NBR Complete Transcripts-March 6. 2008
Thursday, March 06, 2008The Dow's Triple Digit Credit Crisis Dive
SUSIE GHARIB: Stocks on Wall Street fell sharply today on new concerns about the health of the mortgage market. The Dow tumbled 214 points and the NASDAQ lost 52 after news late last night that mortgage lender Thornburg Mortgage failed to meet a margin call. Thornburg's stock plummeted more than 50 percent today and quickly led to a sell-off in other mortgage-related shares, including Fannie Mae, which dropped more than 10 percent. Credit strategist Greg Peters at Morgan Stanley says these latest credit jitters are moving away from the sub-prime market and toward prime loans, creating more anxiety in the financial markets.
GREGORY PETERS, CHIEF CREDIT STRATEGIST, MORGAN STANLEY: There's a clear lack of confidence. There's no confidence in ratings. There's no confidence in banks and the dealer community. There's no confidence in hedge funds. And so no one in the market trusts each other. At the same time, what you're seeing is just continued losses out of the mortgage area.
GHARIB: Peters also says that the credit crisis will be more severe and last longer than many expect. He adds that Federal Reserve interest rate cuts are not enough to turn the situation around.
The Impact of Interest Rates in the E.U. on the U.S.
PAUL KANGAS: There was much ado about interest rates across the pond today in Europe and United Kingdom. The European Central Bank kept short-term rates at a six-year high and the Bank of England also kept its key rate unchanged. As Suzanne Pratt reports, experts say the ECB's reluctance to cut rates is having ramifications for the U.S. economy.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is an old saying on Wall Street -- when the U.S. sneezes, the world catches cold. Some experts now say, when it comes to the effects of monetary policy, the germs may be flowing both ways across the Atlantic. Today's interest rate decision by the European Central Bank comes at a bad time for America. Not only is the dollar at an all-time low against the euro, which experts blame on global interest rate differentials, but the U.S. is also on the brink of recession. Is it the responsibility of European central bankers to prop up the U.S. economy? Experts say of course not. But economist Bob Brusca says the ECB's reluctance to cut rates is exacerbating economic conditions.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: That is definitely contributing to the strength in the euro or you could call it the weakness in the dollar and that's contributing to higher oil and higher gold prices and higher commodity prices. And they're part of the problem; they are not part of the solution right now.
PRATT: The U.S. Federal funds rate stands at 3 percent, while the ECB's benchmark rate remains at 4 percent and the Bank of England's is 5.25 percent. ECB President Jean Claude Trichet (ph) today quashed investors hopes for a cut anytime soon, saying quote, the firm anchoring of inflationary expectations is of the highest priority. To understand why the ECB is not following the Fed, experts say it's important to look at monetary policy guidelines. In the U.S., the Federal Reserve has a dual mandate of encouraging growth and fighting inflation. By contrast, the ECB's mandate is to maintain price stability above everything else. Currently, euro zone inflation is running at an annual rate of 3.2 percent, its fastest pace since the euro was launched nearly a decade ago. Economist Steve Ricchiuto says, if the ECB doesn't get on board soon with rates, commodity prices will continue to soar.
STEVEN RICCHIUTO, FOREIGN EXCHANGE STRATEGIST, HANDELSBANKEN CAPITAL MARKETS: Those commodity prices are then driving up domestic inflation, causing the Federal Reserve to be reluctant in its interest rate decisions and causing the Federal Reserve to warn the markets that, if inflation continues to move higher that they will have to reverse the stimulus at some point in the not-too-distant future and reverse it almost as quickly as they put it in. And that's a big problem for the economy and for the Fed over time.
PRATT: Nevertheless, some experts believe the ECB will follow the Fed on rates as early as this summer -- first, to stop the euro's alarming rise and second, to halt the spread of recession across the Atlantic. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Interest Rates Vs. Mortgage Rates Adds Up To More Frustration
SUSIE GHARIB: A new report today shows American homeowners now have the lowest share of equity in their homes on record. The Federal Reserve says homeowner equity dipped below 50 percent in the second quarter of 2007. That's the first time this has happened since the Fed started tracking the data back in 1945. The total value of equity has also fallen for a third straight quarter. Economist Jack Albertine says declining equity will cut into consumers' appetite for spending.
