NBR Transcripts-August 11, 2008
Monday, August 11, 2008The Russia/Georgia Conflict Isn't Interrupting Oil Flows
SUSIE GHARIB: Sharp words for Russia late today from President Bush. He pressed Russia to accept an immediate cease fire and pull back its troops from Georgia. He says Russia's actions are an unacceptable invasion of a sovereign state. The tough talk came on a day of gyrations in the oil market tied to the conflict. The situation in Georgia initially pushed food prices higher but they quickly fell on reports that oil is continuing to flow through that region. Georgia is an important transport route for oil and gas to Europe. Oil went on to close below $115 a barrel, a level not seen since May 1st. At the New York Mercantile Exchange, September crude futures fell $0.75, settling at $114.45 a barrel. But oil trader Ira Eckstein says any supply disruption there isn't likely to have much of an impact on the U.S. which is why he's still betting on prices here to continue falling.
IRA ECKSTEIN, OIL TRADER, AREA INTERNATIONAL: I think $110, $105 in that range and then below $100. It really looks like the wind's taken really out of these sails here and I don't know when it's going to come back.
GHARIB: That drop in oil prices gave stocks a boost again today. The Dow was up more than 7 percent in the last month as energy prices have headed lower. During that same time, investors bought up shares despite disappointing earnings from many U.S. companies. Suzanne Pratt looks at how the second quarter turned out and what may be in store for corporate profits in coming quarters.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: With 90 percent of S&P 500 names having reported quarterly results, it's time to say good riddance to another bad period for corporate America. Second quarter earnings for the S&P 500 index are so far down 22 percent from a year earlier, continuing a trend not seen on Wall Street since the 2001 recession. Big losses from financial giants like Citigroup and Merrill Lynch grabbed headlines for the quarter. The consumer discretionary sector, which includes autos and homebuilders, was also a big disappointment. Still, Thomson Reuters earnings expert Ashwani Kaul says the results suggest a crisis, not a recession.
ASHWANI KAUL, DIRECTOR OF RESEARCH, THOMSON REUTERS: I characterize this more as a crisis because most of the weakness is coming out of financials. If you ex-financials from our growth number, we're actually at positive 4.5 percent, which is not really a recession number.
PRATT: Companies in the energy, technology and consumer staples sectors posted the best year-over-year results, each in double digit territory. Despite solid second quarter numbers from many companies outside the financial sector, optimism on Wall Street about a third quarter recovery has been eroding. Analysts now expect nearly a 6 percent increase in Q3 profits, half of what they predicted on July 1.
ASHWANI: The third quarter has come down significantly OK and that's a bit concerning because you know we always thought that the recovery was going to happen in the second half of the year. It looks like the recovery is going to be one quarter pushed out.
PRATT: Analysts are forecasting a sharp rebound in fourth quarter profits, although much of that's due to easy comparisons. UBS strategist Mike Ryan is comfortable with Q3 and Q4 forecasts, but he says he's concerned about 2009.
MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: I think the earnings outlook for the second half of the year is reasonable. What we still think is a bit too high is the expectations for next year, where if you look across the board, the market is still looking for double digit earnings gains in virtually all of sectors of the financial markets.
PRATT: Ryan predicts the global economic slowdown will result in earnings disappointments in many sectors of the economy in 2009, not just in financial and consumer discretionary names. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Ross Margolies, Founder & Portfolio Mgr. at Stelliam Investment Management
SUSIE GHARIB: Our guest tonight says don't be fooled by today's positive market moves: this is a bear market rally. He's Ross Margolies, founder and portfolio manager at Stelliam Investment Management. Hi Ross. ROSS MARGOLIES, PORTFOLIO MGR., STELLIAM INVESTMENT MGMT.: Hi, Susie. How you doing?
GHARIB: Why did the bear market rally? I mean what is the missing ingredient that we're not saying that this is a bull market rally?
MARGOLIES: There was two things. There's so much pessimism that things have gotten oversold and secondly, a lot of the bad news is to come. So we think there's going to be another leg down.
GHARIB: So, aren't lower oil prices supposed to be a big positive and driver for stocks?
MARGOLIES: I think they are a big positive driver. But I think that's going to be next year because one month of low oil prices has improved the market sentiment, but it's not necessarily going to fall down to companies' bottom line and the consumers' bottom line unless it stays there for awhile.
GHARIB: So what do you have to see happen before you're more confident and positive on the general market sentiment?
MARGOLIES: I'd like to see the oil prices and the commodity prices, the slow down inflation stick for a little while. And as one of your previous guests were saying, numbers have to come down. I think by the end of this year, people will realize that the bar has to be set lower and that next year isn't going to be as strong. Once they realize that we can build off of that base again.
