NBR Transcripts-August 13, 2008
Wednesday, August 13, 2008A Look at the See-Saw Relationship Between Oil & Stocks
SUSIE GHARIB: Oil prices rose sharply today, giving investors on Wall Street inflation jitters. In New York trading, September crude futures jumped almost $3 to $116 a barrel after the government reported that U.S. oil and gasoline supplies fell last week. Well, that oil rally led to a stock sell-off. The Dow lost 109 points. Suzanne Pratt takes a closer look at why stock prices and oil prices are moving in opposite directions these days.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In what has recently become a familiar pattern on Wall Street -- when oil prices fall, stocks gain steam. And if oil goes up, the stock market often heads south, just as it did today. Standard & Poor's Sam Stovall says one of the reasons for the connection between oil and equities is that higher energy costs cut into corporate profits.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: When oil prices rise, in general, you would find that most industrial companies would be adversely affected, because one of their input costs would be going up.
PRATT: Evidence shows that over the long term, there has not been a strong inverse relationship between oil and equity prices. But in the last month, the connection has been very clear. That's as sky-high oil prices have become more terrestrial. On July 11, oil hit an intra-day high of more than $147 a barrel. Four days later, the Dow bottomed at under 11,000. Since then, while oil prices slid 21 percent, the blue chip index rebounded, gaining about 600 points or 5 percent. To be sure, there have been other variables supporting the recent move higher in stocks.
STOVALL: I think lower energy prices, the strengthening of the U.S. dollar, the falling of gold prices, et cetera. Those factors together, I think, have been helpful for equity prices in general.
PRATT: If oil prices fall further in the coming months, most experts believe the stock market will continue to benefit. But others say investors must also consider why energy prices are falling. Oil experts say it's because there's evidence of slowing demand for petroleum products. Andrew Burkly of Brown Brothers Harriman says weaker demand for oil suggests a slowing economy, which ultimately is not good for stocks.
ANDREW BURKLY, MARKET STRATEGIST, BROWN BROTHERS HARRIMAN: Really, stocks in our opinion are not going to gain a lot of traction until you see leading indicators of the economy start to improve. In that, I think we're still waiting on evidence of that. The economy is still pretty sluggish.
PRATT: Experts also point out the connection between oil and stocks is strongest whenever we see sharp upward or downward moves in energy prices. So, if oil prices head into a trading range, they expect stock prices will be held hostage to factors other than oil. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Banks Are Making Achieving The American Dream Tougher
SUSIE GHARIB: State and Federal regulators may be closing in on a deal with a number of big banks over the issue of auction rate-securities. Reuters is reporting the banks could be forced to re-purchase those securities, which are now illiquid, at face value. Last week, New York's attorney general reached deals with Citigroup and UBS to buy back billions of dollars worth of the controversial investments.
PAUL KANGAS: Meanwhile, making an investment in a home is getting tougher. Thirty-year mortgage rates are inching toward 7 percent and banks have raised the income and asset bar for borrowers. In fact, lenders are uneasy across the board and as Darren Gersh reports, that's affecting all kinds of credit
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you want to take out a loan to buy an SUV, be prepared for your credit rating to be strip-searched. Banks are worried they'll be left holding the keys on a gas guzzler no one wants. Don't even think about a lease. You know the story on real estate loans. Even those credit card offers are drying up. Direct mail researcher Mintel says mailings for new cards are down 20 percent this year. Bankrate.com's Leslie McFadden says card companies are trying to reduce their risk.
LESLIE MCFADDEN, REPORTER, BANKRATE.COM: And that's why it's so important for every consumer to pay down your balances as much as possible right now.
GERSH: McFadden says consumers who don't get the message are finding banks cutting back their credit limits. And while it's not that common, in some cases, banks are going further, using a technique known as "chasing down the balance."
MCFADDEN: This is when they'll lower a person's credit limit to whatever their balance is or maybe just slightly below what their balance is. This causes them to be over limit and then they have to bring down their balance. And whenever they do that, they keep lowering the credit limit to whatever their new balance is, so that's called chasing the balance down.
GERSH: The industry argues underwriting standards haven't changed much on credit cards, though the American Bankers Association's James Chessen says credit card lenders are being more cautious.
