NBR Transcripts-December 17, 2007
Monday, December 17, 2007President Bush's Economic Optimism Is Lost On Wall Stree
SUSIE GHARIB: Encouraging words about the U.S. economy today from President Bush, but stocks on Wall Street fell sharply on concerns about inflation and recession. Speaking in Virginia, the president said the economy is quote, pretty good, but he acknowledged that there are definitely quote, some storm clouds, including rising home foreclosures and slower consumer spending. He also warned that higher taxes would undermine economic growth, adding that he would veto any plan by Congress to raise taxes.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: There are some positive things Congress can do to make sure that the economy continues to grow and people are working and realizing dreams. And there are some negative things they can do. And the most negative thing that Congress can do in the face of some economic uncertainty is to raise taxes on the American people.
GHARIB: But Democratic lawmakers like Senator Chuck Schumer don't share the president's optimism.
SEN. CHARLES SCHUMER (D) NEW YORK: It feels a little bit like the movie "Groundhog Day" where Bill Murray keeps reliving the same day over and over again. It's Groundhog Day because day after day, President Bush tells the American people that the economy is strong, while more and more of the indicators point in an opposite direction.
GHARIB: Another critic of the president's economic outlook, Alan Greenspan. The former chairman of the Federal Reserve thinks the economy is showing early signs of stagflation but Treasury Secretary Henry Paulson disagrees. Speaking today he called the economy fundamentally sound and sees continued growth.
Credit Concerns Hit Big Banks in a Big Way
PAUL KANGAS: Citi downgraded nine U.S. banks today on continued credit concerns. Even big banks were impacted. Citi cut Bank of America, JPMorgan Chase and Wachovia from "buy" to "hold." The move comes as investors prepare for a series of bank earnings that could shed some light on just how bad the credit losses are at the nation's biggest investment banks. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street expects bad news from the big investment banks as they report fourth quarter earnings this week. The only question is: how bad? First up will be Goldman Sachs, reporting tomorrow. Goldman is expected to be the least impacted by the collapse of the sub-prime mortgage market because the company bet on just such a possibility. But Morgan Stanley which reports Wednesday, announced in November it took a $3.7 billion write-down for sub- prime loses in the first two months of the quarter. And Bear Stearns, which reports Thursday, told the Street in November to expect a $1.2 billion hit for sub-prime loans and it will report a loss for the quarter. Brokerage analyst Ryan Lentell of Morningstar says investors will be hoping there are no surprises in these earnings numbers.
RYAN LENTELL, BROKERAGE ANALYST, MORNINGSTAR: It's really tough to tell because the hedges that these firms have in place, how well they held up as the market has deteriorated. Since Bear Stearns and Morgan have announced that their -- what they expected the charges to be, the ABX index which tracks mortgage-backed securities, sub-prime mortgage backed securities, has stabilized. So it could be -- I would expect it to be relatively in line with what they predicted earlier in the quarter.
GURVEY: Investors will also be looking for signals the fourth quarter write-offs are the last but analysts are not optimistic. Alec Young of Standard & Poor's expects additional charges to be taken well into next year.
ALEC YOUNG, GLOBAL MARKET STRATEGIST, STANDARD & POOR'S: What we've seen after the third quarter write-downs was there was more to come in the fourth quarter. At this point, investors have certainly braced themselves for a lot of bad news with regards to write-downs at these companies. However, with the housing market continuing to weaken and the value of the CDOs continuing to decline, we think there continues to be risk to the downside.
GURVEY: Young says the stock market's poor performance recently is because investors are anticipating lower earnings forecasts, both for the financial sector and for companies in general in 2008. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Eric Johnson, Prof. of Management at Dartmouth's Tuck School of Business
SUSIE GHARIB: Toy safety is a hot topic this holiday season and a new poll says most Americans aren't sure whether to trust major toymakers when it comes to ensuring product safety. The Zogby poll released today says just 42 percent of Americans associate major toy makers like Mattel and Hasbro with safe products, while about the same amount do not. The survey also showed 83 percent of Americans associate unsafe toys with China, while 70 percent think American-made toys are safest. What impact is this attitude having on the toy industry? Joining us now with his analysis, Eric Johnson, professor of management at Dartmouth's Tuck school of business, who has conducted extensive studies about the Chinese toy industry. Hi Eric.
