Interview: ConsumerPowerline---Gordon, Michael---Energy Economist
>> it is shaping up to be a very ventful week on the energy front. iran may resume nuclear research. i will manslaughter in nigeria staged a series of attacks and energy department today out with it latest report on inventories. so helping us continue to put that in perspective and see what we could see in the future days and weeks is mike borden, energy economist at consumer power line, a new york-based energy asset management firm. michael, a lot for us to talk about. i want to ask you, what is the most important thing? where should we start?
>> if you’re looking at oil prices, which i know is the story of the day, i’m comfortable starting there. i think that they’re overpriced. it’s almost gotten to the point of all the fundamentals are that the prices are going down. it’s almost gotten to the point that the markets are pricing in the cataclysmic event itself rather than the possibility, you know, the risk premium.
>> one thing i was talking about earlier is several of the people we spoke to and interviewed say that the iran situation is not even fully priced in at this point. so what you are pointing to? what do you think is being overly priced in?
>> well, the inventories are up. the winter is waning. the alternative uses are high. the only direction is down on the use. so when you combine the fact that jet fuel is being used pretty heavily, that the inventories also of gas are quite high at this point. i just don’t see the fundamentals in there. now i do expect short of some sort of an event that we’re going to see a fallback in prices.
>> how much?
>> i’d―i think we have comfortably two to three dollars on the down side. i think perhaps more. i’ve seen too many winters for my own happiness. and, you know, i do think we have at least two to three dollars on the down side.
>> michael, do you think that will be reflected as well in some of the other fuels that we would also say see the jet fuel prices come down, the natural gas prices come down, the heating oil prices come down?
>> yeah. i think so. i don’t think we’ll see the retail prices of heating oil come down. they tend to be stickier. but the barge delivery and tank card prices i do expect will come down. now if we don’t, i think it’s a sign that we have been historically under pricing risk. and i just don’t think so. i don’t think it’s true.
>> let me ask you, this one thing that we here at bloomberg try to figure out a lot when looking at energy prices is how much are the speculators action affecting the prices. i’m curious to know, you help companies such as starwood and macy’s figure out their energy needs. how you are suggesting to companies that they position themselves? you know, how much forward contracts have they bought to try to hedge their bets?
>> yeah. thanks also to them for developing with us. we tend―in these kinds of markets where we think the risk is overpriced, we tend to encourage companies to cap not fix. and then as caps are too expensive, particularly toward the tail end of a heating season, we encourage them to take control of their own self meaning don’t put anything on automatic pilot and buy on dips.
>> whether you say cap not fix, cap at what?
>> if you have―if you have a substantial business reason to get, you know, predictable
>> you pay a little bit extra to make sure that price doesn’t go above that. but that you pay a little extra and also get the down side in the market as well. if you fix, it falls substantially. well, you just aren’t taking advantage of that. and $3, being i think a bit done servetive in thinkinged 2ds to $3 on the down side.
>> and are you finding that companies are being realistic in terms of the actual cost of the energy needs right now?
>> well, the individuals that we’re engaging with are. but the psychology within the company is mirrors the psychology of the speculators which is people are afraid. it’s something that they haven’t encountered before. these unpredictable environments. so they, perhaps, you know, people just don’t know if they’re adequately priced.
>> and, briefly in, terms of volatility, you’re anticipating prices will go down. how much volatility reexpecting in the crude prices, in coming trading sessions?
>> i would say if you’re looking at national and regional markets , i see more volatility. if you look at global long term, our perspective is up. but short term, i think you’re looking at false. and i think you’re looking at much greater volatility locally and nationally.
>> michael, thank you for joining us.
>> thank you as well.
>> michael gordon, nice speaking with you. michael is with consumer power line. a program note for everyone, we’ll speak live with u.s. energy secretary tomorrow at 12:55 pm new york time. right now, we head into a quick break. when we come back, general electric chief executive jeff em eliminate said one reason he sold the company’s insurance suent to focus on the consumer lending business. why are analysts expecting a decline in fourth quarter revenue?
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Listen Market briefing --- Ellen (slow)
NYSE --- Deb (fast)
Merrill Lynch --- Magaret (slow)
for ben roethlisberger. let’s recap the day on wall street. stocks rose across the board, stronger than expected results from companies including advance micro devices, merrill lynch and pfizer. the dow ended the day higher by .2%. the s&p 500 rising .6%. the nasdaq, the percentage gainer higher by 1%. it is that better than expected report from fieser that we want to focus on right now. deborah kostroun joins us from the big board. she has the story.
