NBR Complete Transcripts-February 29, 2008
Friday, February 29, 2008The Dow Takes A Deep Leap In The Wrong Direction
SUSIE GHARIB: Stocks on Wall Street took a big leap backwards on this leap day. The Dow tumbled 315 points and lost 3 percent in February, its fourth straight monthly decline. The NASDAQ dropped 60 points. Triggering the sharp sell-off, a string of bad news: a regional report from Chicago showing business activity fell to its lowest level since 2001; a huge loss at AIG stirring up fears of more big write-downs in the financial sector and last night's disappointing earnings from Dell. Alec Young of Standard & Poor's says these developments do not bode well for the economy and the markets.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: What we're seeing today in the news flow yesterday, growing evidence that the economy continues to weaken, credit market problems continue to deteriorate. That increases the likelihood of a more prolonged recession that moves into the second half of the year. That threatens corporate profits and that's very broad-based. That has negative implications for all of the stocks in the market and that's why you're seeing broad-based selling.
GHARIB: Adding to that market anxiety, another spike in oil prices. Crude rose above $103 a barrel for the first time before falling back. In New York trading, April crude futures settled at $101.84, down $0.75. But as Erika Miller explains, some experts don't think oil will be a major negative for the U.S. economy.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stagflation is a painful economic condition the nation hasn't seen in three decades. It is characterized by a sharp increase in inflation at a time when growth is stagnant. Some investors worry stagflation could be coming back again, exacerbated by $100-a-barrel crude oil. But not economist Lakshman Achuthan.
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH: If we see these levels sustained for a long period of time, it does not necessarily mean some permanent damage to the economy. What is shocking, as it were, when we talk about oil shocks, it's not a number -- $80, $90, $100 that's the shock. It's the rate of change.
MILLER: Still, investors remain concerned that because energy is so widely used, rising prices will eventually push up the cost of most other goods and services. Another fear is that rising gasoline prices will force consumers to slash spending in other areas, stunting economic growth. There again, Achuthan disagrees.
ACHUTHAN: So many times, we've looked for this tipping point on the consumer. So many times people have said that's it. It's going to break the back of consumers. It has not happened, largely because there are jobs. People still have reasonably steady incomes.
MILLER: Over the past six months, crude futures have risen about 50 percent to record levels. Oil analyst Fadel Gheit says two major factors have been propelling prices.
FADEL GHEIT, OIL & GAS ANALYST, OPPENHEIMER & CO.: Lower interest rates, a lower dollar, push commodity prices up, including oil. So, every time you have an interest rate cut, followed by a drop in the value of the dollar, you expect oil prices to move higher and that's exactly what has happened for the last six months.
MILLER: Many industry experts predict energy prices will continue to climb near-term, especially given supply concerns. Rebels have been attacking oil facilities in Nigeria and Venezuelan President Hugo Chavez is threatening to cut off U.S. oil supplies from his country. In addition, hopes are dimming that OPEC will increase production when it meets next week.
GHEIT: The only thing that will stop oil prices from rising in my view, is not supply and demand; it's deep recession, which will curtail demand in an absolute term -- not demand growth will slow down, actual demand will decline.
MILLER: Economists say energy prices will be watched closely by the Fed. They warn that if there's a big up-tick in inflation overall, the Fed could stop cutting rates, even at the risk of prolonging the economic downturn. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
The High Cost of Buying A Home Just Got Higher
SUSIE GHARIB: Get ready to shell out more money if you're in the market for a new mortgage. Wells Fargo said today that borrowers must now make a 25 percent down payment on the purchase price of a home in markets where prices are falling. Mortgage rates are also going up, even though the Federal Reserve has been cutting interest rates. As Stephanie Dhue reports, both factors are combining to raise the cost of buying a home.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tighter lending standards are squeezing potential buyers out of the market. Realtor Mukami Mugo has seen firsthand the effects. She says many home buyers are unprepared for the higher cost of borrowing.
MUKAMI MUGO, REAL ESTATE AGENT, RE/MAX: If, let's say tomorrow's my settlement date and my loan officer says the terms or the conditions have changed, now you need to bring this much more money. Hello, you know, that's likely to kill the deal.