ERIC JOHNSON, PROFESSOR, TUCK SCHOOL OF BUSINESS AT DARTMOUTH: How are you doing, Susie?
GHARIB: Good, thank you. Well, tell us, I mean what impact are these safety issues having on the toy industry? Is there anyway you can quantify for us?
JOHNSON: Well, it certainly has been a wild year. I mean it's hit such big brands, brands like Mattel and Fisher-Price and characters like Elmo and Big Bird. These are right in every American's home. So certainly it has shaken their confidence. And we see surveys showing that a quarter of parents are worried about it. That said, you know, they really haven't stopped buying. I think they are just being more careful. Checking the web sites, looking at what the Consumer Product Safety Commission is saying, looking at the manufacturers are saying and maybe avoiding some of the Chinese toys.
GHARIB: How serious is the situation in terms of quality and in terms of safety? Is it perceptional or is it reality?
JOHNSON: Well, certainly the vast majority of toys are safe and even those toys coming from China. But I think it is just the fact that we have seen one after another all the way back to last summer of some really, you know, big brand toys. That shakes people's confidence. And so it does create some skepticism.
GHARIB: What in your view is the right way to fix the situation? What should companies like Hasbro or Mattel do to monitor the supply chain that works into facilities in China where these toys are being made?
JOHNSON: Well, the key to the problem is deep in the supply chain. Sometimes the second or third level suppliers and from companies like Mattel, it really means that they have to push their quality management practices deeper into the supply chain. It is not good enough to look at the first-tier suppliers. Those suppliers have to be managing their suppliers and their suppliers' suppliers. And that is going to be a challenge. It's something I call product genealogy. Where did the stuff come from that went into your stuff? And it is not just toys. It is going to affect other products as well.
GHARIB: What do you mean, what other products? You mean outside of the toy industry, other industries?
JOHNSON: Absolutely. I think we'll be watching other manufacturers in the next year or two struggling with this same problem with low-cost country sourcing.
GHARIB: So is it realistic to think that there is anything that regulators can do to correct the situation, whether we are talking about U.S. regulators or Chinese?
JOHNSON: Well, certainly the U.S. Consumer Product Safety Commission could use a little more staffing. It is not that they can inspect everything coming in our borders. That is far too big of a problem, millions and millions and millions of toys alone coming across. But a little more effort could be useful and certainly one that would make consumers feel safer.
GHARIB: What about retailers? What is their role in this whole process, especially big ones like Wal-Mart. What influence can they have on improving the safety of toys made outside of the United States?
JOHNSON: Well, in the toy industry, there is an amazing consolidation in the retail channel. And we now see well, Wal-Mart having about a third of the U.S. toy market. If you take the big three, Wal-Mart, Target, Toys R Us, they're more than half of the U.S. market. And so they have tremendous power that they can assert. And you know, they have a stake in this and in fact are working with the manufacturers to improve the situation because it is near and dear to their heart. When I look at Wal- Mart's top 12 toys this year, 11 out of 12 came from China. And one of them, you know, one of the ones on their top 12 list, one that was very popular, Aqua Dots, had to be recalled. You know, and it just a bizarre story of a product that became toxic when ingested.
GHARIB: OK. Well, we'll leave it there. I hope parents have a more successful time when they are buying their toys this season. Eric thank you very much for coming on the program. We appreciate it.
JOHNSON: Thank you.
GHARIB: My guest tonight, Eric Johnson of Dartmouth's Tucks school of business.
Congress May Be Ready To Follow President Bush's Budget Plan
SUSIE GHARIB: Congress is putting the finishing touches on a half a trillion-dollar budget compromise that largely follows the president's spending blueprint. Lawmakers are also trying to put in provisions to help key constituents. As Darren Gersh reports, coal companies and nuclear power generators are some of the biggest winners this year, winning close to $30 billion in loan guarantees for new plants.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the nuclear power industry, the new Federal loan guarantees come at an important time. Five applications to build advanced reactors are now pending before the Nuclear Regulatory Commission. Nuclear industry spokesman Steven Kerekes says the Federal backstop will help secure the financing needed to build the first new reactor in decades.
