NBR Transcripts-January 30, 2008
Wednesday, January 30, 2008The Fed Slashes Interest Rates Another Half Point
SUSIE GHARIB: Another big interest rate cut today by the Federal Reserve. The Fed slashed its key Fed funds rate by a half percentage point to 3 percent, its lowest level since June 2005. This latest move by the Fed comes just over a week after its emergency rate reduction of three quarters of a percentage point. But today's decision was not unanimous. Dallas Fed President Richard Fisher voted to hold rates steady. As Erika Miller reports, the continued threat of recession will likely mean more rate cuts ahead.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The aggressive rate cut was exactly what financial markets were hoping for. Societe Generale economist Stephen Gallagher says the bold action is needed to boost economic growth and shore up investor confidence.
STEPHEN GALLAGHER, CHIEF US ECONOMIST, SOCIETE GENERALE: I think in the end, they're very sensitive to financial market conditions and they just did not want to take any risk whatsoever in being a disappointment to the financial markets.
MILLER: The expectation for a half-point cut gained support on Wall Street this morning on news that fourth quarter economic growth was extremely weak. Gross domestic product slowed to just 0.6 percent in the fourth quarter, far less than the third quarter's reading and half what was expected. Today's decision comes just eight days after the Fed shocked financial markets with an emergency rate cut of three quarters of a percentage point. Despite the aggressive Fed action, Morgan Stanley economist David Greenlaw still believes a recession is likely.
DAVID GREENLAW, CHIEF US FIXED INCOME ECONOMIST, MORGAN STANLEY: The recession risk is still high, but I think that it is shrinking somewhat because of the aggressive policy action on the part of the Fed and the looming fiscal stimulus that's out there.
MILLER: In the statement accompanying its decision, the Fed explained, quote, downside risks to growth remain. The committee will continue to assess the effects of financial and other developments and economic prospects and will act in a timely manner as needed to address those risks. Economists say the message from policymakers is clear: more rate reductions are likely. Some economists think it is possible the Fed might even cut rates before its March meeting.
GALLAGHER: I would say it's very likely we'll see another cut, maybe even before March 18. They moved out of the meeting schedule last week, so we can't rule it out. March 18 seems a long ways away.
MILLER: Many Fed watchers think the central bank will keep cutting rates until there's solid evidence the economy is regaining its footing and financial markets have stabilized. Even optimists don't think that will happen until at least mid-year. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Michelle Girard of RBC Greenwich Capital Management & Mike Holland of Holland and Company Analyze The Latest Rate Cut
SUSIE GHARIB: Back now to our top story, that big rate cut by the Fed. Joining us with more analysis Michelle Girard, senior economist at RBC Greenwich Capital Management and Mike Holland of Holland and Company. Hello to you both.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hello, Susie.
GHARIB: Michelle, let me start with you, two big rate cuts in just eight days. Is this an admission that the economy is in serious trouble?
GIRARD: Well, I think there is some acknowledgment. We've heard that from Fed Chairman Bernanke even as early as the second week of January that they are much more concerned about the economy given the fact that financial markets really remain so volatile. And so what you've seen here is, I think, a real shift in Fed strategy to be much more aggressive and front-loading stimulus to the economy. And I think also there is a much heightened degree of sensitivity to the financial markets. You know, when the financial markets were very rocky last week, they moved inter-meeting. The markets were looking for a 50 basis point cut today. They didn't want to disappoint. So I do definitely sense that in the early 2008, the Fed has shifted their approach and their strategy.
GHARIB: Mike, you've been critical in past appearances on the program of the Fed not being aggressive enough. Are you feeling more comfortable now that the Fed is in control and that maybe it can solve the problems and get the economy growing again?
HOLLAND: A huge yes, Susie. I couldn't be more constructive about what they've done over the past several days and more important than what I feel or what I would say is what the markets themselves -- and it's not just the stock market. It's the credit markets. The financial markets generally last August began having serious problems. There was even a phrase they were seizing up. And we've had a couple of bouts of that ever since then. The Fed belatedly but correctly has identified what the markets have been talking about. This is very good for the economy. For the viewers they should sleep better tonight knowing what the Fed has done over the last several days.
GHARIB: Michelle was just talking about that this is what the markets want. I want to ask both of you, who is making the decisions here? Is it being determined by the needs of the economy or is it Wall Street?
GIRARD: Well, I have to say that's one of the criticisms that we've sort of had about the Federal Reserve this month, is the actions look very much beholden to the markets. And I have to say our expectation about further rate cuts is less viewed on the fact that we think the economy needs it and more based on the fact that the markets are going to demand it. I just said, just seems to want to be not disappointed. To some extent I think they're being criticized for being led around a little bit by the financial markets.
