NBR Transcripts- September 4, 2008
Thursday, September 04, 2008The Bears Roared on Wall Street
SUSIE GHARIB: The bears roared on Wall Street today. Stocks plummeted on fresh worries about the job market, consumer spending, and retail sales, pushing the major averages back into bear market territory. The Dow tumbled 344 points and the NASDAQ fell 74. Joining us now to analyze today's sell-off, Simeon Hyman, equity strategist at Lehman Private Investment Management. Hi, Simeon.
SIMEON HYMAN, EQUITY STRATEGIST, LEHMAN PRIVATE INVESTMENT MANAGEMENT: Hi, how are you?
GHARIB: Well, you know, are things really that bad in the economy to warrant this kind of sell-off today on Wall Street?
HYMAN: I think the fears are not unfounded in terms of the state of the economy. We know the economy is weak. And in fact, one of the things that we've been finding out increasingly over the last several months is that it is a global phenomenon now. It's not just -- it's not just the U.S., it's not just Europe, but it's global. And that's, you know, affecting the ability for economic recovery to start. But there is a little bit of a silver lining here. And that is that inflation pressures are moderating. We all see the headline commodity numbers come down, oil being the most obvious. But even today the prices paid component of the ISM came down. So we're moving into a world of one problem which is better than two. We do have a growth problem. Global growth will be quite poor for a little while going forward. But at least we don't have slow growth and inflation at the same time, which I think was a concern of markets for the first half of this year.
GHARIB: Well, you talk about oil prices, oil prices have been down sharply. The dollar also is much stronger. And one would think that these would be very positive developments for both the stock market and the economy. How come that didn't factor in, in today's trading?
HYMAN: Well, I think they all -- both of those are positive. You know, as the rest of the world slows, that helps the dollar on a relative basis. And oil coming down is helpful too. You know, what you need for the equity markets to recover, I think, are, I would call sort two-and-a-half things. One, inflation pressure is moderating, which we have. Two is some light at the end of the tunnel in terms of when economic growth will resume in a robust way. And I think, unfortunately, that's a little further off than most people are comfortable with. And then the third piece is, we do need credit markets to start to loosen up a little bit so that the benefits of low inflation and low interest rates can move into the equity markets. And we do see some beginnings of some positive signs there. As an example, the balances in the commercial paper market have grown for the first time in a long time.
GHARIB: Where would you put the labor market in all of this? How critical is tomorrow's employment report for the markets?
HYMAN: It is certainly a big number in the short term, because people are just trying to figure out how bad the real economy will get. For a while, actually, in the first half of this year, much of the -- much of the economic dilemma was, I wouldn't say restricted to financial services, but if you looked at the S&P 500, earnings growth outside of financial services grew 10 percent in the first quarter, and if we strip out GM (GM) as well as financials, actually grew about 10 percent in the second quarter too. So, you know, the real economy hasn't quite gotten hammered yet, but people are now obviously concerned that it is bleeding in. So it is an important number, but having one problem and not two means that the central bank, you know, has more flexibility to step in if they need to, to the extent the economy continues to slow.
GHARIB: So the big question for investors watching the program right now is, when do the markets bounce back? When is the recovery? Can you give us some kind of timetable?
HYMAN: I think the mitigation of inflation pressures certainly limits the downside. So I don't think we are at risk for a tremendous leg downward. I don't think we're going to get the big rally out of a bear market for a little while longer. We have some sideways news to deal with. We have a big earning season coming up. We probably have some weak macroeconomic data, and a real recovery could be several quarters away. But the equity markets do usually -- they are forward indicators, so equity markets could recovery a good couple of quarters before the economy. So, you know, we may see some more real directional breakout as we get towards the beginning of 2009.
GHARIB: All right. All right. Lots of good information, good analysis. Thanks a lot, Simeon, appreciate it.
HYMAN: Thank you.
GHARIB: We've been speaking with Simeon Hyman, equity strategist at Lehman.
Investors Shift Interest From Stocks to Bonds
PAUL KANGAS: As we mentioned, plunging stock prices helped fuel a rally in bonds again today. U.S. Treasury debt prices rose, taking the yield on the benchmark 10-year bond to its lowest level since late March. As Suzanne Pratt reports, some experts predict the rally in government bonds will continue.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In recent weeks, investors' appetite for high quality government bonds has heated up. UBS bond expert William O'Donnell says the bond market is now the hot place to be.