STEVE KEREKES, NUCLEAR ENERGY INSTITUTE: It's our belief that once we get those first handful of new applications through the process, if they go through successfully, then that helps take the uncertainty out of the licensing process and companies can then go forward with greater confidence.
GERSH: The Natural Resources Defense Council estimates the $20 billion in Federal loan guarantees Congress is about to provide will help the nuclear power industry secure $25 billion in new private investment. But environmentalists say a policy decision that important should not have been slipped into a massive Federal funding bill with little public debate. Public Citizen's Tyson Slocum adds the loan guarantees essentially leave taxpayers liable for nuclear waste and safety.
TYSON SLOCUM, DIRECTOR, PUBLIC CITIZEN ENERGY PROGRAM: And when you haven't built something in 30-plus years, you're going to have some growing pains. You're going to have some learning on the job. And I think that, given all of these risks, given the enormous financial cost, this could be a boondoggle in the making.
GERSH: There is little doubt that nuclear power now enjoys strong bipartisan support. Speaking in Virginia, the president today said nuclear power was one way to help the nation reduce greenhouse gas emissions.
BUSH: If you're worried about whether or not we can continue to have the electricity necessary to foster economic growth and vitality, you ought to be for nuclear power.
GERSH: Environmentalists say Congress has sent a surprising signal about the energy sources it prefers, rejecting tax breaks for solar and wind power, while backing much more generous loan guarantees for new coal and nuclear technologies. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-The Bush Mortgage Mess Bail Out Plan Needs Work
SUSIE GHARIB: Tonight's commentator says the Bush administration's plan to help sub- prime borrowers doesn't go far enough. He's Mark Zandi, chief economist at moody'seconomy.com.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: It's a bailout. That's the refrain from some of the critics of the administration's plan to help certain sub-prime borrowers with either an FHA refinancing or a five- year interest rate freeze. Sub-prime borrowers should have known better than to take on a mortgage they couldn't afford, so say the critics. To rescue them now will only encourage more bad financial decision-making in the future. There are reasons to be critical of the Bush plan, but this isn't one of them. Yes, the plan is a bailout, but it's a bailout we all benefit from. Surging foreclosures threaten to undermine the already fragile housing market, unsettle the volatile global financial system and push the U.S. into recession. Most of us -- not just those with sub-prime mortgages -- will see our household net worth fall as house prices decline nationwide. Some of us -- not just those working in the housing industry - - will lose our jobs as businesses suffering weaker sales and tighter credit pull back on investment and hiring. Not only are sub-prime homeowners severely chastened by the prospects of eviction, but some of the nation's largest mortgage lenders are teetering on the edge of failure and mortgage investors are losing hundreds of billions of dollars.
The lesson for future borrowers, lenders and investors is assuredly not that the Federal government has their back. The problem with the Bush plan is not that it goes too far in bailing out those being hurt. It is that the plan doesn't go far enough. This is Mark Zandi.
"Last Word"-Santa's Stocks Soar
SUSIE GHARIB: And finally tonight, it appears market volatility has been good for Santa's portfolio. So says the Amegy Bank of Texas, which keeps track of Kris Kringle's hypothetical holdings each year. Tech stocks topped Santa's nice list. His shares of Apple, Garmin, GameStop, Google and Nintendo all posting nice gains. The big winner on his list: Amazon. But Santa's not laughing all the way. His shares of retailers Kohl's, Macys and Nordstrom were all down sharply this year. Santa's portfolio still managed to beat the street, Paul, up 28 percent from this time last year. And in a year like this, I guess you could call that a real miracle on Wall Street.
