NBR Transcripts-February 12, 2008
Tuesday, February 12, 2008Warren Buffet To The Municipal Bond Rescue
SUSIE GHARIB: A surprise offer from the oracle of Omaha to rescue three of the world's biggest bond insurers. Billionaire investor Warren Buffett revealed today he's willing to take on $800 billion in credit risk from MBIA, Ambac and Financial Guaranty Insurance. But his big offer comes with strings attached and is limited to re-insurance of municipal bonds. Erika Miller has more on why Buffett sees value in the troubled bond insurance business.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Warren Buffett is known for his shrewd business sense. Experts say his offer to become the insurer of last resort for $800 billion worth of municipal bond liabilities is another smart move. Buffett is willing to take on one of the safest, most profitable parts of the municipal guarantee business in exchange for a steep fee. Strategist Greg Peters says bond insurers probably can't afford to refuse the help.
GREGORY PETERS, CHIEF US CREDIT STRATEGIST, MORGAN STANLEY: I think it's a pretty astute, plausible offer, honestly. Obviously, Berkshire is a very smart firm, very opportunistic. And, honestly, it makes a lot of sense from his perspective and the monolines, on the other hand, might not have a lot of other choices. So, it seems like a reasonable offer.
MILLER: But Buffett says one bond insurer, who he declines to name, has already rejected his proposal. JPMorgan analyst Andrew Wessel predicts the other two insurers will likely do the same.
ANDREW WESSEL, BOND INSURER ANALYST, JPMORGAN: The problem with that is the guarantors don't really end up with anything other than getting out future earnings and having a lower insured balance of their portfolio. The problem is their portfolio post that transaction would still include all of the higher risk exposures, such as CDOs, mortgage-backed securities, et cetera.
MILLER: Buffett argues his offer will help bond insurers keep their coveted triple-A ratings. A loss of top status would make it harder for insurers to attract business and perhaps trigger widespread sales of muni bonds. But some analysts warn that bond insurers might actually hasten downgrades by accepting Buffett's offer.
WESSEL: If you take away the municipal bond business, it could actually have a negative capital effect on the financial guarantors, from a ratings agency perspective. It actually could lead to negative ratings action, which would obviously be a negative for the companies.
MILLER: What's clear is that Buffett's help would not come cheaply. The oracle of Omaha says he would charge bond insurers 50 percent more than the insurance premium they are receiving from issuers. Buffett admitted as much during an interview this morning, saying quote, when I go to St. Peter, I will not present this as some act that should entitle me to get in. Buffett may be doing it for the money, but analysts say his offer is good for the markets and could help stabilize the entire financial system. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
GHARIB: Late today, one of those three big bond insurers turned down Warren Buffett. Ambac issued a statement after the close of trading, saying it would seek capital on its own. Ambac says, while it welcomes any constructive offers to deal with the current uncertain environment, it believes Buffett's offer would offer no financial relief to support its ratings.
"Project Lifeline" Reaches Out To Troubled Homeowners
PAUL KANGAS: The Treasury Department and some of the largest players in the lending industry today rolled out "Project Lifeline". It's a plan to help more homeowners avoid foreclosure. As Stephanie Dhue reports, the lenders -- all part of the Hope Now alliance -- are reaching out to borrowers who are in imminent danger of losing their homes.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With mortgage defaults continuing to grow, Project Lifeline is the industry's latest effort to keep struggling borrowers from foreclosure. Treasury Secretary Henry Paulson says the plan applies to prime and sub-prime borrowers.
HENRY PAULSON, TREASURY SECRETARY: These efforts are to help American families who both want and can, through a loan modification or re- financing, stay in their homes.
DHUE: The six lenders -- Bank of America, Chase, Citi, Countrywide, Washington Mutual and Wells Fargo -- will begin mailing out letters to borrowers who are more than 90 days late with their payments. The banks will urge homeowners to contact their lenders to work out a loan. In some cases, foreclosure may be paused for up to 30 days to create a work-out plan. Economists say the small step is likely to be overwhelmed by plunging home values and a weakening job market. Consumer attorney Ira Reingold says there's a disconnect between the mortgage industry's rhetoric and reality.
IRA RHEINGOLD, NATIONAL ASSOCIATION OF CONSUMER ATTORNEYS: In some ways, what you're seeing is action by press release, so they keep announcing numbers and they keep saying things are getting better and they are doing more and our foreclosure crisis keeps getting deeper and deeper and deeper.
DHUE: Key lawmakers are also skeptical this latest plan will make much difference. Senate Banking Committee Chairman Chris Dodd says the government needs to more aggressively combat the problem. But Treasury Secretary Paulson rejects the idea of a more sweeping government role. He says the housing market has to work through a correction and the economy has to grow.
