NBR Complete Transcripts: 08-14-2007
Tuesday, August 14, 2007The Dow Dives Another 200+ Points
SUSIE GHARIB: The selling continued on Wall Street today with the Dow tumbling 207 points. The blue chip average has now lost almost a thousand points since it hit an all-time high of 14,000 three and a half weeks ago. Behind today's sell-off -- problems at a company called Sentinel Management Group, which handles short-term cash for commodities traders and hedge funds. This morning, Sentinel sent a letter to clients, saying it couldn't meet redemptions without selling securities at a loss. The letter said Sentinel had, quote, contacted the Commodities Futures Trading Commission and asked for their permission to halt redemptions until we can honor them in an orderly fashion, end quote.
But the CFTC told NIGHTLY BUSINESS REPORT that Sentinel did not ask it to do that and the agency can't grant or deny permission because it doesn't get involved in day-to-day business matters. Then, late today, Reuters reported that U.S. futures exchanges are trying to get other companies to take over some of Sentinel's accounts. That could provide an infusion of cash and credit and let Sentinel's clients take their money out.
One on One with Sam Stovall, Chief Investment Strategist at Standard & Poor's.
SUSIE GHARIB: For more analysis of today's market sell-off, we're joined now by Sam Stovall, chief investment strategist at Standard & Poor's. Hi, Sam.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hi, Susie.
GHARIB: You know, Sam, everyday there seems to be some new thing that throws everybody off balance and surprises investors. What is your assessment of what's going on in this market sell off?
STOVALL: Well, I think as you described and as Paul was mentioning before, we seem to get additional bits of news that causes investors to scratch their heads and to say well, what do we really not know about all of this? What new things are we going to discover about the consumers and possibly the consumers losing their interest in spending the way they have over the past several years? What are we going to do about this national real estate decline? What do we do about the crisis in liquidity?" and if the professionals are being caught up in this, what am I, the typical retail investor, likely to do?
GHARIB: Is this to you a normal financial downturn or is it somewhat different? You've had so many years of experience of living through these financial cycles before.
STOVALL: Well, it's an 8 percent decline from the July 19th high for the S&P 500 to where we close today. So you would actually only call this a pullback. We would have to go beyond 10 percent to call it a correction and every bull market since 1970 has seen at least one 10 percent plus pullback in it. We have just not had it yet. But I think one reason why investors are so concerned about this one is you have to go back to 2002 during the tail end of the most recent market meltdown to find a four-week decline of 8 percent or more. And so I think right now the psychology is such, the mind-set of investors is such that they are simply remembering back to those dark periods.
GHARIB: So many analysts do say that it's normal to have a 10 percent market correction. Is that all it's going to take? Is it going to be only 10 percent or is it going to be more than 10 percent?
STOVALL: Well, I think certainly it will be more than a pullback. I believe that we could see a correction and it could be in the area of 10 to 15 percent. But I don't think it's going to turn into a new bear market. Reason being that the fundamentals in our opinion still remain fairly healthy. Economic growth is likely to be at about 2 percent this year, rising to 2.7 percent next year. We think corporate profits are going to come in at about an 8 percent year over year increase this year rising to a 12 percent increase next year. And actually we're trading at about an 18 percent discount to the average P/E ratio over the past 20 years. So I would tend to say that in general, valuations are likely to support this market as it continues to decline.
GHARIB: There are those people who do think this could be a bear market leading to a recession. What would change, what would have to happen for you to change your opinion?
STOVALL: Well, I think certainly we would have to see the market averages move beyond the 15 percent decline and heading toward the threshold of 20 percent that we regard as a new bear market. We're certainly already seeing those defensive areas such as consumer staples, health care, utilities outperform the more cyclical areas even though everybody is in the red these days. So I would tend to say that we would have to see a slowdown in economic growth projections as well as a whittling down of earnings forecast this year and next.
GHARIB: All right, Sam. Thank you so much for coming on the program. We really appreciate it.
STOVALL: You're welcome, Susie.
GHARIB: My guest tonight, Sam Stovall, chief investment strategist at Standard & Poor's.
The Greenback Profits From The World Market Mayhem
PAUL KANGAS: The turmoil on world markets recently has had an impact on the U.S. dollar, sending it rising sharply against other currencies. That reversed what has been a month-long slide for the greenback. But as Scott Gurvey reports, many analysts believe the dollar's rally may be short- lived.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The dollar hit a six-week high against the euro in today's trading and was strong against most other currencies. Analysts say, in some ways, this is a reaction to the problems in the debt markets. Investors are fleeing securities with exposure to the credit crunch. Thomas Benfer of BMO Capital Markets sees two reasons for the flight to cash.
