NBR Transcripts: December 3, 2007
Monday, December 03, 2007Treasury Secretary Henry Paulson Jumps Into The Mortgage Mess
SUSIE GHARIB: Treasury Secretary Henry Paulson today took aim at an avalanche of home foreclosures expected over the next year. Speaking at a housing conference in Washington, Paulson pressed the mortgage lending industry to come up with a process to help struggling borrowers stay in their homes. As Stephanie Dhue reports, the Treasury secretary thinks regulators and lenders can agree on a plan this week.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Losing patience with rising foreclosures, Treasury Secretary Paulson is urging lenders to set standards to quickly reprocess troubled loans. But he acknowledged the current industry effort, called Hope Now, isn't a complete solution.
HENRY PAULSON, TREASURY SECRETARY: Nothing is worse than doing nothing. The hope Now effort to streamline refinancings and modifications is a positive step, but it is not a silver bullet.
DHUE: The modification plan focuses on borrowers who have been making payments, but who will no longer be able to afford their mortgages once the interest rates reset. But analysts say mortgage workouts will only have a modest impact on rising foreclosures and falling home prices.
FREDERICK CANNON, MANAGING DIR., KEEFE, BRUYETTE & WOODS: It's a pretty narrow segment of people who can really be helped by these loan modifications and the issues that we face in housing today in terms of the impact of lower home prices and the impact on mortgages and mortgage lending generally are going to be with us for quite some time.
DHUE: Countrywide CEO Angelo Mozillo says his firm will modify 75,000 sub-prime loans by the end of the year. That's about 10 percent of the sub-prime loans on its books. He wants the government to do more to jump start the market for mortgage-backed securities.
ANGELO MOZILLO, CEO, COUNTRYWIDE: Holders of those securities who got screwed are going to say, I'm not going to do this again. Something is going to have to happen to give them confidence to go back and take in mortgage-backed securities.
DHUE: Mozillo called on regulators to let Fannie Mae and Freddie Mac purchase more loans in greater amounts. But homebuilder Robert Toll suggests regulators need to reassert themselves in the mortgage market.
ROBERT TOLL, CHAIRMAN & CEO, TOLL BROTHERS: If you're going to have the secondary market back mortgages, you're going to have to make those mortgages more sound. You can't wish for the market to reassert itself. You can't wish, respectfully, for the providers to worry about their reputation.
DHUE: Many economists now expect home prices to continue to decline for the next year and until home prices reach a bottom, they say the market for mortgage-backed securities will also struggle to find its footing. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
A Cold Start For Stocks
JEFF YASTINE: Stock investors struggled to find their footing today in this first day of December trading. Winter months are typically good ones on Wall Street. But as Suzanne Pratt reports, there are a number of reasons why this December could mean rough going for the stock market.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a fairly naughty November, stock investors are hoping for a nice December. But some market pros are concerned that Santa will skip Wall Street this year. Standard & Poor's market strategist Alec Young believes volatility will replace the typical year end run-up in stock prices, known as the Santa Claus rally.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: Santa Claus rally kind of implies that the market makes steady gains throughout the month of December. We don't really see that. We continue to see some choppiness. But considering how bad things were a few weeks ago, I think a lot of investors would be happy with a market that trades sideways for a little while.
PRATT: Young believes investors will hold back because of worries about the credit crunch and a recession in the U.S. economy.
YOUNG: Anything that we get from the government in terms of economic data that reinforces the idea that the economy is weakening would be bad for stocks. Any news on the retailing front that the consumer is ready to pack it in after years of continuing to spend, that that's finally over, that would be bad news for stocks.
PRATT: Others, however, believe a December rally is still a possibility. A look at past history certainly helps to make that case. According to the "Stock Traders Almanac," since 1950, December has been the second best month of the year on Wall Street with the S&P 500 gaining on average 1.7 percent. November has been the kindest month, returning slightly more. Russell Investment Group's Stephen Wood says the December 11th Fed meeting, at which a cut in interest rates is widely expected, could give stocks an added boost.
STEPHEN WOOD, PORTFOLIO STRATEGIST, RUSSELL INVESTMENT GROUP: Is it going to be 25 basis points or 50 basis points? And equity markets are going to like that. So either way, equity markets are going to like it, even though it's inflationary. So I think what you're going to see is the market's moving now ahead of the Fed's cut.
