NBR Transcripts- December 19, 2007
Wednesday, December 19, 2007The Fed's Emergency Funds Auction Pays Off
SUSIE GHARIB: The results are in and the Fed's latest attempt to help ease the credit crunch was a big success. The central bank said today that nearly 100 banks participated in Monday's special auction to lend billions of dollars at below-market rates. The hope is that the banks will use the extra funds to make more loans to consumers and businesses. The Fed plans three more special auctions in the weeks ahead. But as Darren Gersh reports, these moves by the Fed are not likely to influence the central bank's monetary policy.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In football terms, the Federal Reserve auction was an end run. Up the middle, there's no opening, because the 20 big banks the Fed normally deals with are worried about their own credit problems and they're not lending to other banks. So, the Fed changed the play and ran around the middle man. Ninety three banks took part in the new term auction facility. The bids submitted on Monday totaled $61.5 billion, three times the $20 billion in one-month loans the Fed was ready to lend. The interest rate came out to 4.65 percent, just below the so-called discount rate banks in trouble have traditionally paid to borrow from the Fed. The interest rates banks are charging each other, though down a bit since the auction was announced, are still high by historical standards. Vincent Reinhart was a key policy adviser at the Fed. He says the auction succeeded in getting more cash to more banks, but bankers are still reluctant to do business.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: And if they're worried about lending to other banks, then it might mean that over time, they'll be worried about lending to their customers.
GERSH: The auction timing is no coincidence. With the end of the year in sight, banks are now preparing their annual balance sheets and they are working hard to raise cash and clear off bad investments.
REINHART: That means they're just not willing to lend in the market over the year end. So, as we get closer to the turn of the year, you'll see even more withdrawal from those sorts of commitments.
GERSH: ISI political economist Tom Gallagher calls the auction results progress, but he says it doesn't solve the Fed's main problem.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: The market still expects there to be significant tightness in inter-bank lending, even with this new innovation, even after the turn of the year. And that's what the Fed will have to judge is whether or not the continued tightness in that market warrants further interest rate cuts or not.
GERSH: But with the auction on Monday and another tomorrow, the Fed has added a new play to its play book and if needed, the size of the auctions could be ramped up to help keep banks moving money. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Robert Hormats, Vice Chairman of Goldman Sachs International
SUSIE GHARIB: Joining us now for more analysis on that big investment today between China and Morgan Stanley, Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: Hi, Susie, how are you?
GHARIB: Well, besides the news about Morgan Stanley, in recent times, we've seen other sovereign funds investing in Citigroup, in Bear Stearns, in UBS. Is this trend a good development or is it cause for concern?
HORMATS: I don't think it's cause for concern. I think it is just realistic in the current environment that a country that needs capital and the U.S. is indeed a very capital short country because we have a very low savings rate, we have to get it from somewhere. And the Chinese and the Middle East sovereign wealth funds and others have a lot of cash. The savings rates in those countries are very high and those funds are willing and, in fact, eager to invest in American firms of various sorts because they see that the dollar has gone down. They see that the stock values of many of them have gone down. They see these as good opportunities.
GHARIB: Now do you expect that these sovereign funds will be passive investors in companies like Citi and Morgan Stanley or will they take a more active role in determining the corporate direction and the strategies of these firms?
HORMATS: Traditionally they have avoided playing a very active role in the management of these firms. They look at this for the most part over the last several decades and we have a lot of experience with the way these funds work. They look at these kinds of things almost exclusively as financial investments, as ways to earn a profit. Certainly those countries that have large foreign exchange reserves are establishing these funds largely because they want a higher rate of return than they would get on treasury bills. So this is the kind of thing they would invest in.
GHARIB: Bob, can you just say something again, because I lost your audio for a moment.
HORMATS: Can you hear me?
GHARIB: Yes, I hear you now, OK, great. Let me follow up on what you were saying about the Treasury market. To the extent that these funds are investing in American companies and less in terms of Treasuries, what are the implications for the Treasury market?
HORMATS: Well, I think in the near term probably not much because the Fed is going to continue to create liquidity and that has helped to keep interest rates down. But if the market tightens up a little bit and over the median term if they decide to shift money out of fixed income assets and out of Treasuries into equities, it is positive in a long run for equities and negative for Treasuries but not in the short-term because people want Treasuries largely because of the insecurity of the overall investment environment.
GHARIB: For individual investors who may own Morgan Stanley stock or Citi stock or UBS stock and now have these stakes from the sovereign fund, is this a signal to buy more shares or a time to sell?
HORMATS: Well, it is hard for me to make judgments about individual companies. But I do think that you have to look at a lot of these funds as medium term investors. I don't think they are market-timers in the sense that we tend to use it in the U.S. I think they are looking at this as a medium term investment. What I assume is that they see these as good opportunities for returns as they would any kind of company they would buy into. And they probably see that this is a good prospect over the medium term. It is obviously hard to judge one bank against another, one investment versus another but I think in principle, that's the way they tend to look at these as medium term investments.
