NBR Transcripts-February 25, 2008
Monday, February 25, 2008MBIA & Ambac Rise To Better Credit Ratings
SUSIE GHARIB: A big relief rally on Wall Street today, after the nation's two biggest bond insurers got a stamp of approval from S&P. This afternoon, Standard & Poor's announced that MBIA and Ambac Financial can retain their top credit rating, triple-A, at least for now. In reaction, shares of those bond insurers soared and lifted the overall market with them. The Dow jumped 189 points, the NASDAQ rose 24. But S&P said the bond insurers are still at risk for a credit downgrade. It has a negative outlook on MBIA and Ambac remains on credit watch with negative implications.
Existing Home Sales Slide & Recession Worries Rise
SUSIE GHARIB: More sobering news today about the nation's economy. The National Association of Realtors said sales of existing homes fell 0.4 percent in January to their lowest level in almost a decade. That's one reason why according to a new survey, an increasing number of economists are expecting the U.S. to slide into recession. The latest predictions come during a busy week for economic data and lots of talk about the economy by Federal Reserve officials. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sales of existing homes in the U.S. were better than expected last month. But many economists still believe conditions in the housing market will get worse before they get better. Standard & Poor's economist David Wyss doesn't think re-sales or housing starts will bottom until mid-year and he blames two factors.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: Problem number one is we built too many houses at too high a price. And the only way to fix that is to stop building for a while and to let the prices drop, which is going on. Problem number two is the mortgage markets, which have locked up.
PRATT: Given the state of housing, it's no wonder more economists are now predicting a recession this year. According to a new survey by the National Association of Business Economics, 45 percent of those polled expect a recession in 2008. S&P's Wyss is one of the economists surveyed and he thinks the recession has already started.
WYSS: I think the economy probably peaked in November when they get done dating this and it's going to hit bottom somewhere about midyear, about the time people grab their rebate check and head out to the shopping mall.
PRATT: While this is a busy week for economic reports, experts say there are few data points likely to alter views about recession. Nevertheless, economists say they'll be watching for revisions to fourth quarter GDP due out on Thursday, in particular for alterations to inventory measures. Others say they'll pay close attention to January's gauge of personal income and spending when it's released Friday for fresh clues about the health of the consumer. Still, others describe Federal Reserve Chairman Ben Bernanke's testimony to Congress on Wednesday and Thursday as a highlight. Morgan Stanley economist David Greenlaw does not expect Bernanke to telegraph the next move on interest rates. But Greenlaw wants to hear the chairman's assessment of financial market conditions.
DAVID GREENLAW, CHIEF U.S. FIXED INCOME ECONOMIST, MORGAN STANLEY: The sense of risks that the Fed sees going forward, the indication of some tightening of - some further tightening of credit conditions in the last couple of weeks. We'll be looking for his reaction to those sorts of developments.
PRATT: Tomorrow, watch for NIGHTLY BUSINESS REPORT's exclusive interview with Dallas Fed Bank President Richard Fisher. This year, Fisher serves as a voting member of the Fed's open market committee. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Jim Ryan, Bond Insurer Analyst , Morningstar
SUSIE GHARIB: Back now to our top story, that good credit news about the nation's top bond insurers. Joining us now with more analysis, Jim Ryan. He's bond insurer analyst with Morningstar. Hi, Jim.
JIM RYAN, BOND INSURER ANALYST, MORNINGSTAR: Hi. Good afternoon.
GHARIB: So are the bonds insurers out of the woods?
RYAN: No, not yet. You know, there's a whole lot left to play out in this story. Most of it has to do what's going to happen with mortgages later on this year. If we could see that delinquencies would level off, we'd feel a lot more comfortable. But if they continue to rise, this story may still have quite a bit to play out.
GHARIB: So could the bond insurers like MBIA and Ambac lose their triple-A credit rating in the future?
RYAN: Oh, sure. Again, if you do have a surge in defaults which maybe causes some defaults in some of the bonds, yeah, you could see the rating agencies coming back and asking for more capital to keep the triple- A.
GHARIB: So is that why we heard late this afternoon that MBIA announced that it will be cutting its dividend? Is it doing that as a precautionary move to preserve its credit rating?
RYAN: Sure. It's doing it to preserve capital and cash flow. Most of the companies are doing everything possible to keep their capital position intact at the moment.
GHARIB: Now, talking about the capital position, S&P said today that it reaffirmed the bond ratings because it felt that the financial strength of these bond insurers was more secure given that they've gotten some capital infusions, about $2.5 billion in the case of MBIA, possibly $3 billion in the case of Ambac. Is that enough money to alleviate fears of default or do they need to raise more money?