JACK ALBERTINE, MANAGING DIR., ALBERTINE ENTERPRISES: Consumers were using equity in their houses to buy durable goods -- automobiles, appliances and other things. Now, they're not going to have the resources to do it, so it's another blow to the consumer.
GHARIB: Albertine says that consumer spending could be affected for the next year to 18 months, but he expects spending to return to normal once homeowners' equities begin to rise.
KANGAS: As home equity is going down, the number of Americans at risk of losing their homes is going up. The Mortgage Bankers Association reports the number of homes in foreclosure and homes entering the process hit their highest levels ever late last year. The rate of loans heading into foreclosure jumped to 0.83 percent. That's way up from 0.54 percent a year earlier. The spike in foreclosure starts now spans all loan types, as both prime and sub-prime loans saw fourth quarter increases. California and Florida continue to represent a disproportionate share of the country's foreclosure starts.
GHARIB: Federal Reserve has been cutting interest rates, but the benefits haven't necessarily trickled down to everyone. Interest rates on 30-year fixed rate mortgages have been rising in recent weeks after declining in January. As Diane Eastabrook reports, that's frustrating homeowners hoping to refinance.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In late 2006, Bill Bishop closed on a two-bedroom condominium in this high rise just outside of Chicago. At the time, he got a 30-year fixed rate mortgage with a 6 percent interest rate. When rates on similar loans began falling below 5.5 percent this January, Bishop hoped to refinance his mortgage. But he was too late.
BILL BISHOP, HOMEOWNER: They've done nothing but up since that point in time, but with an oncoming potential recession, that should help drive rates down in the long term.
EASTABROOK: In early January, interest rates on 30-year fixed rate mortgages began falling. That prompted a flood of refinancing and an up- tick in the Mortgage Bankers Association refinance index. But since late January, interest rates on those loans reversed course, slowing refi activity to a trickle. So, what happened?
Economists say the 10-year Treasury bond is part of the reason. Long- term mortgage rates are tied to those bonds and interest rates on those bonds have been rising. Risk premiums are another reason. Ibbotson associates chief economist Michele Gambera many lenders are adding risk premiums to mortgages because of concern over the U.S. housing market.
MICHELE GAMBERA, CHIEF ECONOMIST, IBBOTSON ASSOCIATES: Delinquencies have been going up rather steadily for the last four or five quarters and therefore, that might be the fact that the banks are trying to jack up the spread a little bit to make sure that they might be compensated for any delinquencies that might occur.
EASTABROOK: Russ Haraus, risk management chairman for the Illinois Mortgage Bankers Association, thinks refi activity will be stuck in neutral as long as interest rates hover around 6 percent.
RUSS HARAUS, RISK MANAGEMENT CHMN., IMBA: The consumer is very savvy. Our consumer is very keenly aware of interest rates and when the interest the rate goes above 6.25, 6.5, you start to see a pull back from the market and that is what you are seeing now.
EASTABROOK: Some economists think interest rates on 30-year fixed rate mortgages will continue to be volatile throughout the spring, especially if mortgage delinquencies keep rising, putting additional pressure on lender balance sheets. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
KANGAS: Many people looking to buy high cost homes are now eligible for mortgages backed by Fannie Mae and Freddie Mac. The mortgage giants will offer loans of up to $729,000 for single family homes in 220 cities. The increased limits are part of the economic stimulus plan signed into law last month and are temporary, lasting through the end of this year. The previous loan limit was $417,000. The move is aimed at boosting the strapped mortgage market.
"Economic Choices 2008"-Presidential Hopeful Policies
SUSIE GHARIB: Voters may not know who the Democrats will nominate for president until the end of August, but investors won't have to wait that long to understand what the election could mean for their stock portfolios. When analysts pour over policy papers and positions of the three main presidential contenders, they find those positions may have similar impacts on some key economic sectors. Darren Gersh reports as we continue our series, "Economic Choices '08".