GHARIB: Real quickly, what kind of response do you think we are going to get from Washington lawmakers about this trend of international investment in American companies, if at all?
HORMATS: I think they ought to be happy about it, in large measure because this, as I said in the outset is a country that is very short on capital. We need to import $3 billion roughly every working day. A lot of American companies need capital. The big suppliers of capital, internationally now are some of these sovereign wealth funds. And to try to cut it all or to interfere with it would deprive American institutions of important amounts of capital. Obviously there may be issues from time to time with specific investments. But in principles they've got capital. They have a high savings rate. We have a low savings rate. We need capital. It is the way the world is today. And they have to come to grips with that, with that reality.
GHARIB: The $3 billion solution. Thank you very much, Bob.
HORMATS: Per day, per day.
GHARIB: Per day, my guest tonight, Robert Hormats, vice chairman of Goldman Sachs International.
"Street Critique"-Patrick O'Hare, Editor in Chief of Briefing.com
PAUL KANGAS: While the January effect looks at the tendency for small cap stocks to outperform large cap stocks in the early part of a new year, tonight's "Street Critique" guest says there's another January effect. He's Patrick O'Hare, editor in chief of the investor education website briefing.com. Pat, welcome back to NBR.
PATRICK O'HARE, EDITOR-IN-CHIEF, BRIEFING.COM: Hi, Paul, thank you, good to be back with you.
KANGAS: With the markets as volatile as they've been, do you think we will see the traditional short-term boost in small cap stocks in the coming weeks?
O'HARE: Well, we have seen the Russell 2000 under perform this year which would suggest there is some ample opportunity there for that trade to take effect. And I would note that we've seen some vestiges of it this week as the Russell 2000 since Monday's close is up about 2 percent versus a half percent gain for the Russell 1000.
KANGAS: OK, now tell me about this other January effect that you are anticipating.
O'HARE: Sure. Well, the market has a tendency really to not just look at small cap issues in the early part of the year, but to look at beaten down names from the prior year. And that extends to market caps of all sizes. And we think that there are several large cap opportunities there that I would like to brick to the attention of your viewers.
KANGAS: And in recent years the January effect has actually begun in December, has it not?
O'HARE: It has. "Stock Traders Almanac" has noted it really has its roots about mid-December. Of course the more popular this trading phenomenon becomes, arguably it becomes less effective so it is something that your viewers should keep in mind.
KANGAS: Understood. How about giving our viewers some of the beaten down names you think could show some up side in the near term.
O'HARE: Well, one is Starbucks. The stock symbol is SBUX and while plenty of consumers are hooked on its coffee, the market clearly has not been hooked on this stock. It is down about 40 percent year-to-date and off about 50 percent from its all-time high amid concerns about a slowing growth rate. But we do think that it's -- because of that haircut, it's going to start hitting the radar screen for fund managers who have an approach to buy growth at a reasonable price, not necessarily growth versus at any price.
KANGAS: OK. Now your second pick is an ETF exchange traded fund. And it is certainly been beaten down as we look at this chart. We can bring that chart up.
O'HARE: There it, the financial select spider fund.
O'HARE: That's right it is a mouthful. The symbol is XLF. And the thing with this idea is that it offers a more conservative way to play this rebound trade. We're still concerned that there are some write-down skeletons in the closets that could still emerge to sink any number of stocks at any given point but it's well diversified here and we think it mitigates some of that risk.
KANGAS: We just have about 40 seconds for a final choice, if you would.
O'HARE: Motorola, symbol is MOT. The stock's down about 20 percent year-to-date. The market became disenchanted with the company as the consumer interest in the popular Razr phone waned and the company lacked any new products to really offset that decline. And I would note that Carl Icahn has been very vocal of late in terms of talking about working toward ways to help this company bolster shareholder value through share buyback or possibly breaking up the company.
KANGAS: Interesting selection Pat. Incidentally, Do you own any of the issues you mentioned or have any other disclosure to make?
O'HARE: No, I do not, Paul.
KANGAS: All right, want to thank you for joining us again. We'll look forward to seeing you in the New Year.
O'HARE: Great, thank you.
KANGAS: My guest, Patrick O'Hare of briefing.com.
"Money File"-Portfolio Performance
SUSIE GHARIB: In the "Money File" tonight, a better way to assess your portfolio's performance. Here's Chuck Jaffe, senior columnist at Marketwatch.
CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: A lot of investors use 12-month numbers for stocks and mutual funds to determine what kind of year they've had. They're looking at the wrong thing. Year-end portfolio reviews should be more about net worth than absolute performance, more about total return than price movement. For proof, look no further than the Standard & Poor's 500, which is generally considered a proxy for the broad stock market. Index movements typically are quoted without consideration of dividends, even though an investor in those stocks gets the payouts.
