TOM HUDSON, NIGHTLY BUSINESS REPORT ANCHOR: And we head to Phoenix where housing in the land of sand and sun is finally looking up. It’s NIGHTLY BUSINESS REPORT for Monday, April 2.
Can There Be Hope for a Positive Earnings Season?
TOM HUDSON, NIGHTLY BUSINESS REPORT ANCHOR: It was a banner beginning for the second quarter today for investors. Some positive economic news helped power stocks higher, extending the first quarter’s winning streak. Here are those closing digits now for the Dow Jones Industrial Average, rising another 52 points today. The NASDAQ adding 28 and change. The S&P 500 gaining 10.5. Now as the new quarter begins, attention turns to earnings and how the first three months of the year shaped up for corporate America’s profits. Next week marks the start of earnings season. And, with that come new worries about those quarterly financial scorecards. Suzanne Pratt reports.
PRATT: The stock market got off to a super start in the first three months of this year. That’s as investors were cheered by a stronger U.S. economy and solid corporate profits. But with a new earnings season just a couple weeks off, the profit picture is looking pretty dismal. Standard & Poor’s predicts first quarter earnings growth of less than 1 percent for S&P 500 names. Thomson Reuters (NYSE:TRI) is slightly more optimistic with a ho-hum forecast of 3.2 percent. But, it’s not like corporate America is keeping the bad news a secret from Wall Street. So far 120 firms have pre-announced Q1 earnings and what’s most disturbing is that negative pre-announcements outweigh positive ones by a ratio of nearly three to one. That’s more than average. The profit picture is suffering from tough comparisons and an inability of companies to do more cost-cutting. After all, most got pretty lean post financial crisis. But, earnings expert Jharrone Martis points to three other reasons for declining profits.
JHARONNE MARTIS, DIR. OF RESEARCH, THOMSON REUTERS: The first one: slower economic growth in emerging markets, less favorable exchange rates due to the weakness in Europe and higher energy, fuel and commodity costs.
PRATT: Some market pros say the Q1 earnings slowdown is already factored in to stock prices. Others think disappointing corporate profits will only trigger a hiccup in the stock market. Still market strategist, Stephen Wood says he has another worry.
STEPHEN WOOD, CHIEF MARKET STRATEGIST, RUSSELL INVESTMENTS: What’s more likely to trigger a sell-off is probably oil prices because we’ve known that there’s going to be a deceleration in earnings for a number of quarters and we had a fairly good idea of what that would be. What’s turning into a wild card is energy prices have spiked over the last couple of weeks.
PRATT: The bad news for stock investors is that the Q1 earnings slowdown could just be the start of a prolonged decline. Not everybody agrees with that forecast. But it’s one more thing for investors to worry about. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York. Manufacturing is Expected to Deliver Positive Earnings TOM HUDSON: On the optimistic side, the sector expected to show the best earnings growth in the first quarter is the industrials sector as U.S. manufacturing continues showing some signs of life. For instance, the Institute of Supply Management index hit 53.4 in March. Any reading over 50 shows expansion. This is the 32nd straight month of growth. Scott Paul is the executive director of the Alliance for American Manufacturing. He’s with us tonight in our Washington, DC bureau. So what is driving the growth of American manufacturing? Is it U.S. demand or are we shipping this stuff overseas?
SCOTT PAUL, EXEC. DIR., ALLIANCE FOR AMERICAN MANUFACTURING: Tom, it’s a mix but by and large it is U.S. demand. We have seen strong demand for automobiles, for durable goods. We’ve seen consumer confidence slowly creep up. We have seen some increased exports, although the situation in Europe means that that, we can’t count on that as a market for growth. And I expect, I know auto numbers are out tomorrow. I expect to see some good numbers there, which is obviously a good thing for American manufacturing.
HUDSON: So if it is U.S. demand that’s driving the resurgence in manufacturing, does that tell you is more sustainable than if it were just exports?
PAUL: It would obviously be nice to see global growth. But it’s nice to see the U.S. consumer back in the game. And the areas in which we see manufacturing jobs growth in primary metals, in transportation equipment, that’s automobiles and durable goods, there is a strong indication that there is some pent-up demand that is being released right now. Obviously we need to keep moving in the right direction on jobs and on a number of other factors.
HUDSON: Politics being what it is, what do you say to critics who say nothing is made in America any more when you look at these numbers?
PAUL: We’re seeing a renaissance in American manufacturing. We’ve seen about two years of solid job growth, 32 months of this ISM data. This is the best performance we’ve seen since the early 1990s. For those who say we should write off manufacturing, I think this is good evidence that they are wrong.