JAMES CHESSEN, CHIEF ECONOMIST, AMERICAN BANKERS ASSOCIATION: And their big exposure of course is the ability of consumers to really ratchet up and use the entire balance that's available to them. And in a period where there is job losses, concerns about interruptions in income from a spouse or even not even having overtime, it's a concern that that could be used up very quickly.
GERSH: It's not just little guys who are getting the credit once-over; Chessen worries even big commercial borrowers are also getting squeezed, sometimes by regulators.
CHESSEN: And we've had some bankers tell us that they are prepared to make loans. They see good opportunities out there, good borrowers with good plans and the regulators are asking them why would they make a loan in this type of environment. So we're very concerned that it can be a regulatory-induced credit crunch.
GERSH: The comptroller of the currency, a key Federal regulator, tells NIGHTLY BUSINESS REPORT mistakes were made in past economic downturns. Regulators now say they won't take a cookie cutter approach to reviewing loans, but they also stress it's important for banks to identify problems early now that the economy has weakened. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
The Pawn Shop Business Is Picking Up Aid
PAUL KANGAS: While business for retailers is slowing, some other sectors are picking up steam. The pawn shop industry is undergoing a surge in popularity as Americans rush to sell their treasures or borrow against their value. Jeff Yastine takes a look.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: These are the signs of the times -- pawn shops. In a booming economy, they might be considered a lender of last resort. But in today's economy, it's the pawn shop business that's booming. At the 50-year-old Morningstar's pawnbrokers in downtown Hollywood, Florida, father and son Louis and Eric Morningstar noticed the pickup in business over the past 18 months as the housing downturn gradually took hold. Some people come here to sell; others come to borrow.
LOUIS MORNINGSTAR, OWNER, MORNINGSTAR'S JEWELRY & PAWN: Unfortunately, with the economy being the way it is today, things with the real estate market, it's filtered down through all different types of businesses in the country. The pawn industry is riding the crest of a wave, so to speak--
ERIC MORNINGSTAR, MORNINGSTAR'S JEWELRY & PAWN: We get lower class to middle class, lots of realtors, real estate agents - just a lot of people trying to pay their bills and make do, especially with the increase in gas prices and fuel.
YASTINE: Nowhere is the trend more evident than in the share prices of the nation's publicly held pawnbroker chains, like E-Z and Cash America. Those stocks are near two-year highs as investors react to the surge in loans. Industry consultant Jerry Whitehead says gold, in the form of jewelry, coins and bullion, is one of the most popular assets people are pawning. He says they're either selling it to raise cash, or borrowing against its value for a pawnbroker loan.
JERRY WHITEHEAD, OWNER, PAWNSHOP CONSULTING GROUP: The traffic, the amount of product that we're buying and lending on, has increased substantially. To give you one metric, I would say that most of my clients have seen about a 50 percent increase across the board in lending and buying activity of that one commodity, which is the gold, the metal, a significant increase in that.
YASTINE: The national credit crunch is also contributing to growth in the pawn business. As banks have curtailed their lending, it's forced even the wealthy to come in and use their hard assets like Rolex watches, diamond rings, cars and even boats as loan collateral to meet their short- term cash needs.
MORNINGSTAR: Recently, we made a six-digit loan on a person's boat. He was a manufacturer of boats from out of the country and he found a cash problem and we came to his need.
YASTINE: Experts say the pawnbroker industry is counter-cyclical, doing well even if the broader economy does not. But shop owners say they're as eager as anyone else to get the economy back on an even footing. Until that happens, many Americans, rich and poor, will continue to turn to pawnbrokers in their quest for short-term credit. Jeff Yastine, NIGHTLY BUSINESS REPORT, Hollywood, Florida.
"Street Critique"-Kevin Depew, Executive Editor at Minyanville.com
PAUL KANGAS: Tonight's "Street Critique" guest says even with today's run-up in oil prices, crude is in a bear market and so are most other commodities. He's Kevin Depew, executive editor at the financial information website, minyanville.com. And Kevin, welcome back to NBR.
KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: Thank you, Paul. Pleasure to be here.
KANGAS: So we saw crude prices rise about $3 a barrel today, but you think crude and commodities overall are entering a bear market. What is your reasoning?
DEPEW: Well Paul, we've talked so much about the bear market that may or may not be happening in equities and there's really another bear market that's happening right under our noses. If you look at crude oil prices from the mid-July peak, they're down almost about 20 percent. As of yesterday's close, they were down 20 percent on Tuesday's close. So that's a definition of a bear market, that minus 20 percent move. We're seeing commodities come down 15 percent using the CRB commodity index. Gold is down almost about 15-16 percent as well. This is really a global demand story where demand is beginning to slow in response to tighter credit conditions.
