NBR Transcripts-March 13, 2008
Thursday, March 13, 2008Oil Gushes Higher While The Dollar Drops Lower
SUSIE GHARIB: A record day for oil, gold and the U.S. dollar. In New York trading, oil closed over $110 a barrel for the first time, while gold soared above $1,000 an ounce, also a new milestone. Meanwhile, the U.S. dollar sank to a new low against the euro and also fell to its lowest level against the Japanese yen since 1995. Erika Miller looks at the outlook for the dollar and tells us why there are pros and cons to a weak greenback.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: We all know a dollar is worth 100 cents; now, it's also worth about 100 yen. That's the first time the greenback has fallen to that level against the Japanese currency in a dozen years. The U.S. dollar is also trading at all-time lows against the euro. Currency expert Rebecca Patterson says the dollar's decline has serious implications.
MILLER: Many experts predict the U.S. currency will continue to weaken near term, especially if the Fed cuts interest rates. If that happens, foreign exchange analyst Ashraf Laidi worries foreign central banks could move away from dollars as their primary reserve currency.
ASHRAF LAIDI, CHIEF FX ANALYST, CMC MARKETS US: In their forward looking purchases of currency reserves, they may actually be expected to temper their purchases of U.S. dollars, in favor of sterling, in favor of the euro and even in favor of gold.
MILLER: Last night on NIGHTLY BUSINESS REPORT, President Bush made his administration's position on the dollar clear.
GHARIB: Would you like a stronger dollar?
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I would, absolutely and there are certain things that we can do. We can send signals to the world that their capital is welcome into the United States.
MILLER: The big question is whether the U.S. will intervene in foreign exchange markets to prop up the dollar. Some experts say the U.S. currency's decline may soon become sharp enough to turn words into action.
PATTERSON: The question is, given the dollar's weakness today, the pace of that weakness, the contagion risk, do they take statement and change it and make it something stronger and I think we're getting to that point.
MILLER: Experts say intervention works best when it is a coordinated effort among the United States, Japan and European Union. Analysts say that topic could be discussed when the group of seven industrial nations meets in April. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Borrower Bail Out & Mortgage Lender Regulations
SUSIE GHARIB: The Bush administration is proposing stronger rules to oversee mortgage lenders. Treasury Secretary Henry Paulson announced a series of reforms today designed to prevent a repeat of the recent mortgage meltdown. The changes include tougher disclosure requirements for banks and Wall Street firms and a nationwide licensing system for mortgage brokers. The rules also call for improvements by credit rating agencies, which have been criticized for not doing their due diligence. Paulson says the new rules are designed to prevent future excesses.
HENRY PAULSON, TREASURY SECRETARY: The objective here is to get the balance right; regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.
GHARIB: Those in need may soon get help from lawmakers on Capitol Hill. The chairman of the Senate Banking Committee and his counterpart in the House are pushing an aggressive plan to help struggling borrowers. Senator Chris Dodd and Congressman Barney Frank say in the midst of an economic slowdown, now is the time to shore up the housing market. And, as Darren Gersh reports, they are proposing billions of dollars in new Federal loan guarantees to do it.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The proposals put forward by two influential members of Congress could help up to one million homeowners avoid losing their homes. Barney Frank, the chairman of the House Financial Services Committee, says it's time to aggressively use government loan guarantees, even if it means some borrowers who made mistakes get Federal help.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: If you insist on each one of those who made an imprudent decision getting the full measure of punishment for that, then the whole economy suffers.
GERSH: The voluntary plan would provide up to $300 billion in loan guarantees from the Federal Housing Administration. Lenders who agree to write down home loans to the current market value would receive a cash payment. Credit-worthy borrowers would be able to refinance a smaller loan. To prevent home flipping, the FHA would get a temporary second lien on the property, giving the government a portion of any increase in the property's value. Housing finance expert Alex Pollock says the program should avoid a deeper downward spiral in home prices, but stresses the program must remain temporary.
ALEX POLLOCK, HOUSING ANALYST, AMERICAN ENTERPRISE INSTITUTE: There should be money left to send back to the Treasury, if you do this right, with a small profit.
