NBR Complete Transcripts: 08-15-2007
Wednesday, August 15, 2007The Dow Dives Below 13,000
SUSIE GHARIB: Another day of wild swings led to big losses on Wall Street, pushing the S&P 500 into negative territory for the year. The Dow plunged 167 points, closing below the 13,000 level for the first time since April. The blue chip average has plummeted almost 800 points in the past week. The NASDAQ lost 40 points. Driving today's trading, a Merrill Lynch downgrade to "sell" on the nation's biggest mortgage lender, Countrywide Financial, on concerns it could go bankrupt. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Financial stocks have gotten pummeled recently, but few as brutally as Countrywide Financial. Shares of the nation's largest mortgage company plunged 13 percent today after Merrill Lynch raised the possibility of bankruptcy. There were also rumors the company can't raise cash in the commercial paper market, a key short term funding source. Countrywide stock has fallen 24 percent in the past week and is now at its lowest level in nearly four years. Morningstar analyst Ryan Lentell says the sell off is overblown.
RYAN LENTELL, FINANCIAL SERVICES ANALYST, MORNINGSTAR: We don't believe bankruptcy is likely at Countrywide right now. We think they are the strongest mortgage player. We actually think that they could benefit in the long run from what's going on in the market as they should pick up market share.
MILLER: But others believe troubles at mortgage lenders will run deep, likely spreading from sub-prime to prime.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: If you look at the prime mortgage sector, you've got the same delinquency pattern, the same percentage move up. Now prime mortgage is only 1/5 the delinquency of nonprime. But it's 10 times bigger, so if you do the math, there's going to be impact beyond.
MILLER: Virtually every financial stock has been caught in the downdraft. Venerable Wall Street firms like Goldman Sachs and Bear Stearns have fallen sharply, because some of their hedge funds have investments linked to sub-prime loans. However, some industry experts say the damage to financial stocks has been so severe, it creates buying opportunities.
LANTELL: One of the safest ways to play it, we think is with some of the bigger banks. US Bancorp would be one place to look, Bank of America, JPMorgan, Wells Fargo. They all have tremendously diversified businesses.
MILLER: Plenty of other analysts advise investors to sell now, ask questions later. They warn trouble in the credit markets could ultimately hurt the overall economy.
ALBERTSON: Odds are since the mortgage sector is such a large part of our economy and housing and real estate, it will. And then you're going to have to go through a loan-loss cycle.
MILLER: Loan-loss cycles are unpredictable. They depend on how weak the economy gets. The last one started in late 2000 and lingered almost two years. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Robert Hormats, Vice chairman of Goldman Sachs Reacts To Stock Sell Off
SUSIE GHARIB: Back now to our top story, Wall Street's stock sell off. Joining us with more analysis, Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: Hi, Susie. How are you?
GHARIB: So Bob, what's it going to take to stabilize these markets?
HORMATS: I think it's going to take several days of good news or at least several days where you don't hear bad news all the time. It sends to be the case in these jittery environments bad news trumps good news and that's what you had today.
GHARIB: Many market strategists I've been talking to over the past couple of days are saying that this is a normal and healthy correction but is it getting to the point that this market decline is bad for the economy?
HORMATS: Well, it's normal and I'm not sure it's healthy. It could be bad for the economy. That's the real risk. If you've got people losing money in their 401Ks and the value of their home is going down and you have foreclosures and then people can't do this mortgage equity withdrawal which drove a lot of spending over the last several years and then they also find that their mortgage interest rates go up because their adjustable mortgage resets. That could be very harmful to consumer spending and it could have an adverse effect on the national economy, the underlying economy and I think it will. It's a question of how much and how soon, but it certainly will have a negative effect on the domestic economy.
GHARIB: We're going to be getting some consumer numbers out on Friday. How much of a dent do you think that this whole market sell off and the credit crisis is going to have on consumer sentiment? What's your sense of the consumer?
HORMATS: Well, my sense of the consumer is the consumer is already overstretched. The consumer does not have a lot of excess savings and when they see the value of their homes going down and they see the 401Ks going down, they're even more stretched and I think consumers will begin to pull in. How much they will do it, I don't know, but it will have an affect. The Fed will be watching this very carefully along with the jobs market and if they begin to weaken, both of them or one or the other, that will begin to trigger more feelings in the Fed that they've got to make a move, not yet, but I think over time, yes.
GHARIB: Bob, I know you talked to Goldman's international clients on a pretty regular basis. How much of a global impact is this crisis in the U.S. and the stock market sell off having internationally?