GHARIB: Mike, what do you think?
HOLLAND: I kind of disagree a little bit with how Michelle - but Ben Bernanke -- and I think you might have been there, Susie -- last June gave a speech in which he predicted this kind of action. What he said was that when we're moving into the down part of a cycle, the business cycle, the economic cycle, which most people in the country would view that we're probably in after several good years that in fact when you have the financial markets including the stock market going down, it accelerates the downturns. That would only make sense. People who don't know a lot about the stock market would tend to agree that makes sense. The last time the Federal Reserve abandoned that idea was in the 1930s. Andrew Mellon secretary of the Treasury at that time told Herbert Hoover, don't worry about the stock market. Don't worry about house prices. Let it go down. It will clean the system. We know what happened our economy's clock got cleaned at that time. So I think Ben Bernanke has looked at history. He's addressed it and he's done exactly the right thing.
GIRARD: Michael, the only problem is the markets always swing to extremes. You know, we've seen, you know, the bond markets, it's been pricing in with a steep recession even though the economic data don't support it. Maybe the markets will be proven right. Maybe the Fed knows something that we don't know. But to date there really isn't the evidence supporting the dramatic decline in economic activity that the markets seem to be betting on. At some point I think, you know, the markets can get ahead of themselves and the Fed focus too much on that it could be problematic.
HOLLAND: You're exactly right, Michelle. In fact, the durable goods orders this week, the big companies who export big things have been doing very well. The consumer, the people watching this show, have not been doing well. That's two-thirds of our economy based on that. The Fed has anticipated a problem. The absence of the negative will show that what they did was probably heroic but we'll never know. I hope you're right.
GHARIB: Mike, we just have to wrap it up. What happened with the markets today? They got what they wanted and they sold off?
HOLLAND: Yeah, at the end of the day something bad happened once again. This is to Ben Bernanke's credit, unintended. We actually had a Fitch (ph) rating service downgrade one of the municipal bond insurers. It was very bad for the financial markets. We're talking about billions and billions of problems. If we didn't have the kind of back drop that we have from both the Fed and the stimulus, we'd be in a problem. Something happened late in the day that was very important.
GHARIB: We're going to have to leave it there. Thanks a lot, guys. Appreciate you coming on the program.
GIRARD: Thank you.
HOLLAND: (INAUDIBLE)
GHARIB: My guests tonight, Michelle Girard, senior economist at RBC Greenwich Capital Management and Mike Holland of Holland and Company.
"Economic Choices 2008" -The Golden State May Be The Golden Ticket To The White House
PAUL KANGAS: Democrat John Edwards and Republican Rudy Giuliani dropped out of the race for the White House today. That sets up next week's super Tuesday primaries to select the likely nominee for both parties. The richest delegate prize is California, a state that for years has tried and failed to reform its health care system. In tonight's "Economic Choices '08" coverage, Darren Gersh examines how a health care crisis in the golden state will influence the election. DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Venice family clinic serves some of the richest zip codes in Los Angeles. From Santa Monica to Beverly Hills, this clinic offers free care to 57,000 low- income people who have no health insurance. And that's just a small fraction of LA County's two million uninsured. Clinic CEO Elizabeth Forer says most people don't understand the magnitude of the health care crisis in California.
ELIZABETH FORER, CEO, VENICE FAMILY CLINIC: The health care system in LA has limped along like this now for 12 years in a state of ongoing crisis and flux, losing limbs as we go along with different hospitals dropping out, different closures. I'm not sure at what point we just completely destabilize.
GERSH: There are 6.5 million uninsured people in the state of California, almost a third of them in Los Angeles County alone. With emergency rooms closing and costs rising, the voters here know the health care system is in trouble and they want the presidential candidates to be ready with detailed solutions.
Health care made headlines here this week after the state senate's health committee voted down a sweeping reform bill pushed by Governor Arnold Schwarzenegger. In a state facing a $14 billion deficit, lawmakers feared the plan would cost too much. Some consumer groups worried Californians would have been required to buy health insurance that was too expensive. Richard Brown studies health care policy at UCLA and is an advisor to Senator Barack Obama. He says the high-profile political failure of the governor's plan will elevate the debate over health care reform in California's presidential primary next week.
RICHARD BROWN, UCLA: It is really clear that it is going to take Federal leadership, the leadership of the president and support of the Congress, to enact a framework for health care reform, even if it's done through the state level.
GERSH: Many small business owners are relieved the governor's plan collapsed. At Maria's Italian Kitchen, owner Madelyn Alfano says the plan was unfair, because it placed most of the burden on employers. Alfano says she supports health care reform, but now she worries the presidential candidates haven't carefully weighed the economic impact of their plans.
