Interview: ConsumerPowerline---Gordon, Michael---Energy Economist
>> it is shaping up to be a very eventful week on the energy front. iran announced it may resume nuclear research, and the energy department today out with its latest report on inventory. helping us continue to put this in perspective and anticipate what we could see in future days, as well as weeks, is michael gordon, energy economist with consumerpowerline, a new york-based energy asset management firm. michael, a lot to talk about. i want to ask you what’s 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 they’re overpriced. it’s almost gotten to the point, all the fundamentals are that the price is going down, it’s almost gotten to the point that the marketings are pricing in the cataclysmic event itself rather than the possibility, the risk.
>> several of the people we’ve interviewed recently say that the iran situation is not even fully priced in at this point. what do you think is being overly priced in?
>> the inventories are up, the winter is waning, the alternative uses are high, so 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 are going to see a fallback in prices.
>> how much?
>> i think we got comfortably $2 to $3 on the downside. i think perhaps more. i’ve seen too many winters, for my own happiness, and i do think we have at least $2 to $3 on the downside.
>> michael, do you think that would be reflected, as well, in the other fuels, the jet fuel prices, natural gas prices and heating oil prices come down?
>> 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 car delivery prices i do expect will come down. if we don’t, i think it’s a sign that we have been historically underpricing risk and i don’t think it’s true.
>> one thing that we at bloomberg try to understand when we are looking at energy prices is how much is speculators’ action affecting prices. you help clients, starwood and macy’s, figure out energy needs. how are you suggesting to companies that they position themselves? how much forward contracts have they bought to hedge their bets?
>> thanks, also, to them, for developing with us. in these kinds of markets where we think the risk is over priced, 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, by not putting anything on automatic pilot and to buy on dips.
>> when you say cap not fix, what do you mean, cap at what?
>> if you have a substantial business reason to get predictable prices, we suggest that you actually pay a little bit extra to make sure that your price doesn’t go above x, but that you pay a little extra and also get the downside in the market , as well. if you fix and the market falls substantially, well, you just aren’t taking advantage of that and $3, being, i think, a bit conservative in thinking $2 to $3 on the downside.
>> you’re finding among your client base that companies are realistic in terms of the costs of their 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, can which is, people are afraid. it’s something they haven’t encountered before, these unpredictable environments. people just don’t know if they’re adequately priced.
>> briefly, in terms of volatility, you’re anticipating prices will go down. how much volatility are you expecting in 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 falls and i think you’re looking at much greater volatility locally and nationally.
>> michael, thanks for joining us. michael gordon, really nice speaking with you. michael is with consumerpowerline. a programming note for everyone. we’ll speak live with u.s. energy secretary samuel bodman tomorrow at 12:55 p.m. new york time. when we return, general electric chief executive jeff immelt said one reason he sold the insurance unit was to focus on the more profitable consumer lending business. why are analysts expecting a decline in revenue? we’ll have a preview.
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the board. stronger-than-expected results from companies including advanced micro devices, merrill lynch as well as pfizer. the dow ending higher by .2%, the s&p rising .6%, the nasdaq, the percentage gainer, higher by 1%. it is that better-than-expected report from pfizer we want to focus on right now. deborah kostroun joins us from the big board with the story.
>> and 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 better than expected. we were expecting 42 cents, but earnings came in at 51 cents. so that’s the reason pfizer was higher on the day, because pfizer actually did see slowing demand for their lipitor cholesterol treatment and because of the actual―because they did beat, that’s one of the reasons pfizer was up. lipitor sales rose 3%, compared with more than a 20% increase in each of the first two quarters of 2005. and it looks like sales of lipitor generating about 1/5 of their revenue may be falling this year and that is because merck’s patent on the rival drug, zocor, also expires, opening the way for generics to compete with both those drugs. as we’re talking about drugs, take a look at h.m.o. provider united healthcare, number two health insurer, saying fourth-quarter earnings increased 18% as they increased enrollment. it was one of the few h.m.o. stocks that was higher. united health added 3.6 million customers last year, helped by their purchase of pacific healthcare systems that they closed in december. the bloomberg home building index was lower on the day. a couple of earnings, along with news coming out from homebuilders, but d.r. horton, the largest homebuilder, said earnings in the first quarter rose 29%, the slowest pace in five years as sales of houses began to decline industry-wide. so what you did see, d.r. horton and most of the other homebuilders were lower but beazer homes had better-than-expected earnings and that stock was higher. the s&p 500, of course, rising after a two-day slump. it was really the earnings outlook coming in brighter from pfizer, merrill, a.m.d. and other factors including crude oil, coming in at a four-month high, limiting the market . ellen, back to you in the studio.
>> thanks so much. another story important for investors today was merrill lynch surprising investors, reporting fourth-quarter profit higher than even the highest wall street estimates. tomorrow, we hear from citigroup before the bell. analysts saying credit card losses may overshadow gains from investment banking. let’s get a preview from margaret popper.
>> merrill lynch reported profit of $1.5 billion as stock trading and sales of merger advice climbed about 40% each. the per-share profit 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, up 15% from the fourth quarter of last year. merrill’s total revenue for the year, $26 billion, was only slightly below the total for 2000, its best year ever.
>> i think the last few quarters merrill has been beyond the transition, the inflection point of just the cost story to a top-line story. they’ve had several periods, now, where they’ve shown good top-line growth. so i think if you look at investment banking, it’s doing better, at least sequentially and the trading business is getting a little more 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 in credit card losses overwhelmed higher investment banking profit. analysts surveyed by thomson 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 its revenue base by opening more retail branches. he plans to add 300 branches in the u.s. and 850 abroad. but matrix asset advisers jord jordan posner says citigroup remains far behind bank of america. the new branches won’t be profitable for at least a year and a half.
>> they were talking about adding a few hundred branches in 2006. that’s meaningful on the total citi base of existing branches but not that meaningful in terms of profit contribution.
>> on the investment banking and brokerage side, merrill lynch analyst guy mosquekowski estimates citi’s earnings could rise as much as 8% over last year, compared to an aggregate of 44% for morgan stanley, goldman, lehman and morgan stanley.
>> i know you’ll stand by with the earnings tomorrow morning, bright and early. thank you very much. news from lehman brothers, increasing its annual dividend, climb. ing by 20% to 96 cents a share annually. lehman announced plans to buy back as much as 20% of its own shares. partly doing that to offset any earnings dilution that would come from issuing stock to its employees. wachovia, fourth biggest u.s. bank, 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. excluding merger-related expenses, matched estimates at $1.11. the c.e.o. saying acquisitions may include an asset manager and that a brokerage would be attractive. crude oil went above $67 a barrel in extended hours. our next guest says fundamentals are pointing to a bearish trend.
