NBR Complete Transcripts: 08-20-2007
Monday, August 20, 2007Investors Now Seem to be Seeking Security in Bonds
SUSIE GHARIB: Another volatile day on Wall Street. Stocks fell, then rallied, with the Dow closing up 42 points. But the real action today was in the bond market, where yields on Treasuries had their biggest one-day drop in 20 years. Investors sought the safety of Treasuries, and that very strong demand pushed the yield on the three-month Treasury below 3 percent in intra-day trading. It was at 4.7 percent just a week ago. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury bond traders found themselves the most popular kids on the block today -- if, that is, they had something to sell. Investors of all sizes turned to government securities as a haven safe from the uncertainties of the stock and corporate debt markets. Demand for Treasuries drove short-term yields down 54 basis points to 3.17 percent, a bigger decline than the one on 9/11 or on the day of the stock market crash of 1987. Bond market strategist Tony Crescenzi of Miller Tabak, says there was no particular news to drive today's trading, just a continuing sense of fear.
ANTHONY CRESCENZI, CHIEF BOND MARKET STRATEGIST, MILLER TABAK: The psychotic atmosphere still exists in the credit markets. Investors are still lured to riskless assets and are steering clear of riskier assets, buying Treasuries only. Commercial paper buyers are on strike. They're instead buying T-bills. So basically there is still a lot of fear in the markets and it is reflected in T-bills, which many people have very low fear in purchasing.
GURVEY: The freeze in the commercial paper market has the potential to impact the economy. Chrysler automotive and Alison transmission are just two of the 20 or so big firms which have been unable to issue these short- term securities for working capital in the last few weeks. If investors, especially the money market funds which often purchase these securities, do not return to the market, corporations may find themselves short of operating funds. Robert Polenberg of Standard & Poor's says there is a lot of commercial paper waiting for the market to thaw.
ROBERT POLENBERG, DIRECTOR, LEVERAGED LOANS, STANDARD & POOR'S: You also have the concern that there are over $230 billion in loans that are on the forward calendar in the syndicated loan market at this point, so you have these hung deals, plus the $240 billion. We have a lot of paper being come into market in the near future and the question is, where is the liquidity going to come from to bring these deals?
GURVEY: In another move to increase liquidity, the Fed today said it will redeem and not reissue $5 billion in Treasury bills which come due on Friday. It hasn't done that since the liquidity crisis which followed 9/11. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
An Economic Financial Meeting of the Minds
PAUL KANGAS: Federal Reserve Chairman Ben Bernanke heads to Capitol Hill tomorrow to meet with Senate Banking Committee Chairman Chris Dodd and Treasury Secretary Henry Paulson. Dodd called the closed door meeting to talk about the recent volatility on Wall Street. But while the stock market has been grabbing headlines, it's not the main concern of the Federal Reserve. Central bankers are focused on the credit markets that function like the plumbing in the nation's financial system. Darren Gersh explains.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a good chance that your auto loan was financed with help from the nation's $2 trillion credit markets. The same goes for the lease on that back hoe you passed on the way to work. Simply put, America may invest through the stock market, but it does business through the credit markets, which is why, when credit markets get in trouble, the Federal Reserve rolls up its sleeves and gets to work. Money manager Michael Farr says he and other financial pros recognize this fact, to a point.
MICHAEL FARR, CHIEF INVESTMENT OFFICER, FARR, MILLER & WASHINGTON: I think the stock market understands that it's not the Fed's main concern, but I don't think that the stock market actually believes it. It is sort of like hearing your parents say I don't have any favorites among my children and secretly suspecting that you're still probably it.
GERSH: When stock prices are high, investors feel wealthy and eventually they spend more, boosting the economy. Credit markets by contrast, have a more immediate impact on business spending. Safeway sold $500 million in bonds last week, Wal-Mart, $2.7 billion. That's cash that can be used to stock shelves or build stores. Former Federal Reserve Board Governor Susan Phillips says Fed Chairman Ben Bernanke and his colleagues control the benchmark interest rate that helps set prices across credit markets.
SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: They don't directly intervene in the stock market. They intervene in the bond market and that will secondarily affect the stock market. So they don't target the stock market, but they are clearly aware of the stock market.
