NBR Transcripts-March 11, 2008
Tuesday, March 11, 2008The Federal Reserve's $200 B Injection
PAUL KANGAS: The Federal Reserve unleashed the bulls on Wall Street today. The Dow surged 416 points or over 3.5 percent, for its biggest one-day percentage gain in five years and the NASDAQ jumped 86 points or 4 percent. Stocks soared after the central bank moved to ease tight conditions in the credit market by offering to take mortgage backed assets that are hard to sell in exchange for easy-to-trade treasuries. As Darren Gersh reports, some hope the move will unleash or ease I should say the credit crunch brought on by plunging home prices.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street loved the size and global scope of the Federal Reserve's financial injection -- up to $200 billion. Investment advisor Hugh Johnson says traders believed the money would help break through the financial gridlock gripping credit markets.
HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS: The basic felling on Wall Street is that this is both an imaginative move by the Federal Reserve and one that is going to yield positive results. It's going to lead, hopefully, to an increase in bank lending. And, of course, for an economy that runs on money and credit, that's an extremely positive outcome.
GERSH: The rally began after the Fed announced early this morning that it was creating a new program to allow 20 of the nation's biggest banks to borrow U.S. Treasuries for up to 28 days. Those Treasuries are easy to trade, allowing banks quick access to cash. As collateral, the Fed would accept assets that investors are now afraid to hold, including mortgage- backed securities from Fannie Mae and Freddie Mac and other mortgage securities that are rated triple-A. Those securities have been hit hard by the collapse of the housing market. Economist Adam Posen says the Fed was careful to target this relief.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: Effectively, they are saying to banks, we know you've good stuff out there you can't turn over; we're going to let you turn it into temporary cash. Think of it as payday lending for the big banks.
GERSH: The Fed also tripled agreements with European central banks to make it easier for banks overseas to get access to dollars. Financial markets had also been expecting a 3/4 of a percentage point interest rate cut at the Fed's next meeting. Vince Reinhart is a former top staffer at the Fed. He says today's announcement of an aggressive credit injection means the Fed will probably cut just half a percentage point on March 18.
VINCENT REINHART, SR. FELLOW, AMERICAN ENTERPRISE INSTITUTE: These are ways to use its balance sheet aggressively, to deal with the financial market problems, without adjusting the policy rate, which has big macro- economic consequences.
GERSH: If credit market conditions begin to ease, Hugh Johnson hopes the economy will begin to recover, which would help make today more than just another in a long string of one-day rallies.
JOHNSON: I don't want to say we've seen the worst of the downside, but this is an important enough change or move by the Federal Reserve that it could lead to some stability over time in the equity markets.
GERSH: With today's announcement, the Federal Reserve has now committed close to half of its assets to easing the credit crunch. And it made clear today it could do substantially more, if needed. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Moody's Chairman and CEO Ray McDaniel Revamps Its Revenue Forecast
JEFF YASTINE: Moody's cut its 2008 earnings and revenue forecast today on the belief problems in the credit market will last longer than expected. It's the latest blow to the world's second largest credit rating firm, which along with its rivals, has come under fire for failing to warn investors sooner about the risks of the sub-prime related securities it rated. I spoke with Moody's Chairman and CEO Ray McDaniel this morning, and began by asking him if the company and its credit rating system failed investors when they needed it most.
RAYMOND McDANIEL, CHMN & CEO, MOODY'S; The rating system has a very long track record. It is proven to be highly predictive over long cycles, through different business cycles in all geographies around the world. It certainly does not mean that we have flawless foresight. And it is difficult to expect any prediction of the future to anticipate all contingencies, all potential eventualities, and make 100 percent correct predictions. This has been a difficult period and Moody's understands this has been a very difficult period for users of our ratings in certain categories of ratings.
YASTINE: Some would say what good is a rating system though if you can't trust it?
McDANIEL: Well, they're absolutely correct. They do need to be able to depend on our ratings. We can't have a system in which there are large numbers of ratings moving in large rating transition paths rapidly or that erodes confidence in the system. And if our performance that has -- has been shown in these troubled areas coming out of the U.S. housing sector is a signal of future performance, I think people are right to question their ability to rely on the ratings. That's not going to be the case, at least not at Moody's. We know that we have to restore some credibility in these areas. We have to demonstrate why there should be confidence in our ratings. We've already taken a number of actions to try and assure that that is going to be the case. And we are going to make sure that again the rating system deserves the confidence that has been placed in it historically. And that's going to take us some time.
YASTINE: The other criticism about the ratings agencies is that there is a fundamental conflict in that the ratings firms are getting paid to rate securities by the investment banks, which are then going out to sell those securities.