RYAN: For everyone that's a best guess scenario. If you were to look at it right now and say based upon the claims that we've seen and what they're projecting, they have way more than enough capital to pay the claims. The key that's coming down is that the rating agencies are saying, well, what happens in the future? What if in the next three months, the projections that we're running are true and that there's 21 percent sub- prime defaults and things like that? If things get bad enough, yeah, they will be asked to raise capital again.
GHARIB: We've been talking mostly about the nation's biggest bond insurers, but what about the smaller ones? What if one of those defaults? What would be the ripple effect of it, the impact?
RYAN: It certainly won't be as bad. They do have a smaller portfolio but there will be some sort of an effect on it. Someone like Security Capital who was downgraded today to I believe it was an A-minus or an A will probably have some ramifications from bonds that they've insured which may have to be written down. As to how bad it is we don't know. We don't think it's terrible and most of the rating agencies don't think so either at this time.
GHARIB: The stocks of MBIA and Ambac as you know surged today. What's your recommendation on them? Are they still too risky or is there some up side to owning them?
RYAN: Well, our feeling right now is that this is still a very speculative situation and we are not putting a fair value estimate on the stocks or I should say we have not until today. We feel that it's speculative to own the stocks and that any investors should be aware that if they were to buy into this they could lose their whole investment. That said with....
GHARIB: Well....
RYAN: ...with S&P confirming the triple-A today and if Moody's were to take a similar action, we would consider putting our ratings back on the stocks and giving a value to them.
GHARIB: Looking at the bond insurers, which are the best ones to own from a stock investors point of view? Are there any?
RYAN: Right now again we feel that they're all speculative and that it should be approached with caution.
GHARIB: We're going to have to leave it there. Jim, thank you so much.
RYAN: Thank you.
GHARIB: My guest tonight Jim Ryan, bond insurer analyst with Morningstar.
The Role of the Refundable Tax Credit
PAUL KANGAS: This is the time of year when many Americans are spending their weekends scrounging for receipts, getting ready to file their tax returns. When an estimated 40 percent of the taxpayers are done, they'll find they owe no Federal income tax. As we continue our look at the economic choices facing voters this year, Darren Gersh looks at why the major presidential candidates are pushing to give those people a tax break.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: When presidential candidates want to help low- and moderate-income families, their campaigns are increasingly turning to refundable tax credits. Unlike say, a deduction for college expenses -- which reduces a family's income tax bill -- a refundable credit can be refunded to a family that owes little or no income tax. Meaning, those who qualify can get a check from the government. Law Professor Lily Batchelder says it's a good idea. LILY BATCHELDER, ASSOCIATE PROFESSOR, NYU LAW SCHOOL: If you don't make something a refundable tax credit, meaning you can get it if you have no income tax liability, then you're missing basically the bottom half of the income distribution of families with children, which seems to me exactly the portion of the population you don't want to miss, because they are least likely to be able to send their children to college.
GERSH: John McCain, Barack Obama and Hillary Clinton are all campaigning for generous refundable tax credits. The biggest refundable tax credits would be for health insurance. McCain offers up to $5,000 to help families buy coverage. It's his campaign's only refundable tax credit. Senators Obama and Clinton haven't put a precise figure on the size of their refundable health insurance credits, but their campaigns have made it clear they would be extensive. On education, Clinton and Obama are more precise. Obama offers a college tuition tax credit of up to $4,000; $3,500 for Clinton. Both Democrats back refundable tax credits for working families, child care and retirement savings. Senator Obama is the only candidate offering a $500 refundable tax credit for mortgage interest. At the Center for Tax Policy, Len Burman worries all these new credits will make the tax code even harder to understand, further eroding trust in the system.
LEONARD BURMAN, CO-DIRECTOR, TAX POLICY CENTER: People get the sense that other people are getting more goodies from the tax code than they are and they have the feeling that the tax system is unfair. And since our whole system is based on the notion of voluntary compliance, it is important for people to perceive it as being fair.
GERSH: Budget hawks like the Cato Institute's Chris Edwards consider refundable tax credits just another way to get the government to write checks to people.
CHRIS EDWARDS, ECONOMIST, CATO INSTITUTE: Refundable tax credits are really just new spending programs. But people like to -- politicians like to call them tax credits because it sounds like they are less liberal or less sort of big government if you call a spending program a tax credit.
GERSH: While John McCain has proposed a refundable tax credit, Democrats are much more aggressive, using the tax code as a policy tool to ease the financial burdens on working class families. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"A Guide to Giving"-Charity's Role in the Economy
SUSIE GHARIB: Tomorrow is national corporate philanthropy day. The idea is to inspire businesses to take on more philanthropic endeavors. Wal-Mart and its foundation were the largest cash contributor in the U.S. last year, giving away $296 million. Tonight, we kick off our series "A Guide to Giving." Erika Miller looks at who is giving to charity and why those donations are so important to the economy.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This honors violin class could be taking place in an exclusive private school. But it's actually at Mount Carmel Holy Rosary in East Harlem, one of the poorest neighborhoods in New York City. Thanks to the organization Education Through Music, children here have music class once or twice a week, where there was none before. Many students say the program has helped them improve their grades overall.