GHARIB: And yet you're saying that you can still make money in the bear market. You've been putting new money to work buying some beaten down areas. I understand you're putting some significant dollars into airline stocks. Tell us what your strategy is there.
MARGOLIES: We think airlines are an interesting special situation because they're cutting massive capacity because of the high energy prices. That means airfares for everybody are going to go up, but this company -- this industry that is hemorrhaging money right now could become profitable next year just at today's oil prices.
GHARIB: Are there any particular names of airlines that you can tell us about that you think are the slam dunk, good investments?
MARGOLIES: I think, keep in mind I tend to have one to two year I'm horizon, but I think Southwest is relatively safe. They hedge a lot of their energy costs, so you might have volatility, but it's good. Delta is also interesting. They're merging with Northwest and they have lot of good news coming in the second half of the year.
GHARIB: What are some of the sectors that you see have opportunities in this kind of a bear market situation?
MARGOLIES: We think technology is also interesting because the large technology companies are generating a lot of free cash flow. So even if we end up in a recession, you've got a floor to support your evaluation. So the high quality companies like the Microsofts and the Ciscos of the world, if you buy them now and hold them for a couple years you should do very well.
GHARIB: What about financials? A lot of people are trying to guess when is the right time to put some new money to buy financial stocks. What's your view on that?
MARGOLIES: It's the toughest question. We've had financials all along, but we stuck with companies that don't need to raise money. And right now I'd advise other people to do that the same because if they need to raise money, they're going to dilute you and you might not get your appreciation down the road.
GHARIB: Do you have any disclosures on any of these stocks that you've named so far this evening that you own them or your firm has any special relationship with those companies?
MARGOLIES: We own them in our portfolios. We don't have any other special relationships.
GHARIB: Ross, just finally, just to wrap it up, if investors have some new money that they want the put to work, should they put it into the market now, wait and sell into the rally? What is your advice?
MARGOLIES: If I had to time it, I would wait until the fall until we get some numbers from what's going to happen the rest of the year and next year. And I always advise people to dollar cost average. I know it simple but it works.
GHARIB: All right, Ross, thanks so much for coming on our program,, nice to have you here. MARGOLIES: Thank you.
GHARIB: My guest tonight, Ross Margolies of Stelliam Investment Management.
The Credit Crunch Is Putting The Squeeze on Commercial Real Estate
PAUL KANGAS: The Federal Reserve said today that credit got tighter in the past three months. Banks are clamping down on credit cards, mortgages and home equity loans. Commercial real estate loans are also harder to get despite that market doing better than residential. As Stephanie Dhue reports, the double whammy of a slowing economy and tight credit is putting pressure on commercial real estate.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Real estate developer Steven Grigg operates in what is arguably one of the best commercial real estate markets in the country. But even here in the nation's capital, the credit crunch is putting a stress on business.
STEVEN GRIGG, DEVELOPER, REPUBLIC PROPERTIES: We are not immune from the general problems of raising capital and that is probably the toughest challenge right now. The confidence, not only that the capital that you raise to develop something will be available, but what is going to happen down the road in terms of availability of permanent financing.
DHUE: The market for commercial mortgage backed securities, or CMBS, is drying up. In the first half of 2007, $147 billion worth of commercial mortgage backed securities were brought to market and successfully sold. So far this year, only $12 billion worth of the deals have been completed -- a more than 90 percent drop -- and there are no CMBS deals on the market now. That tight credit is making it difficult to refinance commercial real estate loans, which typically have five-, seven- or 10-year maturities. Ken Lore heads the corporate real estate group for the Bingham, McCutchen law firm. He says the credit crunch is making it difficult for owners of even fully-leased properties.
KEN LORE, PARTNER, BINGHAM MCCUTCHEN: If the bank comes and says I'm not going to re-up your loans or I'll only re-up your loan if you put down another 20 or 30 percent equity, which people don't have, then that could end up in a very, very troublesome situation.
DHUE: The situation is becoming more difficult as vacancy rates for retail, office and warehouse space rise. Those rates have increased 1 percent since the beginning of the year and now stand at 14 percent. Robert Bach, chief economist for Grub and Ellis, predicts the vacancy rate may climb to 16 percent and property values could fall 15 to 20 percent over the next 18 months, bad, but not that bad.
ROBERT BACH, CHIEF ECONOMIST, GRUBB & ELLIS: I think it will -- compared with residential it will be much less pain. It's not that commercial real estate is the next shoe to drop after residential. It's more a case of adding insult to injury.
