NBR Complete Transcripts: 07-10-2007
Tuesday, July 10, 2007The S&P's Sub-Prime Mortgage Warning Sparks A Sell Off
SUSIE GHARIB: A steep sell-off on Wall Street today on new warnings about the housing sector. The Dow dropped 148 points, the NASDAQ fell 30. Stocks tumbled after Standard & Poor's said it was preparing to cut the ratings on $12 billion of mortgage securities backed by sub-prime loans. For now, those securities have been placed on negative credit watch, and S&P says it could begin downgrading them later this week.
And then late today, Moody's Investors Service said it cut ratings on nearly 400 mortgage-backed securities worth more than $5 billion. It's also considering a similar move for 32 other securities. Lower ratings could cut off a major source of funding to the housing market.
Also adding to the worries about housing, earnings warnings today from Home Depot, Sears Holdings, and D.R. Horton, that's the big U.S. home-builder. The three companies lowered their profit targets due to the continued weakness in the housing market.
Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was not a great start to earnings season. A trio of negative pre-announcements put investors on notice about the health of second-quarter profits. The warnings also highlighted one of Wall Street's biggest fears, how the weak housing market could weigh on the consumer and spill over into the economy.
Still, S&P equity strategist Alec Young is not particularly concerned.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: Because everyone knows housing has been a weak spot, to really get investors worried, they would have to see that the negative earnings trends were spreading into areas of the economy that have nothing to do with housing. And, so far, we haven't seen that yet.
PRATT: Citing "headwinds" from the housing market, Home Depot lowered its earnings targets for the second half of the year. Home-builder D.R. Horton also stoked housing fears, saying orders for new homes are off 40 percent from a year ago. The company is now forecasting a quarterly loss.
And Sears stock fell sharply today after the retailer warned of weak second-quarter profits, noting soft June sales of home appliances. Market strategist David Katz views the Sears news as company-specific.
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISOR: We think that's a one-off event. It's a retailer that has been struggling. Their comp store sales have been pretty negative. So it's just catching up to earnings. We think retail is going to have a difficult period, pretty much in-line or close to expectations.
PRATT: Despite the negative nature of today's pre-announcements, most experts believe corporate profits will still be decent.
YOUNG: Given that the market has discounted roughly a 5 percent gain in earnings in the second quarter, were we to see a 6 percent again or a 7 percent gain, we think the market would take that positively. So we continue to have a moderately positive outlook on the second-quarter earnings season for the S&P 500 companies.
PRAT: Experts say it's natural in the heart of earnings season for earnings to drive the stock market. But they say investors could still get distracted by inflation worries and problems in the sub-prime mortgage market. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with David Wyss, Chief Economist of S&P
SUSIE GHARIB: More analysis now on that sub-prime credit watch by Standard & Poor's. Joining us, David Wyss, chief economist of S&P. Hi, David.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: Good evening.
GHARIB: Let's begin by getting your reasons of why S&P put these mortgage- backed securities on negative credit watch.
WYSS: Well, the basic reasoning is they're simply not performing as well as we expected. The housing market is not turning around in a hurry. We didn't really expect it to. Home prices still have a ways to drop. And we're already seeing substantially higher default rates on these securities than we had anticipated at this point. So it was time to move them.
GHARIB: But why now? All of these factors that you've mentioned have been going on in the housing sector has been struggling for some time, why now?
WYSS: Well, largely because we need to get enough record on these securities to see how they're performing. We knew the housing sector was underperforming. We knew that when we rated these securities. But what surprised us is that even given the poor performance for the housing sector, the default rates are running higher than we would have expected given the FICO scores here, given the loan-to-value ratios in these mortgages.
GHARIB: Now I understand that there are 612 mortgage securities on your credit watch list. And you're reviewing them and some of them will be downgraded. How many of them will be downgraded do you think?
WYSS: Well, if we knew that we wouldn't have to put them on credit watch. But I would say, you know, the great majority. My personal guess would be at least 90 percent. Let's keep this in perspective. We're looking at $12 billion. That sounds like a lot of money -- it is a lot of money to most of us. It's only 2 percent of the sub-prime securities we rated during that period. And it's 0.01 percent of the U.S. mortgage market.