MADELYN ALFANO, OWNER, MARIA'S ITALIAN KITCHEN: I don't know if all of the candidates are thinking through the policies and how it's going to affect the greater good.
GERSH: Alfano thinks health care reform of some kind is inevitable. That's one reason she's planning to develop an express version of her restaurant, one that requires fewer workers and lowers benefit costs.
ALFANO: That's the only way we'll be profitable.
GERSH: While the governor's plan has been defeated, Elizabeth Forer believes the pressure for change has increased.
FORER: Health care is huge and when the economy turns south, more and more people are uninsured so it becomes a major issue here for our primaries. And I think folks, especially in LA County, are very aware of it.
GERSH: Advertising entrepreneur Renee Fraser certainly noticed after her health care costs jumped 80 percent in three years.
RENEE FRASER, CEO, FRASER COMMUNICATIONS: Every time it comes around it is up again and nothing has really changed with our employees. It is not as if we have been utilizing the insurance. It seems totally out of control and out of our hands.
GERSH: Fraser says Californians know what the health care issues are and will be asking tough questions. She wants to know whether the savings Republicans and Democrats are promising will really offset the costs of increased coverage.
FRASER: So there is some cost reduction building into the system, but we all know that takes a lot of time. And in the short-term, how are we going to be certain that costs are reasonable and that they are paid for in a fair manner by everyone?
GERSH: California tried and failed to answer those questions this week. Now it's up to the presidential candidates. Darren Gersh, NIGHTLY BUSINESS REPORT, Los Angeles.
"Street Critique"-Josh Peters, Equity Strategist at Morningstar
PAUL KANGAS: With the Fed in a rate cutting cycle and stocks swimming in a sea of volatility, tonight's "Street Critique" guest says there are still some great opportunities to pick up solid income-paying stocks at bargain prices. He's Josh Peters, equity strategist at Morningstar and author of "The Ultimate Dividend Playbook." Josh welcome to NIGHTLY BUSINESS REPORT.
JOSH PETERS, EQUITY STRATEGIST & EDITOR, MORNINGSTAR: Thank you, Paul. Pleased to be with you.
KANGAS: You write Morningstar's monthly dividend investor newsletter. Tell me very briefly about your investing philosophy.
PETERS: When you look at the market and the way stock prices are going up and down, you want to get a good cash return from your portfolio. What dividends allow you to do is to get that return in cash directly from the source, the underlying corporate profits of the businesses that you own, much more reliable than capital gains and market prices.
KANGAS: Understood. How are the Fed's rate cuts though impacting that strategy?
PETERS: In fact, these rate cuts are making dividend-paying stocks even more attractive. Not only have the prices of a lot of higher-yielding stocks come down making their current yields even higher. But as interest rates have come down, investors have fewer alternatives to generate good income for their portfolio. You're seeing this big spread widen up that really creates a lot of opportunity when you can be confident that the dividend is safe and that it's going to grow over the long term.
KANGAS: You recently wrote about now is the time to get greedy when it comes to bank stocks. What's the philosophy behind that? What are they? What banks do you like?
PETERS: I think you want to start to get greedy when there is bad news because the bad news from just a couple of banks winds up pushing all of the stock prices down. My favorites are the ones that really aren't having serious problems related to what's going on in sub-prime mortgages and.
KANGAS: Let's have some names.
PETERS: Bank of America, terrific consumer and deposit franchise with a 6 percent yield.
KANGAS: How much?
PETERS: 6 percent, over 6 percent.
KANGAS: Go ahead.
PETERS: You can get yields in the 5 percent range from two south eastern regionals, BB&T (BBT) and Synovus (SNV). They don't have any sub- prime mortgage securities that you have to worry about. They're very solid businesses.
KANGAS: Let's have a look at Synovus, the closing today, $12.64. The yield is roughly what?
PETERS: In the mid 5 percent range.
KANGAS: OK. Where else are you seeing opportunities for strong dividend growth, Josh? PETERS: Well, I like a lot of the consumer and health care names right now. You have to be kind of picky because a lot of investors have already gotten defensive. They've already tried to move money into these areas, but Johnson & Johnson (JNJ) or a Cisco (CSCO) or a Diageo (DEO), these are the kinds of firms that are going to get through a recession and still be able to grow. And chances are they're still going to be able to increase their dividends at very good rates and get income growth out of it as well.
KANGAS: What dividends on average do those last three stocks yield?
PETERS: They're between the mid 2 and the mid 3 percent range. There are a lot of good opportunities in that yield range right now.
KANGAS: Josh, do you own or have any other disclosures to make regarding the stocks you've mentioned?
PETERS: Only one and that's BB&T and Synovus are both covered by my wife who is also a Morningstar senior bank analyst.