Paul Kangas' Stocks in the News
PAUL KANGAS: Bearish sentiment dominated Wall Street as stocks opened this morning broadly lower amid growing fears of recession and inflation. The Dow fell 90 points at the outset of trading and the NASDAQ lost 22. A mild midday rally attempt failed as worries about the economy weighed again on investors. The market was also pressured by a sharp drop in New York State's December manufacturing activity. Against this negative backdrop, stocks closed near their worst levels of the day. The Dow Industrial Average ended down 172.65 points at 13,167.20. The NASDAQ Composite lost 61.28 points at 2574.46, while the Standard & Poor's 500 Index fell 22.05 to 1445.90. Over in the bond market, the 10-year note climbed 24/32 to par and 26/32, putting the yield at 4.15 percent.
A familiar one at the top of the active list on the big board, Citigroup (C) trading 27.7 million shares and edging up $0.07, an uptick for a change.
General Electric (GE) down $0.43.
Then Pfizer (PFE) with a $0.13 loss.
Followed by Bank of America (BAC) a $0.46 drop.
ExxonMobil (XOM) was off $1.29.
Ford Motor Co (F) lost $0.09 a share. The "Wall Street Journal" reports the company is close to deciding what to do with its Jaguar and Land Rover units.
AT&T (T) down $0.64.
Washington Mutual (WM) a $0.23 drop.
Advanced Micro (AMD) fell $0.48.
And then JPMorgan Chase (JPM) with a $0.67 closing loss.
Caterpillar (CAT) hurt the Dow today with that loss of $2.23. Morgan Stanley downgraded it from "equal weight" to "under weight" with a target of $67 a share.
Then Trane (TT) a big gainer, up $8.04. Ingersoll Rand will acquire Trane for $36.50 a share in cash, plus about a quarter of a share of Ingersoll stock and today that deal would be worth about $46.50 a share to Trane shareholders. Ingersoll stock tumbled $5.58 to $43.60 on the news. Incidentally, the merged company will be the largest manufacturer of air conditions in the world.
Grant Prideco (GRP) up $6.45. National Oilwell Varco will acquire this company for $23.20 a share in cash and about .45 shares of National Oilwell. That has a value today of about $55 a share for Grant Prideco owners. And incidentally, National Oilwell stock plunged $6.68 to $70.69 per share.
Plains Exploration & Production Co (PXP) up $0.87. The company's going to sell some of its oil and gas properties to Occidental Petroleum and XTO Energy for $1.75 billion and then plans to buy back $1 billion worth of its own stock.
Delek US Holdings (DK), this is a refiner, up $1.79. The company received an upgrade from Citigroup from "hold" to a "buy." Tesoro got the same upgrade, but Tesoro stock edged up only $0.84 to $47.71.
LDK Solar Co (LDK) up $11.34. The company says its audit committee found no errors in silicone inventory reports as alleged by a former employee.
Allied World Assurance (AWH) up $2.31. The company bought 11.7 million of its shares from its founding company, AIG Corp. and they paid $48.19. That represented a little over 19 percent of the float.
Ambac Financial (ABK), the bond insurer, Moody's completed the review of the company's capital position and affirmed a triple A rating with a stable outlook, did the same for MBIA and that stock edged up $0.94.
UBS AG (UBS) up, I should say down $1.24. CIBC World Markets brokerage downgraded it from "sector perform" to "under perform."
Apple (AAPL) topped the NASDAQ active list, down nearly $6.
Google (GOOG) tumbled $20.73. Google is testing a new product that will compete with Wikipedia.
And then Baidu.com (BIDU) down nearly $37 a share.
$5.72 loss in Research in Motion (RIMM).
Microsoft (MSFT) falling $0.92.
And then Intel (INTC) a $0.57 loss.
Cisco Systems (CSCO) dropped $0.70.
First Solar (FSLR) hit for a $19.72 loss.
Yahoo! (YHOO) off $1.02.
And then Oracle (ORCL) off just $26 a share.
Starbucks (SBUX) was off $1.10. RBC Capital brokerage downgraded it from "out perform" to "sector perform" partly because they say the company's pricing power has eroded.
And then Esmark (ESMK) plunging $2.67 on news the company's $1.3 billion deal to buy a steel mill from ArcelorMittal fell through. The deal fell through.
And those are the stocks in the news tonight.