THOMAS BENFER, SR. FOREIGN EXCHANGE ADVISOR, BMO CAPITAL MARKETS: Investors want to have liquid investments. They're trying to liquefy whatever they do have and that's really the main objective, at this point. And the dollar is strengthening because you notice that some of the investments, the plays that we've seen over the last year -- the yen carry trade, the Swiss carry trade. Those trades are being reversed and investors are getting out.
GURVEY: Another reason for the dollar's rise might be found in the unexpected increase in American exports in June. Exports rose 1.5 percent to a record $134.5 billion. Imports grew one half of one percent to a record $192.7 billion. That cut the deficit to just over $58 billion. A stronger dollar should increase the trade deficit by making American exports more expensive to overseas buyers. But trade is a lagging indicator and the effects of a stronger dollar would take months to show up. And some market watchers think the dollar may be nearing a top, mainly because economies are weak in Europe and Japan. Bob Brusca of Fact and Opinion Economics says slow growth overseas will hold back the dollar.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: A traditional approach would be to say, look, we've got this big trade deficit. The dollar should fall; it needs to fall in order to correct that. But there are other things that are happening that are sort of stopping that. One is that there isn't really any other currency that can rise and since the dollar is a relative variable, it can't fall unless it falls against another currency.
GURVEY: A cut in interest rates in the United States would also restrain the rise in the dollar. Market watchers who are calling for the Fed to make such a rate cut will be closely watching tomorrow's report on consumer prices for signs of inflation. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Mattel Recalls More Toxic Toys
SUSIE GHARIB: For the second time this month, toy maker Mattel announced a major worldwide recall. The company said today that 18 million more of its toys made in China could contain lead paint or small magnets that pose a hazard to children. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mattel is pulling Polly Pocket, Batman and Barbie because of small, powerful magnets that can come loose and be easily swallowed. Sarge is being removed because of lead paint. All the toys in Mattel's recall were made in China. Mattel's vice president, Bryan Stockton, says the company is stepping up its inspections.
BRYAN STOCKTON, EXECUTIVE VP INTERNATIONAL, MATTEL: We are testing every single batch of toys made, whether it's made in China or some other country, whether it's made in one of our vendors' plants, whether it's made in a Mattel plant.
DHUE: The Consumer Product Safety Commission says 78 percent of toys sold in the U.S. are manufactured in China. Companies that import goods have the legal obligation to ensure they meet U.S. safety standards. CPSC Chairman Nancy Nord wants the toy industry as a whole to ramp up product testing.
NANCY NORD, ACTING CHAIRMAN, CONSUMER PRODUCT SAFETY COMMISSION: What I would like to see, at the end of the day, is a program where all toys are tested in China before they are imported into the United States.
DHUE: The CPSC is also in talks with the Chinese about safety issues with lighters, fireworks and electrical products. China is already under scrutiny for exporting unsafe tires, tainted toothpaste, seafood and pet food. Lori Wallach, who heads up Public Citizen's Global Trade Watch, says it's time to stop talking and take action.
LORI WALLACH, DIRECTOR, PUBLIC CITIZEN'S GLOBAL TRADE WATCH:
There have to be changes to our trade agreements and to our domestic inspection import policies. That mean we stop dangerous products, so that producers in other countries know, if they make an unsafe product, it's not coming here and if it, there are huge financial liabilities for them.
DHUE: John Frisbee of the U.S.-China Business Council says both the U.S. and China need to take steps to reassure consumers their products are safe.