DHUE: Lenders are coping with rising foreclosures and falling home prices. Twenty percent down payments are quickly becoming the standard. "Inside Mortgage Finance" publisher Guy Cecala says lenders don't have confidence prices will stabilize anytime soon.
GUY CECALA, PUBLISHER, INSIDE MORTGAGE FINANCE: The lending market is discovering that home values are dropping a lot faster than they thought across the country and everybody is reacting by wanting more equity in a mortgage going forward.
DHUE: Besides Wells Fargo tightening its standards, Bank of America now requires 10 percent down in what it calls troubled markets. Depending on the market, Wachovia says it could require more than 20 percent.
CECALA: Once you've got a default and see firsthand how much it's costing you, the knee jerk reaction of course is to raise the loan-to-value ratio. Of course, it's somewhat like closing the barn door after the horse is out, because I can tell you now, all the mortgages made now are going to be pretty safe.
DHUE: FHA, the Federal Housing Administration, was once shunned as too demanding; now, it has become a savior for qualified buyers. The agency has relaxed some of its standards and in some cases, a borrower can put just 3 percent down. Mugo says that has helped as other lenders have tightened up.
MUGO: Right now, the sellers are happy to get a buyer who is FHA- qualified. The buyers are happy with FHA because they can qualify for it. They are more likely to qualify for FHA than conventional loans.
DHUE: Analysts say if tighter standards keep large numbers of potential borrowers out of the market, lenders may be forced to reconsider their terms to boost business. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Market Monitor"-Frank Cochrane, President of Investment Timing Consultants
PAUL KANGAS: My guest market monitor this week is Frank Cochrane, president of Investment Timing Consultants, a financial advisory firm based in Bloomfield Hills, Michigan. Welcome back to NIGHTLY BUSINESS REPORT Frank.
FRANK COCHRANE, PRESIDENT, INVESTMENT TIMING CONSULTANTS: Paul, it's great to see you.
KANGAS: Well, another rugged day for investors on Wall Street. The question is, is the economic news bad enough to justify such a steep sell- off?
COCHRANE: Well, obviously, the market thinks so. I think, Paul, what we're entering here is this is going to be a grinding bear market, something that's going to take many quarters and a couple of years to sort of unfold for a number of reasons, but obviously, housing is sort of the pinnacle of that and the questions there. And that falls on the banks, and so on. So I think we're entering something unlike we've seen in a long, long time, probably the closest I could say was maybe -- other than the early '30s would be the '73-'74 time frame. And I think what we're going to do if I wanted to picture the two up, I would say 2008 will be like 1973 and 2009 will be like 1974 in that 1974 was the worst and that the market declined by almost 30 percent that year. I think that will happen in 2009 primarily because if you accept the theory that perhaps all the stimulus that we're getting now will have been for naught and there won't be that much ammo left in the machine guns, so to speak, to stop these things, and that will cause a problem in 2009. That's where I say the bottom being a place, probably late 2009 early 2010.
KANGAS: And down as much as 30 percent from this level?
COCHRANE: I think you could go even more. It all depends what unfolds and unwinds and so on. What we have now is a very severe credit crisis and lack of liquidity in the market. That's what the mark thrives on. That's the fuel that drives the engine.
KANGAS: What strategy are you using to weather stormy days like this?
COCHRANE: Well, I think what you have to do, first of all is trade the market, but secondly, I would take a more bearish slant and either be short some stocks or be heavily in cash. I think -- and it's not something -- you're going to see some significant rallies. For example, the 2000- 2002 decline, the 80 percent decline in the NASDAQ 100, you saw 35 or more rallies that were in excess of 5 percent. You're going to see some significant rallies in this downturn. However, I think when you look at it now or last October, again, through the end of next year into early 2010, you're going to see a significant decline.
KANGAS: During your August visit the last time you were here, you had three buy recommends for our viewers. Let's see how they've done since then. Ultrashort, Triple Q's (QID) up nearly 18 percent, ultrashort Russell 2000 (TWM). You were a bear then and you're a bear now. That was up 24.6 percent. Are you still with those?