PAULSON: We made the decision, the president made the decision that we are going to focus on programs like this and in order to deal with the broader issue, we have a stimulus plan.
DHUE: Clearly, many lawmakers want to go further and are considering ideas ranging from giving first-time home buyers tax breaks to having the government buy out bad loans. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
GM's Big Loss
SUSIE GHARIB: General Motors posted the biggest annual loss ever by an auto maker today. It lost $38.7 billion in 2007 as it worked to turn around its North American business. Excluding charges, but including a $1.6 billion tax gain, GM actually earned $0.08 a share in its fourth quarter. The struggling auto maker also announced a fresh wave of employee buyouts. As Diane Eastabrook reports, industry watchers believe those buyouts are a step in the right direction.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: General Motors says sluggish auto sales in North America and Europe contributed to its worst year in history. As a result, the company today offered another round of buyouts to its 74,000 union workers in the U.S. Under the deal, 46,000 workers could retire now and receive up to $65,000 in cash, plus pension benefits. The remaining workers could walk away from their jobs and benefits and pocket up to $140,000 in cash. GM's chief financial officer Fritz Henderson says GM could replace some of those workers with lower-paid employees.
FRITZ HENDERSON, CFO, GENERAL MOTORS: This is a key step in us being able to transform our workforce and actually begin to new hire workers into some of these non-core jobs at the second tier wage, so we can be much more competitive on a cost basis.
EASTABROOK: Still, Henderson admits GM faces another difficult year in the U.S. A struggling economy could keep many consumers out of showrooms. GM has responded to that situation by rolling out incentives on many vehicles. GMAC, the finance unit General Motors owns a stake in, is also struggling. It lost more than $2 billion last year due to losses in its mortgage division. Henderson says efforts are underway to prop up that unit.
HENDERSON: I wouldn't say we are at all satisfied with where the situation is. But a lot of actions have been taken in order to reduce the balance sheet, reduce exposure, reduce losses and I think we'll start to see the benefit of that in '08.
EASTABROOK: Despite its problems, analysts think General Motors is headed in the right direction. The company has reduced fleet sales and improved its product mix. Global Insight auto analyst Rebecca Lindland is also impressed with GM vehicle sales outside the U.S. REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: There is a lot of potential on a global basis with emerging markets such as China, where GM sold over a million units last year, 2007, and also Latin America, where they are having very good profits as well as higher sales.
EASTABROOK: GM thinks it should be profitable in another two years. But Lindland thinks that forecast is a bit optimistic. She thinks it could take another three years before the auto company is back in the black. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Of Mutual Interest"-Jason Zweig, Investing Columnist for "Money" Magazine & Author of "Your Money and Your Brain"
PAUL KANGAS: In tonight's "Of Mutual Interest" segment, how individual investors can find some shelter in this stormy market. Joining us is Jason Zweig, the investing columnist for "Money" magazine and author of the book "Your Money and Your Brain". Jason, welcome back to NIGHTLY BUSINESS REPORT.
JASON ZWEIG, INVESTING COLUMNIST, MONEY MAGAZINE: Great to be with you, Paul.
KANGAS: This has been a wild and crazy marketplace with mutual funds and sectors like gold and energy going sky high. But should investors buy in now?
ZWEIG: I don't think so, Paul. A lot of people have really gotten carried away. The markets have not been cooperative. We're down 7 or 8 percent so far this year in the stock market and people are getting desperate. And instead of chasing what's hot, people really should be looking for what's cheap. And you can find some value in some surprising areas.
KANGAS: What does offer some good value in these turbulent times?
ZWEIG: Well, one area I'm kind of excited about is normally pretty boring, which is municipal bond funds. These are funds that offer income that's normally tax free, free from Federal taxes and typically yields less than you could get from a Treasury bond or Treasury bond fund, but now actually the yields are comparable and historically that's always been a real value opportunity for income investors.
KANGAS: So these bonds have been beaten down because of the problems in the credit market no doubt.
ZWEIG: Exactly, Paul. There's been a real flight to quality over the past couple of months and investors have really bid up the price on Treasury bonds. And what that's really led to is a situation where the price has gone so high on those that the yields have really drop dropped and munis now offer really fat yields in a market that's starved for income.
KANGAS: You think Warren's Buffett's reinsurance proposal will help the municipal bond market?
ZWEIG: It can't hurt. Anything that leads to greater stability has to be a good thing.
KANGAS: Understood. Give us an example of the type of fund you think would work for investors.
ZWEIG: A very good choice I think, Paul, is the Vanguard Intermediate term tax exempt fund. The ticker is VWITX. I guess like an old VW beetle, this fund is cheap, it's short and it's reliable and now it offers yields of roughly 3.2, 3.3 percent after tax, which for the typical taxpayer is somewhere between 4 and 5 percent and that's very attractive.