SYDNEY DORNER, STUDENT, MOUNT CARMEL HOLY ROSARY: In math you learn beats (ph) and fractions and music is all about that.
AAREN LOVE, STUDENT, MOUNT CARMEL HOLY ROSARY: My experience was better and my schoolwork got better.
MILLER: Philanthropy is not just important to these kids. It's a vital part of the U.S. economy. The latest data shows that charitable giving totals nearly $300 billion a year and represents over 2 percent of gross domestic product. Studies show that about seven out of 10 households contribute to at least one nonprofit each year. High-income families are responsible for about two-thirds of all household giving. Married couples give the most and single men the least. Among households which give, the average total amount is roughly $2,000 a year. Patrick Rooney of the Center on Philanthropy at Indiana University says about 60 percent of that amount goes to religious organizations.
PATRICK ROONEY, DIRECTOR OF RESEARCH, CENTER ON PHILANTHROPY AT INDIANA UNIVERSITY: Interestingly, the one area that is recession proof for the most part, is religious giving, so that people tend to give to their church or their mosque or their synagogue, regardless of where we are in the business cycle.
MILLER: On the corporate side, donations are typically linked to profits. Nationally, that giving has averaged 1 percent of pre-tax income a year, a level that has held steady over the past four decades. Among the most generous corporations is the 5 Percent Club, 3M, Target and other Minneapolis/St. Paul-based firms have been giving that percentage since the 1960s. The biggest beneficiaries of U.S. corporate giving are health organizations, followed by education. Carolyn Cavicchio of the Conference Board, an organization that researches business trends, says firms often want to support their communities and boost their image.
CAROLYN CAVICCHIO, SR. RESEARCH ASSOC. GLOBAL CORPORATE CITIZENSHIP, THE CONFERENCE BOARD: It definitely raises an awareness of their brand with potential consumers as well as existing consumers. If they support a cause or an issue, if they engage in cause-related marketing, companies have seen pretty much across the board, an uptick in sales or an uptick in awareness of the company.
MILLER: She also says charitable giving helps companies attract and retain workers.
CAVICCHIO: I am hearing very uniformly from companies that employee pressure and interest in giving has increased. And that is one of the most important factors recruiters are hearing when they are interviewing top candidates.
MILLER: Another trend is an increase in U.S. corporate donations going to overseas charities, often used as a way to boost sales in global markets. A big concern for many non-profits is the current health of the U.S. economy. But Education Through Music's Executive Director Katherine Damkohler say none of her donors have pulled funding yet.
KATHERINE DAMKOHLER, EXECUTIVE DIRECTOR, EDUCATION THROUGH MUSIC: When they see that we are fiscally responsible, when they see that 81 percent of our money goes to our children, when they see the results that at the end of the day, music education supports learning, they really are very happy about investing.
MILLER: However, experts warn if there is a recession, many nonprofits will get likely take a hit.
ROONEY: What we've seen historically, is that during recessions giving -- total giving -- tends to decline at least on inflation-adjusted basis dollars. It tends to fall between one and five percentage points each year of a recession.
MILLER: There is also increasing competition for fundraising dollars. That is leading many organizations like Education Through Music to do their best to strike a chord with potential donors. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
KANGAS: Tomorrow, our series continues with a look at how to determine if a charity is serving its purpose and deserves your contribution.
"Commentary"-Curing Medicare
SUSIE GHARIB: Tonight's commentator says fixing Medicare should top Washington's to do list. She's Nada Eissa, associate professor of public policy and economics at Georgetown University.
NADA EISSA, ASSOCIATE PROFESSOR PUBLIC POLICY & ECONOMICS, GEORGETOWN UNIV.: With people living longer and health care costs rising rapidly, Medicare is getting expensive and now poses the greatest threat to the future fiscal health of this country. To pay for all of Medicare's expected spending in 75 years, we would have to cut out all other government spending or raise taxes sharply.
Today, we pay for Medicare with a combination of premiums, payroll taxes and general tax revenues. In 2003, after adding a prescription drug benefit and more half a trillion dollars to the 10-year cost of the program, Congress and President Bush also agreed to try to hold down future Medicare spending. Their plan: when general tax revenues are about to exceed 45 percent of the program's cost, a general revenue warning is triggered. That requires the president to submit legislation to bring down Medicare's general revenue spending and the Congress to consider the proposed changes.