JOHN FRISBEE, PRESIDENT, U.S. CHINA BUSINESS COUNCIL: We need to make sure we take that approach that's constructive in trying to get at - as I said, the objective here, which is to maintain consumer confidence and not have this become a trade dispute, which gets us nowhere near where we want to be
DHUE: The Consumer Product Safety Commission is holding a safety summit with the Chinese next month. In the meantime, Mattel says it may have more recalls as it steps up inspections. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest" - Jason Zweig, "Money" Magazine's Investing Columnist
PAUL KANGAS: In our "Of Mutual Interest" segment tonight, your money and your brain and how one affects the other when making investment decisions. Our guest Jason Zweig, "Money" magazine's investing columnist, has a new book out next month called "Your Money and Your Brain". Jason, thanks for joining us. JASON ZWEIG, INVESTING COLUMNIST, MONEY MAGAZINE: Thanks, Paul, good to be here. KANGAS: Investors seemed swamped with bad news these days, volatile stock markets, crumbling credit, major mortgage problems. What happens to your brain and your body with all that negative input? ZWEIG: Well, Paul, within one or two tenths of a second when you're exposed to real time negative information about your finances, your brain fires up in these ancient fear centers and puts your entire body on red alert for more trouble. Your pulse goes up, your breathing accelerates, you sweat, your muscles tense. And you may not even be aware of this unconscious emotion. But it puts you on edge and it's going to slant your decisions towards selling and panicking.
KANGAS: Tell us how it could affect the buy or sell of a mutual fund.
ZWEIG: Well, if you've been holding a fund for a long time, you may well have a very substantial gain on it. But if you measure how well you're doing in terms of how much you've lost since the peak or how much you've lost during this summer's market troubles, being exposed to the negative news in the market on a real time basis could make you sell a fund that you've actually made money on in the long run.
KANGAS: So it's important for an investor to realize this is really happening and to understand it, correct?
ZWEIG: It's very important. The key thing to understand about how your brain works in these conditions when the markets are very turbulent is that you may be in the grip of your emotions without realizing it. That's why it's called unconscious emotion.
KANGAS: It's almost like a temper tantrum, would you say?
ZWEIG: It's like an internal temper tantrum that you can't really hear at the conscious level. But, yes, it's a lot like a temper tantrum for better or worse and usually worse.
KANGAS: So how does an investor fight this?
ZWEIG: Well, the best thing to do is to realize that this kind of behavior isn't really controllable. And just as, for example, a recovering alcoholic knows not to step inside the bar, the best thing for an investor to do is to try to minimize your -- the amount of contact you come into with exposures to negative news about your finances. And that might mean grabbing the clicker, maybe putting certain TV stations or programs -- not this one -- on mute. And it might also mean just not checking on the value of your portfolio quite as often.
KANGAS: So sometimes watching the market in real time isn't the best idea?
ZWEIG: No. Getting upset -- whether you realize you're upset or not -- is very likely to lead you to take action. And the more you trade, the less likely you are to do well.
KANGAS: Very interesting information, Jason and very important for mutual fund investors to keep in mind. I want to thank you for joining us once again tonight.
ZWEIG: Thank you, Paul.
KANGAS: My guest, Jason Zweig, investing columnist for "Money" magazine.
"Commentary"-What's in a Name?
SUSIE GHARIB: What's in a name? Tonight's commentator says market euphemisms are no good for Wall Street. Here's Allan Sloan, senior editor at large at "Fortune."
ALLAN SLOAN, SR. EDITOR AT LARGE, FORTUNE: We're hear a lot these days about problems caused by sub-prime mortgages. Now the name sub-prime mortgage is yet another example of how Wall Street makes ugly stuff sound pretty or as they say puts lipstick on a pig. We should really call these loans junk mortgages or high-risk mortgages or manure-like mortgages. That's more what they are than sub-prime, which sounds like a little bit less than prime, basically OK.
Wall Street sold hundreds of billion of dollars of securities more or less backed by these things -- mortgages, remember, made to buyers whose credit was in doubt. Many of them borrowed the full purchase price of their houses, so if housing prices went down -- which they did -- or borrowers ran into financial trouble -- which many of them did -- there was no cushion. The Street carved these mortgages into pieces and convinced rating agencies, always hungry for fees, that large parts of these loans were triple "A" credits.
It's amazing. Junk mortgages rated as safe as loans made to the Federal government. Now, losses are rising and the lipstick is off the sub-prime pig. It's time for another awful product with a pretty name. Maybe next, the Street can offer investors nuclear waste that glows in the dark and call it carbon-free illumination material. I can hardly wait to buy some. I'm Allan Sloan.
Paul Kangas' Stocks in the News
PAUL KANGAS: Also impacting the markets today, a mixed bag of economic news. Rising energy costs helped drive up producer prices last month. The Labor Department says wholesale prices rose 0.6 of a percent in July, above expectations of just 0.2 percent. But stripping out energy and food, the so-called core rate was up just 0.1 of a percent and that was below expectations for 0.2 percent rise.