KANGAS: If you're in the 30, 40 percent bracket, that's a very nice return.
ZWEIG: That's correct and to get a similar yield giving effect for the tax benefit, you'd have to buy a 30-year Treasury bond if you could find one and if you did, you'd face a lot more risk from rising interest rates than you would with a fund like this.
KANGAS: Now this particular fund is one of the "Money" magazine's 70, "Money" 70, isn't that what you call it, Jason?
ZWEIG: That's correct, Paul. Every year "Money" magazine publishes the "Money" 70, which is our list of the funds we prefer for low cost and stable management and consistent performance. And this fund is on that list. It's a good bet.
KANGAS: Very good and interesting, Jason. Once again I want to thank you for joining us tonight.
ZWEIG: My pleasure, Paul. Thank you.
KANGAS: My guest, Jason Zweig, investing columnist for "Money" magazine and author of "Your Money and Your Brain."
"The New Business of Education"-Tutoring Services
SUSIE GHARIB: Increasingly these days, parents are spending more money to help their kids stay on top of their schoolwork or get an edge in the classroom. That has helped make tutoring a $4 billion industry. As we continue our series, "The New Business of Education," Dana Greenspon looks at how companies, both large and small, are benefiting from the boom in tutoring. DANA GREENSPON, NIGHTLY BUSINESS REPORT CORRESPONDENT: When ninth grader Amy Newman began struggling in math, her mother Anne added tutoring to the after-school equation. Newman says now Amy is getting an "A."
ANNE NEWMAN, AMY'S MOTHER: When you have somebody who is really just sort of hitting a bump, I knew it was going to probably be solved pretty quickly. Now they've moved on and started working on study skills, because her habits aren't that great.
GREENSPON: More and more students like Amy are getting help outside the classroom. It's a trend Newman encounters daily -- she's an education counselor at TutorFind, a small tutoring company in Manassas, Virginia. The 15-year-old firm has seen significant growth in its business over the past decade. Executive Director Debbie Bergeron says one major driver is busy kids and even busier parents.
DEBBIE BERGERON, EXECUTIVE DIRECTOR, TUTORFIND: So the pockets of time to actually do schoolwork are thinner and a lot of parents don't want to spend the time that they have with their kids fighting over schoolwork. And it's just easier to hire somebody who knows what they're doing, who can focus on something and get that job done and then when they're together, it's just much less stressful.
GREENSPON: Another factor that has propelled the entire industry is the No Child Left Behind Act. The law allows low-income children in failing schools to receive tutoring services, with the local government picking up the bill. The law has spurred growth across the industry. Major tutoring provider Sylvan Learning Centers has devised a program called "Ace It," specifically designed for students receiving government- sponsored tutoring. CEO Peter Cohen says the NCLB law has provided new opportunities for those operating a Sylvan franchise.
PETER COHEN, PRES. & CEO, SYLVAN LEARNING: It's a different business model. It requires a special focus and some of our franchisees have embraced that opportunity and have built a business that's as big as their Sylvan consumer business in the "Ace It" program.
GREENSPON: Another factor helping Sylvan is its reliance on local franchisees. The company has more than 1,100 centers in the United States and about 85 percent are franchises. Sylvan is now in the process of moving to a 100 percent franchise model. As college admissions become more competitive, Cohen says local ownership helps students succeed.
COHEN: When you have people who have grown up in a community or live in the community, may have their own children in the school system, they really understand the challenges of that school system, the challenges of those neighborhoods.
GREENSPON: Yet, as tutoring centers pop up in shopping centers across the country, the competition is also mounting, from both local operators and online companies, based as far away as India. That competition has been both a challenge and a blessing for small firms like TutorFind. While national companies like Sylvan and Huntington Learning Centers may be more visible, Debbie Bergeron says independent operators also benefit from their efforts.
BERGERON: Companies that can afford to advertise on TV, for example, well, they're pushing tutoring. And if somebody just goes to the phone book or to the Internet, they're going to find me. So there's a great possibility they're also driving the tutoring industry and helping us grow.
GREENSPON: And with 10 percent growth in tutoring revenues expected this year, there is room for companies both big and small to multiply. Dana Greenspon, NIGHTLY BUSINESS REPORT, Manassas, Virginia.
GHARIB: Tomorrow, our series "The New Business of Education" continues with a look at the boom in charter schools.
"Last Word"-Love Seems Recession Proof
SUSIE GHARIB: And finally tonight, only a few days until Valentine's Day. And, in the midst of weakness in the economy, people are still spending big on love. $17 billion will be spent this Valentine's Day on flowers, cards, chocolates and a night on the town. That's according to the National Retail Federation. For many people, one of their main loves is actually puppy love. About one in five people will buy a little something for their pets. Paul, in case you forgot, Valentine's Day is on Thursday.