HUDSON: Scott Paul along with us tonight on the state of manufacturing. Scott’s with the Alliance for American Manufacturing
DEMs vs. GOP: Their Budget Proposal & How It Affects You
TOM HUDSON: We mentioned politics just a moment ago, just a while ago and it was certainly - this is an election year, but it still a slower time of year for Congress—a break in the usual politicking about the Federal budget. Still, there are two very different spending plans for Uncle Sam being considered in Washington. How far apart are Republicans and the president when it comes to the budget proposals? How far are both sides away from reality and what does all this mean for you? Darren Gersh went looking for some answers.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is hardly news to say that, before they left town for the holidays, Democrats and Republicans failed to solve the budget crisis. But they did accomplish something else and it’s pretty important. They put the president’s budget on one side and the budget from House Republicans on the other. You now have a very clear idea of where each party would take the country if they could.
JOSH GORDON, POLICY DIRECTOR, CONCORD COALITION: If you never want taxes increased, this is what happens to social insurance. If you only want to increase taxes on the wealthy, this is where the debt ratio winds up. Perhaps it’s not stabilized enough. And these are really the basic questions the voters need to be able to understand and then answer in the election.
GERSH: The differences are really quite striking. In their budget, House Republicans cut taxes deeply and cut Federal spending so deeply that there’s not much left of the Federal government beyond defense, Social Security and a slimmed down Medicare. The president’s budget raises taxes on the wealthy, but even then, Federal debt only stabilizes over time and that’s if you use some very generous assumptions. And both Republican and Democratic budgets ignore the really big enchilada. There’s no policy to deal with the retirement of the baby boomers. And short term budget cuts are just that, a short-term fix.
GORDON: You’re still right on the cusp of that becoming destabilized because of the increase and aging of the population.
GERSH: Interestingly enough, House Republicans and the president agree on how much they want Medicare to grow in coming years. The answer: not by much. And many analysts think that’s unrealistic.
ERIC TODER, CO-DIRECTOR, TAX POLICY CENTER: We’re going to have think —go to the middle class and say these are benefits, you know, these are programs you benefit for and you’re going to have ante up a little bit more.
GERSH: And when it comes to middle class benefits and taxes, the two parties share the same focus.
TODER: A huge part of the action has to do with changing the taxes on upper income taxpayers. One side would raise them, one side would lower them. Nobody is really looking and saying seriously well—is everybody else paying the right amount of taxes.
GERSH: And that question is likely to be answered after the election. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
HUDSON: Still ahead, tonight’s “Word on the Street”: contrary. Gregg Greenberg will be along from thestreet.com joining us with some stock picks running against the grain.
Phoenix Housing: Safe, but Not Sound
TOM HUDSON: This week, we continue our look at the spring housing market nationwide. Tonight, we head out to Phoenix in the heart of Arizona. It was one of this sand state’s hardest hit housing markets. But as Mike Sauceda reports tonight, buyer demand is building.
MIKE SAUCEDA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cristal Romney of Avondale, Arizona wants her own home so she can move out of her sister’s place. She’s taking a tour of a place in Gilbert, Arizona, has a good credit rating and a 20 percent down payment, but still it’s been difficult to find a home.
CRISTAL ROMNEY, HOMEBUYER: It is very frustrating to buy a home because when I look at the house that I want, I put in an offer, it has a multiple offers. I go way above the listing price and it goes for more than what I put the offer in.
ERIC NYQUIST, REALTOR, KELLER WILLIAMS: I am seeing the market tightening up. There are less homes for buyers, which is creating a buying frenzy on properties.
SAUCEDA: That frenzy is being fed by a shrinking housing inventory in the Phoenix area. It has fallen from a high of 58,000 homes in 2008, which would be a 19-month supply at average sales rates. However, up to 8,000 homes are being sold monthly now and the nearly 16,000 homes on the market that are not under contract represents just a two-month supply. Although the shrinking housing supply signals a housing recovery, the health of the market also depends on the willingness of banks to loan money. Mike Thorell is president of Pinnacle Bank in Scottsdale, a community bank with one branch. Half of its lending is to small businesses, the other half to home buyers.
MIKE THORELL, PRES. PINNACLE BANK: I would harken back to the days when I started in banking it took a real highly, highly qualified person to get a 5, 10 percent down mortgage. We’re there and maybe more.
SAUCEDA: Thorell says that local and regional lenders are stepping up in the absence of aggressive lending by the mega banks.
THORELL: It now has been very clearly represented that you got to be careful. And you’re seeing a lot of the national lenders not fully embracing coming back into the state to make loans and if they are coming, they’re being extremely careful.