PRATT: In the last four decades, there have only been a handful of years without a Santa Claus rally. But it is interesting to note when Santa has failed to show up, his absence sometimes precedes a bear market. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Will Chevy's Malibu Bring Financial Sunshine To GM?
SUSIE GHARIB: November was a turkey of a month for General Motors, the nation's biggest auto maker, but its rivals managed to hold their own. Sales at GM fell 11 percent last month to 261,000 vehicles. That drop came despite solid gains in two key new models -- the newly redesigned Chevy Malibu and the Cadillac CTS. Ford Motor notched a slight sales gain, up 0.4 percent to 182,000 cars and trucks. Even rival Toyota had a difficult November, as consumers struggled with rising fuel prices and sliding home values. Its sales rose only 0.3 percent. Chrysler sales fell 2 percent to 161,000 cars and trucks. As Diane Eastabrook reports, U.S. auto companies and dealers are looking ahead to next year with uncertainty.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chevrolet dealer Mark Scarpelli says he's had a hard time keeping the new Chevy Malibu in stock since it rolled into showrooms last month.
MARK SCARPELLI, CHEVROLET DEALER: It's General Motors anticipation that they are going to sell 200,000 of these in 2008. At the rate in which we are all selling them I think they have underestimated the demand. I think it's going to be a wonderful seller for them.
EASTABROOK: If Scarpelli is right, the Malibu could be one of the few bright spots for the U.S. auto industry next year. Global Insight predicts U.S. auto companies will sell about a half a million fewer vehicles next year than this year. Auto analyst George Magliano says rising mortgage rates from sub-prime loans are primarily to blame.
GEORGE MAGLIANO, AUTO ANALYST, GLOBAL INSIGHT: You see more and more problems emanating out of sub-prime and more and more problems that number one are going to cause money to be taken out of the consumers' pocket.
EASTABROOK: Magliano says how auto companies respond to a more challenging U.S. economy will determine how profitable they will be. Incentives could be more prevalent. General Motors for example recently rolled out zero percent financing on remaining 2007 models and analysts think it could be extended to poor performing 2008 models. Magliano also believes auto makers will tweak production plans more often next year based on monthly sales numbers.
MAGLIANO: You have to restrict the flow of cars and trucks going into the dealerships in order to keep the pricing at a reasonable level and in order to hope to sell what you're producing.
EASTABROOK: While Scarpelli admits the auto industry faces some potholes, he remains optimistic. He thinks new union contracts and massive restructurings will help the industry better navigate in a tougher economy.
SCARPELLI: I think they are poised pretty well to be able to be much more adaptable than they had been three years ago.
EASTABROOK: Industry watchers say the holiday shopping season could be a good indicator as to how vehicle sales perform next year. They think if consumers opt to buy big ticket items this holiday shopping season, they might opt to buy cars and light trucks next year. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
Japan's Banks Are Taking A Hit From The Sub-Prime Crisis
SUSIE GHARIB: The U.S. economy is not the only one taking a hit from sub-prime loan losses. The mortgage woes are also hurting Japanese banks and insurance companies. While the problems in Japan aren't on par with the carnage seen in the U.S. and Europe, the situation is hardly cheering. As Lucy Craft reports, sub-prime fallout is just one of many headwinds buffeting the world's second biggest economy.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The good news -- at least if the latest figures released by Japanese financial institutions accurately reflect the extent of their losses -- is that Japan may have escaped the worst of the sub-prime debacle. The total damage so far comes to $11 billion spread across 10 banking groups, says KBS Securities banking expert Kristine Li.
KRISTINE LI, BANKING ANALYST, KBS SECURITIES TOKYO: I still think the direct exposure of the Japanese banks is still quite small, (INAUDIBLE) this $11 billion exposure. It's probably less than 1 percent of their total loans and this is much smaller than their global competitors, like U.S. banks, European banks, even Chinese banks.