GHARIB: All right. So if it's 2 percent, then how serious is this announcement that you made today? How worried should investors be?
WYSS: I don't think you should be worried generally, but obviously what we do worry about, is there a concentration of this risk that has built up in some of the hedge funds, for example, that could cause problems.
GHARIB: Well, how exposed are hedge funds and also banks and insurance companies that hold these securities?
WYSS: Well, one of the problems is we don't really know. We have a pretty good idea for the banks and the insurance companies. And for them we think this is a minor problem. But the hedge funds by their nature don't have to tell us what they hold. And as a result, we just don't know what they've got.
GHARIB: You know, David, a lot of economists that we've talked to on this program, I've asked them about the spillover effect of this whole sub-prime crisis on the economy and now this is a new development. Is there a spillover on the economy?
WYSS: So far we aren't seeing much. Obviously there's an impact on the housing market itself. There's an impact on employment in the construction industry, but except for stuff that's really closely related to the sale of a house, furniture, appliances, building materials, we aren't seeing much impact on consumer spending or on business investment.
GHARIB: So then what does this mean? We saw stocks really sell off today. And investors were unloading financial firms, you know, that sort of thing. So what is the impact of all of this for investors and for American consumers if at all?
WYSS: Well, I don't think there's much direct impact on the consumer except to the value of his house which is going down. But we already knew that. We're worried that -- obviously about the hedge fund build-up and whether there are some financial institutions, probably not banks or insurance companies but possibly on Wall Street that are exposed to certainly the worries that were enhanced by Bear Stearns' (BSC) recent problems.
GHARIB: All right. David, thank you very much. You've cleared up a very complicated subject. My guest tonight David Wyss, chief economist of Standard & Poor's.
The China Trade Trend Picks Up Steam
PAUL KANGAS: China surprised economists today with news its exports to the world rose almost 22 percent, sending that country's trade surplus to $26.9 billion in June. At this pace, the U.S. trade deficit with China is sure to expand beyond last year's $232 billion record. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If China were a growth stock, it would be outperforming expectations. But surging Chinese exports threaten to spark inflation at home and worsen political tensions with the United States. China analyst Jeffrey Bader says this is one record Beijing can do without.
JEFFREY BADER, DIRECTOR CHINA PROJECT, THE BROOKINGS INSTITUTION: It's discouraging. The steps that the Chinese have taken so far clearly are not slowing the pace of exports.
GERSH: China's global trade surplus in June hit $26.9 billion, up 85 percent from a year ago. For the first half of the year, China's trade surplus topped $112 billion. It is possible some of the strength was exaggerated, as companies tried to beat a July 1st rule change eliminating tax rebates for many exports. John Frisbie is president of the U.S.-China Business Council.
JOHN FRISBIE, PRESIDENT, U.S.-CHINA BUSINESS COUNCIL: That rule change had driven a lot of those exporters to record sales in June, prior to the July 1st date, which perhaps contributed to the large global increase. We'll see if that's the case as we get into the second half of the year.
GERSH: So far, safety concerns over dangerous chemicals found in Chinese toothpaste and other products haven't cut into export demand. Beijing today sent a signal of its determination to protect the reputation of Chinese products by executing the former head of its food and drug agency. Zheng Xiaoyu was convicted of accepting bribes to approve a drug later blamed for killing 10 people.
But China scholar Minxin Pei says pledges of regulatory reform in China are as short- lived as many campaign promises in the United States.
MINXIN PEI, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE: The savvy people will take away from this example this: Do not mess with the government at this point, because the government is serious about this problem right now. Three months from now, we don't know.
GERSH: Reform will require sweeping changes. A recent Chinese government survey found one out of every five products sold in China is laced with toxic chemicals or additives or lacks proper labels. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest"-Jason Zweig, Investing Columnist for Money Magazine
PAUL KANGAS: It was a solid second quarter on Wall Street, with just about everything doing well. Some investors are now taking profits, if today is any example, and looking for somewhere to stash cash. Many will look to money market mutual funds. In our "Of Mutual Interest" segment , Jason Zweig, investing columnist for Money magazine, joins us to discuss these funds. And, Jason, welcome back to NIGHTLY BUSINESS REPORT.
JASON ZWEIG, INVESTING COLUMNIST, MONEY: Thanks, Paul. Good to be with us.