SAUCEDA: Another factor are Arizona laws preventing banks from going after homeowners for any money owed on a home after it’s been foreclosed on and sold. But mortgages are not a factor in many housing transactions in the Phoenix area. Forty percent of homes sold here are being bought with cash, even as median prices have turned higher. Last summer, Phoenix median home prices fell to $108,000. In February, that had jumped to $122,000. Rising prices and shrinking inventories will help those underwater on their mortgages come up for a breath, according to Michael Orr, the head of the Arizona Real Estate Center at Arizona State University’s WP Carey School of Business.
MICHAEL ORR, ASU REAL ESTATE PROFESSOR: That will probably have a beneficial effect on the local economy because people will feel more confident that they’re not losing value in their homes anymore. If they’re underwater, they’re not as underwater by as much and it think it’s going to spur homebuilders to try and catch up with this shortage and create jobs in the construction industry and everything that goes around that.
SAUCEDA: Mike Sauceda, NIGHTLY BUSINESS REPORT, Phoenix.
HUDSON: Tomorrow, housing reports continue. We turn to real estate in the big apple and show you that market’s surprising sweet spot.
UBS CEO Explains How the U.S. Can Improve Employment
TOM HUDSON: This week’s big news for investors will come on Friday at the end of the week on Good Friday, the March jobs report. The nation has posted solid gains averaging over 240,000 new jobs per month over the past three months and there’s plenty of optimism the momentum can continue. It’s been almost a year since President Obama’s council of jobs and competitiveness first met. This group of top CEOs, labor leaders and economists has focused on getting American companies to create more jobs and create them faster. Erika Miller sat down with a member of that committee, Robert Wolf, chairman Americas of UBS to get his views.
ROBERT WOLF, CHAIRMAN, UBS AMERICAS: I think there’s a myriad of things that this country can continue to do. I do think that one starts with education. We have over two million jobs available for engineers and mathematicians. So we need to make sure that we are educating to align with jobs and business needs.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wolf is also a big advocate of infrastructure spending, estimating that a billion dollars spent on improving the nation’s infrastructure would create more than 25,000 jobs. What are some other things our nation can do to boost hiring?
WOLF: This is a debate that’s not easy. One, there’s a skills gap. So, a lot of the jobs available, we don’t necessarily have the skills to fill that gap. And then the second part is you need a demand driven economy.
MILLER: But there, the news is getting better. From manufacturing to consumer confidence to the rally in the stock market, most economic indicators seem to be improving. Are you seeing any signs from your corporate clients that confidence is improving?
WOLF: There’s no question that the acquisition pipeline is building. We also have an IPO pipeline that is starting to build. And the debt markets have been on, you know, just a complete roaring run with low interest rates where they are. So you know, our business lines are doing well.
MILLER: UBS is obviously headquartered in Switzerland and one of Europe’s biggest banks. What can you tell me about the health of the financial environment there?
WOLF: It’s clear the lessons we have learned as a banking industry over the last few years is equity is equity and nothing else is equity. And we had to go through a situation where we had to de-lever and we had to raise equity to be stronger. We’re now one of the most well-capitalized banks in the world. And that makes people wanting to do business with us more.
MILLER: But UBS has faced plenty of challenges in the past year. It is in the process of downsizing its investment bank. And it has been clawing back employee bonuses, which could make it harder to keep top performers. And there are even bigger issues of trust. UBS has stumbled from one credibility crisis to the next. First there were big losses during the credit crisis. Then there was the U.S. probe into offshore tax evasion and then the $2 billion rogue trading scandal. What kind of toll has that taken on your business?
WOLF: I would say it a little differently. I would say, we like all other firms have had a very humbling three to four-year period. But I look at where we are today. We are one of the most well capitalized in the world. We have a great group of leaders. And we have a great bench.
MILLER: Where do you see the biggest opportunities for growth in your business?
WOLF: From where I sit, it’s the U.S because the U.S. for us is a great growth engine. Fifty plus percent of the fee pool in our industry is in the U.S. And we are now ranked somewhere between seven and 10. So we have a great opportunity to take market share and continue to grow.
MILLER: Robert Wolf, chairman Americas UBS, thank you very much for joining us.
WOLF: Thank you.
HUDSON: UBS looking at Americans for growth. American stocks were growing today beginning the second quarter building on the historic first quarter gains as we get you updated here with tonight’s “Market Focus.”