Any true progress report must look inward, at the big picture, focusing less on the investments and more on the individual and the entire portfolio. Your year-end statements are a great starting point for reviewing your net worth, in part because they can help you calculate where you were 12 months ago. Add up everything you own, subtract everything you owe and the result is your net worth. Even in bad years on the market, your net worth can grow as you pay down debt or increase your financial set-asides. It's your net worth, rather than the performance of any one investment, that determines the kind of year you've had financially.
The moment you build a diversified portfolio rather than chasing hot investments pursuing maximum short-term profits, you should commit to judging every investment based on how it works for you on the grand scale. Without the context of your whole financial plan, 12 months of performance data on any single investment won't tell you much, good or bad, that's worth acting on. I'm Chuck Jaffe.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened higher in positive reaction to the Fed's auction and that $5 billion Chinese investment in Morgan Stanley. The Dow rose 50 points and the NASDAQ gained eight points early on. But stocks sold off sharply on the Standard & Poor's ratings move on the bond insurers and a jump in oil futures. The Dow was down 65 points at noontime. The market then turned mixed amid the cross currents of year-end portfolio adjusting and that's the way it closed, mixed. The Dow Industrial Average ended down 25.20 at 13,207.27. The NASDAQ Composite gained 4.98 to 2,601.01. Standard & Poor's 500 Index fell 1.98 to 1,453 even. Over in the bond market, the 10-year note gained 23/32 to 101 24/32, putting the yield at 4.03 percent.
Once again topping the big board's active list today on 24 3/4 million shares, Citigroup (C) down $0.17. Then Pfizer (PFE) with a $0.10 loss.
Sprint Nextel (S) fell $0.32.
General Electric (GE) a $0.23 loss.
Advanced Micro (AMD) managed to buck that trend, up $0.30 a share.
SLM Corp (SLM), Sallie Mae, down $5.98. That's a negative reaction to the CEOs conference call where he talked about strategy which could include a dividend cut to bolster the balance sheet. Meanwhile, Standard & Poor's today repeated a "sell" recommendation on SLM.
AT&T (T) down $0.66.
Bank of America (BAC) edged up $0.09.
Ford Motor Co (F) a nickel loss.
Then Morgan Stanley (MS) up $2.01. As you heard, it's getting a $5 billion infusion of money from China, but it also reported a fourth quarter loss of $3.61 versus earnings of $1.87 a share a year ago.
Mastercard (MA) up $10.57. The European Commission ruled the company must drop the fees it charges for cross-border credit card purchases within six months or face fines. The company said it's going to appeal that and that helped the stock recover.
Union Pacific (UNP) down $4.82. The company cut its fourth quarter earnings guidance from the range of $1.90 to $2, down to $1.70 to $1.80 a share and that's mainly due to rising diesel fuel prices.
Major percentage loser of the day, Kingsway Financial (KFS) off $3.34. Standard & Poor's cut its credit ratings after the company boosted its fourth quarter and current claims estimate by $95 to $125 million.
Darden Restaurants (DR) down $7.74. The story here, the company reported lower second quarter earnings, $0.30, down from $0.41 a year ago as acquisition costs offset a 17 percent rise in sales. The company says 2008 earnings growth will only be 2 to 4 percent. This had a negative impact on other restaurant chains like Brinkers, which fell $1.07 and IHop, which was off $4.19 a share.
Carmax (KMX) off $1.52, lower earnings there, third quarter, $0.14 versus $0.21 last year, $0.03 below the Street estimate and the company sees 2008 sales up only 2 percent.
Aerospace components company, AAR Corp (AIR) up $2.70, higher second quarter earnings, $0.42, up from $0.33 a year ago, $0.02 above the Street estimate. Sales jumped 27 percent.
Lower earnings on Park Electrochemical (PKE) sent the stock down $3.13. Third quarter, $0.43 in earnings, down from $0.47. Sales fell almost 7 percent.
And then we see Barclays Plc (BCS) off $1.37. Goldman Sachs downgraded it from "neutral" to a "sell."
Apple (AAPL) topped the active list on NASDAQ, up $0.14.
Followed by Google (GOOG) with a $4.02 advance.
Research in Motion (RIMM) rising $1.44.
Microsoft (MSFT) gained a nickel.
Baidu.com (BIDU) up $2.01 a share.
Oracle (ORCL) closed down $0.49, but as you heard, second quarter earnings of $0.31, $0.04 above the Street estimate. In after hours trading, Oracle stock was about $1 higher than this price.
Cisco Systems (CSCO) $0.04 gain.
Intel (INTC) $0.28 rise.
$0.88 rise in First Solar (FSLR).
And Dell (DELL) was up $0.34 a share.
New issue today, Orion Energy Systems (OESX), came public on 7.7 million shares at $13, opened at $17.49, high, $22.18, closed pretty close to the high today.
And finally, Macatawa Bank (MCBS) or Macatawa Bank, yes, that's out of Holland, Michigan I believe. The stock down $1.78. The Michigan bank raised its fourth quarter loan loss provision by $9 1/2 million and that will hurt earnings by $0.36 per share.
