NBR Transcript-November 17, 2009
Tuesday, November 17, 2009What Was Really Behind the B of A/Merrill Lynch Merger?
SUZANNE PRATT: In late December, it was a big deal. Tonight there are still big questions about just how it happened. Was Bank of America forced into buying Merrill Lynch or did the bank make the move on its own? As Stephanie Dhue explains, on Capitol Hill, the search is on for answers.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Democratic lawmakers painted Bank of America as a tough guy, threatening to walk away to force more money from the government, as losses at Merrill were piling up. Committee Chairman Edolphus Towns says B of A fired general counsel Tim Mayopolous because he said they didn't have a legal reason to call off the deal. Then, when Bank of America threatened to cancel the deal, regulators quickly came up with another $20 billion.
REP. EDOLPHUS TOWNS, (D) NEW YORK: The facts show that Bank of America, one of the largest banks in the United States, was able to manipulate Federal regulators to obtain billions of dollars in taxpayer money to help it go through with a deal that it intended to do in any event.
DHUE: Brian Moynihan replaced Mayopolous in the middle of the deal. Moynihan says he believed the bank did have a case to call it off.
BRIAN MOYNIHAN, PRES., SMALL BUSINESS BANKING, BANK OF AMERICA: When I came in to general council on December 14 or 15, we became aware that the losses had now reached $18 billion, pretax. It was a different set of facts and circumstances.
DHUE: Republicans paint the scene differently. They think Federal regulators pressured the bank to go through with the deal. Ranking Republican Darryl Issa says the government's heavy hand kept Bank of America from getting a better price.
REP. DARRELL ISSA (R) CA: Merrill Lynch was not worth what you paid for it. Had you been able to negotiate in December instead of in September, you would have been able to negotiate a much lower price.
DHUE: To add another angle to just how controversial the Merrill deal was and still is, even a Bank of America board member seemed unsure about it. In January, Charles Gifford told his family in an email, quote, it was a bad decision. Today he defended the deal.
CHARLES GIFFORD, BANK OF AMERICA BOARD MEMBER: Although it is fair to say I had a number of probing questions about the transaction at the start, I firmly believe that over the long haul, Merrill Lynch will continue to be an important contributor to Bank of America's profitability.
DHUE: How the deal really went down may never be completely clear. But the prevailing story line is sure to have an impact on how regulatory reform and the history books are written. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Lincoln Ellis of the Linn Group on Inflation & The Economy
SUZANNE PRATT: Joining me now with more on the economy, inflation and the markets is money manager Lincoln Ellis of the Linn Group. Lincoln, welcome to the program.
LINCOLN ELLIS, MANAGING DIR., LINN GROUP ASSET MANAGEMENT: Thanks so much for having me.
PRATT: Tomorrow we get a look at retail inflation with the consumer price index. Any chance we're going to see any inflation signs in that report?
ELLIS: If the PPI and the housing numbers from today were any sort of leading indicator, I would suspect that we won't see any uptick in the CPI at all. The ex food and energy costs should leave us consensus plus two, but it should leave us pretty flat on the number here. There's really no sign of aggregate demand across the consumer complex at the moment. So, no, I don't think that there's any sign of inflation here at the moment.
PRATT: So do you think that if we actually started to see inflation maybe not in tomorrow's report but in the near future, that it could possibly be interpreted as a good sign for the Fed and by the markets because it would be suggesting that we were seeing some increase in demand?
ELLIS: Remember that there's two kinds of inflation. One is M3 or monetary types of inflation and that is being anticipated by the market and that's reflected in things like upticks in TIPs, prices and in the price of gold. The other is more consumer related or demand related inflation and that's more reflected in the CPI number and that would be a positive certainly in the Fed's play book to allow them to take their foot off the gas pedal a little bit and begin to think about what their exit strategy is going to be in terms of cleaning up the massive amounts of liquidity that we've seen enter into the market over the last 18 months.
PRATT: How much inflation, what level of inflation would you expect that we would need to see before we would actually see the Fed start to raise rates?
ELLIS: You'd have to see a .5 percent ex food and energy. It would have to be something quite significant. And the sad fact of the matter is that despite the equity market's recent levitation higher and higher, the real aggregate demand picture out there is really quite weak and it was reflected both in Chairman Bernanke's comments yesterday in New York and Vice Chairman Cone's comments later on in the evening that there's really not the chance for the public handoff into private demand. It's just not there yet.
PRATT: You raise the point of equity markets levitating. We certainly have seen the market on a tear here. What do you think is behind what we've been seeing in terms of the rally?
ELLIS: Yeah, so I think that there's a couple of things here. First of all, as we enter the holiday season, you normally tend to see volumes dry up. And volumes throughout the fall actually have been quite low. When you have low volume trade, the price tends to move higher. It's just a dynamic of having, there are more natural buyers of equities than there are sellers. The second piece is, you know, there's a single trade out there right now and it is the short U.S. dollar trade. If that continues to play itself out here and we continue to see weakness in the U.S. dollar, you will see higher equity prices. Then finally, most of this talk about money on the side lines, we think is really a little bit of fabrication. Most of the institutional money managers that we know and talk to are fully invested and the last leg of somebody coming into this market is going to be the retail investor, of which we would caution them at these levels, equities are quite pricey.