Well, that producer price number didn't sit well on Wall Street, especially after that disappointing earnings news from Wal-Mart and a weak outlook from Home Depot. By 11:30 this morning, the market had fallen 167 points on the Dow, NASDAQ was off 23 as those Sentinel woes added to a rocky market. A mid-day rally attempt failed amid growing concerns that the sub-prime mess was creeping into the commercial paper market, so it was all downhill from there. The Dow Industrial Average closed off 207.61 points at 13,028.92. The NASDAQ Composite tumbled 43.12 to 2,499.12. Standard & Poor's 500 Index plunged 26.38 points ending at 1,426.54. In the bond market, the 10-year note gained 11/32 to par and 7/32, putting the yield at 4.72 percent.
New York Exchange volume leader on 35.2 million shares, EMC Corp (EMC) moving down $0.71 despite a very successful initial public offering of its VMware (VMW) unit which came in second in volume and look at that, 33 million shares offered at $29, opened at $52. The high, $55.50, backed off a little bit, still up a massive $22 a share on the day . This was the most successful technical IPO since Google incidentally.
General Electric (GE) $0.49 drop.
Wal-Mart Stores (WMT) down $2.35. You heard about the company's lower than expected second quarter earnings and cutting its full year guidance. And on top of that, JPMorgan today downgraded Wal-Mart from "over weight" to just a "neutral" rating.
Ford Motor (F) $0.30 loss.
Time Warner (TWX) $0.61 drop.
Citigroup (C) fell $0.88.
Home Depot (HD) losing $1.72. Second quarter earnings from continuing operations, $0.77, down from $0.82, but $0.05 above the Street estimate. The stock still down.
Pfizer (PFE) $0.31 loss there.
And then came ExxonMobil (XOM) with a $0.21 gain.
Countrywide (CFC) down $2.15. The company said its July mortgage funding rose from a year ago, but it fell 14 percent from June. Also it said that foreclosures and delinquencies rose in July to the highest levels in several years.
Thornburg Mortgage (TMA) was halted, down $6.67, a 47 percent drop on liquidity concerns and that did prompt a lot of downgrades by brokerages today, including Jefferies and RBC Capital, Friedman, Billings, Ramsey and Credit Suisse. After the close in a news conference, Thornburg's CEO said the company will delay payment of a $0.68 quarterly dividend, but it would not seek bankruptcy.
UBS Ag (UBS), the big financial firm, second quarter profit, up 79 percent on record fee income, but the company said the current quarter had very weak trading income and Credit Suisse downgraded it from "out perform" to just a "neutral" rating there.
Fortress Investment (FIG) down $1.35. You can see by the chart this company went public February 9th at $35. Today it reported a second quarter loss of $0.66 a share, versus a loss of only $0.12 a year ago.
Bway Hldg (BWY) which makes all kinds of containers was down $1.97 today. This company went public June 12th at a price of $15, well below it now and third quarter loss of $0.46 reported today versus earnings of $0.37 a share a year ago.
Excel Maritime (EXM), this company owns seaborne dry bulk carriers, big second quarter earnings of $1.02, up from $0.23 a year ago. Revenues jumped 40 percent.
And DeVry (DV), the higher education firm, up $0.75. Fourth quarter earnings up 35 percent to $0.22 versus $0.17 a year ago.
Apple (AAPL) topped NASDAQ's most active list, down $3.76.
Cisco Systems (CSCO) $0.57 drop.
Google (GOOG) got hit a bit today, down $6.90.
Research in Motion (RIMM) losing $5.81.
And then Intel (INTC) with a $0.22 loss.
Microsoft (MSFT) down $0.26.
Qualcomm (QCOM) fell $1.14.
Nvidia (NVDA) bucked the trend with a gain of $1.69.
Ebay (EBAY) $0.66 drop.
And then Comcast Corp A (CMCSA) a $0.26 closing loss.
Physicians Formula (FACE), you'll notice the symbol, it's face. It is a cosmetics firm and the company warned of a third quarter loss due to flagging sales.
Then came Jamba Inc (JMBAU) down $1.82. This is a holding company for the Jamba Juice chain. Second quarter revenues were up 14 percent. Same store sales actually fell 3.3 percent.
And on the American exchange, Environmental Power (EPG) was a big loser, falling $1.45 or 22 percent. The renewable energy firm posted a wider second quarter loss of $0.71 versus a $0.30 loss in the year ago period and that's despite a 13 percent jump in revenues.