HORMATS: More in Europe than in Asia because a lot of these European banks we've seen heavily exposed to some of this paper and they've had to take write-downs. The Asian situation is somewhat different. The Asian economies are doing pretty well, by and large quite well in the case of China. And it's very important to the United States to maintain the confidence of foreign investors because we need $2 to $3 billion every working day because we have such a savings short fall in our country and we want to make sure that money continues to flow. In the medium term it may also be the case that bargain hunters in Asia start looking for distressed assets here, for weaker assets here and they could be part of the answer to the problem as opposed to several months ago China was one of the originators of instability because people perceived the decline in Chinese economy. Now China and other countries in Asia could be part of the salvation of our financial markets.
GHARIB: Do you see international investors still being very interested in U.S. stocks and bonds or are they pulling away?
HORMATS: They're very cautious. We've seen concerns about fixed income assets and also equities at this point and they're nervous along with everyone else, but I know a lot of foreign investors who are beginning to nibble or are thinking about nibbling, doing a little bottom fishing when they think this has reached a bottom.
GHARIB: Real quickly Bob, because we're running out of time here, I'm just wondering what the foreign investors are telling you about how the Fed has been handling the situation. Do they find that it's being responsive?
HORMATS: So far I think they're generally quite happy with the Fed adding liquidity, as did other central banks, including European central bank. But if they see the economy weakening, they will want, as I think many Americans will want to see the Fed take more aggressive action. They don't necessarily expect it to bail out certain companies if they get into trouble, but they want to see that if the economy weakens, if jobs weaken and consumer spending weakens, they'll want to see the Fed take bolder action to avert a downturn or a recession. Now lower interest rates by the Fed may weaken the dollar a little bit, but they want to see strong action if they perceive the biggest economy in the world is drifting towards a significant slow down. They'll want to see that.
GHARIB: All right, we're going to have to wrap it up here, Bob, thank you very much.
HORMATS: Thanks for having me Susie.
GHARIB: My guest tonight, Robert Hormats, vice chairman of Goldman Sachs International.
The Toxic Toy Trouble Scares Up Talk of an Import Czar
PAUL KANGAS: After the recall of millions of tainted toys from China, there are calls tonight for an import czar to help protect consumer safety. U.S. Senator Charles Schumer says the recalls show current safeguards are not working. Meanwhile, toy sellers are working hard to make sure the holiday selling season is profitable. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The toy story for this Christmas is shaping up now as retailers begin to stock their shelves for the holiday season. Lynne Stierman owns this boutique toy store in Vienna, Virginia. The shop, called Once Upon a Time, doesn't sell Mattel toys. But the recall has caused her to think twice about the merchandize she's buying now.
LYNNE STIERMAN, CO-OWNER, ONCE UPON A TIME: We haven't ordered a lot since the recalls, but I think we are more diligent about where things come from and quality control, things like that, then we probably were before.
DHUE: Stierman doesn't expect the recall to soften overall sales this holiday season, as kids will still want toys and the grown-ups won't want to disappoint. Some parents are already reconsidering what types of toys they may purchase.
IRENE KOZMAN, PARENT: I definitely will change my habits this Christmas and I'm going to be looking for where toys are manufactured and it does make me a little bit skeptical about what kind of system we have to check the products.
DHUE: But some moms say they can't worry too much about what their kids put in their mouths.
ANNE MARSH, PARENT: I'm a low key mom and I'm careful with my boys, but it's not going to change what I buy.
DHUE: Consumers who want to steer clear of Chinese-made toys face a challenge. Nearly 80 percent of toys sold in the U.S. are made in China. Toy analyst Sean McGowan expects sales to hold up for the holidays.
SEAN MCGOWAN, TOY ANALYST, WEDBUSH MORGAN SECURITIES: I don't think the recent recalls are going to have much of a measurable impact on holiday sales for this holiday season unless of course it spreads to a lot more products, a lot more factories and a lot more marketing companies.
DHUE: Analysts say a lot will depend on how confident consumers are that manufacturers are testing the materials in their toys and pulling any products that are unsafe. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Vienna, Virginia.
"Street Critique"-Patrick O'Hare, Editor in Chief of the Financial Information, Briefing.com
PAUL KANGAS: Tonight's street critique guest is normally a bargain hunter, but he says when searching for stocks in a crazy market like this one, it's more about finding a safe place to wait out the storm. He's Patrick O'Hare, editor in chief of the financial information website briefing.com and author of briefing's bargain hunting column. And Pat welcome back to NIGHTLY BUSINESS REPORT.