PRATT: All right. And you said when we spoke earlier today that you are worried right now that the market you think is dangerous. Explain or elaborate for me, if you will, on that.
ELLIS: Sure. So the danger here is that markets like this that tend to trade on technical levels and when you have light volume and technicals driving markets, they tend to have this melting up effect. Unfortunately, in the kind of economic environment that we're in, it doesn't really, to our mind, support the kind of multiple expansion that we've seen. In the past recessions you've had the dual tail winds of expanding credit and interest rates coming down. And in fact this time around we have exactly the opposite. We will have interest rates moving higher over the course of the next 12 to 18 months and you have seen a massive contraction, the largest contraction in consumer credit since World War II, which really will crimp the consumer's ability to spend and unfortunately sustain themselves. Because, remember, there's one in 10 or one in six depending on how you count it persons out of work that are highly dependent on that credit to patch them through these past recessions and it's not going to be there this time and that puts is in a very precarious position.
PRATT: OK, I think we have to leave it there. Some very interesting thoughts, thank you for joining us.
ELLIS: You bet.
PRATT: My guest, Lincoln Ellis, managing director of asset management at the Linn Group.
GE is Saying B-Y-E to NBC Universal
PAUL KANGAS: Dotting the I's and crossing the T's is apparently all that's left tonight for negotiators working out a deal to sell Comcast majority control of NBC-Universal. NBC was once a jewel in GE's crown, but as Scott Gurvey reports, that jewel has lost its luster.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: NBC was the prime motivation in 1986, when GE bought NBC's parent, RCA. The television network was a cash cow, sitting on top of the Nielsen ratings and with its owned stations throwing off tons of money. That came to an end with the explosion of cable TV and the Internet. Those are competitors for the eyeballs of consumers and alternative distribution channels for the programming NBC was creating at its great expense. NBC was a strange fit for industrial giant GE, which prided itself on being first or second in its markets. Analyst Nicholas Heymann says with cash no longer flowing and headaches mounting, GE decided to stop fighting the entertainment revolution.
NICHOLAS HEYMANN, GE ANALYST, STERNE AGEE: This is a real challenge and so they've done a resourceful job figuring out how to mitigate that impact. I think the number one and number two is not necessarily the only reason. I think the structural change in the whole economics of the industry as you move from digital to analogue distribution and fragmented audiences was really -- there just wasn't enough -- how do you call it -- gum to plug all the leaks in the dam.
GURVEY: There is also a sense on Wall Street that the challenges faced at NBC-Universal are distracting GE management. The firm also faces problems in its much larger energy, technology and financial business segments. Tuna Amobi of Standard & Poor's says in the right hands, there is considerable value in NBC-U.
TUNA AMOBI, MEDIA ANALYST, STANDARD & POOR'S: The new owners, whoever they turn out to be, could devote more resources and try to scale up the business and leverage some potential synergies, which up to now, arguably, GE investors don't seem to believe that GE has done to the potential that it can be executed. So I think this is what it comes down to. Would Comcast be a better owner of NBC-U compared to GE, which is a non-media business?
GURVEY: Wall Street gossip says GE's decision on NBC-Universal is final. The rumors say if GE fails to complete the deal with Comcast, it will spin a majority stake in the NBC-U to the public by means of an IPO. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Commentary"-Commodities 101
SUZANNE PRATT: Tonight's commentator says when it comes to commodities, we literally have a lot to learn. He's Todd Buchholz, author of "New Ideas from Dead CEO's."
TODD BUCHHOLZ, AUTHOR, "NEW IDEAS FROM DEAD CEO'S": Whenever oil prices shudder, Washington blames energy traders. Meanwhile, pundits warn of peak oil. They say the earth is running out of dead dinosaurs. We cannot drill our way out of this mess, says T. Boone Pickens. He turned in his oil drill-bit for a flock of windmills. Since higher oil prices coincide with climbing sugar and cocoa prices, why don't those peak oil pundits stretch their argument to all commodities? They may not believe the world is flat, but they do seem to think the earth is hollow. In fact, the stumbling block is not geologic; it is not even environmental. It is a lack of talent. We are not suffering from peak oil; we're suffering from peak people. The U.S. graduates only 10 percent as many petroleum engineers as it did 25 years ago. West Virginia faces a shortage of coal miners because the coal miner's daughter doesn't want to strap on a headlamp. During the 2008 oil price spike, foundries in Houston struggled to find machinists who could handle pipes without tripping into the gears like Charlie Chaplin in "Modern Times." Last year, tortilla and rice riots raged across the globe and yet we have no more agricultural scientists than we did 10 years ago. Colleges could help by launching commodity majors not in make-a-quick-buck speculation, but in figuring out how to get more stuff out of the ground. Today in the U.S., we have more dance choreographers than metal casters. That makes it easy to put on a high-kicking production of "Oklahoma," but a lot tougher to erect an oil rig in Tulsa. I'm Todd Buchholz.
