Nightly Business Report

Published: July 27, 2004

PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: The Dow vaulted back above the 10,000 level today as consumer confidence hit its highest level in two years. A look at what s driving confidence and the day s big gain coming up.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: It looks like Verizon dialed up the right number for Wall Street today. Its second quarter earnings beat Street estimates. We ll tell you by how much and just how the stock reacted.

KANGAS: Then the Democratic National Convention continues in Boston and we continue our look at the candidate and the issues. Tonight, John Kerry and his economic plan.

GHARIB: Pension turbulence at United Airlines could result in a bumpy ride for the nation s pension insurance program, but United s not the only airline hitting an air pocket.

KANGAS: I m Paul Kangas.

GHARIB: And I m Susie Gharib. This is NIGHTLY BUSINESS REPORT for Tuesday, July 27.

Good evening, everyone. News that more consumers are optimistic about the economy gave Wall Street a boost of confidence today. The Dow gained 123 points, closing above the 10000 level once again and the NASDAQ added 30 points. That boost came as the Conference Board s measure of consumer confidence hit a two-year high this month. The July consumer confidence index climbed more than three points to 106.1. The number exceeded Wall Street expectations and was the fourth consecutive increase. The Conference Board says the index reflects growing optimism about the labor market and the economy as a whole.

LYNN FRANCO, DIRECTOR, THE CONFERENCE BOARD: This month s surge in confidence was driven by a surge in the expectations component as consumers tell us they are more optimistic about business conditions. They re more optimistic about labor market conditions. They re somewhat pretty flat in terms of their income expectations but overall they really expect the strength that we ve seen in the economy to continue over the next six months

GHARIB: And Franco expects consumer confidence to stay strong as long as the job market continues to grow.

KANGAS: That strength in consumer confidence comes even as stocks have continued to struggle. But some on Wall Street point to a bright spot for equities: valuations have fallen over the past few years. But does that mean that stocks are now undervalued? Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPODENT: On Wall Street there s always plenty for pundits to debate. For instance, is the economy stalling? Or, are oil prices likely to climb higher? Add to that the question of whether the stock market is undervalued. Believe it or not, a growing number of experts say it is looking undervalued.

DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS: On a valuation basis, the market it starting to look interesting, especially in light of the fact that we have very low inflation and very low interest rates. A P/E of about 16.5 is modestly undervalued.

PRATT: Yes and no, depending on how you view the numbers on an historic basis. The average price earnings ratio for the S&P 500 going back to 1988 is 23. Currently, stocks are priced at 18 times this year s estimated earnings and more than 17 times 2005 earnings. So that would make stocks seem somewhat cheap. But, if you look at the average P/E going back to 1935, it s a much more sobering 15, well below the numbers estimated for this year and next, which makes current stock prices still look high. So which is it? Undervalued, overvalued or fairly valued? While no one really knows, some experts say it s easier to make the case for a market that s getting more attractive.

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR S: Earnings are headed higher. The rate of change is likely to be slowing. And, if the market continues to edge lower, then it means that stocks will get increasingly attractive, greatly so from the 15-year average but approaching the 65-year average.

PRATT: So if it s true that stocks are becoming more attractive, why is it that investors are still reluctant to step in? Some experts say it s because most are distracted.

KATZ: Right now the market is being driven by psychological factors rather than valuation factors. So, for example they are concerned about geopolitical concerns, terrorism concerns, the election and there also has been a modest slowdown in the economy in June.

PRATT: Experts say it s tough to know what it will take for investors to latch on to those lower valuations. But some say when fundamentals are good, inflation tame and P/Es ratios relatively low, stocks ultimately should move higher. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.