McDANIEL: The short answer to that is not that we don't have conflicts of interest. Of course we do. We have conflicts of interest that must be managed properly. And that oversight authorities or the marketplace can see we manage properly. It doesn't matter whether we are paid fees by issuers of securities or whether we are paid fees by investors in those securities. As long as we are paid by any party that has a financial stake in the outcome of our opinions, they are going to be motivated from time to time to try and persuade us that their point of view about our opinion is correct. And so I would not defend Moody's practices and processes on the basis that there are no potential conflicts of interest. There are. They must be managed properly. They must be managed transparently, so that there is the ability to judge whether we have -- have got the processes and practices in place that demonstrate a prudent professional, appropriate management of the rating system. And I think we do.
YASTINE: Ray McDaniel, Moody's, thanks.
McDANIEL: Thank you very much
"Of Mutual Interest"-Dan Wiener of Vanguard & Jim Lowell of "Fidelity Investor"
PAUL KANGAS: In tonight "Of Mutual Interest segment, a look at what is going on at two of the nation's largest mutual fund families, Vanguard and Fidelity. Joining us for that discussion, two men who follow those firms as outside observers, Dan Wiener, editor of the independent advisor for Vanguard investors and Jim Lowell, editor of a similar newsletter called "Fidelity Investor." Dan and Jim, welcome back to NIGHTLY BUSINESS REPORT.
DAN WIENER, EDITOR, INDEPENDENT ADVISER FOR VANGUARD INVESTORS: Thank you.
JIM LOWELL, EDITOR, FIDELITY INVESTOR: Good to be here.
KANGAS: Dan, when people think of Vanguard, they generally think of index funds like the Vanguard 500 which moves in lock step with stocks in the Standard & Poor's 500 Index. But I know that you have long favored some of Vanguard's managed funds. Have those faired better in this bear market?
WIENER: They sure have. Particularly the health care fund which is a great buffer and the portfolio is down, a lot of their managed funds are doing better.
KANGAS: OK, Jim, unlike Vanguard, Fidelity's reputation has been built on the skill of its individual managers. Have your favorite Fidelity managers been able to beat the market lately?
LOWELL: They absolutely have. They trounced it last year, some getting three to four times of the returns of their market benchmarks. This year they are doing what we pay active managers to do, namely loose less when the market is in a downdraft.
KANGAS: Jim, a few months ago Fidelity was heavily promoting the reopening of its former flagship fund Fidelity Magellan which has been closed to new investors for several years. How did the timing of that move turn out?
LOWELL: It turned out fairly well for new investors. We have been calling it for it to be reopened ever since the new manager Harry Lang took the helm back in October of 2005. Since then he has been able to dramatically outperform the S&P 500 for the first time in the last decade of Magellan's return performance history and lately he is been doing what I expect him to do. He's a global growth, go anywhere stock picker; he's delivering the goods.
KANGAS: There has just been a changing of the guard at the top of Vanguard, as long time CEO John Brennan has been replaced by William McNabb. Dan, do you expect that to lead to any big changes in the company?
WIENER: I don't expect big changes. I think that McNabb is going to continue on the path that Brennan set. Brennan more than quadrupled assets under management and he was behind the big move into exchange-traded funds which has been very successful.
KANGAS: Now Jim, what about at Fidelity? There have been some major changes in the executive ranks there as well.
LOWELL: No question, June of last year, July of last year, we saw the return to the fold of Roger Lawson. He was instrumental in Fidelity's heyday of basically broadcasting to the world that he wrote the book on growth fund investing and selling to the product, rather than to the platform. Since he has taken over, we have seen significant management as well as manager changes, all for the good as far as I'm concerned.
KANGAS: OK. Now Dan and Jim, we should note that your work also involves money management. So Dan, what Vanguard funds do you like right now?
WIENER: Well, I'm a big believer in the health care fund at Vanguard. I also think that the managers at Prime Cap Corp., which is a terrific prime cap management fund is one that you want to invest in. And obviously I still think you ought to put your money in emerging markets. They've come down a bit. All have outperformed.
KANGAS: OK, now Jim over at Fidelity, what funds do you like there?
LOWELL: I pick four, equal measures for growth fund investor, mega-cap stock, leveraged company stock, international small cap opportunities and strategic real return. Those four funds I think will net you twice the return of the S&P 500 over the next 10 years.
KANGAS: OK. Dan and Jim, do you own any of the funds you are recommending or have other disclosure to make?
WIENER: We absolutely own all of them. In fact most of our net worth is invested in these funds.
KANGAS: And.
LOWELL: I would echo that sentiment.
KANGAS: That good. That is a vote of confidence from both of you.
WIENER?: Eat our own cooking.
KANGAS: There you go. Dan and Jim, as always it is great to have both of you here and we look forward to seeing you again.