To no one's surprise, Medicare is about to exceed the limit and the trigger has been pulled. The White House has put forward a proposal that, among other things, requires the wealthy to pay higher Medicare premiums. That is a start. And where is the Congress? The president's proposal was deemed dead on arrival when it got to Capitol Hill. Not only that, Congress now wants to eliminate the trigger. That would be a big mistake. The way we finance Medicare now is equivalent to taking out a credit card for our grandchildren and slapping our own medical bills on it. The trigger alone won't stop that, but it will help keep our feet to the fire. Let's hope our policymakers don't walk away from it. I'm Nada Eissa.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street started the week narrowly mixed but stocks firmed up after a smaller than expected decline in January existing home sales. We'll have more on those home sales figures in a moment. By late morning the Dow was sporting a 92-point gain and the NASDAQ was up 14 points. Then some light profit taking caused a pullback over the next few hours, but then came that rally on Standard & Poor's decision to keep bond insurers MBIA and Ambac at a triple-A credit rating. That helped the Dow Industrial Average surge to a closing gain of 189.20 at 12,570.22. The NASDAQ Composite rose 24.13 to 2327.48, while the Standard & Poor's 500 Index was up 18.69 ending at 1371.80. Over in the bond market, the 10-year note fell 27/32 to 96 21/32, putting the yield at 3.91 percent.
Big board volume leader today on 34.3 million shares, Citigroup (C) down $0.38. Oppenheimer cut its 2008 earnings estimate from $2.70 a share all the way down to $0.75 and of course Oppenheimer last Friday said another dividend cut is imminent. Today Goldman Sachs cut its earnings outlook on Citigroup, predicting the company would need to take more write downs on bad mortgage bets. Then General Electric (GE) $0.66 gain.
Pfizer (PFE) $0.28 advance, although the company is withdrawing advertising for its Lipitor product which features heart specialist Robert Jarvik. The company said that the ads led to misimpressions.
Motorola (MOT) down $0.20. Oppenheimer downgraded it from "out perform" to "market perform."
And then JPMorgan Chase (JPM)
a dime gain.
Moving along in the actives, Bank of America (BAC) up $0.34.
Followed by Ford Motor Co (F) up $0.21.
Wells Fargo & Co (WFC) gained $0.25.
EMC Corp (EMC) adding on $0.33.
And SprintNextel (S) with a $0.04 advance.
MBIA Inc (MBI), there you see it, up $2.40, traded as high as $15.25 on the news from Standard & Poor's rating.
And then the sister to it, Ambac Financial (ABK) closed up $1.70 on the S&P reaffirmation.
Alcoa (AA) did well, up $2.30. The European Commission has cleared New Zealand-based Rank Group to buy Alcoa's packaging and consumer business unit for $2.7 billion.
Lowes Companies (LOW) a $0.91 gain, even though fourth quarter earnings tumbled 33 percent to $0.28 from $0.40 a year ago, but that was $0.03 better than the Street consensus. Incidentally, Home Depot's fourth quarter earnings are due out tomorrow.
Genentech (DNA) did well, up $6.37. Last Friday, the FDA granted the company accelerated approval for its Avastin product, which can now be used to treat advanced breast cancer.
Fannie Mae (FNM) a $0.64 drop. It traded as low as $27 this morning after Goldman Sachs downgraded it from "neutral" to "sell," did the same for Freddie Mac, but that stock fell only $0.43 on the close.
Getty Images (GYI) star of the day, up $7.22. Private equity group Hellman and Friedman will acquire the company for $34 a share in cash.
Gulfmark (GLF) up $6.06. This is a Marine transportation company for the oil drilling platforms. Fourth quarter earnings jumped to $1.66 and that was $0.59 better than the Wall Street analysts were expecting.
Brinks Co (BCO) up $3.55. The board has approved a spin off of the company's home security unit into a separate publicly traded firm. It will be a tax-free transaction.
NASDAQ's top on the active list by Apple (AAPL) up $0.28.
Google (GOOG) got hit from profit taking, $21.36 drop.
Microsoft (MSFT) up $0.16.
Research in Motion (RIMM) $0.75 gain.
baidu.com (BIDU) down $3.38.
Intel (INTC) managed to gain $0.12.
$0.20 advance in Cisco Systems (CSCO).
Oracle (ORCL) up $0.07.
First Solar (FSLR) gained $17.06, $17.16.
And Take Two Interactive (TTWO) up $9.53. Electronic Arts Corporation is offering $26 a share on a takeover but Take Two rejected that bid as being inadequate.
Elsewhere, GTX Inc (GTX) up $4.70. Late stage trials for the company's prostate cancer treatment are promising.
And those are the stocks in the news tonight.