KANGAS: Encouraged by that jump in consumer confidence, buyers took the upper hand on Wall Street this morning. The rally was also fueled by better than expected earnings from companies like Verizon, Wrigley and Automatic Data Processing. At mid-day the Dow was up about 83 points, NASDAQ up 15. The rally shifted into high gear this afternoon amid growing confidence that the market was so oversold that an extended rebound was likely. Stocks ended the day near their best levels. The Dow Industrial Average closed up 123 1/4 at 10,085.14. The NASDAQ Composite gained just over 30 points to 1869.10. Standard & Poor s 500 Index up 10 3/4 points at 1094.83. Treasury prices tumbled on that healthy reading in consumer confidence and the disappointing auction of $ 11 billion in 20-year TIPS. The 10-year note slid 1 1/32 to 101 1/32, lifting the yield to 4.62 percent. GHARIB: Earnings season is now past the halfway mark, 300 companies of the S&P 500 have reported second quarter numbers. And so far earnings growth is very strong, up 24 1/2 percent compared to the same period a year ago and 86 percent of the reporting companies have matched or surpassed expectations. Joining us now with more analysis, Chuck Hill, president of his financial firm, Veritas et Lux. Hi Chuck. Nice to have you on the program.

CHUCK HILL, PRESIDENT, VERITAS ET LUX: Nice to be back Susie.

GHARIB: Chuck, as you dig through the numbers, what you would say have been the high points and the low points of this second quarter so far?

HILL: Well, it s clearly the fourth quarter in a row where we re benefiting from the surge and all of the stimulus so we re seeing earnings growth that will be above 25 percent for the third quarter in a row. That s not unusual at this stage of the recovery. You have all the fiscal and monetary stimulus and we got it in spades this time but that s starting to fade now. So enjoy these very strong earnings, but don t extrapolate them out and I don t think the market is. I mean, it understand earnings have to deaccelerate here. We re headed for something probably in the mid teens in the third and fourth quarter. The real crux of the issue though affecting the market is what s the growth and earnings going to be in 2005? And I think at least for the first and second quarter we re probably headed for mid single digit earnings growth and that not only may be lower than what we have been seeing, but less than what many are expecting for 2005.

GHARIB: Let me ask you a few questions about this current quarter before, the second quarter, before we go on to look ahead. There is still plenty of companies that have yet to report their second quarter numbers. We have ExxonMobil later this week. We have a number of big tech companies like Dell and Cisco and the retailers. What are your expectations there?

HILL: Well, I think, I mean we re going to hear from the energy companies this week and the news I think is going to be quite good. This is the sector where for some months now we have been seeing the analysts raising their estimates far more than in any other sector. So I think they ll be upside surprises. I don t think we re going to get much in the way of warnings about what s coming in the future. As we move into the insurance companies and some health care service companies probably a mixed bag. Then we have the August or July ending quarters that report in August, which will be all the retailers, major retailers except for Sears. That s going to probably have some negative aspects to it.

GHARIB: Let me pick up on what you were saying about looking ahead to the third quarter. So you see still strong earnings but they re going to begin to slow down as we go through the rest of the year, right?

HILL: That s correct. I mean the analysts are at 14.9 percent for the third quarter. We think we ll probably do about that. We ll probably end up at maybe a little better, maybe 16. They re at 14 plus for the fourth quarter. We think we ll probably be back to normal patterns and that would imply that we ll end up somewhere around 14 there but maybe only 5 or 6 in the first quarter.

GHARIB: Real quickly, we have a few seconds left. You mentioned about stock market reaction to earnings. Do you think it s been an overreaction?

HILL: Well, I think it probably overreacted to some of the negative things that we heard at the beginning. I mean what happens is various industries and sectors report at various phases of the reporting cycle, so we tend to overreact to whoever happens to be reporting at the time and we got some good reports here the last couple days, which has helped the market, but don t get carried away by one sector or industry s reports.

GHARIB: All right. Thank you very much, Chuck, appreciate your thoughts.

HILL: Thank you.

GHARIB: We have been speaking with Chuck Hill of Veritas et Lux.

KANGAS: It s day two for the Democrats in Boston. Tonight, Ron Reagan will talk about stem cell research and what it might mean for people like his father who suffered from Alzheimer s. Tonight, as we continue our look at the candidate and the issues, we turn to economics. Darren Gersh scrubs John Kerry s budget numbers to see if they add up.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: You could call John Kerry s economic plan retro: a back to the 90s revival of fiscal discipline.

SEN. JOHN KERRY, DEMOCRATIC PRESIDENTIAL CANDIDATE: There is nothing conservative about saddling debt on our children as far as the eye can see, running up deficits out into the future.