GERSH: The Fed doesn't believe it has much immediate impact on stock prices. In research a few years ago, Ben Bernanke concluded an unexpected change in the Federal funds interest rate of a quarter point will move stocks roughly one percent -- about what they move on any given trading day. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Liz Ann Sonders, Chief Investment Strategist at Charles Schwab
SUSIE GHARIB: Despite Wall Street's positive finish today, our guest tonight says she's still worried about the future, especially the risk of recession. Joining us now to explain, Liz Ann Sonders, chief investment strategist at Charles Schwab and Company. Hi Liz Ann.
LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB: Hi, Susie.
GHARIB: Do you see any signs out there that the stock markets are stabilizing?
SONDERS: Well, I think Friday was a good sign and the market does tend to like when the Fed does finally step in. And stock market typically has not performed all that bad during financial crises at the moment the Fed comes in. The real key to a long-standing recovery for the market, though, is ultimately what happens in the macroeconomic environment. The stock market doesn't tend to look at favorably upon a hard landing in the economy. And I think that really holds the key going forward, is how big of a ripple effect this is and will have on the overall economy.
GHARIB: When you talk about the macro environment, you are talking about the economy and as I said when I introduced you, you are worried about a recession. Tell us why.
SONDERS: I think the risks have increased of late. The report that you put out just prior to me coming on here talked about the credit markets really being the backbone for the overall economy and the seizing there up I think calls some long term growth expectations into question. If you look at housing as the root cause of these problems in the overall market, of course, we still have a lot of that in front of us. We have the employment effect in front of us. We still have quite a few mortgages yet to reset coming up in 2008, particularly those that had originations in 2006. And we have the wealth effect. We had the weakness in net worth that came as a result of housing that was offset by a rising stock market. And now we have some volatility in the stock market that may cause some problems in terms of overall net worth, which has both -- both actual effect on the economy as well as a psychological effect. So, there's still some issues ahead of us.
GHARIB: And those issues are all very real, but the flip side of it is people have jobs. The unemployment rate is low and in terms of corporate America, profits are pretty good. Inflation is low. Many analysts come on and say the economy is sound. What do you say to that?
SONDERS: The economy absolutely is sound right now. I'm not suggesting a doom and gloom scenario here, but if you were to look at when we start recessions in the past and where the unemployment rate typically is, it is typically at the low in the cycle. You look at corporate profits and you look at the starting point of recessions. Corporate profits are normally at the high in the cycle. So those are both very much lagging indicators and you can't simply point to those and the health that they represent right now as a guarantee that we're not looking at economic trouble going forward.
GHARIB: Charles Schwab, your firm is sort of a proxy for the individual investor. What's your read on individuals these days in regarding to the market situation?
SONDERS: Fortunately, we're not seeing a lot of panic. There's certainly been slightly more mutual fund redemptions that we're seeing new flows in. But much like with individual investors across the board not just at Schwab, you have seen a heavy bias toward purchases of foreign equities, not U.S. equities. So a lot of action in our market is really absent the individual investor. They have been much more overseas. That's why I think this market environment is so dominated by professional investors and that's part of the reason why you're seeing the volatility that we're witnessing.
GHARIB: So, what do you think individuals should be doing in this environment? Is it smart to be putting your money in overseas markets?
SONDERS: It depends on how aggressive an investor you are. At Schwab, we believe in a strategic asset allocation approach which is long- term asset allocation, not market timing. And if you are far up the aggressive spectrum, then having a decent exposure to international investments does make sense, maybe 25 percent. But that's not applicable across the risk spectrum. For a more conservative investor, given the typically increased volatility associated with the international market, you probably want much less exposure. I think the key in volatile markets in general is for investors to just assess their risk tolerance and then see if it's matched in the risks that they're putting on in their portfolios.
GHARIB: All right. Good advice. Liz Ann, pleasure to have you on the program as always.
SONDERS: Thanks, Susie, my pleasure.
GHARIB: My guest tonight, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company.
