NBR Transcripts-May 20, 2010

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NBR for May 20, 2010 – Full EpisodeThursday, May 20, 2010

Stock Sell Offs Go Global

TOM HUDSON: A massive sell-off today around the world with global markets. Susie, the selling started overseas and spread to Wall Street right at the ringing of the opening bell.

SUSIE GHARIB: You’re right, Tom. All 30 stocks in the Dow were in red and the major market indexes are down by 10 percent or more from their April 23 highs, considered correction territory.

HUDSON: Let’s go ahead and take a look at these closing numbers now. The Dow at the bell plunged 376 points, trading at 10,068. The NASDAQ tumbled almost 95 and the S&P 500 fell 43 points. And as you would imagine, volume was very heavy. Over two billion shares trading hands on the big board and 3.3 billion on the NASDAQ. Uncertainty about the economy in Europe as well as the U.S. weighed on investors as did some new concerns about financial reform. So what will stop the selling? Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: On Wall Street, sometimes it’s hard to detect a change in sentiment. Not lately. In fact, you’d have to be stuck on a desert island to miss the recent 180-degree turn investors have taken. Fear now dominates the stock market. Less than a month ago, euphoria ruled. That sentiment swing has resulted in a more than 10 percent drop in the S&P 500 since its April 23rd high as investors have become obsessed with everything from the euro to the stalled global recovery. But the stock market declines also have investors questioning what it will take to stop the selling. Strategist Craig Peckham sees no quick fix, but says investors will need to refocus on strength in the U.S. economy.

CRAIG PECKHAM, EQUITY STRATEGIST, JEFFERIES & CO.: The marketplace needs to be able to say with conviction that the issues in Europe and the fundamental economic picture in the U.S. are disconnected at some level.

PRATT: Peckham says it will take a continued stream of positive economic data before stocks become appealing again.

PECKHAM: I think it’s going to happen. I just can’t predict that it’s going to happen in the immediate future. We’ve got I think a lot of fits and starts in front of us right now. But the market has an interesting way of turning its sentiment measures around pretty quickly.

PRATT: Others disagree. Strategist Nick Colas says U.S. stocks cannot regain favor until the euro’s free-fall begins and Europe begins to repair its financial problems. Otherwise, U.S. financial institutions are also at risk.

NICHOLAS COLAS, CHIEF MARKET TECHNICIAN, CONVERGEX: It isn’t the case anymore that 300 or 400 banks lend the money in the U.S. It’s now the case of less than 10 banks in the U.S. basically control most consumer lending. Those banks all have big operations in Europe and all have what they call a lot of counter party risks with the European banks. So if the European financial system is sick, then the U.S. is certainly at least going to catch a cold.

PRATT: As for how long it will take policy makers to stabilize the euro, it may be less time than you think.

COLAS: They would put together the basics of the game plan. It all has to be approved. It all has to get put to work. That’s going to take time, three to six months at a minimum.

PRATT: When and if investors rediscover U.S. stocks, experts say the appetite may not return overnight. They say it may take months for a new base to form and for the stock market to regain its footing. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.

One on One with Carter Worth of Oppenheimer & Company

SUSIE GHARIB: Let’s get another forecast on the markets from a technical analyst. Joining us right now, Carter Worth. He’s chief market technician at Oppenheimer and Company. Hi Carter.

CARTER WORTH, CHIEF MARKET TECHNICIAN, OPPENHEIMER: Hi Susie.

GHARIB: Well, as you look at your indicators, do you think that what we’re going through now is a normal market correction or the beginning of a bear market?

WORTH: Sure, there’s a pretty time-tested rule that one can rely on for determining bear or bull — a 200-year old rule and it is the character of slope of the (INAUDIBLE) mechanism, the 150-day moving average. So currency, commodity, index, stock, what have you, if the (INAUDIBLE) mechanism is rising, the instrument in question is bullish. If it’s declining, the instrument in question is bearish. What’s happened now for the first time in over a year, the smoothing mechanism on the S&P 500 is now no longer rising and just as of two sessions ago has turned down. And it’s turned down in China, months ago. It’s turned down in most of the European borses (ph) from Paris to Italy, to Spain months ago. So one of the last holdouts is the U.S. and the issue is not so much whether it’s an opinion of bull or bear, it’s the primary trend has now changed to no longer rising.