GERSH: Kerrynomics sound a lot like Clintonomics: lower deficits equal lower interest rates which lead to higher growth.

KERRY: I think we want an America that understands that if you ignore the deficit, this will be an America that invites inflation and recession.

GERSH: Kerry vows to cut the budget deficit in half over four years. But do his promises add up?

KERRY: We will not raise taxes on middle class Americans. We will lower them. But for Americans making more than $ 200,000 a year, we will simply roll back the Bush tax rates to the very same level that they were under Bill Clinton.

GERSH: Compared to current law, the Tax Policy Center figures those promises net out to a 10-year tax cut of $ 361 billion.

KERRY: And we will pass new tax cuts to make education and health care more affordable.

GERSH: Total cost: $ 248 billion.

KERRY: We will pass health care for all Americans. GERSH: The Kerry health plan adds another $ 650 billion over 10 years. The bottom line is the Federal bottom line will be worse, not better.

LEONARD BURMAN, TAX POLICY CENTER, THE URBAN INSTITUTE: Overall, according to our estimates, the Kerry plan would add about $ 1.2 trillion to the deficit over the next decade which is basically what President Bush s plan would do as well. So it s not a great triumph for fiscal responsibility but it s not any worse than what the president is proposing.

GERSH: But there is a huge difference. Kerry says he will change the rules enforcing the budget documents that roll off the government printing presses.

KERRY: The strong spending caps in my plan will insure that spending doesn t grow faster than inflation and if Congress fails to keep spending in line, the budget caps will mean across the board cuts in every area except security and education and mandatory programs like health care, Social Security and Medicare.

GERSH: But timing is everything. Kerry plans to abide by the budget rules after his tax cut and spending programs are enacted.

BURMAN: It s a little bit like an alcoholic saying after this one last drinking binge, I m going to stop drinking for good.

GERSH: That kind of talk infuriates Kerry aides who say their man has a 20 year record supporting budget discipline, a sharp contrast to a president who wiped out a $ 5 trillion surplus. GENE SPERLING, KERRY ECONOMIC ADVISOR: President Bush came into office and completely and single-handedly obliterated a bipartisan commitment to fiscal discipline, a bipartisan commitment to the notion that if you want new tax cuts and new prescription drug benefits, that you have to find a way to pay for it so that it s deficit neutral. GERSH: Analysts say Kerry is clearly setting a different fiscal tone. TOM GALLAGHER, POLITICAL ECONOMIST, INTL. STRATEGY & INVESTMENT: (INAUDIBLE) campaign budget documents get high marks in terms of credibility and it s more what they would do afterwards and I think that s what the Kerry people are trying to suggest is, look who s advising Kerry. GERSH: Those advisors include former Treasury Secretary Robert Rubin and other centrists from the Clinton years. The hope is, if you re nostalgic for the fiscal record of the 90s, you ll vote for Kerry. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington. GHARIB: Financial turbulence in United Airline s pension plans could jeopardize the financial stability of the government s pension insurance program. United suspended its pension contributions last week, a move many believe will lead to the outright termination of UAL s retirement plan and as Diane Eastabrook reports, a United pension default could raise the stakes for other companies. DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: United Airlines meets with the government s Pension Benefit Guarantee Corporation on Thursday to discuss the future of its pension plans which cover 58,000 employees. The bankrupt airline skipped a $ 72 million quarterly payment earlier this month and is required to pay nearly $ 4 billion into its retirement plan over the next five years. If United terminates the plans, the PBGC, which acts as an insurer, would have to pick up the pensions. And analysts fear that is what is likely to happen.

WILLIAM WARLICK, AIRLINE ANALYST, FITCH RATINGS: I think the PBGC sees a real risk that the under funded liability associated with these plans could grow over the next year, assuming United is able to restructure and exit bankruptcy sometime in 2005.

EASTABROOK: But termination of United s retirement plans would push the pension insurance program into a deep hole. At the end of June the PBGC had a nearly $ 10 billion shortfall. If it assumed United s under funded pension plans, its deficit could increase by 50 percent. There is also fear other troubled airlines may file for bankruptcy and end their retirement plans too. Currently the industry s pensions are under funded to the tune of about $ 30 billion. Analysts say American, Northwest and especially Delta present the greatest risk.