KANGAS: I won't forget because I learned by heart.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened sharply higher in response to Warren Buffett's offer to reinsure municipal bonds, while the Treasury's mortgage rescue plan also helped the Dow soar 210 points by mid-day, with the NASDAQ Composite up 30 points. The rally was further fueled by better than expected results from General Motors, which we'll detail shortly. By mid- afternoon the gains however were too tempting to resist some profit-taking, so, while the market ended higher, it was well below the day's best level. The Dow Industrial Average closed up 133.40 at 12,373.41. NASDAQ ended down just .02 at 2,320.04. Standard & Poor's 500 Index rose 9.73 ending at 1,348.86. In the bond market, the 10-year note fell 11/32 to 98 21/32, putting the yield at 3.66 percent.
New York exchange volume leader on nearly 25 million shares, Citigroup (C) moving up $0.40. Followed by Ford Motor Co (F) a $0.07 gain.
Bank of America (BAC), which will soon be a Dow stock, a $0.68 rise there.
American Intl Group (AIG) rebounding $1.40 after dropping nearly $6 yesterday on fear that the derivatives the company owns could result in huge write offs, but today, the company calmed investors, saying the size of any write down was not expected to be material to the company.
Pfizer (PFE) $0.48 gain there.
Moving along in the active list, we see General Electric (GE) with a $0.36 advance.
Time Warner (TWX) rose $0.59.
Hewlett-Packard (HPQ) $0.25 gain.
JPMorgan Chase (JPM) down $0.04.
And then AT&T (T) closed with a $0.64 per share gain.
ExxonMobil (XOM) up $1.16. Analysts have been doubting whether Venezuela will cut oil shipments to the United States because it hurt more in Venezuela than it would here. But late today, Venezuela's state oil company suspended oil exports to ExxonMobil in retaliation for that company's freezing billions of Venezuela's assets in the United States in quite a legal fight that's going on.
Schering-Plough (SGP) was up $1.21. Fourth quarter earnings excluding one-time items, $0.27, up from $0.17 a year ago, $0.03 above the Street estimate. The company cited strong sales of its product called Zetia.
3M Co (MMM) down $0.18, even though it's boosting its quarterly dividend by 4.2 percent to $0.50 a share.
Monsanto (MON) up $1.02. The company boosted its 2008 earnings guidance from a high of $2.60 a share up to $2.80 a share at best.
Masco (MAG) down $2.39. The building products company had fourth quarter operating earnings drop to only $0.19 from $0.35 last year. That's $0.09 below the Street estimate. Sales fell almost 8 percent. Standard & Poor's 500, Standard & Poor's I should say, downgraded the stock from "buy" to an outright "sell."
And Dycom Industries (DY) plunging $8.01. After the close yesterday, the company said it sees second quarter earnings of only $0.03 to $0.04 a share and that's $0.11 to $0.12 below the company's guidance way back in November.
Berkshire "A" (BRKA), the expensive one, the A stock, down $250 a share to $139,700, negative reaction to Ambac's withdrawing or not interested in the help that they could get from Berkshire Hathaway.
MBIA (MBI) is down $2.08. The fact is that Warren Buffett's terms might be a little bit too tough and he'll do better than the bond insurers. Apparently that's the concern.
Moving along, we see Evercore Partners (EVR) up $1.60. The merger advisory firm had fourth quarter earnings of only $0.25, down from $0.69 a year ago, but that was $0.02 above the Street estimate.
Stifel Financial (SF) up $5.31. Fourth quarter adjusted earnings $1.14, well above the $0.83 Wall Street estimate.
And GMH Communities (GCI) a $3.08. America Campus Community will acquire the company in a two-part transaction worth $9.61 a share in cash and stock.
Volume leader on NASDAQ, Apple (AAPL) down $4.59.
Followed by Google (GOOG) down $3.07.
Baidu.com (BIDU) off $1.28.
Research in Motion (RIMM) down $2.97. The company's investigating the source of yesterday's Blackberry outage and it seems to be a routine upgrade of a data routing system is the cause.
Microsoft (MSFT) a $0.13 gain. That was fifth in NASDAQ volume.
First Solar (FSLR) down $14.08.
Cisco Systems (CSCO) $0.09 drop there.
$0.30 loss in Yahoo! (YHOO).
Intel (INTC) moved up $0.22.
And Qualcomm (QCOM) $0.92 loss, tenth in big board volume.
Electronic Arts (ERTS) up $2.50 a share. The company sees revenues by 2011 around the $6 billion annual mark.
And finally, shares in NxStage Medical (NXTM) plunged $4.26 after posting a wider than expected fourth quarter loss of $0.47 a share versus a loss of $0.37 per share a year ago.
