NBR Transcripts-March 24, 2008
Monday, March 24, 2008JPMorgan Ups the Ante For Bear Stearns
SUSIE GHARIB: Shares of Bear Stearns surged 76 percent today, as JPMorgan Chase sweetened its bid for the debilitated investment firm. The revised offer now stands at $10 a share. In return, Bear Stearns has agreed to sell JPMorgan newly issued shares, giving it a 39.5 percent stake. New York bureau chief Scott Gurvey takes a closer look at the new terms of the takeover.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some see it as a windfall for Bear Stearns shareholders. Others say JPMorgan's decision to quintuple its offering price just makes the fire sale a little less hot. JPMorgan is now offering $10 a share for Bear, up from its $2 offer of a week ago. The deal now appears to value Bear at $1.2 billion, up from the original offer of $236 million. JPMorgan CEO Jamie Dimon spent much of last week under attack from Bear shareholders and employees angry at the price. JPMorgan says the former head of Vanguard, Jack Bogle, must have concluded the deal would not be approved.
JACK BOGLE, FORMER CEO, VANGUARD GROUP: I imagine they concluded, because Jamie Dimon is a very tough negotiator, he didn't have any recourse but to raise his offer. You know, they are in the process of needing to get a majority shareholder vote and so he must have figured that it was in his interest to sweeten up that offer a good bit.
GURVEY: The Federal Reserve will still assume control of $30 billion in Bear assets, but JPMorgan will be on the hook for the first $1 billion of any losses. Market watchers say the sweetened deal reduces uncertainty about Bear. Scott Sprinzen of Standard & Poor's says the Fed's decision to open the discount window to investment banks should relieve pressure on the entire sector.
SCOTT SPRINZEN, CREDIT ANALYST, STANDARD AND POOR'S: It's a positive, no question. It affords a safety net to these companies that didn't exist before. But it's not an unlimited program. There are only certain asset types that can be borrowed against under the terms of the program and, also, it's not a program that the Fed has said it's committed to indefinitely.
GURVEY: But not every investor is satisfied. Jack Bogle sees a double standard.
BOGLE: It is to me remarkable that all these capitalists who say just keep the government out of the way and we'll do fine are the first ones in line when they're coming to search for help -- you know, go to the government whenever you get in trouble. And so I'm deeply troubled by the conflict between those two kind of polar positions.
GURVEY: Bogle says it is time to revive the Glass-Steagall act of 1933, which separated commercial banks from investment banks. That law was repealed in 1999. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Tobias Levkovich, Chief U.S. Strategist for Citigroup
SUSIE GHARIB: Our guest tonight says it's too early for the all clear signal in the markets, but he's forecasting that stocks will be up by the end of 2008. Joining us now, Tobias Levkovich, chief U.S. strategist for Citigroup. Hi, Tobias.
TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: Hi, Susie, how are you?
GHARIB: Good, thank you. Stocks were up. The dollar was up, investors feeling more hopeful about the markets. What's your outlook for the next few months?
LEVKOVICH: We still see the market being up about 5 percent by the end of the year, but it could still be a bumpy ride. We may have put in a bottom at 1270 on the S&P, tested it a few times. But one of the big problems still is that earnings estimates are too high going into the second half of the year. That's going to have to be trimmed and I think we're still going to see some volatility.
GHARIB: Everybody is talking about bargains in the stock market, beaten down stocks but there's also a lot of fear that there's more bad news coming. Is this a good time to put new money to work into the markets or is it too early?
LEVKOVICH: I still think you want to be putting money in. You don't put all your money in at anyone point in time anyway. I think you kind of average your way in. We still, as is said, we still think the markets will be up. So if the market pulls back, put a little bit more in and I think some of the very beaten up areas, financials, consumer discretionary really offer some of the greatest value. I would be very loath to chase some of these commodity oriented areas which have become very overweight in a lot of portfolios, heavily owned and do have some risk. For example, the dollar strengthening having some impact on the currency, on the commodity, sorry.
GHARIB: But isn't there risk also in financials that I know that you have been buying up? I know financials were up today on that news about Bear Stearns. But isn't this also a risky sector?
LEVKOVICH: Well, you know, up don't get reward if you don't take some risk. And I think the more important issue is when you think about stocks, what you think about is fundamentals but you also think about valuation and sentiment. And philosophically I would really like to buy stocks that have very attractive valuations, awful sentiment and very beaten-down expectations. That fits financials so it's not that people aren't worried about some of the issues, sub-prime, CDOs and things like that. That is priced in to a great degree. It isn't priced in in any kind of risk right now in some of the commodity areas. And I think that's where you really have to be worried.
GHARIB: There's a lot of speculation about the health of many of the big financial institutions, speculation about the future of Lehman, about Merrill Lynch, about your firm, Citigroup. Do you expect more consolidation in the financial sector?