WILLIAM O'DONNELL, CHIEF U.S. RATE STRATEGIST, UBS: What we've seen is that as global commodities have fallen and the dollar has risen, we've seen a significant of new money come into the Treasury market, and a lot of it has come from overseas.
PRATT: The hunger for bonds picked up last month as investors realized economies around the world were also slowing, not just the U.S. As a result, global investors started to back away from stocks and revisit bonds. Experts say not only are U.S. Treasuries once again a safe haven, but they're also a good place to park cash as investors figure out what else looks appealing. In addition, T. Rowe Price portfolio manager Dan Shackelford says investors who would have bought Fannie Mae (FNM) and Freddie Mac (FRE) debt are now moving into government bonds.
DAN SHACKELFORD, PORTFOLIO MANAGER, T. ROWE PRICE: Given their circumstance right now, valuations in the Treasury market could reach extremes because, really, that's the only game in town that people feel that, you know, their capital will be completely safe.
PRATT: The price of the benchmark 10-year Treasury bond has rallied in the past few months. And the yield, which moves in the opposite direction to price, has fallen to the 3.6 percent level. That's after hitting a high of 4.28 percent in mid-June. Even with the recent rally in bond prices, some experts say it's not too late for a seat at the bond market table, provided investors choose short- to intermediate-term Treasuries.
O'DONNELL: We do ultimately think that front-end Treasury yields are going to fall further and, in particular, as it becomes more clear to people beyond what we believe here at UBS that the Fed is going to have to cut the funds rate further.
PRATT: Experts say it's debatable whether economic fundamentals will support a continued rally in bonds. But they also say persistent problems in the credit markets are likely to keep investors hungry for Treasuries. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices '2008"-McCain on Business Taxes
SUSIE GHARIB: Senator John McCain will take the spotlight tonight as he accepts his party's nomination at the Republican National Convention in St. Paul. McCain is expected to renew the Republican traditional commitment to cut taxes. As we continue our "Economic Choices '08" coverage, Darren Gersh reports some analysts consider the McCain plan a mixed bag for business and investment.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The centerpiece of John McCain's tax plan is a deep cut in the corporate tax rate. Actually, there is a growing consensus in Washington that something like that is a pretty good idea. Tax expert Martin Sullivan says the goal is to make the U.S. more competitive with the rest of the world.
MARTIN SULLIVAN, ECONOMIST, TAX ANALYSIS: If you look around the world, corporate tax rates are declining: In France, in Germany, in Canada, everywhere, small countries, large countries.
GERSH: McCain would leapfrog the U.S. ahead. Over five years, he proposes to phase in a cut of the top corporate tax rate from 35 percent to 25 percent. In addition, McCain plans to keep the current 15 percent rate on capital gains and dividends, which could help make capital available to business. Like Senator Obama, Senator McCain would make the research and development tax credit permanent. Senator McCain also backs a short-term plan to allow businesses to expense what accountants call "short-lived assets." Tax expert Clint Stretch says that could have an immediate impact on the economy.
CLINT STRETCH, MANAGING PRINCIPAL, DELOITTE: So, things like office furniture, cars, computers, that's very helpful. It's something that looks like a stimulus package.
GERSH: But businesses are worried about how McCain will make these promises balance out. To begin with, he has proposed raising $30 billion a year by cutting off "corporate welfare," as he calls it.
STRETCH: What is that $30 billion? Because if you did nothing else, you just went after $30 billion from corporations, that's like a 10 percent tax increase. So businesses are very cautious about that. They're wondering, is that my core incentive that he's talking about going after?
GERSH: The Tax Policy Center figures McCain's business and investment tax cuts would cost more than $1.2 trillion over 10 years, far more than any spending cuts that are likely to be enacted, which means the country would go even deeper into debt. When he adds it all up, the American Enterprise Institute's Alan Viard is lukewarm on the McCain plan.
ALAN VIARD, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: If the McCain plan were adopted, it would have ambiguous effects on investment. On the one hand, the corporate rate reduction would certainly be an incentive to increase investment. There would be an increase in the deficit, which might boost interest rates to some extent.
GERSH: Viard and other analysts say there is little chance the McCain plan would ever be adopted. Democrats are expected to expand their majorities in Congress, and helping another Republican president cut taxes is not their top priority. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Molson Coors CEO Peter Swinburn
SUSIE GHARIB: Change is brewing in the U.S. beer industry. Mergers are on the rise as beer sales slow down and prices increase for commodities like barley, aluminum, and glass. Earlier today, I talked with the new CEO of Denver- based Molson Coors. My first question to Peter Swinburn, his strategy for growth for the nation's third-largest brewer.