Japan Is Feeling The Shock of Foreign Competition
SUSIE GHARIB: America was once home to a number of major electronics companies until the 1980s, when an onslaught of cheaper and better Japanese products triggered a massive restructuring of the industry. Today Japanese companies find themselves at a similar crossroads, pressured by lower-cost Asian competitors. Lucy Craft looks at why that industry continues to resist dramatic consolidation.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sony, Sharp, JVC, Japan's status as cutting-edge tech superpower is underscored by its veritable army of electronics manufacturers. From electric fans to tricked-out cell phones to semiconductors and nuclear reactors, manufacturers continue to churn out a boggling range of products. Japan supports not one or two, but close to a dozen major electronics companies and nearly as many smaller players. Bain & company's Jean-Philippe Biragnet says that means lots of" me-too" products, and far thinner margins than their western rivals.
JEAN-PHILIPPE BIRAGNET, PARTNER, BAIN & CO. TOKYO: The key challenge with the Japanese conglomerates is more that their profitability lags at least twice the profitability of other comparable technology conglomerates.
CRAFT: Best-selling critic Fumiaki Sato, an engineer who used to design video players for JVC, says the day of reckoning may not be far off. An overcrowded Japanese electronics industry, he says, risks short- circuiting its long-term future.
TRANSLATION OF: FUMIAKI SATO, AUTHOR, "SCENARIO FOR CONSOLIDATING JAPAN'S ELECTRONICS INDUSTRY": For example, while Japanese cell phones are the smallest and lightest in the world, they can't make inroads overseas. That's because engineering talent is dispersed across 10 companies and resources are spread too thin. If the global market has room for only five players, then each one has to be big enough to capture a 20 percent share. Japanese makers now each have about a 1 percent global share. That's why they need consolidation.
CRAFT: With passive shareholders giving way to activist investors demanding better returns on equity, Sato says the only answer is shock treatment, consolidating the industry down to just two mega-manufacturers.
SATO: Japanese electronics conglomerates now have so many subsidiaries it would take a decade to refocus them on their core competencies. That's too slow, so I propose consolidating all 10 companies into two groups under holding companies.
CRAFT: Fat chance of that happening, say analysts like Steve Myers of Lehman Brothers.
STEVEN MYERS, SR. ANALYST, LEHMAN BROTHERS JAPAN: There's a greater tolerance of what by purely western standards would be regarded as unacceptable profitability. This has been a country where there's a lot of technology and not so much in the way of financially driven management.
CRAFT: Despite their undervalued market caps and operating profits well under half the average for all Japanese manufacturers, Japan's electronics makers have always favored incremental restructuring, says Bain's Biragnet and that's unlikely to change, even now.
BIRAGNET: Historically, those firms have been developed based on -- the object was to grow revenues. So clearly that remains for many of these companies the key measure of success, which is to grow revenue, rather than increase profitability.
CRAFT: Asked about prospects for consolidation in the Japanese electronics industry, most of the major companies we spoke to said no comment. One of the few that was willing to speak out, Sharp, said they are not considering any mergers now, but they are taking a wait-and-see approach. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
"Commentary"-What Good Can Grow Out Of Free Trade & Labor
SUSIE GHARIB: In tonight's commentary, balancing free trade with U.S. labor market policies. Here's Glenn Hubbard, dean of the Columbia graduate school of business and former chairman of the White House Council of Economic Advisers.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIV.: Congressional leaders say they care about economic growth abroad as long as it doesn't cost American jobs. OK, but what are the implications for growth and politics in Latin America, where our national security and economic interests come together? Tough trade talk by the Congress feeds Hugo Chavez' anti-U.S. rhetoric. And this protectionism flies in the face of Democratic presidents' support of free trade, from President Kennedy's Alliance for Progress to President Clinton's NAFTA. And the Bush administration's support for free trade has sometimes sidestepped legitimate public concerns about U.S. labor markets and job prospects.