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Senators McCain, Obama and Clinton may disagree on issues like free trade and the war in Iraq, but on many other issues, Washington strategist Stuart Sweet says the three agree more often than you might think.
STUART SWEET, PRESIDENT, CAPITAL ANALYSTS NETWORK: In these cases, it really doesn't matter who the next occupant of the White House is. They are going to be more aggressive towards passing initiatives which are hostile to seven or eight industries.
GERSH: Industries like electric utilities. All three candidates are pushing for caps on the nation's greenhouse gas emissions, 40 percent of which, Sweet says, come from coal-fired electric plants. Sweet thinks oil companies may lose tax breaks, too. Pharmaceutical companies are headed for a tough time. McCain called them bad guys, while Clinton and Obama are pushing for big Medicare savings from drug companies. All three candidates want to see more competition for health insurance companies. Cable television prices are rising faster than inflation and Democrats are skeptical about industry pricing power. Sweet says McCain could be even tougher than Clinton and Obama.
SWEET: I would worry about the cable industry. Senator McCain wants to impose what he calls a la carte pricing on the industry. Also wants the telephone companies to become aggressive participants in delivering cable services.
GERSH: The impact on defense is a harder call. Democrats are likely to shift money from procurement to personnel, but defense analyst Brett Lambert says McCain might also cut some big weapons programs.
BRETT LAMBERT, DEFENSE ANALYST, DENSMORE GROUP: Well, Senator McCain knows the industry quite well and also knows its foibles and knows the waste that has occurred in the industry. So, if I were running a poor program, he's the one I'd be afraid of.
GERSH: The Bush tax cuts expire in 2010 and the next Congress is expected to have larger Democratic majorities. Political economist Tom Gallagher says that means the next president will likely raise taxes, though they may go up less under McCain.
TOM GALLAGHER, POLITICAL ECONOMIST, INTERNATIONAL STRATEGY & INVESTMENT: If it's President McCain and a Democratic Congress, if he just says I'm not going to sign any bill that raises taxes, then in 2011, you get a significant increase in taxes. So, as you play through that process, it would make sense for him to try to cut a deal to prevent tax increases of that magnitude.
GERSH: So while the politics of this presidential campaign may not be sorted out until after the Democratic convention, many of the most important investment impacts are already fairly clear. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-The Key To Keeping Key Employees
SUSIE GHARIB: In tonight's commentary, the importance of retaining key employees. Here's Alfred Edmond, Jr., senior vice president and editor in chief of "Black Enterprise."
ALFRED EDMOND JR., SR. VP, EDITOR-IN-CHIEF, BLACK ENTERPRISE: It is easy for many employers to dismiss their inability to retain valuable employees as inevitable, particularly in an environment of slow economic growth and stagnant wages. Yet high turnover is, in fact, avoidable. Employees, especially your stars, can be retained and it may not even require throwing additional compensation their way. If you want to keep talent from looking for greener pastures, focus on their managers. Surveys of workers show that immediate supervisors, more than nearly every other reason, as why people stay and thrive in an organization or become disenchanted and leave.
Identify, empower and reward those managers who make their direct reports feel valued and fully engaged in the mission of the company, or they may think about leaving themselves. And if you can't change the behaviors of those who seem to be constantly driving away talent, because they are perceived by workers as abusive, disengaged, overly critical, biased, ethically challenged, etcetera, get rid of them. All it takes is one bad supervisor to lose dozens of good employees. The price of replacing that person pales against the cost of losing top talent, along with their training, contacts and trade secrets, the morale of the workers they leave behind your company's reputation, making it even more difficult and costly to bring in new talent to replace them. I'm Alfred Edmond, Jr.