PETER SWINBURN, PRES. & CEO, MOLSON COORS: We need to get scale internationally. And that means, actually, developing Coors Light internationally, and also looking for any smart deals that might be out there. We're in the position to do that now. We haven't been in previous years because we've been paying down debt. But fundamentally it's also concentrating upon our core businesses. And that really means investing in our brands, developing the brands and making sure that we can gain margin from to those brands over the medium to long- term. But a lot of that is what we have done in the past, and it has been a great recipe for success.
GHARIB: Mr. Swinburn, to what extent is the weak economy impacting your business?
SWINBURN: Presently not significantly. We can only talk about our business. But in the United States, for example, the category is over 1 percent, which historically is quite good. And we have not seen any evidence of trading down or indeed trading out.
GHARIB: Are you doing things differently now than Anheuser-Busch (BUD) has merged with InBev and it created this powerhouse competitor? What are you doing to stay competitive?
SWINBURN: We've already done it, to be honest with you, we put the -- our American business, the Coors business together with Miller. And we did that specifically to make ourselves more competitive in the United States market. So instead of having a 20 share and a 10 share, we now have 30 share combined. The big advantage is going to be that having put the businesses together, we will drive out about $500 million worth of cost savings, and put two great brand portfolios together.
GHARIB: As you know, there is a lot of consolidation going on in your industry. Is your partnership with Miller just the beginning of a full-out merger?
SWINBURN: Absolutely not. It's a partnership just in the United States. And it makes sense for both businesses to do that in the United States. Outside of the United States we compete very vigorously against each other.
GHARIB: But do you feel that given all the consolidation that is going on in the industry, to be competitive in the international -- in the global marketplace, that, you know, size really matters, and that you really do need to partner up with somebody at some point?
SWINBURN: No, size does matter, you're right, it is about scale. But we've played that game very successfully. I mean, you have to remember that both Molson and Coors were individual businesses just six years ago. We probably quadrupled the size of our market cap in that time. What we have proven is that we can actually come up with really smart deals. We can execute them very, very efficiently, and bring huge shareholder value. There is no reason why we can't continue to do that.
GHARIB: As you know, China is the biggest beer market in the world. What is your China strategy?
SWINBURN: We are expanding our footprint. We are actually establishing all the brand values that we need to establish in the consumer's mind. And what you get then is an inflection point. We have been in China for about six to seven years, it is a very, very big country. And so it's taken us time to get distribution, solid distribution, solid brand-building and brand health. And we would expect to get an inflection in China within the next five to six years.
GHARIB: Let's talk a little bit about Molson Coors stock. It has been volatile. What do you think is going to be the catalyst to make it to move higher?
SWINBURN: The important thing for shareholders is that we've actually virtually doubled the value of our stock in the last three years since we put Molson Coors together. With the deal that we've done in the U.S., we've got more savings coming through. The fundamentals of the business are tremendously strong. We've got a strong balance sheet. We've great plans that are growing and getting pricing. And we're throwing off cash. And really that's what investors look for, especially in today's market.
GHARIB: Mr. Swinburn, thank you so much for your time. We appreciate it.
SWINBURN: Thank you.
"Commentary"-The Price of Popularity
SUSIE GHARIB: Tonight's commentator says, when it comes to investing, there's a cost to being popular. He's Allan Sloan, senior editor-at-large at Fortune.