KANGAS: So you're seeing a slow down in the global economy as the main cause here.
DEPEW: That's right. In you go back maybe six, nine months ago, there was this talk of a decoupling, where the United States problems with credits were not going to spill over into the global economy. That's clearly not the case. We're seeing slower demand in China on the heels of the Olympics or during the middle of the Olympics here and I think that's going to persist.
KANGAS: You were previously bullish on the U.S. stock market. How does this commodities bear market impact our stocks?
DEPEW: Here's the thing Paul. Now sitting at home, we would think OK, if crude oil is going to go into a bear market and gasoline prices are going to come down, commodity prices are going to come down, that's going to be good for the stock market. Well, that's not really the case. That's good for us at home as consumers and good for our economy, but we're in a situation where consumer demand is slowing and so that's going to impact the stock market and the economy as well. It's not necessarily a good thing for stocks.
KANGAS: All right now, with this in mind, you do favor a few sectors, do you not? Which ones are they?
DEPEW: Well that's right. When there's a commodities bear market, the sectors that benefit the most are consumer staples and health care.
KANGAS: Well, let's get specific here. How about some names and ticker symbols?
DEPEW: These are no big surprises, but if you look at the charts, it is surprising. Johnson & Johnson, ticker symbol JNJ is the first stock. All these stocks are making higher lows or higher highs since the beginning of the year in contrast to the S&P 500.
KANGAS: OK, a second choice?
DEPEW: Campbell Soup (CPB). That's a classic defense play, a beneficiary. As commodities prices come down, input costs for Campbell's are going to come down and they're not going to make those packages any larger and they're not going to roll back those price increases they've been passing through.
KANGAS: OK, one more choice.
DEPEW: Final one is Clorox, symbol CLX. Clorox make those house staples that we need when it's cleaning supplies, what have you and these are all just unsurprising. They sound like very boring stocks, but those are beneficiaries in the coming environment.
KANGAS: Well, they've had a pretty good run up, most of them, just in recent months.
DEPEW: Well they have and I think that's going to continue and I think this is a longer- term story in a couple of months.
KANGAS: Kevin, do you own any of the stocks you mentioned or have other disclosure to make?
DEPEW: I do own all three.
KANGAS: You own all three, well, that's a vote of confidence isn't it? I want to thank you very much for being with us, once again.
DEPEW: Sure thing, my pleasure.
KANGAS: My guest, Kevin Depew, executive editor at minyanville.com.
"Money File"-History of Bears
SUSIE GHARIB: In tonight's "Money File," a short history lesson to help educate and calm nervous investors. Here's Gail Marks Jarvis, personal finance columnist at the "Chicago Tribune."
GAIL MARKS JARVIS, PERSONAL FINANCE COLUMNIST, CHICAGO TRIBUNE: You probably want the stock market to stop torturing you. One day it suggests you'll be fine with a 350-point rally. The next day it slaps you down. That's a bear market for you. Wild swings come with the territory. We've had 10 sharp swings since the bear market began last fall. Investors are starting to wonder if the pain will ever stop and if their portfolio will ever recover. So a little history might be reassuring. Over the last 100 years, there have been 22 bear markets or declines of 20 percent or more. (INAUDIBLE) great in a bull market and awful in a bear market. Investors are actually in bear market (INAUDIBLE) at the time. And each time we do recover what we've lost, maybe not in specific stocks, but definitely in the full stock market. On average, people are back to even about two years after a bear market. That's not always true. Some analysts are comparing this bear market to 1973, '74, a slump mixed with inflation. You should hope they are wrong. Then, investors did not recover until seven and a half years later. But even in that awful bear market, investors did recover and the '90s, eventually made us feel very good. So be assured, sunshine will return. I'm Gail Marks Jarvis.
Paul Kangas' Stocks in the News
PAUL KANGAS: Continuing worries over the delicate condition of the credit markets had Wall Street on the defensive early today, as did lower July retail sales, which we'll detail in a moment, and of course there was that up-tick in oil prices. After an hour of trading, the Dow posted a 135-point loss, with the NASDAQ off only five points, thanks to a firm tech sector. A comeback in the oil, steel and coal sectors helped the market recover briefly this afternoon, but the blue chips sold off again in the final hour. The Dow Industrial Average closed down 109.51 at 11,532.96. The NASDAQ Composite lost only 1.99 ending at 2,428.62. Standard & Poor's 500 Index fell 3.76 to 1,285.83. In the bond market, the 10-year note fell 10/32 to par and 16/32, lifting the yield to 9 point or make it 3.94 percent.