DHUE: Just how much insult will be added will depend largely on the economy, consumer spending and just how much demand there will be for commercial space. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Get Your Finances Ready for Retirement"-Covering Healthcare Costs in Retirement
SUSIE GHARIB: Fewer and fewer retirees are receiving health care benefits from their former employers. And many soon-to-be retirees mistakenly believe Medicare will cover all of their health care costs. As we continue our ongoing series, "Get Your Finances Ready for Retirement," Joe Collum reports that proper planning is essential to pay for medical bills in retirement.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: After years trying to get around on a pair of painful arthritic knees, Tony Basone decided to have them replaced.
TONY BASONE, RETIREE: We went to Disney World with our grandkids and couldn't walk with them. We couldn't keep pace, so we ended up with electric cart. That's when it tells you, you got to do something.
COLLUM: So last January, at age 69, Basone had the surgery. Two months later he was playing golf pain-free for the first time in years, but Basone's biggest surprise came when he got his bill for the $110,000 procedure. What did you pay?
BASONE: $69, amazing. We expected to pay more.
COLLUM: Only $69 out of Basone's pocket because Medicare paid approximately 80 percent of the tab, while his Humana Medigap insurance paid the remainder. Medigap or supplemental insurance, covers many costs that Medicare doesn't. Policies vary in coverage and costs and can be expensive. But in Basone's case, Medigap really paid off.
BASONE: We probably would have had maybe a $20,000 bill, yes.
COLLUM: Many baby boomers assume that when they hit 65 years of age and Medicare kicks in, their days of paying big medical and health insurance costs will be over. But unfortunately, that's hardly the case. Sunit Patel is an actuary at Fidelity Investments who conducts an annual survey on retirement health costs.
SUNIT PATEL, ACTUARY, FIDELITY INVESTMENTS: What we found was that a couple who's age 65 in 2008, that they would need $225,000 in savings in order to pay for health care costs over their life expectancy.
COLLUM: Dr. Kathryn Votava of goodcare.com cites similar figures.
DR. KATHRYN VOTAVA, PRESIDENT, GOODCARE.COM: The average American today who is 65 needs to budget $5,500 to $6,700 a year out-of-pocket for all their premiums, co-pays and other things like glasses and so on and so forth that they need to buy.
COLLUM: Although Medicare is available to everyone over 65, it's not a free ride. Take Medicare Part A, which covers hospital stays and rehabilitation. Even though it is provided to most Americans at no cost, it does have a deductible of just over $1,000. Medicare Part B carries a $96.40 monthly premium, which rises every year. It covers 80 percent of the cost for doctors' visits, outpatient hospital care and ambulance transportation and there's a $135 deductible. Since Medicare's Part D prescription drug plan is offered through different insurance companies, its costs vary. But in addition to a monthly premium, most people also have to pay a large share of their initial drug costs. And Medicare doesn't cover eye exams, dental care or hearing aids, nor most long-term-care in nursing homes. Medical costs are expected to continue going up faster than the rate of inflation. So anyone planning to retire at age 65 or above should be sure to have the right Medicare coverage in place. It's also a good idea to look into a Medigap policy and to have cash reserves to pay for the items that insurance may not cover. Joe Collum, NIGHTLY BUSINESS REPORT.
"Money File"-The FDIC Rules
SUSIE GHARIB: In the money file tonight, making sure your bank deposits are covered by FDIC insurance. Here's Eric Schurenberg, managing editor at "Money" magazine.
ERIC SCHURENBERG, "MONEY" MAGAZINE: Three banks failed last month and some 90 more are on regulators' troubled list. But you're not worried because you know your deposits are insured by the FDIC. Well, yes they are, but remember that protection is good only if you obey all the FDIC's rules. Here's how to make sure you are doing that. Start by asking the FDIC itself. In general, you're good if you have less than $100,000 in any one bank and up to 200 grand in joint accounts. Some retirement accounts may be covered up to 250 grand. But just to be sure, go to the FDIC's web site, fdic.gov and plug in information into its calculator, the electronic deposit insurance estimator. If that exercise informs you that some of your money lacks insurance, the first step is to try changing your accounts' ownership status. For example, by titling one account in your name, one in your spouse's name and one jointly, you can insure as much as 400,000 bucks. Or you can spread your money among banks and insure an unlimited total amount, as long as you keep under the limits for each institution. If you have so much in the bank that this seems like a lot of trouble, check out the certificate of deposit account registry service, known by its acronym CDARS. It lets you keep up to $50 million in CDs with one home bank. That bank then parcels out your holdings among other banks, so that you stay fully insured. Interest rates may be a tad lower than you could get on your own, but that's a lot of peace of mind for a lot of wealth. I'm Eric Schurenberg.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened slightly lower as some investors cashed in on last week's big gains, but after seeing the Dow drop only 25 points and the NASDAQ actually gain 10 points early on, buyers appeared and those buyers became more aggressive when oil pulled back at midday. By early afternoon, the Dow posted 115-point gain with the NASDAQ up 42 points. The rally lost a lot of its momentum over the next few hours but the market still held moderate gains at the final bell. The Dow Industrial Average closed up 48.03 points at 11,782.35. The NASDAQ Composite was up 25.85 ending at 2439.95, while the Standard &Poor's 500 Index added exactly 9 points, closing at 1305.32. Over in the bond market, the 10-year note fell 16/32 to par and 1/32, lifting the yield to exactly 4 percent.