GERSH: Housing advocate John Taylor sees no need for a government guarantee when the private sector can write off bad loans now.
JOHN TAYLOR, CEO, NATIONAL COMMUNITY REINVESTMENT CORPORATION: Sell them at market rate, or what the mark to market, what the precise value of these mortgages are. That alone will cut a lot of these loans down by 30 percent.
GERSH: The Treasury has not ruled out the plan proposed today, but the Bush administration is reluctant to commit taxpayer dollars to bail out struggling homeowners. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
REBECCA PATTERSON, GLOBAL HEAD OF FOREIGN EXCHANGE, JPMORGAN PRIVATE BANK: What makes me nervous is that dollar weakness in recent days has started having a contagion effect to equity markets. So the weak dollar is actually starting to be the dog that wags the tail and the equity markets are the tail. So, to the degree the dollar pulls down stocks, it happens globally.
One on One with Robert Hormats, Vice Chairman of Goldman Sachs
SUSIE GHARIB: More analysis now on our top story, those new records for the dollar, oil and gold. Joining us now, Robert Hormats, vice chairman of Goldman Sachs. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: Hi Susie.
GHARIB: Let's first talk about the dollar. As you saw in our report, President Bush told me yesterday that he's in favor of a stronger dollar. Treasury Secretary Hank Paulson said today that he also wants a strong dollar, but the dollar keeps falling. Do you think that Bush administration really wants to strengthen the dollar? If so, what can they do?
HORMATS: Well, I think they are concerned that the dollar has dropped quite precipitously. They're concerned in part because it's inflationary and in part because it undermines prospectively the reserve currency role of the greenback, so that you will find central banks and indeed corporate treasurers in the future buying fewer dollars and diversifying their holdings to lots of other currencies. On the other hand, a lower dollar has helped along with growth abroad to improve the U.S. trade balance rather considerably. But I do think they're concerned that the dollar perhaps is going down too sharply.
GHARIB: That's what I wanted to ask you. Is there a point where the dollar is just too low because it's been on a steady decline for the last almost seven years?
HORMATS: There is a point. Whether we're there or we're close to it, there is a growing danger that if the drop continues at this rate it will, as I say, endanger the reserve currency role of the dollar. That's a very valuable thing for the United States to have. If foreign central banks lose confidence in the dollar and start diversifying out of dollars or add a lot more euros and pound sterling and Swiss franks and Australian dollars to the currency, it further undermines the global role of the dollar.
GHARIB: Let's move on to talk a little bit about oil. It hit a new high $110. Your firm Goldman Sachs is forecasting $200 a barrel over the next few years. What are the risks and dangers of these ever-high oil prices?
HORMATS: Well, of course, the major risk is that it takes a lot of money out of the pocketbooks of American consumers. American consumers at this point, if they have to pay more for gasoline at the pump and more for home heating oil, that means they have less money to spend on a lot of other things. We just saw, for instance, consumer purchases drop dramatically. That's in part because of a slower economy and in part because consumers simply don't have as much money to spend because oil and we should also add, food prices have taken a lot of money that they might have been spending on other things and forced them to devote it to those two essentials.
GHARIB: So you put the package together, high oil, high gold. You know, hitting $1,000 today and the weak dollar. What is the impact of this on the markets?
HORMATS: Well, the impact on the market is, first of all, that it pushes prices up, particularly the price of oil and food and other raw materials. That causes additional inflationary pressures. It sucks money out of the wallets of American consumers. I think this is the bad thing about it at this point.
GHARIB: Just to wrap it up. As you know, President Bush will be in New York speaking to Wall Street and business leaders including yourself. What does Wall Street need to hear from the president tomorrow?
HORMATS: I think Wall Street would like to hear from the president that the administration is going to continue to be proactive in addressing the problems that face the financial markets, not that they'll bail the markets out. I don't think Wall Street expects that. But I do think that Wall Street is concerned that if these, the housing market continues to drop dramatically without some degree or some additional degree of government support, that could push the economy into a much sharper downturn than is expected. I think they also want to hear support for some of these trade agreements. Wall Street basically likes open trade, so there are a number of things that Wall Street would like the president to take a lead on.