WIENER?: Thank you Paul.
KANGAS: My guest, Dan Wiener of the independent advisor for Vanguard Investors and Jim Lowell of "Fidelity Investor."
Paul Kangas' Stocks in the News
PAUL KANGAS: On Wall Street, those record oil prices were far overshadowed by the Fed's aggressive infusion of liquidity into the banking system. Stocks skyrocketed at the opening, with the Dow moving up 275 points and the NASDAQ up 40 points in just the first half hour of trading. There was a mild mid-day pullback, but stocks came on strong again thanks to buyers who feared they might miss a major market upturn. Frantic short covering added to the gains. At the final bell, the Dow Industrial Average posted a huge gain of 416.66 points at 12,156.81. The NASDAQ Composite soared 86.42 ending at 2,255.76, while the Standard & Poor's 500 Index jumped 47.28 to close at 1,320.65. In the bond market, the 10-year note plummeted 1 2/32 to 99 7/32, lifting the yield to 3.59 percent.
Once again topping the active list today on 41.2 million shares, Citigroup (C) moving up $1.80. The big banks like Citi were very strong today on the Fed's addition of liquidity. SprintNextel (S) dropped $0.55.
Then General Electric (GE) had a good day, up $1.70.
Bank of America (BAC) gained $2.41 on the strong banking sector.
Followed by JPMorgan Chase (JPM) up $2.36 a share.
Washington Mutual (WM) up $1.84 on speculation the company may get a capital infusion from Goldman Sachs or perhaps even from Warren Buffett.
Wells Fargo (WFC), another strong bank, up nearly $3.
Well over a $3 in Wachovia (WS).
Ford (F) up $0.30.
And then tenth in volume was Pfizer (PFE) with a $0.57 gain.
Wellpoint (WLP), the health benefits company, plunging $18.66 after the company cut its first quarter earnings estimate from $1.44 down to $1.26 at best. The company cited higher medical costs and lower than expected insured enrollments and the news from Wellpoint had a very negative impact on the whole sector of health benefits.
Let's have a look at some of the majors, Aetna (AET), Coventry Health Care (CVM), Health-Net (HNT), Humana (HUM) all major losers on the day.
Unitedhealth Group (UNH) off $6.83.
One of the groups that was strong was mortgage-related stocks Annaly Capital Management (NLY) up $2.50 on that liquidity addition.
And then we Capstead Mortgage (CMO), Fannie Mae (FNM), Freddie Mac (FRE) all better than $2 gainers.
And Thornburg Mortgage (TMA) up only $0.85, but that turned out to be a 120 percent gain from where it was. This quote is from compositing trading incidentally.
Systemax (SYX) up $2.84. The company had fourth quarter earnings of $0.64, almost triple last year's $0.22 on a 19 percent jump in revenues. The company set a special a $1 a share cash dividend. The company sells computers and related products.
Duff & Phelps Co (DUF) up $4.34. It's an investment banking services company and it reported a fourth quarter loss of $0.49 when the Street was looking for earnings of $0.20, but revenues were better than expected at $92 million and earnings guidance for the future was well above Street estimates. You might recall, Duff & Phelps went public in September at a price of $16 a share.
Piper Jaffray Cos (PJC) did well, up $6.05 on optimism that its Asian operations will grow 20 percent annually over the next few years, thanks to more Chinese initial public offerings.
Then we see Spartech (SEH) which makes thermal plastic sheeting, came in with a first quarter loss of $0.12 versus the Street estimate for earnings of $0.10 to $0.15 a share, no wonder the stock was down a bit.
Standard Motor Products (SMP) fell $1.27. A fourth quarter loss of $0.19 versus earnings of $0.14 last year. Standard & Poor's downgraded it from "buy" to a "hold."
Topping the NASDAQ active list, Apple (AAPL) up $7.66.
And Google (GOOG) up $26.22, you heard the news, it now owns Doubleclick.
Microsoft (MSFT), look at that gain, up $1.23, best move on the upside in a long time.
Research in Motion (RIMM) up $7.15.
Baidu.com (BIDU) up just over $19 a share.
Cisco (CSCO) gained $1.16.
$1.08 rise in Intel (INTC), nice move there.
First Solar (FSLR) up $21.54.
Qualcomm (QCOM) up $0.25.
Similar gain in Oracle (ORCL), tenth in volume.
Global Sources (GSOL), this is a company that has online marketing systems. Citigroup upgraded it from "hold" to "buy" after the company reported fourth quarter earnings of $0.26, up from $0.20 last year.
And a major loser was Superior Well Services (SWSI) plunging $5.61. Fourth quarter earnings, $0.30, down from $0.49 last year and $0.22 below the Wall Street consensus estimate.
And those are our stocks in the news tonight.