>> thanks a lot. pfizer, that was the second biggest gainer in the dow, up 4% on the day. only disney did better today. and this was after pfizer’s fourth quarter profit coming in a little bit better than expected. we were expecting 42 cents. but earnings actually coming in at 51 cents. and so that’s the reason that pfizer was actually higher on the day. because pfizer actually did see some slowing demand for their lip tore cholesterol treatment and because of the actual -- because they did beat that is one of the reasons that fies syrup. lip tore sealingstherks rose 3%. compared with more than a 20% increase in each of the first two quarters of 2005. it looks like sales of lip tore generating about a fifth of the revenue, maybe falling this year. and that is really because merck’s patent on the rival drug zolcor expires that opens the way for a lot of general arkse to compete with both those drugs. as we were talking about drugs, take a look at h.m.o. provider united healthcare. that is the number two health insurer. the earnings increased 18%. they increased enrollment. it is one of the few h.m.o. stocks that is higher. united health added 3.6 million customers last year. that was helped by the purchase of pacific health care systems that they actually closed in december. and home builders, bloomberg home building index, it was lower on the day. we had a couple of earnings along with some news coming out on some of the home builders. the d.r. horton, that is the largest home builder, earnings in the first quarter rose 29%. that was the slowest pace in five years. that as sales of houses began to decline industry wide. and so what you did see that d.r. horton and most of the other home builders were lower. these are homes, as you can see, better than expected earnings. and that actually that stock was higher. the lone standout. there the s&p 500, of course, rising after a two-day slump. it was really the earnings outlook coming a little bit brighter from pfizer, marle, a.m.d., and some of the other things that we looked at was crude oil. crude oil coming in at that four-month high. and that really limiting the market . we could have seen this market higher. crude oil obviously limiting factor right now. now back to you in the studio.
>> deb, thanks so much. anticipate another story that was important for investors today was merrill lynch. surprising investors reporting fourth quarter profit that was higher than even the highest wall street estimates. tomorrow we hear from citigroup before the bell. analysts, what they’re saying, credit card losses may overshadow gains from investment banking. so let’s get a preview with margaret popper.
>> thanks, ellen. merrill lynch reported profit of 1.5 billion dollars. a stock trading sales and merger of advice each climbed about 40%. the per share profit of $1.51 was 21 cents better than the consensus estimate of analysts. analysts say higher than expected banking fees and lower costs were the surprise. c.e.o. stan o’neal was able to boost revenue to 6.8 billion dollars, up 15% from the fourth quarter of last year. marle’s total revenue for the year, $26 billion was only slightly below the total for 2000, the best year ever.
>> i think the last few quarters, merrill lynch has been beyond the transition. you know, the inflecks point of just the cost story to a top line story. you know, they had several periods now where they’ve shown good top line growth and so i think, you know, if you look at investment banking, it’s doing better. at least see quenlly. and trading business is getting a little bit nor aggressive.
>> citigroup reports earnings tomorrow before the bell. the bank’s profit may have fallen by about 5% during the fourth quarter, as 600 million of credit card losses overwlell amed higher investment banking profit. analysts surveyed by thompson financial expect profit to drop to about $5.1 billion from 5.3 billion a year earlier. c.e.o. chuck prince said in december the firm will expand the revenue base by opening more retail branches. he plans to add 300 branches in the u.s. and 850 abroad. but the asset advisors says citi remains far behind the retail branch leader bank of america. also the new branches won’t be profitable for at least a year and a hatch.
>> i think they were talking about adding a few hundred branches in 2006. that’s meaningful on the total citi base of existing branches. but it’s really not that meaningful in terms of profit contribution.
>> on the ib vest am banking and brokerage side, they estimate citi’s earnings could rise 8% over last year. that compares to an aggregate of 44% for bear stearns, goldman sachs, lehman brothers, and morgan stanley. back to you, ellen.
>> all right. thanks so much. i know we’ll be standing by with the earnings tomorrow morning bright and early. thanks so much. let’s also check out news from lehman brothers as well. increasing the annual dividend for 10 consecutive year. the dividend is going to climb by 20% to 96 cents a share on annual basis. lehman brothers announced plans to buy back as much as 20% of its own shares. partly doing that to off set any earnings dilution that would come from issuing stock to its own employees. also what wachovia out with results saying profit rose 18% to a record. increased lending and investment banking fees, giving a boost. there net income coming in at $1.09, up from 95 cents. if you exclude merger-related expenses, the estimate is at $1.11. ken thompson saying wachovia’s acquisitions may include an asset manager and that would be attractive there. let’s take a quick break. when we come back, crude oil, we’ve been talking a lot about it. it went above 67 dollars a barrel. fundamentals are pointing to a bearish trend. consumer power lines, energy economics, mike borden will join us and be our guest straight ahead.
