Interview: Wells Capital Management---Schlossberg, Gary---Analyst
>> it’s official, consumers are bullish on the economy. the conference board published its survey of consumer confidence for december this morning. all indications are that consumers have put fears of a hurricane damage behind them. consumer confidence rose for a third straight month, recovering much of the ground it lost in the wake of hurricane katrina. the december number rose to 103.6, compared to a revised 98.3 in november after hitting a two-year low in october when consumers were grappling with the potential costs of storm damage. the conference board’s december figure is a four-month high for the index but but low this year’s peak of 106.2 in june. some economists say the importance of the december reading is a confirmation of a rising trend reversing overreaction to the hurricane season.
>> the old high before the hurricanes hit was june of 106.2 so we’re gradually making up ground there. we were as low as 85 on this -- in october. so we’ve come back a long way. i think the consumer is just fine here.
>> but lynn franc says it’s more than surviving katrina. recent declines in prices at the pump and job growth have consumers feeling more confident at year end, then they felt at the start of 2005. university of michigan’s consumer confidence index rose to a five-month high in december, though still off this year’s high from july. today’s consumer confidence report showed a gauge of american’s optimism about their present situation but what does it mean for our economy as we head into 2006. gary schlossberg is senior economist at wells capital management and joined me earlier from our san francisco bureau with the forecast.
>> not only was the confidence index up, the highest we’ve seen in the last several months, reversing the decline after the hurricanes, but you got a sense of what’s driving it. the assessment of the labor market conditions was relatively strong for the first time in about four or five months, those reporting jobs plentiful exceeded the percent of respondents reporting jobs hard to get. spending plans, buying plans for cars, appliances were up, as well. generally a very good report. >> we saw a decent holiday season. is that lackluster confidence a regflag for―red flag for spending?
>> the two don’t always move together. i think the track, the correlation between current conditions and spending tends to be stronger than the overall index but certainly in this case, the two have moved together and the weekly chain store sales numbers out today indicated another strong week in the period leading up to christmas. it looks like sales came in if not as than better than expected. that was the message from the confidence index, benefiting from lower gasoline prices and improved view of the job market .
>> we saw the yield curve on the u.s. treasury inverted yesterday. in your view, what does that suggest, does that suggest recession?
>> we’re certainly watching it. we’re certainly concerned about it. just given the ability to anticipate slowdowns in the economy in years past. i think it’s compelling, though, that greenspan and others have pointed out that the level of interest rates, the fact that the curve is inverted due in part to a drop in long-term interest rates should provide some support to the economy so that at this point we don’t think it necessarily means a slowdown on the horizon just yet but certainly given its track record, we’re monitoring it.
>> how confident are you that businesses will pick up the slack of slower consumer spending?
>> generally speaking, the news on business spending has become a bit more upbeat. the potential is certainly there. inventories lean relative to sales right now outside of the auto industry, capital spending, certainly in the tech area. strong, broadening out beyond that. even in today’s batch of economic data, we got a report from executive magazine indicating that c.e.o. confidence was the strongest we’ve seen since july 2004. hopefully that bodes well for that rotation away from housing with some of the slack picked up by business spending.
>> but why would companies expand capital to build operations if they didn’t expect consumer spending to accelerate?
>> i think they do expect consumer spending to hold up reasonably well. other businesses, building up inventories, operating rates, have risen to a point, a threshold normally associated with increases in capacity raising lower tech investment. so i think the conditions are there provided consumer spending continues to grow at a reasonably good rate providing that foundation but we have other sources, other business spending, exports, which should provide a lift, as well.
>> gary, what’s your outlook for the economy early next year?
>> stronger growth in the first half, moderating growth in the latter part of the year as rising interest rates, particularly shorter term rates, begin to bite just a bit. overall, we think that growth for the year as a whole will come in about 3%, 3.5%, a little short of the growth rate we saw in 2005, which looks as though it’s coming in just north of 3.5%.
>> and that was gary schlossberg, senior economist with wells capital management. the former enron chief accounting officer has pleaded guilty to securities fraud. how much will his assistance help prosecutors go after the enron executives on trial next month? defense attorneys are saying they need to regroup. more on the story when bloomberg “after the bell” continues.
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Interview: Cathay Financial---Kammerman, Eli---Analyst
NYSE --- Julie (slow)
former enron chief accounting officer, richard causey, will cooperate with prosecutors in their case against kenneth lay and jeffrey skilling. and guidant recommends shareholders approve a $21.5 billion takeover offer by johnson & johnson. we will have details. first, let’s catch up on the closing numbers -- what’s being called a key development for the u.s. justice department, former enron chief accounting officer, richard causey, has pleaded guilty to securities fraud and is said to be cooperating in the case. causey’s plea is expected to strengthen the government’s prosecution of former enron executives jeffly skilling and kenneth lay who go on trial next month. greg miles has more.
>> this may be the biggest white collar fraud trial for 2006. causey faces up to seven years in prison when sentenced in april but he faced up to 20 years on 30 counts of conspiracy, fraud and insider trading charges relating to enron’s demise. the question now is just how much his cooperation will help prosecutors going after the big fish charged with swamping what was once the world’s largest corporation, enron. those individuals are ken lay and jeffrey skilling.