CRAFT: The bad news is that sub-prime exposure could be the least of Japanese banks' problems nowadays. Much of the reason Japanese financial sector profits are stagnant right now, foreign experts charge, is self- inflicted damage -- Japanese policy makers shooting themselves in the foot. Take a hastily enacted new law aimed at shielding consumers that has ended up squashing investment. Robert Feldman is an economist with Morgan Stanley.
ROBERT FELDMAN, SR ECONOMIST, MORGAN STANLEY JAPAN: If you want to say, buy a foreign investment fund here, there is a huge amount of red tape that is wrapped around your application. For that, you have to go through the application every time. It's a very long, complicated explanation process. And so the purchases of those instruments have fallen very sharply. Capital outflows have slowed and the yen is stronger.
CRAFT: Another poorly executed new law, intended to make buildings earthquake-safe, has sent construction into a tailspin. KBS Securities' Kristine Li says new housing starts have been slashed almost in half, year on year.
LI: Mortgage growth had been strong until recently, but we had a new construction code and new housing starts collapsed and this certainly hurt mortgage growth. We're looking for some big decline in the second half.
CRAFT: Japan's policy missteps, compounded with the specter of a slowing American market on which Japan so heavily depends for selling its exports, could bring down the curtain at last on Japan's record, six-year- long growth streak, says Jesper Koll, head of Tantallon Research Japan.
JESPER KOLL, PRESIDENT, TANTALLON RESEARCH JAPAN: Unfortunately the risk of a recession in Japan is now very high. We've got domestic demand that is being derailed by some policy tightening by the politicians. On top of that, we now have the hit to exports that is coming from the slowdown in the United States economy. So unfortunately, zero growth in 2008 is a good working assumption for Japan.
CRAFT: Foreign investors have been the biggest players in the Tokyo stock market, but many are writing off Japan nowadays to focus on other parts of Asia. With an array of risks aside from the sub-prime crisis hanging over the Japanese economy, the Tokyo stock market is bracing for a bearish 2008. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
"Commentary"-Recession Rescue
SUSIE GHARIB: Tonight's commentator says maybe a recession wouldn't be so bad. He's Bernard Baumohl, director of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: Here's a question that may bring cries of heresy, is a recession bad for the economy? Many forecasters see such a downturn in 2008. But would a recession further devastate an economy already reeling from a failing housing market and a damaged financial sector? Or is it just the right medicine this economy needs to cure its ills and hasten a healthy recovery?
I believe a recession may actually be beneficial this time and here's why. Recessions are a natural and vital part of a business cycle. After all, consumers and business leaders sometimes make mistakes and occasionally these mistakes are big enough to bring on a recession.
One drag on the economy today is the housing sector, which is suffering a slow bleed. The drip-by-drip fall in home prices and tougher refinancing rules only deepen the housing debacle. A recession however would permit interest rates to fall more aggressively and this can lure homebuyers back much sooner. Moreover, financial institutions burdened by sub-prime assets may write them off more quickly under the cover of recession and thus improve their balance sheets.
Of course, recessions are not painless. Some lenders and hedge funds may go under. But the economy now looks like a train wreck moving in slow motion. A recession could purge the country of its real estate excesses and bad debt more rapidly and allow the economy to emerge from this mess faster and much sounder. I'm Bernard Baumohl.
"Last Word"-Rolls Royce Rolls Into History
JEFF YASTINE: And finally tonight, a car auction in a league of its own. The world's oldest surviving Rolls-Royce drove into the record books today becoming the most expensive vintage car ever auctioned. The price tag, more than $7 million. The 1904 two-seater was the fourth car ever produced by Charles Royce -- excuse me, Charles Rolls and Frederick Royce. The car was expected to sell for about $2 million but interest from around the world accelerated the price of the bids and the buyer is a British collector. And Susie, believe it or not, the car is still drivable and has a top speed of 40 miles per hour.
GHARIB: Forty miles, take me on a ride in that classy vehicle.
YASTINE: You can't have too many cars going that far these days.
