York exchange volume leader on 20 1/2 million shares, Citigroup (C) moving up $1.09 in the strong financial sector.
Bank of America (BAC) up $0.96.
Washington Mutual (WM) gained $0.35.
Wachovia (WB), second day in a row nice gains, up $1.95.
And then Pfizer (PFE) edged up $0.73 a share.
General Electric (GE) gained $1.08.
Ford (F) up $0.28.
Wells Fargo (WFC) rose $1.36.
Motorola (MOT) down $0.27.
And then American International Group (AIG) rising $3.20. UBS Financial upgraded it from "neutral" to "buy" today. Second quarter results are due tomorrow for AIG.
Proctor & Gamble (PG) up $2.15. Fourth quarter earnings out today, nicely higher, $0.92 versus $0.67 a year ago on a 10 percent rise in revenue. Standard & Poor's repeated a "strong buy."
Let's look at some of the other big gainers in the Dow. American Express (AXP), Boeing (BA) especially nice gain.
3M Company (MMM), McDonald's (MCD), Wal-Mart Stores (WMT) up $1.91. The retail sector especially strong today because of the sharp drop in oil prices.
Archer Daniels Midland (ADM) down $1.53. Fourth quarter earnings came in at $0.58 and that was $0.09 below the Wall Street consensus.
On the upside, Cablevision (CVC) rose $2.27. The company's board has authorized the firm to take all necessary action to establish a regular dividend policy along with stock buybacks and also to explore possible spinoffs of some of the company's businesses.
The big brewing company, Molson Coors Brewing (TAP) down $6.25. Earnings second quarter, $0.93, down from $0.97 a year ago. That's despite nearly a 5 percent rise in sales.
Westlake Chemical (WLK) did well, up $2.29. Second quarter earnings jumped to $0.72 but $0.58 last year and revenues shot up 41 percent.
The outsourcing firm Hewitt Associate (HEW) up $4.48. The third quarter earnings came in at $0.48 versus $0.43 last year and a 7 percent rise in revenues in the period.
Fortress Investment (FIG) fell $1.57. Citigroup downgraded it from "hold" to "sell" and cut its price target from $14 to only $9 a share.
And Marvel Entertainment (MVL) down $4.07. Higher earnings second quarter, $0.59 versus last year's $0.34, but the company sees 2008 earnings, the best of them would be up around $1.75. The Street estimate is up there at $2.02.
Apple (AAPL) topped the active list on NASDAQ, up $7.41. UBS Financial today started covering Apple with a "buy" recommendation and a target price of $195.
Microsoft (MSFT) up $0.93.
Research in Motion (RIMM) gained $5.55.
Google (GOOG) did well, up $16.85.
And then Cisco Systems (CSCO) up $0.66. After the close, Cisco reported fourth quarter earnings, $0.40, up from $0.36 last year, a penny better than the Street was expecting, but Chairman and CEO John Chambers withheld full year 2009 guidance because of what he says are the challenges over the next few quarters.
Moving along in the active list, Qualcomm (QCOM) up $2.86.
Intel (INTC) $0.64 gain.
Oracle (ORCL) up $0.96.
Dell (DELL) was down $0.28.
And Baidu.com (BIDU) a $0.09 gain.
Global Industries (GLBL) tumbled $3.05 on a huge earnings miss. The maker of pipelines for oil and gas delivery posted a surprise second quarter loss of $0.12 per share versus analyst estimates for a profit of $0.37 per share.