Paul Kangas' Stocks in the News
PAUL KANGAS: Sellers dominated Wall Street in early trading amid news of those record high home foreclosures, margin calls and generally tepid retail sales. By late morning, the Dow had tumbled 140 points, with the NASDAQ off 17 points. The market remained sharply lower as the day wore on, with few buyers willing to step in ahead of tomorrow's February employment report. Adding to the negative tone, another new high for crude. Oil prices closed at a record $105.47 a barrel. Stocks also broke below several key support levels and then went on to close at their lows of the day. The Dow Industrial Average down 214.60 points at 12,040.39. The NASDAQ Composite plunged 52.31 ending at 2,220.50. Standard & Poor's 500 Index tumbled 29.36 ending at 1,304.34. Over in the bond market, the 10- year note rose 24/32 to 99 8/32, putting the yield at 3.59 percent.
Big board volume leader on 25 3/4 million shares, Citigroup (C), that's down $0.98 and I believe that's about a 10-year low for the stock. After the close, the company said it's going to scale back its mortgage operations to free up capital. The company has a $200 billion loan portfolio and that will be cut by about 20 percent over the next year. Then came Annaly Capital Mortgage (NLY) down $3.50 a share. Failure by Thornburg Mortgage and Dutch-based Carlisle Capital to meet margin calls set off a wave of selling in the real estate investment trust. Let's have a look at more of them.
Anworth Mortgage (ANH), Deerfield Capital (DER), Capstead Mortgage (CMO) and MFA Mortgage (MFA) all major percentage losers on the day.
Back to the active list, General Electric (GE) down $0.81.
SprintNextel (S) was a $0.20 loser.
Bank of America (BAC) the weak sector of banking, down $1.03.
And we see more weak banks, JPMorgan Chase (JPM) off $1.32.
Merrill Lynch (MER) down $3.50. The company is discontinuing mortgage originations at its First Franklin unit in the U.S. and may sell its mortgage servicing unit.
Fannie Mae (FNM) down $2.61. Corporate agency debt obligations issued by the company fell relative to U.S. government securities. Same thing happened to Freddie Mac (FRE) today and that stock fell $1.50 a share.
Wachovia (WS) down $1.29.
And then Pfizer (PFE) with a $0.45 loss, topping off the 10 actives.
Thornburg Mortgage (TMA), the big percentage losers of the day, off nearly 51 1/2 percent after the company could not meet a $28 million margin call and so now the company's liquidity is in question. The stock really hit.
Wal-Mart Stores (WMT) up $0.39. As you heard, February same store sales at Wal-Mart up 2.6 percent and the company is boosting its annual dividend by 8 percent to $0.95 a share.
Some more retailers, Nordstrom (JWN) down $2.34. February same store sales there down 5.8 percent. The Street was only looking for about a 3 1/2 percent drop.
Longs Drug Store (LDG) down $6.81. Fourth quarter earnings, $0.97, up from $0.84, but that was only in line with estimates and the company's 2009 earnings guidance of $3.12 a share at best, $0.02 below the Street estimate.
A good gainer today, Steinway Music (LVB) up $2.47. Fourth quarter adjusted earnings, $0.91, $0.17 better than the Street was expecting and way up from $0.13 a year ago.
National Semiconductor (NSM) closed down $0.51, but after the close, the company announced fourth quarter earnings, $0.28, up from last year's $0.22, a nickel better than the Street was expecting and that stock after the close was as high as $17.63.
NASDAQ's most active, Apple (AAPL) down $3.56.
Google (GOOG) got hit, $15 despite optimism the company will get European Union approval to take over Doubleclick Corp.
Microsoft (MSFT) a $0.55 loss there.
Research in Motion (RIMM) down $3.81.
What's this, a gainer? Baidu.com (BIDU) up $0.20 a share, fifth in volume.
Cisco Systems (CSCO) down $0.33.
Oracle (ORCL) bucked the trend, up $0.43.
Then Intel (INTC) $0.33 loss.
Yahoo! (YHOO) a $0.03 gain.
And First Solar (FSLR) down $4.42 a share.
Comtech Telecommunications (CMTL) up $4.51. Second quarter earnings jumped to $0.91 from $0.68 a year ago and the company boosted its 2008 revenue estimate.
On the downside, Omrix Biopharmaceuticals (OMRI) plunging $10.96. Fourth quarter earnings came in at $0.19, way down from $0.41 a year ago and $0.07 below the Street estimate.
And those are the stocks in the news tonight.