KANGAS: Let's go over the basics first. What are money market funds and what do they invest in?
ZWEIG: Money market funds are essentially cash mutual funds that invest in very short-term securities issued by the federal government, state and local governments or corporations. And they tend to be very safe, but of course also somewhat lower in return than stock or bond funds.
KANGAS: Well, sometimes a fund company will in effect put its money market funds on sale by temporarily waiving fees. Jason, how does a fee waiver work?
ZWEIG: Well, what happens, Paul, is the fund company replaces its normal full fee with a partial fee. It might be half the normal rate. But whatever discount the fund company passes through goes into your return. So, for example, a typical yield right now on a money market fund might be 4.5 percent. If the fund company normally charges a full percent to manage the money and they give you a half price cut, then you're going to get another half a percent in return, so long as the waiver is in place.
KANGAS: Right. Now so on paper, fee waivers sound like a great idea for investors because they can take advantage of no fees for a while, but I know you think there's a catch. And it has to do with human nature. Why can fee waivers be a bad idea?
ZWEIG: Well, they're a bad idea, Paul, because we all tend to underestimate our own inertia. You know, we're going to quit smoking tomorrow. We're going to go on a diet tomorrow. We're going to kick the habit tomorrow. Whatever it might be. And when you know the waiver is going to expire, say, 12 months from now, it's very easy today to say, well, when it does expire, then I'll move my money to a fund that's cheaper. But the chances.
KANGAS: So you get complacent, in other words.
ZWEIG: The chances are when that date comes, when the waiver is -- expires, instead of moving your money, you're going to leave it there. And then you're going to pay the full fee which is probably much higher than you could get elsewhere.
KANGAS: So what is your advice for investors when dealing with fee waivers?
ZWEIG: Well, the first thing is make sure you read the funds documents carefully, whether you're getting them online or on paper. Watch for the asterisk. Watch for a statement like "fund expenses before reduction," which tells you what they're really going to charge you when the waiver expires.
KANGAS: Right.
ZWEIG: And as a general rule, you should be able to get a good money market fund for well under half of a percent of your assets per year. If it's charging more than half a percent, with or without the waiver, it's probably not a good deal in the long run.
KANGAS: OK. And when one waiver expires, go into a fund that has one just starting in other words, right?
ZWEIG: Well, you certainly can do that. There are people who shop these things the same way people do like frequent flyer miles. But.
KANGAS: Very interesting and useful information once again, Jason. Thanks for joining us.
ZWEIG: Thanks, Paul. My pleasure.
KANGAS: My guest, Jason Zweig, investing columnist for Money magazine.
"Commentary"-The New Fuel Efficiency Standards
SUSIE GHARIB: Tonight's commentator says, when it comes to the recently passed increase in auto fuel economy standards, "more" is definitely "less." Andrew Zolli, founder of Z + Partners, explains.
ANDREW ZOLLI, FUTURIST & FOUNDER, Z + PARTNERS: Congress has finally taken up the decades-overdue task of raising automotive fuel efficiency standards. But you would be excused for thinking they were trying to pass a law requiring un-anaesthetized dentistry.
After howling that increased standards would cause economic ruin, destroy consumer choice, and even spur mass casualties on America's highways, U.S. automakers begrudgingly endorsed a minimal increase. The recently-passed Senate bill would require autos to get just 10 more miles to the gallon by 2020.
Unfortunately, this modest compromise is likely to accelerate Detroit's demise rather than prevent it, not because the increased standards are too strong, but because they're far too weak. In the carbon-constrained global economy of the coming decades, countries around the world are going to be forced to seriously rethink their transportation infrastructure. In that world, the 12-miles-to-the-gallon SUVs, which are Detroit's bread-and- butter, will quickly go the way of the liquefied dinosaurs that propel them down the road.
We shouldn't let Detroit cling to its own obsolescence. By doubling or tripling the proposed standard, Congress would get a "three-fer": They would further reduce America's contributions to global warming; unlock a new wave of technological innovation; and ensure Detroit another century of global preeminence. That's a deal we can all live with.