>> the one thing, i’ll answer a question posed many times in terms of what happens from here with mr. causey. mr. causey signed a plea gaement, not a cooperation agreement. i’m sure many of you understand the significance of that but what is true, to the extent he has any involvement in upcoming legal proceedings, he will tell the truth. that’s who he is. that’s what he should do and that’s what he is going to do.
>> lawyers for jeff skilling and ken lay, former enron executives, say causey buckled under pressure and all three are ino innocent.
>> rick causey did this to protect his family. speaking for ken lay, it’s a tragic day for mr. causey, his heart goes out to mr. causey. ken’s been under the same stress and can understand and sympathize with a man with a family who is broke making peace for the government but it’s a sad day for the process, for due process in general when something like this happens.
>> attorneys close to the case say causey’s plea could bolster the federal government’s case against both lay and skilling, who led the company before it fell under bankruptcy in 2001. now, that collapse inflicted billions of dollars in losses on investors, 5,000 lost jobs and 800 million dollars in lost pensions. earlier today, former federal prosecutor stephen ryan says causey will be especially useful in the case against lay.
>> his defense is on the dummy andien what was going on in the corporation and there’s not that much paper that links him to the criminal conspiracyies that have been discovered in enron so this movement in making causey a government witness and adding him to andrew fastow, former chief financial officer, is a significant move for the government in strengthening their case.
>> the stakes are enormous for former chairman ken lay. he faces up to 30 years in prison and $5.75 million in fines if convicted in thegating trial. he is―the upcoming trial. causey would be the highest enron executive to cooperate with prosecutors since chief financial officer fastow pled guilty to orgseparating the financial fraud that led the company into bankruptcy. the case has been postponed two weeks. jury selection will start january 30 and the trial will last several months, if not longer.
>> thank you very much. there is also news involving the future of medical device maker guide guidant. guidant’s board recommended shareholders approve a bid from johnson & johnson over a rival offer from boston scientific. looking to see how all three stocks traded. guidant up .7%, johnson & johnson up .2% and boston scientific down 1%. guidant is the second biggest maker of implantable heart rhythm devices and johnson & johnson’s $21.5 billion buyout bid will be voted on at a january 31 shareholder meeting. but even with the recommendation by guidant’s board to approve the j&j offer, guidant said it may still agree to boston scientific’s higher offer of $25 billion. earlier, i spoke with eli camera man, and he gave us reaction.
>> this is a preliminary and tentative decision because there is no formal merger agreement or offer on the table now from boston scientific because the due diligence is ongoing so it’s only natural that at this stage guidant’s board will recommend the johnson & johnson offer. they are not in the position to recommend the boston scientific offer until that offer becomes firm.
>> what response, if any, do you expect from boston scientific?
>> well, because the bad news on the lower outlook for guidant’s sales and earnings came out immediately after boston scientific’s offer was put on the table, i’m expecting boston scientific to reduce their offer upon the completion of due diligence. it appears to us that boston scientific may have overestimated the remaining strength in guidant’s defibrillator business and upon the completion of due diligence will see that the market share has eroded more than they had expected. consequently, the business may not be worth what they thought it was on december 5.
>> mr. kammerman, the important decision for guidant’s approach is the determination fee. under what conditions would it have to pay j&j $625 million?
>> they would be obligated to pay the breakup fee if they were to walk away from the transaction in favor of a higher bid from boston scientific. other conditions for paying the fee might include a failure to win sufficient shareholder votes altogether. however, we don’t think this is very likely unless, of course, the bid from boston scientific becomes formalized.
>> and that was cathay financial’s eli kammeman. the consumer confidence report and strength in energy stocks came in with higher energy prices. stocks finished higher. julie hyman reports from the new york stock exchange.
>> energy stocks accounted for much of the gains today as they accounted for much of the decline in yesterday’s session. also helped by the consumer confidence report that we got. stocks lifted overall today as investors overlooked the yield curve inversion for the second day. looking at energy, the s&p 500 energy index, up about 1.3%. and the amex natural gas index recovered today after a decline yesterday. specifically, here, individually, exxon-mobil, chevron, conocophillips and schlumberger were some of the large caps that benefit from the record upturn in energy prices and energy stocks. another group that suffered yesterday was the retail group. it came back, as well, in today’s session. officemax was the worst performer in the s&p yesterday, one of the best today. big lots, nordstrom, federated department stores also higher. another individual mover is linens and things. this company filed a proxy statement with the securities and exchange commission saying it’s confident it will meet conditions of its sale to a group led by apollo management for about $1.3 billion so investors were assured by that and shares rose. basic materials in the session, allegheny technologies, newmont mining, freeport-mcmoran and newmont, as well as phelps dodge, so metals group propelled higher. interest-rate-sensitive group not performing as well. a drop in utilities, limiting some of the gains, as well as banking stocks falling in today’s session, that group down about .4%. i’m julie hyman at the new york stock exchange.
>> consumers did a lot of last-minute shopping in the final stretch before christmas. we will take a look at the latest retail data. along with what it means for our economy. with gary schlossberg, senior economist with wells capital management. that’s coming up next as we head to the break. oil rises, $60 a barrel, after iran’s deputy oil minister said opec should cut production next month. stay with us.