Big board volume leader on 23 million shares, Merrill Lynch (MER) up $0.72.
Followed by Bank of America (BAC) down $2.27.
And speaking of Merrill Lynch, it affected Citigroup (C) today. Merrill widened Citigroup's third quarter loss estimate from minus $0.28 to minus $0.55, cut its price target on Citigroup from $20 down to $16. Merrill also increased loss estimates and cut price targets for a host of investment banks, including JPMorgan, Goldman Sachs, Morgan Stanley and Lehman Brothers.
Kraft Foods (KFT) in there with a $0.19 gain.
Ford Motor (F) $0.31 drop there.
Pfizer (PFE) an $0.08 loss.
ExxonMobil (XOM) up $1.29 leading a strong energy sector on the higher oil prices.
Let's have a look at some of the other majors in the oil group. Chevron (CVX), ConocoPhillips (COP), Hess (HES), Marathon (MRO) and Occidental Petroleum (OXY) all posting very nice closing gains.
Elsewhere we see Wells Fargo (WFC) losing $1.09.
Wachovia (WB) fell $1.19.
And Amer Intl Group (AIG) down $0.80 a share, tenth in volume.
Deere (DE) lost $2.25 and believe it or not, during the day it traded as low as $61. Third quarter earnings out this morning, $1.32, up from $1.18 last year, but $0.04 below the Street estimate and Deere's outlook was below projections on the Street.
Longs Drug Stores (LDG) up $16.66 or almost 31 percent. After the close yesterday as we reported, CVS Caremark will acquire Longs for $71.50 a share in cash.
Fertilizer stocks strong along with other commodities, Agrium (AGU), Intrepid Potash (IPI), Monsanto (MON), Mosaic (MOS) and Potash (POT) all posting nice gains in that strong group.
Tween Brands (TWB), one of the biggest percentage losers, off $6.87. After the close yesterday, second quarter loss of $0.27 reported versus earnings of $0.07 last year. Sales fell 8 percent. Citigroup downgraded the stock from "hold" to "sell" today and yesterday the company also announced the closing of 26 under performing stocks, or stores I should say.
And then Liz Clairborne (LIZ), another retailer, down $1.73. Second quarter earnings at only $0.09, down from $0.23 last year on a 7 percent drop in sales.
Watson Wyatt (WW) was a $0.37 loss at the close, but it traded as low as $51.57. It reported higher fourth quarter earnings of $0.95, up from $0.71 but forecast first quarter earnings of only $0.82 to $0.85. The Baird brokerage downgraded it from "out perform" to "neutral" on a valuation basis.
And Dr Pepper Snapple (DPS) chart looks a little strange, of course this is a spin off from Cadbury, up $1.13 today. Second quarter earnings, $0.60, up from $0.56 a year ago and the company is upbeat on its revenue outlook.
Apple (AAPL) topped the NASDAQ active list, up $2.57. Best Buy will begin selling the company's 3GI (ph) phones for - starting September 7th, first big retailer to do so in this country.
Down $1.39 on Research in Motion (RIMM).
Google (GOOG) fell $2.58.
Microsoft (MSFT) $0.21 loss there.
And Intel (INTC) dropped $0.40, very active however.
Qualcomm (QCOM) up $1.18 bucking the trend.
Cisco (CSCO) $0.19 loss.
Applied Materials (AMAT) up $0.86. Third quarter earnings $0.17, down from $0.37 a year ago, but $0.03 better than the Street consensus and Standard & Poor's repeated a "buy" on Applied Materials today.
Baidu.com (BIDU) up $4.04.
And Nvidia (NVDA) $1.19 gain. After the close yesterday, second quarter earnings $0.13, down from $0.34, but a penny better than the Street expected and Nvidia will buy back an addition $1 billion of its stock.
And finally semiconductor manufacturer Cree (CREE) jumped $3.05 on better than expected fourth quarter earnings of $0.16 versus $0.09 a year ago. Morgan Keegan brokerage repeated an "out perform."