LEVKOVICH: It's a really good question. It's possible clearly. I don't think anybody would have thought that one of the big transactions that occurred in the past couple of weeks. I think it's more important that we're going to see a lot of companies fall away and we have already. Mortgage brokers have disappeared. We've seen some of the kind of hedge funds that took incredible risk. There you're going see more consolidation I think in the hedge fund community, but it's hard to tell what deals might come down the road. I do think investors understand and particularly the Fed understands that there's real risk in these areas today. We need to keep the capital markets going if we want to have the economy going. We've seen eight financial crises in the past 20-odd years. Only two of them thus far have entered into recessions. We think this current one's going to also enter recession. When you start having real problems with credit markets, businesses can't get money and as a result start laying off people, start cutting production, start cutting orders. I think the Fed understand that risk. So they're responding.
GHARIB: Before we end this interview I want to ask you real quickly about a comment you made about earnings. We're going to get a lot of quarterly earnings coming out very soon. What impact are those quarterly reports going to have on the markets and what CEOs say about the outlook?
LEVKOVICH: Well, I hate to say it this way. I think CEOs don't necessarily have the great outlook. I think the orders are going to be more important than the earnings. We're still probably a quarter away before they really start to see the impact of tighter credit on their business conditions. So I think they're still going to be pretty robust. I've been to two Citi conferences in the last two weeks. They still think business is good. I'm very worried about them kind of getting a rude awakening over the next few months.
GHARIB: Tobias, thank you very much for your insights. Appreciate it.
LEVKOVICH: You're welcome.
GHARIB: My guest tonight, Tobias Levkovich, chief U.S. strategist for Citigroup.
Comparing Today's Credit Crisis to Yesterday's S&L Crisis
PAUL KANGAS: This may sound familiar. George Bush was in the White House, a real estate boom had gone bust and critics wondered why regulators hadn't stepped in earlier. Those snapshots from the savings and loan crisis of the 1980s are strikingly similar to the financial situation the nation is coping with now. So is it a case of deja vu? Stephanie Dhue takes a look.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bad real estate loans, misguided regulation and fluctuating interest rates sent over a thousand savings and loans into bankruptcy from the mid-80s to the early 90s. The boom in real estate then went bust. Debbie Rosenstein sold new homes back then and is still in the business.
DEBORAH ROSENSTEIN, VP, THE CHRISTOPHER COMPANIES: You have to know the process, and that's the hardest thing.
DHUE: She says the current slowdown feels as painful as the one following the S&L crisis. But what's different now is that banks and home builders are working together.
ROSENSTEIN: Last time it was very much builders and lenders at odds and this time it's not like that at all. Lenders are truly trying to work with the builders in getting them through the downturn.
DHUE: There were other key differences. S&L losses were regionally concentrated, whereas today's losses are spread around the globe. S&L's also held deposits that were explicitly guaranteed by the Federal government. Former Fed Governor Lyle Gramley says the leveraging of assets and falling home prices make the current financial situation more complex.
LYLE GRAMLEY, SR. ECONOMIC ADVISOR, STANFORD GROUP: One had a pretty good idea of what the value of the S&L assets were, so one could get a decent feel of the dimensions of the problem. We were not looking at that time at a collapse in home prices such as we are now.
DHUE: Regulatory changes and industry consolidation followed the S&L crisis. In the wake of the current financial situation, former Fed Governor Susan Phillips expects mortgage brokers to face new regulation, including licensing standards.
SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: There will be public relations efforts to make sure that people only deal with licensed brokers, so they will have some standards. There will be increased disclosure and they won't be doing no doc, low doc loans in the future.
DHUE: Eventually, U.S. taxpayers wound up footing the bill to bail out S&L depositors. Gramley says additional taxpayer money will be needed to help solve the current financial crisis.
GRAMLEY: The problems are the same. You've got to put in some taxpayers' money and my own feeling is that the sooner we go down that direction, the cheaper the bill will be.
DHUE: The savings and loan debacle cost taxpayers an estimated $200 billion. Observers say overall, the cost of the current crisis is likely to be much greater, but the burden for taxpayers may be smaller. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
SUSIE GHARIB: There are 137 days before the summer Olympics get under way. The Olympic torch was lit in Greece this morning for the start of its 85,000-mile journey to Beijing. Half a million visitors are expected to travel there for the Olympic games. With revenue from Beijing's tourism industry already growing an annual 7 percent, new hotels are entering the market and preparing for a boom in visitors. Shannon van Sant has details.
SHANNON VAN SANT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Li Zixiang is a wedding planner. On this special day, he's planning his own and telling his soon-to-be wife to hurry up. He had to teach his friends how to perform in a western ceremony. But he says the preparation was worth it.
LI ZIXIANG, GROOM: The western style is simple, stylish, elegant. That's what we wanted.
VAN SANT: Inspired by weddings they had attended in Europe, Li and his wife Wang Xiao Fang decided to forgo Chinese tradition and get married here, in the chapel of Beijing's new Ritz Carlton -- the second Ritz Carlton hotel in the city. The Ritz is one of many hotels to open its doors in the months leading up to this summer's Olympics. During its bid for the games, Beijing promised 800 hotels would meet government standards. A hundred are still under construction or renovation. The Olympics begin August 8 and during the games, some hotels have hiked room prices up to six times their normal rates. Many are asking for minimum two week stays. While the high prices and Olympic hoopla could deter some visitors, hotel managers like the Ritz Carlton Beijing's Manifred Webber are looking beyond this summer.