WARLICK: Given the opportunity in bankruptcy to restructure costs and potentially to wipe out these obligations, it does present some interesting opportunities for these companies to address their pension issues.

EASTABROOK: Experts say termination of even one airline s pensions could put such a financial burden on the PBGC, it could be forced to pass the burden on to others.

BRIGITTE MADRIAN, FINANCE PROFESSOR, UNIVERSITY OF PENNSYLVANIA: The question then is if it faces this large deficit, how exactly will it fund those benefits in the future? Can it raise premiums substantially enough to cover the benefits or will it need some sort of a taxpayer financed bailout?

EASTABROOK: United says at this point, it s made no decision regarding the future of its pension plans but if the airline does decide to terminate the plan, it would need permission from a Federal bankruptcy judge. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.

KANGAS: Now let s take a look at some stocks in the news tonight. Big board volume leader on a hefty 55.7 million shares, Nortel Networks (NT) down $ 0.64 or 16 percent. The company said it is now clear that its business model is not achieving its goals. Lucent Technology (LU) dropped $ 0.07. Cardinal Health (CAH) tumbling $ 6.47. That s a 13 percent drop. The chief financial officer resigned amid an SEC probe of the company s accounting. Fourth quarter results will be delayed. Standard & Poor s put the company on credit watch, with negative implications. Verizon Communications (VI) up $ 1.36. Second quarter earnings, $ 0.64, way up from $ 0.12 a year ago and $ 0.04 better than the Street was expecting. Anthem (ATH) tumbled $ 6.38. Second quarter earnings were higher, out today $ 1.66 versus $ 1.25 but Goldman Sachs said those earnings were all right, but not great. Meantime, Anthem and Wellpoint are determined to complete their merger, despite objections by California regulators. Pfizer (PFE) up $ 0.36. $ 0.26 gain in Time Warner (TWX). GE (GE) up $ 0.49. SBC Communications (SBC)gained $ 0.59. Lehman Brothers made some upbeat comments about this stock and a lot of the other regional Bells, saying that they are going to have strongsecond quarter revenues. Lehman has a $ 30 a share target for SBC. Elan PLC (ELN), tenth in volume was up $ .04. Then Dupont (DD), a member of the Dow, up $ 0.41. Second quarter earnings excluding one time items, $ 0.80. That s a penny below the Street estimate but the company did boost its 2004 estimate to $ 2.35 at best. That s a nickel above its best previous forecast. Automatic Data Processing (ADP) up $ 1.64. Fourth quarter earnings $ 0.36, a penny above the Street estimate and the company sees double digit earnings growth in the year 2005. McGraw Hill Company (MHP) is up nearly $ 2. Second quarter earnings nicely higher, $ 0.86 versus $ 0.74 a year ago. Revenues up 5 percent and the company did boost 2004 earnings guidance. Pulte Homes up (PHM) $ 3.08. Second quarter earnings strong, $ 1.45, up from $ 0.97 a year ago, $ 0.02 better than the Street expected. Revenues up 29 percent. And Sonic Automotive (SAH) up $ 2.82. Second quarter earnings, $ 0.70 versus $ 0.68 a year ago. The company also boosted its quarter dividend from $ 0.10 to $ 0.12 a share. L-3 Communications (LLL) gained $ 3.90. Second quarter earnings, $ 0.81, $ 0.02 above the Street consensus. Sales jumped 37 percent. Oshkosh Truck Corp. (OSK) down $ 4.80 despite third quarter earnings $ 0.85, way up from $ 0.69. The company also boosted its quarterly dividend from $ 0.05 3/4 a share to $ 0.08 3/4, but the thing that hurt the stock, the company sees 2005 earnings of $ 3.30. The Street estimate was $ 3.66, down went the stock. Intel (INTC) topped the active list moving up $ 0.30. Microsoft (MSFT), $ 0.22 loss. Cisco Systems (CSC) $ .17 gain. eBay (EBAY) did well, up $ 4.19. Yahoo! (YHOO) up $ 1.79, that was fifth in volume. Qualcomm (QCOM) lost $ 0.07. ImClone Systems (IMCL) rebounding $ 2.68 after a big loss yesterday. Amgen (AMGN) up $ 0.41. Broadcom (BRCM), $ 0.62 gain. And then Silicon Labs (SLAB) down $ 4.71. Second quarter earnings $ 0.41, way up from $ 0.21 but the company cut its third quarter revenue guidance due to swelling inventories. Then Kmart Holding (KMRT) big gain of $ 9.16. Deutsche Securities issued an upbeat outlook for a number of the retailers, knowing that they are trading well below net asset value, up went Kmart Holding, big move, 14 percent. Those are the stocks in the news tonight, Susie.