GHARIB: And how do you see the trend going through the rest of this year, for the Dow and for the S&P?

WORTH: Sure. We spend a lot of time trying to pay attention to symmetry and there are rules of symmetry if you will, borrow from some of the rules of physics. And in the S&P, what’s happening so far, basically, we came in this morning, we were unchanged on the year. And there is a tendency where if you have a violent up year right after a big bear market, meaning you go down hard in a big bear and the first year that’s up is up big, we had that in ’09 — the second year is often at the end a push, nothing’s happened. And this happened after the 2000 NASDAQ bubble crashed when we dropped from 2000 to 2002, the first up year ’03 was up big (INAUDIBLE).

GHARIB: So how do you see your — specifically your prediction for the Dow and the S&P by the end of this year? Are they going to be unchanged or are they going to go higher or lower?

WORTH: (INAUDIBLE) unchanged and we’re mirroring ’04 almost exactly. Strong in the beginning of the year, January as we were in ’04, weak now and we were weak in ’04. And then we had strength at the end of the year in ’04. We’re looking for that same pattern to repeat. At the end —

GHARIB: What is the likelihood that the Dow could turn back statistically into the 11,000 territory or the S&P could get back up to the 1200 level?

WORTH: Right. We think that the highs are in for the year, so the late April highs of 12, 19 change on the S&P and 11,200 or thereabouts on the Dow, we think that marks the high. We think the lows are about 2 percent from here. And then we end up again on the year what you call (INAUDIBLE) plus or minus 2 percent.

GHARIB: You told me that despite this, you know, flat performance or downward performance of the S&P this year, there still are some stocks that are worth buying and you gave me a couple of names. And let’s take a look at them. Heinz (HNZ), Campbell’s Soup (CPB) and General Mills (GIS). They’re all up so far in 2010. What does the technicals tell you and is it a good idea to buy these stocks now?

WORTH: Sure. Well they have one — let’s say two common characteristics. They are all defensive by nature, right — ketchup, canned soup, corn flakes, General Mills. So the issue they’re still in primary trends that are rising. And as you point out, they’re up on the year. And it’s of all the things that have ever been tested in all markets at the highest level of the biggest machines ever, computer, relative strength is the number one thing. How is something doing, a stock, compared to its asset class other stocks? These stocks are outperforming. They’re exhibiting impressive relative strength.

GHARIB: Let’s look at the opposite way because you said there are so many stocks that are not exhibiting any strength. You gave up three names — Google (GOOG), Goldman Sachs (GS) and Freeport (FCX), all of them down double digits. What’s your analysis there?

WORTH: And here it’s really, it’s the quota, yes, or quite the opposite. In each case and they’re totally different businesses, a media company — Google, a broker dealer, Goldman, a copper company, Freeport, but the patterns are identical. Each was very strong. Each has been faltering. And now the smoothing mechanism (INAUDIBLE) has turned down in each one.

GHARIB: What about market volatility, Carter? We hear a lot about this, the market volatility, the so-called Vix index has really spiked up in the past week even. Do you see between now and the end of the year a lot more volatility or not?

WORTH: I think the volatility — elevated volatility will persist and that happens in transition periods, right. If you’re in a steady down trend, volatility abates. If you’re in a steady uptrend (INAUDIBLE). When you’re in a transition period, there’s a debate raging and that’s what’s (INAUDIBLE) and those who think the market is cheap and those who think it’s got problems. The Vix or volatility typically spikes.

GHARIB: Very good information. Thank you so much for coming on the program.

WORTH: Thank you, much obliged.

GHARIB: My guest tonight, Carter Worth, chief market technician at Oppenheimer and Company.