COCHRANE: Yes, Paul, those are trading vehicle for us, but definitely, and that's something -- the very volatiles you can see from the chart and if somebody is uncomfortable with that, you can use a 10 or 15 percent trailing stock to try to mitigate the volatility.
KANGAS: OK, there was one other recommendation that you had back then, Precision Drilling Trust (PDS) and that's up 16.2 percent. Still with that one?
COCHRANE: Yes, nice dividend there. It pulled back a bit after I recommended it, but I think that could go up to the 30 to 35 range over the next couple of years.
KANGAS: OK, our time is drawing short. Any new recommendations, Frank?
COCHRANE: Yes the I-shares silver trust, which is a little bit pricey. It pulled up nicely from the $130-$195 area. That could pull back to $160 if silver goes back to around $16, but I think eventually that could be around $300 to $350 easily a share over course of the next couple years.
KANGAS: Trading symbol SLV.
COCHRANE: Correct.
KANGAS: OK, another one?
COCHRANE: Symbol SDS.
KANGAS: Ultrashort Standard & Poor's -- you are bearish.
COCHRANE: And that, again, is a two times index. You buy this and what it is, as the market down, it increases in values much like the QID and the TWM. So it's an inverse relationship to the market.
KANGAS: You've been making money with your bearish strategy, haven't you?
COCHRANE: Yes, sir. And the thing is, in the big picture I believe that these were things to hold. Again, there are many things you can do, use stops, trailing stops, that type of thing.
KANGAS: Do you personally own the securities you've mentioned here?
COCHRANE: From time to time, Paul, yes, we do.
KANGAS: But that's because you're a trader in and out, back and forth, OK.
COCHRANE: Yes, that's correct, Paul.
KANGAS: I want to thank you for being with us once again.
COCHRANE: Great, Paul, thank you.
KANGAS: My guest, Frank Cochrane, president of Investment Timing Consultants.
"Commentary"-Saving Social Security
SUSIE GHARIB: Tonight's commentator has some ideas to sustain Social Security. He's Allan Sloan, senior editor at large for "Fortune."
ALLAN SLOAN, SR. EDITOR AT LARGE, FORTUNE: I've got a magical solution to the Social Security problem, or at least part of it. Let's set up a sovereign wealth fund to invest Social Security's cash surpluses. That way, when Social Security takes in less cash than it spends about 10 years from now, we'll have a way to cover the shortfall. Sovereign wealth funds, which are owned by countries, are a very big deal these days as I'm sure you know. They've put about $50 billion into big Wall Street firms that needed capital. They own maybe $3 trillion worth of various stuff but our country doesn't have one.
So Social Security's cash surplus -- about $90 billion this year -- goes into Treasury securities. Its trust fund owns more than $2 trillion of them, but they're not wealth. Because when Social Security takes in less cash that it spends, the funds wont' make it any easier for the government to cover the checks than if there were no fund. A Social Security wealth fund could buy high-rated corporate bonds, home mortgages of credit-worthy borrowers or anything solid. Then, when Social Security needs cash, the fund would have real wealth. Now, I don't think for a minute that anyone in Washington has the nerve to do this, because it would involve admitting the trust fund is useless. So, we'll keep doing what were doing. Instead of building a Social Security sovereign wealth fund, we're running an impoverishment fund and our children and grandchildren will get to pay for it. I'm Allan Sloan.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened sharply lower in the wake of Dell's disappointing results we told you about last night and also on AIG's huge loss reported early today. After an hour of trading, the Dow was down a hefty 213 points and the NASDAQ off 44. The sell-off steepened as recession worries were revived by a drop in Midwest manufacturing activity. A cut in earnings for several investment banks by UBS also added to the selling. The Dow plunged to a closing loss of 315.79 points at 12,266.39. This week, the index rose three times, fell twice, had a net loss of 114.63 points. The NASDAQ Composite tumbled 60.09 points to 2,271.48 today and like the Dow, it too endured a rout of selling yesterday and today. For the week, it was down 31.87 points. Standard & Poor's 500 Index slid 37.05 today, ending at 1,330.63, the broadly based index down in three in of the last five sessions for a loss of 22.48 points on the week. In the bond market today, the 10-year note rose 24/32 to 99 27/32, putting the yield down to 3.52 percent.