GHARIB: We'll see what he says. I'll see you there tomorrow.
HORMATS: I'll look forward to that. Thanks.
GHARIB: My guest tonight, Robert Hormats, chairman of Goldman Sachs International.
The Effect Of Rising Commodity Costs
PAUL KANGAS: As we mentioned, the price of everything from corn to crude oil is going through the roof, and everyone from food companies to consumers are paying the price. As Diane Eastabrook reports, economists see no end in sight to the higher costs that could take a bigger bite out of household budgets.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chicago's Alpha Baking Company makes the buns that accompany Burger King's whoppers and the bread served at many restaurants and school cafeterias. The company says, in the past year, the cost of wheat used in bread flour has tripled and the cost of soybean oil, used to coat baking pans, has more than doubled. This week, Alpha Baking was forced to raise its prices across the board for the third time in a year. Company President Lawrence Marcucci calls it an unprecedented move in the firm's 30-year history.
LAWRENCE MARCUCCI, PRESIDENT, ALPHA BAKING COMPANY: We've tried some consolidation to cut our route distribution costs, our fuel, et cetera, but it's just such a low margin business, you can't absorb those very long and not have to do something.
EASTABROOK: Growing worldwide demand for food and soaring production of the corn-based fuel ethanol are fanning the fires of commodity inflation. Since the beginning of the year, the Reuters-Jefferies index of commodity prices known at the CRB has climbed more than 15 percent. As a result, Conagra Foods says later this month, it will raise prices more than 5 percent on most of its products, which include the Healthy Choice and Chef Boyardee brands. The company raised prices a handful of times last year. While CEO Gary Rodkin thinks Conagra can maintain sales with some new products, he still has concerns.
GARY RODKIN, CEO, CONAGRA FOOD: We do believe that, clearly, as we go forward, if these cost increases don't abate, we will probably see some volume tradeoff as the prices go up. But I am very comfortable that our portfolio is positioned extremely well.
EASTABROOK: Dan Basse, president of forecasting firm Ag Resource Company, doesn't see any decline in commodity prices on the horizon, unless the U.S. government intervenes.
DAN BASSE, PRESIDENT, AGRESOURCE: There either has to be more acreage that are brought into production, or we're going to have to back off on our biofuel mandates because we just don't have enough food to go around.
EASTABROOK: In the meantime, Alpha Baking's Marcucci is monitoring grain prices more carefully and hoping his customers stick with him.
MARCUCCI: It's harder to make longer term commitments with customers, because we just, we don't know where the market it going.
EASTABROOK: Marcucci says he can't rule out the possibility of another price hike later this year, especially if commodity prices keep climbing throughout the spring and summer. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Commentary"-Don't Blame Canada
SUSIE GHARIB: In tonight's commentary, America's problems should not be blamed on Canada. Here's Chrystia Freeland, U.S. managing editor at "The Financial Times." CHRYSTIA FREELAND, US MANAGING EDITOR, FINANCIAL TIMES: Remember blame Canada, the "South Park" ditty about how America's neighbor to the north is responsible for all of this nation's ills? Part of the joke, of course, was that Canada was too marginal to the American discourse to be legitimately blamed, or credited, for much of anything. Against this cultural backdrop, the sudden emergence of Canada as a player in the U.S. presidential race is not something most pundits would have predicted.
And yet, in the to-and-fro between Senators Hillary Clinton and Barack Obama over NAFTA, that is exactly what happened. Although this particular dispute was about a specific trade deal, Canada really owes its 15 minutes of American fame to a broader national anxiety about globalization and technological change and their impact on the average U.S. worker. The hardship caused by these forces, which have hit men without a college education most brutally, has been exacerbated by the current U.S. economic slowdown. Federal Reserve out this month showed that, for the first time in five years, American households are getting poorer.