PATRICK O'HARE, EDITOR-IN-CHIEF, BRIEFING.COM: Hi, Paul, thank you.
KANGAS: Give is your current view on what's going on Wall Street these days.
O'HARE: Well to state the obvious, it's not a very good market right now. Trying to call a bottom is a little bit more of a guessing game really. The market will eventually throw off some (INAUDIBLE) but we're not seeing any yet as the selling remains pretty indiscriminate surrounding the headlines related to credit market risk.
KANGAS: What should value-oriented investors be looking for?
O'HARE: A market like this, we think value-oriented investors should be favoring quality blue chip companies and specifically those blue chip companies that have exhibited relative strength during the sell off and also have a very good fundamental story behind them.
KANGAS: And not in the mortgage business.
O'HARE: No definitely not.
KANGAS: Now I know you brought our viewers three picks tonight which you consider to be safe places to wait out the volatility and you believe they've got some upside potential as well. What is your first pick?
O'HARE: Well, Walgreen, the symbol is WAG, which is the nation's largest drug store in terms of sales is nicely positioned for a risk adverse market given its position in that consumer staples industry. The stock trades at about 22-times trailing 12-month earnings which is roughly a 25 percent discount to its five-year historical average in good financial shape with no debt, over $1 in free cash per share.
KANGAS: You know your fact and figures on that one. How about another one?
O'HARE: Proctor & Gamble is a name everyone knows. The symbol there is PG. It's a leading consumer staples company. The thing that we like about Proctor & Gamble it's coming off a year in which it delivered 5 percent EPS growth. It's got good visibility into the next fiscal year for looking for 13 to 14 percent growth and very strong from a financial standpoint. It's over (ph) $3 per share in free cash and just announced a plan to buy back up to $30 billion worth of stock over the next three years.
KANGAS: And the chart indicated it's not exactly at a high either, is it?
O'HARE: No that's right. At 21 times trailing 12-month earnings, it's at about a 10 discount to its five-year historical average.
KANGAS: And finally, I understand that you like a tech stock. Which one is it?
O'HARE: Yeah, it's Cisco. The symbol is CSCO, the leading networker, just coming off a great quarter and strikingly had nothing but good things to say about the global economy including its business in the United States. John Chambers has done a great job managing this company. It too trades at roughly about a 20 percent discount to its five-year historical average, has - is also in good financial shape and is in an ideal position to capitalize on the competition between telecom companies and cable providers as they work to expand their communication networks.
KANGAS: Some very interesting selections there Pat. Do you own any of the stocks mentioned or have other disclosure to make?
O'HARE: No, I do not Paul.
KANGAS: All right, most interesting, we'll follow them with care. My guest tonight, Patrick O'Hare, editor in chief at briefing.com.
"Money File"-Is Now Bond Season?
SUSIE GHARIB: In the "money file" tonight, in the midst of the credit crunch. Is it a good time to invest in bonds? Here with some answers is Gail Marks Jarvis, personal finance columnist at the "Chicago Tribune."
GAIL MARKS JARVIS, CHICAGO TRIBUNE: When the stock market acts as spooky as it has lately, investors often find comfort in bonds, but not this time. The stress in the stock market is all about credit or lending and the fear that most homeowners and businesses will not get repaid. Since bonds are IOUs for loans, that puts people who have invested in bonds in the center of the storm, especially if they have risky corporate bands or high yield junk bonds.
In July, the average high yield bond fund lost more than the stock market. Investors are frightened by the reckless lending practices of the last few years. Financially stressed homeowners already are drowning in debt and the bond plunged unnerving investors world wide. The next shoe to drop could be corporate bonds, especially for companies overloaded with leverage-borrowed debt.
Corporate bonds as a group have been getting junkier and junkier. More than half have considered speculative. Twenty percent of junk bonds are rated triple-C which means they stand a strong chance of defaulting on payments to bonds investors. More than $600 billion in leveraged loans will need to be refinanced during the next few years. If you buy bonds to be safe, be cautious. You might earn nine percent in junk bonds, but safe U.S. Treasury bonds, CDs and money market funds let you earn close to 5 percent and sleep soundly. This is Gail Marks Jarvis.