GHARIB: Thanks Paul. Four former executives of Royal Ahold, the Dutch supermarket giant were charged today for participating in a scheme to inflate earnings. The Securities and Exchange Commission filed civil charges against the executives for allegedly reducing costs by $ 800 million at U.S. Food Service. It s an Ahold subsidiary, through a scheme of phony rebates from suppliers. Former U.S. Food Service finance chief Michael Resnick (ph) and Mark Kaiser, former executive vice president for purchasing, have been charged with conspiracy, securities fraud and making false filings. Prosecutors say two other former executives pleaded guilty within the last week for their roles in the alleged scheme.

KANGAS: Tomorrow, we get the scoop on Boeing s earnings from its chairman Harry Stonecipher (ph).

GHARIB: Some big changes in the boardroom at Martha Stewart Living Omnimedia as the company s namesake prepares to go to prison. Venture capitalist Jeffrey Ubben (ph) is stepping down as chairman after more than a year in the post. He ll be replaced Thomas Siekman (ph), a fellow director of the New York-based company. Ubben said that it s time for a more permanent leader now that Martha Stewart s legal troubles are less of an issue for the company.

KANGAS: The Federal Trade Commission wants MGM Mirage and Mandalay Resort Group to put all their cards on the table. The FTC is concerned about antitrust implications and has requested more information on casino operators proposed merger. The blockbuster deal is worth nearly $ 5 billion and would create the world s second largest gaming company. MGM Mirage and Mandalay say they will comply with the request quickly. Here s a look at what s happening for tomorrow. The June report for durable goods orders comes out and the Fed s beige book survey of the economy. As for earnings, Anheuser-Busch, Avon Products, Boeing, Comcast, Kerr-McGee, Metlife, Time Warner and Whole Foods are all scheduled to report. Tonight s commentator says hedge funds and the dot-com boom have a lot in common. Here s Lionel Barber, U.S. managing editor of the "Financial Times."

LIONEL BARBER, U.S. MANAGING EDITOR, "FINANCIAL TIMES": Hedge funds are all the rage these days. Big names are deserting Wall Street firms. In the fast-growing industry, total assets under management, a cool $ 830 billion, everyone s a winner. Or so it seems. "Institutional Investor" magazine calculates that the world s 25 best-paid hedge fund managers almost doubled their pay last year, taking home an average $ 207 million each. George Soros made $ 750 million. Two other top hedge funders made more than $ 500 million. The rush to make a fast buck feels like dot-com fever all over again. Hedge funds can produce very high investment returns, but they are known to be risky. William Donaldson, chairman of the SEC is worried. He wants hedge fund advisers to register with the commission. This means providing the SEC with information and adopting some compliance rules. The industry is adamantly opposed. Lobbyists have laid siege to the SEC and are wheeling in big guns such. But this is not a philosophical issue about free markets. Hedge funds are not a one-way bet. The SEC s intervention is a prudent exercise in managing risk. At the height of the dot-com boom, the SEC was asleep on the job. Mr. Donaldson does not want to make the same mistake. His new doctrine of preemption deserves credit, not criticism. I m Lionel Barber.

KANGAS: Recapping today s market action, a boost in consumer confidence lifted the Dow back above the 10,000 level. The Dow gained 123 points. The NASDAQ Composite added 30 points. And please be sure to join us at our worldwide web site, nbr.com.

GHARIB: And that s NIGHTLY BUSINESS REPORT for Tuesday, July 27. I m Susie Gharib. Good night everyone. Good night to you Paul. KANGAS: Good night Susie. I'm Paul Kangas, wishing all of you the best of good buys.