Most active New York exchange issue on 13 1/2 million shares, Citigroup (C) moving up $0.43.
Pfizer (PFE) edged up $0.04. The company agreed to settle litigation regarding its cholesterol drug Lipitor with Canadian drug maker Apotex.
General Electric (GE) up $0.31. The company says its exceeded its $1 billion sales goal from infrastructure projects at the Beijing Olympics. It now stands at $1.7 billion in sales.
Bank of America (BAC) up $1.13.
Wells Fargo (WFC) gained $1.44.
And then Qwest Communications (Q) $0.20 advance there. Citigroup upgraded it from "hold" to "buy."
Ford Motor Co (F) on the downside by a dime.
And Co Vale do Rio (RIO) down almost $1.
Home Depot (HD) up $1.14.
And JPMorgan (JPM) an $0.82 gain there, tenth in volume.
The airline stocks because of the lower oil prices and a prediction by Morgan Stanley that the industry will turn a profit in 2009, if oil stays around $115 a barrel helped (ph) and UBS also boosted the price targets for a number of the major airline stocks. All of these were up over $1 at one stage today and they all ended very nicely higher, percentage.
AMR Corp (AMR)
Continental Airlines (CAL)
UAL Corp (UAUA)
US Airways (LCC)
A very weak group of course gold, New York December gold plummeted $36.50 an ounce. That's $828.30 an ounce. Anglogold Ashanti (AU) and Barrick Gold (ABX) and Kinross Gold (KGC), Newmont Mining (NEM), Yamana Gold (AUY) all down and they were down a lot more in the early part of the day.
The coal stocks also weak in the very strong sell off in commodities. We see Arch Coal (ACI), Consol Energy (CNX), Patriot Coal (PCX) and Peabody Energy (BTU) well on the downside.
Sysco (SYY) up $1.28. The food distribution company had a fourth quarter earnings report of $0.55, up from $0.49 a year ago. That was $0.03 better than the Street was expecting.
Clear Channel Outdoor Holdings (CCO), which is into billboards and mall displays and things like that, had higher second quarter earnings, $0.23, up from $0.19 a year ago and that was $0.05 above the Street consensus.
Emulex (ELX) moving up $0.93, traded as high as $13.70 after Citigroup upgraded it from "sell" to a "buy."
And Whirlpool (WHR) moving $3.83 to the positive. Longbow Research sees the company's profit margins improving as the year progresses.
And then one of the best percentage gainers was Beazer Homes (BZH), up $0.97, traded as high as $8.20. Friday it reported a narrower third quarter loss than last year and today, JPMorgan trimmed its 2008 loss estimate from $15 a share to $13.40.
Apple (AAPL) topped the actives list on NASDAQ, up $4.01. "Wall Street Journal" reported users had downloaded 60 million programs from the company's online (INAUDIBLE) store.
Research in Motion (RIMM) down $2.33.
amazon.com (AMZN) moving up $7.58. Citigroup is upbeat on the sales outlook for the company's Kindall (ph) electronic reader.
Google (GOOG) up $5.83.
Microsoft (MSFT) $0.23 drop there, fifth in volume.
$0.15 gain in Intel (INTC).
Qualcomm (QCOM) fell $1.44.
Cisco Systems (CSCO) a $0.37 advance.
baidu.com (BIDU) down $14.86.
And then Oracle (ORCL) was off $0.44 a share.
Ciena (CIEN) moved up $1.16. Morgan Keegan brokerage upgraded it from "market perform" to "out perform."
But on the downside, Sterling Construction (STRL) fell $1.71 despite higher second quarter earnings of $0.37, up from last year's $0.32. But that was a few cents below the Street estimate of $0.43 and the company cut its 2008 earnings guidance from a high of $1.57 down to $1.36 at best.
Those are the stocks in the news tonight.