There is a better way. We need to aggressively fund personal reemployment accounts. These are funds for individual training assistance to workers likely to be unemployed for significant periods of time and would be an important reform of our antiquated labor market policies. This progressive policy is consistent with free trade. Trade remains a big win for the U.S. economy, with gains for consumers and benefits to our productivity. But it's also vital for our Latin American allies. Putting free trade on hold -- as the Congress is now doing -- weakens our Latin American allies and strengthens the lure of Chaveznomics. And it's unnecessary. Better labor market policies at home are the answer, not protectionism. I'm Glenn Hubbard.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened with modest gains thanks to those lower oil prices and higher markets in Asia and Europe. The Dow posted a 26-point advance at 11:00 a.m. and the NASDAQ was up 6 points. The early upturn gave way to those lingering concerns over woes in the credit market. At 1:30 this afternoon, the Dow was off 85 points. Low volume on the sell-off and that drop in bond yields prompted a late rally resulting in a mixed close for stocks. The Dow Jones Industrial Average ended up 42.27 at 13,121.35. The NASDAQ Composite gained 3.56 to 2508.59 but the Standard & Poor's 500 Index lost .39, ending at 1445.55. Over in the bond market, the 10-year note rose 14/32 to par and 30/32, lowering the yield to only 4.63 percent.
New York exchange volume leader on 21.1 million shares was Countrywide Financial (CFC) losing $1.62. Bank America upgraded it from "sell" to "neutral" but Keefe Bruyette & Woods downgraded it from "market perform" to "under perform." (INAUDIBLE) reportedly the Office of Thrift Supervision is closely monitoring the company's business practices.
Pfizer (PFE) $0.23 gain.
While General Electric (GE) lost that much.
Citigroup (C) in a weak financial sector, down $0.42.
JPMorgan Chase (JPM) lost $0.52 a share.
Bank of America (BAC) down $0.41.
Time Warner (TWX) bucked the trend, up $0.13.
Wells Fargo (WFC) $0.14 drop.
Ford Motor Co (F) up $0.17.
And then EMC Corp (EMC) $0.36 gain.
American Express (AXP) was down $0.21. The "London Sunday Times" reported the company has put its private banking business up for sale and it could fetch as much as $400 to $500 million.
Consol Energy FMC Corp (CNX) edged up $0.45. The company is boosting its quarterly dividend by 43 percent. It will go from $0.07 to $0.10 a share quarterly.
FMC (FMC), this is the big chemical company, up $0.63. The company announced it's declaring a two for one stock split.
Then we see KKR Financial Holdings (KFN) up $1.24. The company is going to sell 16 million of its shares to institutional investors at a price of $14.40 a share. That'll raise $230 million. And then it's going to offer $270 million in stock to existing shareholders also at that price of $14.40 a share, all of this o improve company liquidity.
Freeport-McMoran C&G (FCX) up $3.06 on news Atticus Capital has boosted its stake in the firm from 6.4 to 7 1/2 percent. Then the big Danish pharmaceutical company up $5.31. Novo-Nordisk (NVO) said its phase three trials of its diabetes drug improved glucose control and also lowered body weight.
Thornburg Mortgage (TMA) down $1.54. The company sold a substantial part of its AAA rated mortgage securities portfolio and also significantly cut its borrowing. It's going to take a third quarter capital loss of $930 million. Then McGraw Hill (MHP) down $1.41. JPMorgan downgraded it from "over weight" to "neutral." Now McGraw owns Standard & Poor's, the rating service.
And at the same time, here's another rating service, Moody's (MCO) down $4.09. Both companies down apparently on news that on Friday, the Senate Banking Committee has called for an examination of credit rating agencies regarding the sub-prime mortgage security market.
Looking at the NASDAQ's most active, Research in Motion (RIMM) did rather well, up $15.47. Goldman Sachs made very positive comments about the company's subscriber growth. Goldman Sachs' price target on RIMM is $295 a share.
Apple (APPL) was up $0.16.
And then Cisco Systems (CSCO) $0.23 loss.
Intel (INTC) $0.41 gain there.
Google (GOOG) down $2.12 on NASDAQ.
Microsoft (MSFT) edged a penny higher.
Qualcomm (QCOM) a $0.12 loss.
baidu.com (BIDU) was up $11.04.
Comcast "A" (CMCSA) down $0.62.
And then Crocs (CROX), the footwear maker, up $4.91. The Webush Morgan brokerage highlighted the company's strong growth abroad and this all appears in the latest issue of "Smart Money."
Elsewhere, First Solar (FSLR) up $8.80 a share. Deutsche Bank upgraded it from "hold" to "buy" on a valuation basis.
And those are the stocks in the news tonight.