Paul Kangas' Stocks in the News
PAUL KANGAS: It was a narrowly mixed open on Wall Street today. The Dow spiked up some 86 points around 11:00 a.m. on what seemed like a delayed reaction to just a modest rise in July consumer inflation. That uptick quickly faded on the jump in oil prices. Stocks bounced around for the next several hours but couldn't overcome concerns about the credit market, especially considering that Merrill Lynch sell recommendation on the shares of Countrywide Financial. So the market again tanked in the final hour of trading. The Dow Industrial Average closed off 167.45 points now at 12,861.47. The NASDAQ Composite was down 40.29, ending at 2458.83. Standard & Poor's 500 Index fell 19.84 ending at 1406.70. Over in the bond market, the 10-year note fell 1/32 to par and 6/32, putting the yield at 4.73 percent.
The most active big board issue on 32.2 million shares was Countrywide Financial (CFC) plunging $3.17, traded as low as $19.25 this morning after Merrill Lynch downgraded it from "buy" to "sell" on liquidity concerns in the mortgage sector. Then GE (GE) $0.78 drop.
A nickel loss in Pfizer (PFE).
Time Warner (TWX), bucked the trend with a $0.13 gain.
And then EMC Corp (EMC) down $0.20 a share.
Citigroup (C) dropped a nickel.
And a $0.07 loss and there you see Ford Motor (F), down $0.07 as they bargain with the UAW.
Bank of America (BAC) moved up $0.37. Shareholders of Sallie Mae have approved a $60 a share buyout from a private equity group and that does include Bank of America.
Wal-Mart Stores (WMT) was down $0.32.
And AT&T (T) $0.27 loss on that stock.
The star of the day, Deere & Co (DE) up $3.51, traded as high as $126.92 after reporting third quarter earnings up 23 percent, $2.37 a share, well above last year's $1.85. Sales were up nearly 6 percent and the company sees worldwide sales of its farm equipment up 16 percent this year.
We just saw Deere & Co, let's try another one just for kicks and see what comes up. That's better, HJ Heinz (HNZ) up $1.18. The company's forecasting first quarter sales will rise about 9 percent and it sees earnings in that period of $0.62 to $0.63 a share, well above the Wall Street estimate of $0.55 a share.
Thornburg Mortgage (TMA), one of the best percentage gainers of the day, up $2.95, traded as high as $12.11. The CEO says he hopes the company will be back to business as usual as early as next week.
KKR Financial Holding (KFN) tumbling $4.75. The company said it sold $5.1 billion of residential mortgages and took a $40 million loss. Meanwhile, Lehman Brothers downgraded the stock from "over weight" to "equal weight" and Friedman, Billings downgraded it from "out perform" to just "market perform."
Levitt Corp (LEV) losing $0.79 or 21 percent of its value on news BFC Financial has terminated its earlier merger pact with Levitt.
Agilent Tech (A) fell $3.94. Third quarter earnings dropped 19 percent to $0.45 a share, but on an adjusted basis, they were higher, $0.48, versus last year's $0.39, but that $0.48 was still a penny below the Street estimate.
Amrep Corp (AXR), a real estate company, down $3.79. The world is that Karabots foundation may sell over 447,000 shares in order to comply with an IRS code requirement. That could put some pressure on the stock.
Macy's Inc (M) down $0.63, traded as low as $30.70. Second quarter earnings tumbled 77 percent to $0.16 versus $0.57 last year.
And the Brazilian aircraft manufacturer, Embraer Aircraft (ERJ) off $4.36. Second quarter earnings plunged 52 percent to only $0.36 a share from $0.75 a year ago and that was despite an 11 percent rise in sales.
NASDAQ's most active, Apple (AAPL) down $4.13.
They hit Google (GOOG) too, down $11.05.
Cisco Systems (CSCO) $0.34 drop.
Research in Motion (RIMM) fell $8.25.
Intel (INTC) off $0.58 a share.
Microsoft (MSFT) down $0.17.
Followed by Qualcomm (QCOM) with a loss of $1.69.
Finally a gainer, Verisign (VRSN) up $0.87.
Amgen (AMGN) was down $0.73. The company lowered its 2007 earnings outlook and it's going to cut about 14 percent of its workforce. That could be around 22 to 2300 jobs.
Applied Materials (AMAT) was down $0.88 a share.
Accredited Home Lenders (LEND) was off, I should say up $0.60, traded as high as $7.18. Lone Star Fund has extended its $400 million merger offer for two more weeks.
And finally, shares of Coleman Cable (CCIX) falling $8.36 or 43 percent as investors react to a big drop in second quarter earnings, $0.24 a share, well down from a $1.00 a share in the year ago period.