I'm Andrew Zolli.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened broadly lower on those earnings warnings from Home Depot and Sears. The Dow fell 66 points at the outset of trading and the NASDAQ was down 15. But many traders stayed on the sidelines ahead of that mid- session speech by Fed chief Bernanke, so a recovery attempt by stocks came up short. Afternoon brought a steep sell- off, which analysts linked not to the Bernanke speech, but rather to that potential Standard & Poor's downgrade of $12 billion in bonds backed by sub-prime mortgages.
The Dow Industrial Average tumbled to a closing loss of 148.27 points at 13,501.70. The NASDAQ Composite fell 30.86 points, ending at 2,639.16. Standard & Poor's 500 Index dropped 21.73 to 1,510.12.
In the bond market, the 10-year note climbed 26/32 to 95 30/32, pushing the yield all the way down to 5.03 percent.
Now, let's look at what's making news in our "Stocks in the News" tonight.
Most active New York Exchange issue, trading 25.5 million shares was Pfizer (PFE), losing $0.30.
Followed by GE (GE) with a $0.72-drop.
Ford Motor (F) bucked the trend with a penny gain. JPMorgan upgraded Ford from underweight to overweight on optimism over the upcoming talks with the United Auto Workers. JPMorgan upgraded GM (GM) for the same reason. And that stock was up $0.64 at $37.41.
Time Warner (TWX) in there with a $0.48-drop.
Micron Technology (MU) moved up $0.12. Jefferies brokerage upgraded Micron to a buy on the improving outlook for DRAM chip prices, set a $17 a share target for Micron stock.
Citigroup (C) down $0.60 in the weak financial group.
AT&T (T) dropped $0.99.
Home Depot (HD) managing to gain $0.02 despite that earnings warning you heard about, probably because Home Depot plans to buy back up to a billion dollars of its own stock.
Exxon Mobil (XOM) a $0.94-loss.
And Bank of America (BAC), another weak financial, off $0.45 a share.
Altria Group (MO) down $1.27.
A $2.14 loss in American Express (AXP). And the rest of these big blue chips in the Dow all off more than $1 in this hard-hit day for the Dow.
D.R. Horton (DHI), a home-builder, off only $0.39. As you heard, the company's new home orders are down 40 percent. And it sees a third-quarter loss. But all that news from Horton had a bigger negative impact on other housing stocks.
Let's have a look at some of them. Lennar (LEN), KB Home (KBH), M.D.C. (MDC), Meritage (MTH), and Ryland (RYL) all down over a dollar a share.
Pepsi Bottling Group (PBG) up $1.31. The company in with second-quarter earnings, $0.70, up from $0.61 last year. Revenues were up 7.1 percent. And the company boosted its 2007 earnings guidance by about $0.09 up to $2.07 a share at best.
Greenbrier Company (GBX), manufacturer of railroad cars, had great third- quarter earnings, rolling right along, $0.81 versus $0.67 last year. And revenues jumped 45 percent. That $0.81 earnings per share, incidentally, was $0.42 above the Wall Street consensus.
NASDAQ's most active topped by Apple (AAPL), up $2.02. JPMorgan yesterday said it expects the company to produce a smaller, cheaper iPhone by the fourth quarter of this year.
Google (GOOG) bucking the trend, up $0.78.
And then Microsoft (MSFT), a $0.54-drop.
Sears Holding (SHLD) tumbling $17.20. As you heard, the company forecasting a sharp drop in earnings. And hardly cushioning it today was the fact that the company plans to buy back up to $1 billion of its own stock.
Intel (INTC) managed to gain a penny.
Then baidu.com (BIDU) up nearly $10 a share. No specific news I saw.
Research In Motion (RIMM) down $5.15.
Cisco (CSCO) a $0.14-drop.
Cognizant Technology (CTSH) off $0.16.
And then Amgen (AMGN) topping out the active list there with a $0.26-drop.
Akamai Technologies (AKAM) up $1.92. That stock to be added to the Standard & Poor's 500 Index, replacing Biomet (BMET), which is being bought out. Index fund buying there.
Depomed (DEPO) losing 59 percent of its value, down $2.93 on news that late stage trials for its shingles pain treatment failed to achieve its endpoint, down went the stock.
And finally, Physicians Formula (FACE) tumbled over $4 after boosting its second-quarter loss forecast from as little as $.0.01 per share to a high of $0.07 per share on disappointing sales.