ALLAN SLOAN, SENIOR EDITOR-AT-LARGE, FORTUNE: Buying investments that are popular may make you feel good, but it's generally not a good way to make money. Take the Standard & Poor's 500. Ten years ago, S&P index funds were becoming wildly popular. The theory was you couldn't go wrong buying the S&P. It had been returning 20 percent a year for 16 years. It gave you instant diversification, and you would own a piece of America's biggest companies, especially high-flying tech and telecom companies. Well, it turns out, you could go wrong buying the S&P if you bought it 10 years ago when it was very expensive. For the decade ended August 31st, the S&P returned only 4.7 percent a year. That's better than losing money, but its less than half the S&P's historical return, less than a quarter of what it had been earning for almost a generation, and not much more than you got from boring old Treasury bills. Meanwhile, mid-cap and small-cap stocks, which were out of favor 10 years ago, have done quite well, making 12.5 and 11.5 percent a year. Now, I don't know which investments will do well over the next decade. What I do know, though, is that investing in what's popular and expensive today isn't likely to give you a great long-term return. Maybe in some alternative universe, trees grow to the sky, but not in this one. I'm Allan Sloan.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those lackluster retail sales sent stocks on Wall Street skidding sharply lower this morning as investors became more convinced a recession was either here now or on its way. In a steady sell-off, the Dow fell 246 points by noon, with the NASDAQ off 43 points. A continued decline in oil prices also weighed on stocks, as investors blamed oil's drop on slowing global demand. So the market went on to close at the day's worst levels. The Dow Industrial Average tumbled 344.65, ending at 11,188.23. The NASDAQ Composite plunged 74.69 to 2,259.04, while the Standard & Poor's 500 Index fell 38.15, ending at 1,236.83. Flight to safety in the bond market, the 10-year note gained 21/32 to 103 3/32, putting the yield down to 3.63 percent.
The most active New York Exchange stock on 17.75 million shares, Ford Motor (F), losing $0.18.
Followed by Citigroup (C) in a weak financial sector, down $1.31.
Bank of America (BAC) lost $2.36.
GE (GE), an $0.87 loss there.
And Pfizer (PFE) down $0.53 a share.
Corning (GLW) down another $0.45. It was down $2.45 yesterday after the company cut its third-quarter earnings guidance.
Time Warner (TWX), an $0.87 loss.
Wells Fargo (WFC) down $1.34.
JPMorgan Chase (JPM) lost a $1.80.
And Wachovia (WB) down $1.65 in this blizzard of minus signs.
Moving along, we see American International Group (AIG) down another $1.36. The New York Post reports that AIG may form a separate company to hold billions of risky credit assets that have dogged its balance sheet. But the company says that's pure speculation.
Boeing (BA), one of the weaker Dow stocks, off $3.04. Its machinists union voted to strike, but agreed to postpone a strike for 48 hours in a last- ditch effort to reach an agreement.
Some other very weak Dow stocks today: American Express (AXP), Caterpillar (CAT), Chevron (CVX), IBM (IBM), United Tech (UTX), these losses combined with these five stocks accounted for 127 points of the Dow's 344-point loss today.
Terex (TEX) group tumbling $9.30. The company cut its 2008 earnings guidance from a high of $7.15 down to $6.65 a share at best. The Street's estimate is around $7.06 a share.
Some other very weak heavy equipment makers: Agco (AG), Cummins (CMI), Deere & Company (DE), they're all down substantially in tandem with Terex.
Navistar (NAV), however, one that bucked that trend very nicely, up $4.96 after reporting third-quarter earnings of $3.68, way up from a nickel loss a year ago. And sales jumped 34 percent.
Home builder Hovnanian Enterprises (HOV) off $1.35 after reporting a third- quarter loss of $2.67 a share, much larger than last year's loss of $1.27 a share. And revenues tumbled 35 percent. Standard & Poor's issued a sell recommendation today.
And then H&R Block (HRB) down $2.57. The company reported a first-quarter loss of $0.40, bigger than last year's $0.34 loss. And that was $0.05 worse than the Street was expecting. Revenues fell 11 percent. Some of the retailers very weak today, like Limited (LTD), off $1.36, average August same-store sales were down 7 percent.
And then Abercrombie & Fitch (ANF) down $3.72. It's August same-store sales dropped 11 percent.
But one retailer that did well today was Collective Brands (PSS). This is the holding company for Payless Shoe Stores. Second-quarter earnings, $0.54, way up from $0.28 last year. And sales jumped 30 percent.
Apple (AAPL) topped the NASDAQ active list, down $5.74.
Research In Motion (RIMM) off $7.29.
Google (GOOG), a $14 loss and then some.
Intel (INTC) down $1.02.
Microsoft (MSFT) fell $0.55 a share.
Oracle (ORCL) down $1.26.
Qualcomm (QCOM) fell $0.72.
Cisco (CSCO) losing $1.03.
And Baidu.com (BIDU) tumbled a little over $22.
But finally a gainer, and that was Dell (DELL), up $0.05 a share.
Ciena (CIEN) down $4.34, the communications equipment manufacturer had third-quarter earnings a bit lower, $0.37 versus last year's $0.41. But pretty much in-line with the Street. However, the company cut its fourth- quarter revenue target due to order delays. And that hurt the stock.
And those are our "Stocks in the News" tonight.
