Market briefing --- Lori (slow)
>> welcome back to “after the bell.” crude oil is little changed today. close to a five-week high after the international energy agency increased its forecast of fuel demand growth. crude oil closing out at $61.37 per barrel. natural gas surged to a record on predictions of cold weather in the northern u.s. exxon-mobil said today world energy demand is expected to grow 1.6% a year through the year 2030. the company says the world will need 60% more energy by that time. sales at u.s. retailers rose 3.2% in the second week of december, compared with the same period a year ago. that was slower than the previous week’s annual gain. the international council of shopping centers reiterated its holiday forecast for a gain of between 3% and 3.5% for the november and december. in a separate report, retail sales in november rose .3%, less than expected. taking out auto purchases, sales actually fell. best buy is giving investors a double dose of bad news. the stock is plunging as much as 12%. third-quarter profit missed analysts’ forecasts, best buy blaming the cost of building its so-called geek squad computer repair unit. you may have seen the tv and print ads for the geek squad service. computer technicians will come to your home to fix your computer or do it in the store. the appliance chain is expanding into highly profitable services to keep growth going but it stumbled this quarter. best buy’s geek squad grew its staff 21% last quarter to 11,900 people. but that pushed up the company’s overhead costs to 21.8% of sales last quarter. a year ago, so-called spending, general and administrative costs, were 19.7% of sales. still, geek squad’s fat profit margins also lifted the company’s profit. earnings for the quarter came in at $138 million or 28 cents a share for the quarter, missing analysts’ expectations. the company’s own forecast, 30 cents a share. best buy says its quarter’s earnings will also miss analysts’ forecasts. best buy spent more money expanding a store remodeling program to target specific kinds of customers. they caterer to small businesses, affluent professionals, family men, suburban moms and younger shoppers. chief executive brad anderson acknowledged expenses were too high saying “we overinvested in certain transformation activities. as a result, our spending was unacceptably high.” anderson says the company will cut back on spending that won’t pay off on future growth. prudential equity group downgraded the shares to neutral from overweight. analyst mark rowan says this is the second quarter in a row best buy missed his forecast. given that, what he calls a lofty valuation for the stock, he says investors should cut their stakes until the company gets its fiscal house back in order. and billionaire investor nelson peltz bought a 5.5% stake in wendy’s international. peltz urged the company to cut costs and sell assets, saying a management overhaul plan doesn’t go far enough. specifically, peltz wants wendy’s to reduce expenses by $200 million, sell the baja fresh cafe express and pasta poodoro brands and spin off the tim hortons donut chain. the stock up 7%. european investigation of the c.i.a. cites indications people were abducted. derek davis has the latest in world and national news.
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Listen Interview: PIMCO---Gross, Bill---Managing Director / Partner
>> fed policymakers raised interest rates for the 13th straight time and already traders are talking about the next meeting that comes our way in january. for a closer look at the bond market ‘s reaction to today’s rate decision, we are joined by peter cook in washington with bill gross of pimco. peter?
>> thank you very much, lori. bill gross manages the world’s largest bond fund and joins me from pimco’s offices in california. thanks for your time today.
>> you’re welcome.
>> what do you make of today’s increase from the fed and the changes, in particular, in the fed’s statement.
>> well, the market expected some changes. i expected the dropping of the word “accommodation.” we did get that. the replacement word or phrase for “measured” was “some measured moves in the future” and i guess that’s what is quizzical from the standpoint of going forward, how many is “some?” is it one, two, three or four and i suggest it’s one or two. if it’s more than that, the bond market has selling off to do. if not, then we have a different scenario.
>> you think that the chances that the fed goes to 4.75%, better than 50/50 at this point?
>> i’m sticking to my 4.5. i think the fed’s pointed to the housing market and that house’s getting pretty weak here and that by the end of january the fed will recognize that and stop. but there’s a chance we see 4.75. some would suggest that there’s a chance we go to 5, 5.25, based on higher inflation and stronger economy. i just don’t see that and i think what the market is saying this afternoon is that the fed stops somewhere at 4.5 or 4.75 and from that point forward we have a pretty lackluster federal reserve for the next three to six months.
>> if they do go to 4.5, as you expect, and stop there, do you think that’s a fed that’s gone too far?
>> i do. because i think 4.5% in today’s terms―in terms of bernanke’s global savings glut, is a very onerous rate t.certainly compared to the 6.5% top early in 2000 it’s not an onerous rate but today’s environment is different. when bernanke becomes fed chairman, i suspect his view in terms of a global savings glut will preview and that view basically suggests that short-term interest rates should be lower than previous peaks because of a lackluster investment environment on a global basis.
>> are you surprised by the reaction today in the bond market ?
>> oh, a little bit. i think it was a little more bullish than i would have expected. most of the bullish sentiment and buying has been on the front end. that’s where pimco is and i’m glad to see it. based on the statement, i would have expected a plus or minus neutral type of move and it hasn’t been substantial, to be fair. but the bulk of the move has been four or five basis points on the front end, again, anticipating a fed that stops at 4.5 to 4.75 and at some point, which i think is critical, in late 2006, lowering rates, as well. >> any particular changes you made today in light of the fed’s action?
>> we’re accentuating and accelerating our moves into the mortgage market . if you look at it as i’ve described it, if you look at it as the fed stopping at 4.5 or 4.75 and staying there for six months or so in 2006 before they ease again, then what a bond investor wants to do is capture as much safe yield as possible. that can be done most effectively via the mortgage market which yields 5.75%. the mortgage market is relatively sensitive to volatility which, in my described scenario, would come down. so we’ve accentuated and accelerated our moves into the mortgage market today and i suspect we’ll continue to do that through the week.
>> we haven’t wrapped up 2005 just yet but could be the worst year for treasuries since 1999. look back for us at the year in review and give us your sense of 2006. first, 2005, your take on it?
>> sure, 2005 was a year dominated by the fed. tremendous upward movement in terms of short-term rates and as described by greenspan and bernanke and others, a rather flat movement on the longer end of the curve. that would be and would have been a move that very few bond managers and lifts analysts would have expected of the we did not expect that. that’s been the dominant characteristic for the market as a whole. yield spreads themselves in terms of corporates and high yield haven’t moved that much relative to each other but mainly the flattening of the curve has come about in a rather unusual way.
>> i have to leave it right there. bill gross with pimco, thanks so much for your time today. i will send it back to lori rothman in new york.
>> thank you very much. when we come back, latest world and national headlines and the geek squad promises computer repair and customer satisfaction. it’s left best buy’s investors wanting more. the company’s third-quarter profit missed analysts’ forecasts. more on best buy’s earnings when we return.