Market Focus – Monday, Apr 30, 2012
TOM HUDSON: We’ll begin with the S&P 500 rallying mid-morning after that report on manufacturing we told you about earlier and the market holding onto most of those gains into the closing bell. Now in fact, today’s rally takes the S&P index to another post-recession high, back to prices last seen in May 2008. The economically sensitive materials sector was up almost 1.5 percent leading the charge today, while the more economically insulated information technology sector rallied more than 1 percent.
Energy prices also turned around midday on the manufacturing numbers and the energy sector gaining almost 1 percent. Topping the technology trading was Apple (NASDAQ:AAPL). The incredible rally for Apple (NASDAQ:AAPL) continued with the stock moving up another 3 percent today almost $20 to the upside. It takes AAPL to another all- time high, over $618 per share. One investment analyst thinks the iPhone is the top-selling smart phone at all three major U.S. wireless carriers. A separate media survey finds 51 percent of U.S. households have at least one Apple (NASDAQ:AAPL) product.
Another company that is familiar in many households, but has been struggling lately is Avon. Today, a perfume maker went public with an offer to buy Avon. The privately owned Coty offered $23.25 per share in cash for Avon, making it a $10 billion offer. Coty’s first offer was made less than two weeks ago in private. It went public today and Avon said no, saying it quote, substantially under-values Avon and is opportunistically timed, end quote. Now that last phrase is in reference to Avon’s recent management shake-up. Just late last year Avon announced it would replace long time CEO Andrea Jung. But no replacement has been hired yet. Shares of AVP as you can see shot up 17 percent though as the buyout interest went public. The fall-out from last Friday’s credit card customer data breach continued today. Processing firm Global Payments (NYSE:GPN) first discovered the intrusion about three weeks ago it said. On a conference call today, CEO Paul Garcia noted the break-in will cost the company. How much, he doesn’t know.
PAUL GARCIA, CEO, GLOBAL PAYMENTS : We will get through this. I will tell you that absolutely, positively. Now, it might be bigger than we’d like. But we are going to get through this. This is a one-time charge. We’re going to be better for it. We’ll get through this and the sooner we can tell you, the better and that’s what we’re focused on.
HUDSON: Shareholders were focused certainly on the stock and not showing much patience. Global Payments (NYSE:GPN) shares fell almost 4 percent today. As many as one and a half million cardholder accounts may have been exposed to hackers, including Mastercard (NYSE:MA) and Visa (NYSE:V) customers, Those two stocks though each rebounded with today’s market action. Finally, Sirius XM Satellite Radio shares saw heavy volume even for it. More than 140 million shares trading with the stock finishing just below a 52-week high. The “Wall Street Journal” reports that Liberty Media is asking the FCC to declare it in de-facto control, even though Liberty owns less than 50 percent of Sirius stock. And that is tonight’s “Market Focus.”
Prescription Drugs’ Monster Merger
TOM HUDSON: Despite some objections from drug companies, two giant companies managing prescription drugs, prescription drug insurance are now one tonight. Express (NYSE:EXPR) Scripts finished its $29 billion buyout today of Medco Health Solutions. This coming after the Federal Trade Commission ruled combining the two largest players in the industry would not hurt competition.
Combined, these two companies handle 40 percent of drug prescriptions. That’s almost one and a half billion prescriptions annually. And after an eight-month review, the government gave the merger a green light.
STEVE MILLER, CHIEF MEDICAL OFFICER, EXPRESS SCRIPTS: There’s a billion dollars of synergies in this deal and those really come from actually looking at the contracts, looking at who has the best contracts with both pharmaceutical manufacturers and the pharmacies, but more importantly, it’s really driving patients to the right drugs. So getting them on those low-cost generics, low-cost brands and really getting them to adhere to their medications and have better health outcomes.
HUDSON: But some are skeptical about the merged company’s ability to drive down prescription drug prices. Jennifer Mallon represents 23,000 privately-owned pharmacies with the National Community Pharmacists Association.
JENNIFER MALLON, GENERAL COUNSEL, NAT’L COMMUNITY PHARMACISTS ASSOC.: Frankly, one of the concerns that we have is that even if there are alleged efficiencies, we are very concerned that those efficiencies will not be passed on in the form of cost savings.
HUDSON: But in OKing the merger, the FTC anticipates more competition coming from health insurers themselves. For instance, next year United Healthcare will switch to its own pharmacy benefits unit.
Gregg Greenberg, of TheStreet.com on the Idea of a “Contrary Investment”
TOM HUDSON: While the S&P 500 may be at its highest level tonight since the great recession, insurance, taxes and television haven’t exactly been hot stocks to buy. That brings us to tonight’s “Word on the Street”: contrary. Gregg Greenberg is a reporter at thestreet.com with us tonight from the NASDAQ. So Gregg, with the market in post recession highs, is contrary simply an investment, something that just hasn’t rallied?