SEC Chairman Mary Schapiro Reveals a Flash Crash Prevention Plan

SUSIE GHARIB: Now we have learned a lot of new terms since the market’s flash crash earlier this month. One of the most controversial is broken trade. That’s Wall Street’s speak for a trade that’s considered a mistake and is reversed after the fact. Well today, the nation’s top securities regulator told the Senate Banking Committee she wants to write new rules on broken trades in the next few weeks. Darren Gersh explains.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sure, the iPad is selling well. But would you pay $100,000 for a single share of Apple stock? Apparently during the flash crash, someone did. And there were $100,000 a share trades in four other stocks. told the Senate Banking Committee today those trades will almost certainly be broken. Though she says it’s pretty arbitrary which flash crash trades will be broken and which will not.

MARY SCHAPIRO, SEC CHAIRMAN: There are clearly going to be aggrieved customers given the level at which the exchange is set, the break threshold. Going forward, we have to fix this process. It is very badly broken.

GERSH: Schapiro also says the SEC is investing whether brokers met their regulatory requirement to find the best prices available for retail trades. At this point, you’re probably wondering how a $200 stock could trade for $100,000 and a $30 stock could sell for a penny. Here’s how. If a Wall Street trading firm wants to keep bringing in business, it is required to submit a price to buy and sell a stock. In market speak an offer to both buy and sell is called a two-sided quote. But when markets go crazy, many firms don’t want to buy or sell anything, so they offer to buy at a penny and sell at $100,000.

SCHAPIRO: The obligation to provide a two-sided quote used to be required to be reasonably related to the market price no longer is in all cases. And we end up with, you know, a spread of one cent to $100,000. That’s just unacceptable.

GERSH: The SEC is actively considering restoring rules that require firms that make markets to do just that — offer real prices and buy and sell real shares even when the markets are rough. And regulators say it is critical to use circuit breakers to stop extremely volatile trading so people can step in to correct the mistakes made by high-tech computers. That’s critical says Commodity Futures Trading Commission Chairman Gary Gensler because those fancy computer trading strategies you may be hearing about, the ones that use mathematical algorithms, it turns out Gensler says they’re not so fancy.

GARY GENSLER, CFTC CHAIRMAN: A lot of these algorithms, just because it’s an algorithm, don’t think smart. A lot of the algorithms are very just rote, even dumb. I mean they just do what they have been programmed to do, repeatedly.

GERSH: We also got more insight into why it’s taking the Securities and Exchange Commission so long to analyze the flash crash data. The SEC’s computers are too old to quickly crunch the vast amount of trading data generated by Wall Street’s state of the art trading systems. Regulators are looking to hire an outside firm to help out. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

Commentary-Austerity is the New Black

SUSIE GHARIB: With the U.S. debt ballooning and Europe slogging its way through a debt crisis, tonight’s commentator welcomes a new age of global belt tightening. She is Chrystia Freeland, global editor at large at Thomson Reuters.

CHRYSTIA FREELAND, GLOBAL EDITOR-AT-LARGE, THOMSON REUTERS: Get ready for a new age of austerity. That’s the message from several of the world’s top CEO’s I spoke to this week. Why so grim? The short answer is, Athens. Greece’s crippling debt and the deep cuts the government has imposed to start paying it off have focused minds in other western capitals on their own financial difficulties. Britain’s new coalition government has already started belt tightening, beginning with the 5 percent cut to cabinet ministers’ paychecks. Other government employees are sure to feel the pinch too. And everyone will face a bigger bill from the tax man. The U.S. will take on its deficit in earnest after the mid terms, when the bipartisan fiscal commission reports back to the president. It may be hard to sell politically, but ultimately, America, like western Europe, will have to stop consuming more than it produces. For business, Starbucks boss Howard Schultz told me the inevitable spending cuts and tax increases will mean catering to customers with less money and more fear. Hello, via (ph) instant coffee. Even the super rich are changing their ways. Robert Polet, the CEO of Gucci, says that in the developed world, his most popular logo today is no logo at all. People still want status symbols, but in the new age of austerity, they need to be very discreet. Just as the great depression changed buying behavior for a generation, smart CEO’s are bracing themselves for a new breed of consumers who focus more on value and less on spending money they don’t have. I’m Chrystia Freeland.