KANGAS: A little home research there. That's kind of nice, in-house. Josh, I want to thank you for being with us tonight.
PETERS: Thank you.
KANGAS: My guest, Josh Peters of Morningstar.
Paul Kangas' Stocks in the News
PAUL KANGAS: After two straight days of solid gains, Wall Street came under some profit taking pressures early on, especially as investors grew cautious ahead of the Fed's rate decision. At noon, the Dow posted a 50 point loss while the NASDAQ was off eight points. Stocks held to their noontime levels until 2:15 this afternoon, when the rate cut news sparked a very strong rally which lifted the Dow to a 160-point gain at 3:00 p.m. But that surge attracted some aggressive last hour selling, sending stocks to a lower closing. The Dow Industrial Average ended with a loss of 37.47 at 12,442.83. The NASDAQ Composite was down 9.06 at 2349 even. Standard & Poor's 500 Index fell 6.49 to 1355.81. In the bond market, the 10-year note rose 7/32 to 104 28/32, putting the yield at 3.65 percent.
Big board volume leader on 37.6 million shares, Citigroup (C) down $0.04 a share.
Followed by Bank of America (BAC) up $0.27.
JPMorgan Chase (JPM) dropped a dime.
General Electric (GE) a $0.23 gain.
And then Wells Fargo & Co (WFC) in there with a $0.16 advance.
Pfizer (PFE) lost $0.08.
Washington Mutual (WM) $0.65 rise.
EMC Corp (EMC) down a nickel.
Wachovia (Wall Street) off $1.06.
And then Ford Motor Co (F) a $0.06 gain.
Merck (MRK) down $1.32. Fourth quarter loss of $0.75 a share versus earnings of $0.22 last year, most of that loss of course due to big charges related to the company's buyout settlement.
Altria (MO) up $0.46 a share. Fourth quarter earnings of $1, $0.03 above the Street estimate and up from $0.95 a year ago. Those earnings are not including one-time items.
Boeing Co (BA) up $1.96. Fourth quarter earnings of $1.35, $0.03 above the Street estimate, up from $1.30 a year ago. The company boosted its 2008 earnings guidance by about $0.10 a share to $5.85 at best and the company said now its 787 aircraft production is on schedule. Once again we apologize for no charts today. We're getting close to solving our little computer problem I believe.
Baker Hughes (BHI) down $6.17. The oil service company, fourth quarter earnings of $1.26, $0.02 below the Street estimate, but up from $1.02 a year ago. But the company sees lower North American drilling activity this year.
Lehman Brothers (LEH) a $0.06 gain. The company will boost its quarterly dividend 13 percent from $0.15 to $0.17 and also the board has approved a 100 million share stock buyback.
United Parcel Service (UPS) up $1.10. Fourth quarter earnings excluding one-time items $1.13, up from $1.04 last year.
Allstate (ALL), the big insurance company, down $3.76. Fourth quarter operating earnings, $1.24, well down from $1.78 last year and revenues fell 1.14 percent.
Centex (CTX), the home builder, down $2.60. Third quarter operating loss of $7.94, versus a loss of $2.02 a year ago. UBS financial brokerage downgraded the stock from "buy" to "neutral."
Then FTD Group (FTD) a very nice gain of $2.02, one of the best percentage movers today on the upside. FTD had second quarter earnings of $0.30, up from $0.21 last year and boosted 2008 earnings estimates. Standard & Poor's repeated a "buy" recommendation.
And Municipal Mortgage & Equity (MMA) tumbling $2.06. New York Stock Exchange said today it's going to spend (ph) trading in the stock February 6th. The stock will then go to trade on the over the counter market.
Apple (AAPL) topped NASDAQ's most active list, moving up $0.64.
Then Google (GOOG) down $2.25. Earnings due out tomorrow as you heard.
Microsoft (MSFT) $0.40 loss.
Baidu.com (BIDU) down $11.32.
Research in Motion (RIMM) up $2.64, bucking the trend there.
Then Yahoo! (YHOO) down $1.76. After the close yesterday as we reported, fourth quarter earnings fell to $0.15 from $0.19 a year ago and the company's going to lay off 1,000 employees.
Intel (INTC) $0.19 gainer.
Cisco Systems (CSCO) $0.30 advance.
First Solar (FSLR) fell $7.55.
And then Amazon.com (AMZN) down $0.26 a share.
Flextronics (FLEX) up $1.29. Excluding charges for its acquisition of Solectron, the company had third quarter earnings of $0.30, up from $0.23 last year and that was $0.04 above the Wall Street estimate.
And finally, shares in Hutchinson Technology (HTCH) slid $8.04 on sharply lower first quarter profits of only $0.09 per share down from $0.22 per share a year ago. Results were $0.28 below analyst estimates.