"Last Word"-Car-to-Go
SUZANNE PRATT: And finally tonight, the city of Austin, Texas, is taking on congestion -- not the kind that comes with cold and flu, the kind that clogs our streets. Austin is working with car-2-go, a car-sharing service based in Europe, to test a car sharing program with city employees. The city says if the tiny blue and white smart cars are a hit with its workers, it could roll out the plan to residents. The fleet of 200 smart cars began driving around Austin today. The pilot program is expected to last about half a year. And Paul, have you ever ridden in one of those cute little smart cars?
KANGAS: No, I haven't, but I just hope that the drivers are as smart as the cars.
PRATT: Absolutely.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street retreated this morning on profit taking from recent gains, a weaker than expected .1 percent rise in October industrial production and a firmer dollar also prompted some of the selling. Two hours into trading, the Dow was off 27 points and the NASDAQ down 10 points. The downturn was cushioned by a subdued .3 percent rise in October's wholesale prices. Buyers jumped in after seeing how mild the market's pullback was and that turned the major averages positive by the close. The Dow Industrial Average ended up 30.46 at 10,437.42. The NASDAQ gained 5.93 ending at 2203.78, while the Standard & Poor's 500 index added 1.02 points to 1110.32. In the bond market, the 10-year note rose 7/32 to par and 14/32, putting the yield at 3.32 percent.
New York exchange volume leader on 31.8 million shares, Citigroup (C) moving up $0.06.
Then came Ford Motor Co (F) very active and up $0.27. As you heard, Ford Fusion selling well. Also the Soros fund disclosed it bought 7.3 million Ford shares in the third quarter.
Bank of America (BAC) down a dime today.
And Sprint Nextel (S) up $0.20.
General Electric (GE), you heard the news there, $0.02 gain.
Motorola (MOT) was up $0.15.
Home Depot (HD) down $0.66. As you heard, the company posted lower but slightly better than expected third quarter earnings.
ExxonMobil (XOM) a $0.60 gainer.
Regions Financial (RF) a $0.25 advance.
And then Smith International (SII) down $3.90. The company began a 20 million share public offering of common stock. In the meantime, Credit Suisse downgraded the stock from "out perform" to "neutral."
Target (TGT) off $1.52. Third quarter earnings were up 18 percent to $0.58 a share, $0.08 better than expected, but same store sales in the period fell 1.6 percent and on top of that, the company gave a very cautious outlook.
Another department store, Dillard (DDS) up $1.18. Third quarter turnaround, earnings of $0.11 versus a loss of $0.76 a share last year. Same store sales were down just 9 percent.
TJX Co (TJX) yet another retailer, up or down $0.61. Third quarter earnings were up though, 32 percent, to $0.81 a share from $0.58 last year, but that was just a penny better than expected.
Jacobs Engineering (JEC) tumbling $6.61. Sharply lower fourth quarter earnings, $0.63 versus $0.92 last year. Revenues tumbled 19 percent and the company sees 2010 earnings at $2.60 a share at best and that's well below the Wall Street estimate of $2.83. Nevertheless, Standard & Poor's repeated a "strong buy" on Jacobs stock.
Assured Guaranty (AGO) a big gain of $4.32. Third quarter operating earnings came in at $0.44, well above last year's $0.28 and $0.13 better than expected. JPMorgan meanwhile boosted its price target from $28 all the way up to $42 a share.
State Street (STT) up $1.17. HSBC bank upgraded it from "neutral" to "over weight," saying the recent 26 percent pullback in the stock was overdone.
And Teekay LNG Partners (TGP) off $1.28. The company plans a public offering of 3.5 million shares. That represents earnings dilution.
Moving along to the NASDAQ actives, Apple (AAPL) topped the active list, up $0.37.
Followed by Microsoft (MSFT) $0.59 gain there. Morgan Stanley boosted its price target for Microsoft from $33 to $36 a share. Elsewhere, Comscore said in October it expects a slight increase in Microsoft's market share.
Google (GOOG) up $1.21.
Amazon.com (AMZN) $0.34 loss.
Research in Motion (RIMM) $0.13 gain there.
Cisco Systems (CSCO) a $0.22 advance.
Directv (DTV) gained $0.62.
Intel (INTC) $0.09 advance.
Oracle (ORCL) down $0.03.
And Baidu (BIDU) was up $3.18.
Elsewhere on NASDAQ trading Sunpower (SPWRA) tumbling $5.04. The company is having some accounting problems in its Philippine operations and it's begun an internal investigation there.
And a good gainer, Semitool (SMTL) up $2.62. Applied Materials Corp. will acquire the company for $11 a share in cash.
And those are our stocks in the news tonight.