Big board volume leader once again, Citigroup (C) on 34 1/2 million shares, down $1.30 in a very weak banking group. UBS had downgraded earnings reports on many of them.
SprintNextel (S) down another $0.98 after losing $0.86 yesterday when it reported a fourth quarter loss of a whopping $10.36 a share. Today, RBC Capital, Citigroup and Credit Suisse all lowered their price targets on Sprint stock.
General Electric (GE) $0.71 drop there.
Pfizer (PFE) off $0.27.
AT&T (T) fell $1.13.
And then Bank of America (BAC) in that weak group, down $1.68.
JPMorgan Chase (JPM) lost $1.79.
Motorola (MOT) dropping $0.43.
American Intl Group (AIG) down $3.29. Fourth quarter, the company lost $5.3 billion which is equal to $2.08 a share. It was due to huge credit derivative losses. Standard & Poor's today repeated a "sell" and of course, AIG undermined the financial sector to a great extent.
Wells Fargo & Co (WFC) off $1.33, was number 10 in big board volume.
Then General Motors (GM) off $1.22. The company may have to idle three plants due to the ongoing strike at a major supplier, namely American Axle.
Let's have a look at some of the other big Dow stocks that were hard hit today, all more than 2 points losses in ExxonMobil (XOM), Chevron (CVX), American Express (AXP), Caterpillar (CAT) and Boeing (BA).
RH Donnelley (RHD) which publishes the Yellow Pages, off another $2.25 after tumbling nearly $8.50 yesterday on a fourth quarter loss of $0.17 a share. Today Bear Stearns downgraded the stock from "out perform" to just "peer perform."
And then Gap (GPS) bucked the trend with a $0.72 gain. After the close yesterday, fourth quarter earnings came out at $0.35, up from $0.27 a year ago and today the company said it's going to boost its annual dividend from $0.32 to $0.34 a share and buy back up to $1 billion of its own stock.
Universal Health Services (UHS) up $2.37. The company owns acute hospitals. Fourth quarter earnings, $0.75, up from $0.63 last year and a 12 percent jump in revenues.
Then came Commscope (CTV) up $3.43. The company makes fiber optic cable products. Fourth quarter earnings jumped to $0.51 from $0.38 a year ago. Revenues up 17 percent.
FTI Consulting (FCN) had a good day, up $7.62. Fourth quarter earnings, $0.60, well above $0.42 a year ago. Revenues up 29 percent. The company's expanding its Asian and European operations.
Armstrong World (AWI) up $2.87. Fourth quarter earnings, $0.37, way up from $0.06 last year and the company set a special cash dividend of $4.50 a share.
On the downside, AbitibiBowater (ABH), the forest products company, down $4.28. Yesterday the company posted a fourth quarter loss of $5.09 a share. Today, Raymond James financial brokerage cut its price target from $14 to $12 and it's already well below that.
Apple (AAPL) topped the NASDAQ active list, down $4.89.
Google (GOOG) off $4.21.
Microsoft (MSFT) $0.73 drop.
Baidu.com (BIDU) fell $1.67.
Research in Motion (RIMM) losing $5.25.
Cisco Systems (CSCO) down $0.27.
$0.97 advance or drop in Dell Inc (DELL). Dell had yesterday of course reported a fourth quarter earnings of $0.31. That was a nickel below the Street estimate.
Intel (INTC) $0.52 drop.
And Gilead Sciences (GILD), the only one in the actives to buck the trend, up $1.86.
And First Solar (FSLR) down $0.11.
Elsewhere, Momenta Pharmaceuticals (MNTA) up $2.26 on hopes a generic blood thinner may soon get an FDA approval and today Bear Stearns upgraded it from "under perform" to "out perform."
And then lastly, Limelight Network (LLNW) down $1.69, lost 26 percent of its value. The company itself lost a patent case and must pay $45.5 million in damages for infringement.
Those are the stocks in the news tonight.