Thinner pocketbooks inevitably prompt people to look for simple solutions. But in real life, the fixes are probably complicated and long- term. To compete in the world economy, America needs a better educational system, healthcare reform and an overhaul of the nation's finances. It is a lot easier, especially on the campaign trail, to just point the finger across the border or to more distant culprits, like China. In an era of global economic interdependence, that could be a dangerous impulse. I'm Chrystia Freeland.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those retail sales numbers helped set a negative tone on Wall Street this morning. And so did those new lows in the dollar and new highs in oil futures. By 11:00 a.m., the Dow was down a hefty 212 points, with the NASDAQ off 37 points. The market stabilized during mid-day and then turned higher after Standard & Poor's rating unit predicted the major banks are more than halfway through an estimated $280 billion in write-downs. Financial stocks spearheaded a rally on the news and the market ended modestly higher. The Dow Industrial Average closed up 35 1/2 points exactly at 12,145.74. The NASDAQ Composite gained 19.74 to 2,263.61. Standard & Poor's 500 Index rose 6.71 ending at 1,315.48. In the bond market, the 10-year note lost 24/32 to 99 24/32, putting the yield at 3.53 percent.
New York exchange volume leader today, Ford Motor (F) on 37.3 million shares, stock down $0.31. Morgan Stanley widen its 2008 loss estimate from $0.15 a share to $0.40 a share and lower industry sales estimates by a half million vehicles to 15.4 million.
Citigroup (C) off $0.14.
GE (GE) up $0.29.
Bank of America (BAC) gained $0.11.
JPMorgan Chase (JPM) down a half a dollar.
Then we move along to Pfizer (PFE) with a $0.07 drop.
Bear Stearns (BSC) losing $4.58. It traded as low as $50.48 this morning. Reuters reported that hedge funds are nervous about entering long- term trade with the company and market scope Europe noted there are rumors resurfacing that Bear Stearns may have to file Chapter 11 bankruptcy. The company denies that.
Washington Mutual (WM) $0.49 gain there.
Wachovia (WS) $0.81 drop.
And then came General Motors (GM) off $0.62. Morgan Stanley forecast a 2008 loss for GM of $1.30 a share. That's down from its previous estimate of a profit of $1.30 a share.
Time Warner (TWX) edged down $0.25 on news that its AOL unit will acquire Bebo. That's a global social media network and the price, $850 million.
Humana (HUM) rebounding $4.10 from a $6.50 a share loss yesterday on the company's first quarter cut in earnings guidance. Today UBS financial upgraded it from "sell" to a "neutral" rating.
Cornell Cos (CRN) which is a builder of corrective facilities, fourth quarter earnings were up 14 percent from $0.33 last year to $0.37 this year and that was $0.06 above the Street estimate. The company sees earnings in the first quarter as much as $0.31. That would be $0.07 above the consensus.
Virgin Mobil USA (VM) losing 41 percent of its value. This stock went public at $15 you will recall in October. Fourth quarter earnings or I should say loss today, $0.28 a share and it sees flat 2008 revenues. Bear Stearns downgraded it from "peer perform" to "under perform." Merrill Lynch issued a "sell."
Genesco (GCO), the footwear company, up $1.71. Fourth quarter earnings, sharply lower, $0.19 versus $1.36 last year, but the company will buy back up to $100 million of its own stock.
Apple (AAPL) topped NASDAQ's most active, up $1.91.
Followed by Google (GOOG) gaining $2.83.
Research in Motion (RIMM) up $4.26.
Baidu.com (BIDU) was up, down $5.55.
Microsoft (MSFT) dropped $0.01, fifth in NASDAQ volume.
Yahoo! (YHOO) $0.95 drop there.
Cisco Systems (CSCO) off $0.19.
But Amgen (AMGN) moved up $2.19, even though an FDA panel decided to further restrict the company's anti-anemia Aranesp on safety concerns, but it didn't ban its use completely as some investors feared, hence the rise in the stock.
Intel (INTC) $0.16 gain.
First Solar (FSLR) up $1.41 a share.
Elsewhere, Take Two Interactive (TTWO) gained $0.73. Electronic Arts took its $26 a share takeover bid directly to Take Two shareholders. Management asked those shareholders to take no action for the moment.
And then Sigma Designs (SIGM) plunging $4.16. The company expects its chip customers like Motorola to cut back orders. RBC Capital and UBS financial cut their price targets on the stock.
And those are the stocks in the news tonight.