Paul Kangas' Stocks in the News
JEFF YASTINE: Traders may have to wait another day or two for Santa's arrival, because it sure wasn't here today. The Dow jumped about 30 points through the morning session, reaching the 13,400 mark by midday. But then General Electric fell hard on an analyst downgrade. Same for the NASDAQ, where Research in Motion and some of the other big tech stocks dropped sharply, Research in Motion on a downgrade. The result: lower prices across the board and the Dow settling out the day down 57.15 to 13,314.57 and the NASDAQ off 23.83 to 2637.13. The S&P 500 sliding 8.75 to 1472.42. In the bond market, the 10-year note falling 27/32 to 103 9/32 and the yield now down to 3.85 percent
And General Electric (GE) topping our list tonight, dropping $1.36. Citigroup lowering its profit forecast and price target for GE. The analyst sees pressure on GE's consumer finance unit and a tougher marketplace for sales at GE's health care division. And earlier today, NBC Universal said it would start buying two hour blocks of programming from outside producers of prime time documentaries because the programming costs a lot less than scripted programs or even network reality shows. There's Citigroup (C) giving back $0.24.
Invesco ADR (IVZ) rising $0.98, the company moving to simplify its corporate structure. It will eliminate its dual listing on the London Stock Exchange.
Countrywide Financial (CFC) also easing back $0.14.
And then Ford Motor Co (F) dropping $0.26 and as you heard, the auto maker posting a modest November sales gain. Analysts were expecting a decline.
Pfizer (PFE) off $0.21.
EMC Corp (EMC) dropping $0.23.
ExxonMobil (XOM) off $0.31.
Motorola (MOT) losing $0.54.
And then Bank of America (BAC) dropping $0.66.
General Motors (GM) falling $1.22. As mentioned a moment ago, a disappointing 11 percent drop in auto sales. GM also not offering as many sales incentives to prospective car buyers compared to Ford or Chrysler.
And while we're on the subject of autos, Lehman Brothers will a cautious note on auto parts suppliers with many anticipating large production cutbacks at the auto makers next year. American Axle & Mfg (AXL), Johnson Controls (JCI), Tenneco (TEN) all being cut back themselves in terms of their stock prices.
IBM (IBM) gaining $0.65. The company boosting its stock buyback program by up to $1 billion.
And the big loser of the day, Verifone Holdings (PAY) nose diving $2. Accounting errors mean Verifone will have to postpone announcing its fourth quarter and full year results.
Nokia (NOK) rising $0.93. The Finnish phone giant says it's gaining market share in India. That's the second largest cell phone market globally behind China.
And then Fannie Mae (FNM) down $2.17. Goldman Sachs cutting its earnings targets on a belief the write downs for the fourth quarter will be equally as large as those in the third quarter.
MBIA (MBI) falling $2.63. Analysts at Bank of America taking a knife to earnings estimates there due to a drop in new production and earned premiums.
On the NASDAQ, Apple (AAPL) dropping $3.36. Klausner Technologies filing $365 million patent infringement lawsuit against the iPhone maker.
Research in Motion (RIMM) sliding over $9. Morgan Keegan downgrading the shares of the Blackberry maker on valuation, thinking the stock's gotten a little ahead of itself.
Google (GOOG) off nearly $11.50.
Microsoft (MSFT) down $0.68.
Baidu.com (BIDU), it never seems to go down. It rose $3.29 today.
Cisco Systems (CSCO) falling $0.45.
Intel (INTC) though gaining $0.17.
Dell (DELL) off $0.60.
First Solar (FSLR) down nearly $8.
Qualcomm (QCOM) dropping $0.82.
Activision (ATVI) jumping nearly $3. How do you say guitar hero in French? The maker of the hugely popular Guitar Hero video game being bought by France's Vivendi for $27.50 a share, $1.7 billion. The new company combines Vivendi's own video game unit and it'll be called Activision Blizzard.
UAP Holding Co (UAPH) soaring more than $8. The seller of seeds, fertilizer, farm chemicals, being bought by Agrium for $39 a share, about $2.6 billion.
And Merrill Lynch boosting its price target on some several fertilizer companies because of that hook up. Agrium (AGU), CF Industries (CF), Mosaic Co (MOS) and Potash (POT) all sprouting nicely higher.
Another buyout deal, Cohesant Technologies (COHT) being bought by a Minneapolis firm, Graco for $35 million or $9 a share in cash. Graco will keep just one division, GlasCraft, and spin off all the rest of Cohesant's unit. That stock rising $3 or nearly $3 today.
Those are our stocks in the news tonight.