GREGG GREENBERG, REPORTER, THESTREET.COM: Well, to a certain extent, as we all know on Wall Street, eventually the last become first. That is a great way to make money. Everyone says you want to buy when there is blood in the street so it is the best way to make money. Otherwise you might as well just stick with the index.
HUDSON: It’s easy to say buy low. It’s a tough one to actually do it. One of the stocks, the fund managers have told you they are looking at, AFL is Aflac (NYSE:AFL), the large insurance company, a big presence in Japan. It has been trending lower over the past 12 months. What could fuel it higher?
GREENBERG: Well, Aflac (NYSE:AFL) was up about six percent in the first quarter. That compares to about 13 percent for the S&P. And you look at the other insurers like Metlife (NYSE:MET), Aetna (NYSE:AET), AIG, they were up about 20 percent so it certainly lagged the sector. Now Aflac (NYSE:AFL) is to a certain extent gotten over its troubles. It had a bad European bond portfolio. A lot of people say that is resolved. A lot of people say if you are looking for a contrarian name and maybe even a takeout look to Aflac (NYSE:AFL) because there is another big insurer which didn’t do that well in the first quarter. That was Berkshire Hathaway (NYSE:BRK.A). That stock was only up about 7 percent. And we all know that Warren Buffett likes to buy cheap stocks that are out of favor.
HUDSON: And he has made a name in insurance over the past several generations. What about Gannett (NYSE:GCI), GCI, probably best known for “USA Today” but also owns a lot of TV station and this stock meantime is not necessarily out of favor but it hasn’t rallied as sharply as the markets. It has kind of flat lined here in the mid teens.
GREENBERG: Well, the sector is out of favor. Everyone keeps saying that newspapers are going to go the way of buggy whips. And when people think about Gannett (NYSE:GCI) they think about “USA Today” and those lovely pie charts when they stay at Holiday Inns and hotels across the country. But Gannett (NYSE:GCI) also owns TV stations. And TV stations are a very good asset in election years with all that super PAC money buying commercials. So that’s why Gannett (NYSE:GCI) had had actually a very good first quarter. It was up about 16 percent and a lot of people say it can go higher despite being an out of favor sector.
HUDSON: All right, of course election year with those TV ads,. How about disclosures, do you or you can own positions in these two stock stocks?
GREENBERG: I do not.
HUDSON: You can read Gregg’s article with one more stock idea as well. It’s on thestreet.com’s web site, a link to it on nbr.com as well. It’s our guest this evening, Gregg Greenberg with thestreet.com. A Worrisome Future of Health Care Reform?
TOM HUDSON: After an historic six hours of arguments last week, the U.S. Supreme Court now weighs the future of President Obama’s health insurance reform law. We know this. Today, the president weighed in on those arguments, saying he’s confident the law will be upheld. BARACK OBAMA, PRESIDENT OF THE UNITED STATES: And the reason is because, in accordance with precedent out there, it’s constitutional. That’s not just my opinion, by the way, that’s the opinion of legal experts across the ideological spectrum, including two very conservative appellate court justices that said this wasn’t even a close case.
HUDSON: While we expect to learn the law’s fate in three months by June, tonight’s commentator worries about the fate of any future health care reform effort. He’s Steven Ullman, professor of health sector management and policy at the University of Miami school of business.
STEVE ULLMANN, PROF., UNIV. OF MIAMI, SCHOOL OF BUS. ADMIN.: Last week, the Supreme Court listened, questioned and contemplated the affordable care act. The court will announce its ruling in June as it reflects on issues from a constitutional perspective rather than a policy perspective. So now we wait and see. And what if the Supreme Court declares the accountable care act unconstitutional? Then what? Without any indication of a plan B by either political party, it is projected that 68 million people will be uninsured within six years. It is anticipated that health care costs will reach a staggering $13,700 for every man, woman and child. With our unique employer-based health care system, it will mean that these costs will be borne heavily by employers as they pay the bulk of the costs for their own employees and implicitly pay the costs of those who are uninsured. It will mean that firms will find it ever more difficult to compete globally. Just as Medicare was adjusted and improved over time, so it would be with health care reform. However, if the affordable care act fails this constitutional test, no one will touch health care reform for another 20 years. And that is a very scary prospect. I am Steve Ullmann.
HUDSON: That’s it from us tonight here on NIGHTLY BUSINESS REPORT this Monday, April 2, still taking your tax questions on our website, nbr.com. We’ll see you online and right back here tomorrow evening.