Market Focus with Tom Hudson

TOM HUDSON: Pretty much busy for all investors here. Heavy selling taking its toll on the major indices with the Dow industrials now less than 200 points away from that intraday flash crash low a couple of weeks back. Leading the market lower today, financial (XLF), industrial (XLI) and energy stocks (XLE). Financial investors selling as the Senate vote on financial regulation nears as we reported earlier. Industrial stocks dropping as sentiment shifts on this trend for the global economy and energy fell as oil prices closed below $70 a barrel hitting their lowest price since last September.

The market’s latest high was set back on April 23. Since then some of the biggest losers reflect both the pessimism over the strength of the global economy and concerns here at home about regulatory reform. Take a look. Both the materials and energy sectors have dropped 15.5 percent since the market high just a few weeks ago while the financial sector is down just about the same. While these are certainly stiff losses in this bull market run, each of these sectors rallied strongly off those 2009 lows and in the case of the financial sector recall it more than doubled.

One result of the fear in the market is a rush into safety such as U.S. government bonds. Here’s the yield on the benchmark 10-year government IOU dropping to its lowest level of the year, down to 3.2 percent. It was just back in early April, about six weeks ago when the yield touched 4 percent before heading lower while bond prices rallied in connections to worries about Europe. But other traditional safe havens did not really hold up in today’s sell off. Precious metals like gold (GLD) and silver (SLV) exchange-traded funds fell as you can see. Even a more diversified commodity exchange-traded fund (DBC) fell to a new low for the year as the U.S. dollar weakened slightly and the euro gained.

Now, one place we found, however, and found buyers was Mastercard (MA). Credit card processing firm, just a handful of gainers in the market. Shares in fact were up about 1.5 percent on the day, but clearly they’ve been under pressure as you can see by this 12-month chart as financial reform makes it way through Congress. One of the amendments that failed today would have allowed states to set interest rate caps on out of state credit cards. That failure is seen as bullish for Mastercard.

At the close tonight, Dell Computer (DELL) did not help improve the tone of the market really after turning in better than expected results. Now, Dell made $0.30 per share in profits in the first quarter and analysts expecting 26. Revenues and shipments growing each by more than 20 percent, but the stock was off by more than 5 percent after the news. A 12-month chart here coming into the report, Dell was weaker along with the broad market. Now a move below $14 tomorrow would take Dell stock down to a six-week low, one to watch.

Intuit (INTU) also worth watching tomorrow. Shares added to their losses after hours, slipping in at about 1 percent on its earning news as well. Let’s get you updated here with results better than expected again. It raised its full year guidance thanks to a strong tax season from its Turbo Tax software. Initially the stock did catch a bit of an after-hours bid though before succumbing to more selling pressure.

Sears Holdings (SHLD) turned in a pretty soft earnings report, especially when compared to some of the other big retailers like Wal-Mart and Target we mentioned earlier in the week. Profit at Sears was two pennies per share. Analysts were expecting $0.14 a share. A significant miss there as promotions took a toll on profit margins and that took the toll on Sears stock dropping almost 11 percent. The stock has lost a third of its value just since late April.

One retailer that was able to fight against the market was discounter Ross Stores (ROST). The stock closed up 1 percent on heavy volume after expanding its margins and profits in the first quarter. SFN SFN GROUP Another retailer of sorts also finding some buyers, Advance Auto Parts (AAP) jumping more than 6 percent thanks to a strong first quarter. And again expanding profit margins were key to its performance. On the heels of the jump in weekly first-time unemployment claims we mentioned earlier, some employment firms really got hit in the sell-off today. Take a look at a trio. SNF (sic) (SFN) shedding 11 percent. Kelly Services (KELYA) losing 10 percent. Manpower (MAN) dropped more than 8 percent, all at the closing bell.

And that is tonight’s “Market Focus.”

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