MANFRED WEBER, GM, THE RITZ CARLTON-BEIJING: We strongly believe that China has not reached its peak yet. It still has many, many years to come where they will grow.
VAN SANT: If the games are successful, the Olympics could spur a rise in foreign visitors and expansion of Beijing's convention sector. And China's growing domestic market means more brand conscious consumers for franchise hotels like the Ritz Carlton. But hotel owner Shauna Liu offers guests something different. After college and a career in the United States, she returned to Beijing to convert this 500-year-old courtyard home into hotel Cote Cour.
SHAUNA LIU, OWNER, HOTEL COTE COUR: You are living in a Hutong (ph). You see how local people are living every day.
VAN SANT: Her guests live in opulent luxury: Tibetan rugs, Chinese antiques and Venetian tiles fill each room. As the historic Hutongs or alleyways, disappear to make room for new development, Shauna says Chinese travelers will want to stay here.
LIU: I think in the long run, it will give lots of people an opportunity and then a chance to think about their old life, remind them of their childhood memory.
VAN SANT: For now, Shauna's guests are mostly foreign, while Li and Wang chose modern grandeur. And keeping customers happy will be the task for Beijing's hotels long after the Olympics are over. Shannon van Sant, NIGHTLY BUSINESS REPORT, Beijing.
"Kevin McCormally's Tax Tips"-Foreclosure Options
SUSIE GHARIB: Time now for our tax tips series. Every Monday between now and April 15, we'll try to help you prepare your tax return. Tonight, our tax guru Kevin McCormally, executive editor at "Kiplinger's Personal Finance" has advice for people who are facing foreclosure.
KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tonight I want to talk about people who have lost their homes or who are threatened by foreclosure. You know, the latest statistics show that nearly one million home mortgages are in the foreclosure process right now. What's this have to do with taxes? Actually quite a lot, because the tax law contains a time bomb for foreclosure victims. You see, if the bank forecloses and sells your home for less than you owe -- and forgives the rest of the mortgage -- the amount forgiven is treated as taxable income to you. You see as far as the IRS is concerned, money you couldn't afford to pay back is treated as though it was paid to you.
The IRS even has a special form for reporting this windfall, the 1099- C. The "C" stands for cancellation of debt and you can also wind up with this phantom income if a lender restructures a loan to help you keep your home. Now, late last year, Congress passed emergency legislation to waive this tax for folks who lost their homes or had debt forgiven in a restructuring in 2007, 2008 and 2009. This is a big deal. The three-year break will save affected taxpayers some $600 million.
But note this: the relief only applies to owners who lose their primary residences. If you lost a vacation home or an investment property to foreclosure, forgiven debt is still considered taxable income to you, unless you were in bankruptcy or insolvent. And beware that even if you qualify for this break, the lender will still send you a 1099-C form. It will be up to you to know whether the discharged debt is taxable or tax- free. Be careful. I'm Kevin McCormally.
Paul Kangas' Stocks in the News
PAUL KANGAS: That unexpected rise in existing home sales and of course the sweetened bid by JPMorgan for a Bear Stearns takeover brought Wall Street`s bulls out in force this morning. In a steady surge, the Dow posted a 231-point gain by midday, with the NASDAQ Composite up a hefty 72 points. The strong breadth and trading volume convinced many investors the market was signaling it had bottomed out. But some late selling trimmed the gains and cast doubt on that theory. Still, the Dow Industrial Average closed up 187.32 points at 12,548.64. The NASDAQ vaulted 68.64 points ending at 2326.75, while the Standard & Poor`s 500 rose 20.37 ending at 1349.88. Over in the bond market, the 10-year note lost 1 26/32 to 99 17/32, putting the yield at 3.56 percent.
Big board volume leader as it so often is, Citigroup (C) trading 35.8 million shares today, edging up $0.79.
Then Bear Stearns (BSC) the big gainer of the day, up 76 percent with that advance of $4.86. As you heard, the bid from JPMorgan sweetened from $2 to $10 a share. Incidentally, Standard & Poor's repeated a "sell" on Bear Stearns and repeated a "buy" on JPMorgan stock.
Ford Motor (F) up $0.34. The "Financial Times" of London reported late today that the company is due to report an agreement to sell its Jaguar and Land Rover units to India's Tata Motors. The price will be around $2 billion.
JPMorgan Chase (JPM) up $0.58.
Then came GE (GE) with a $0.07 loss.
Moving along on the active list, Bank of America (BAC) up $0.59.
Washington Mutual (WM) $0.40 advance.
Pfizer (PFE) edged up $0.02.
And then Wells Fargo (WFC) $0.46 drop there. The Baird brokerage downgraded it from "neutral" to "under perform" on a valuation basis.
Tenth in volume was Time Warner (TWX) with a $0.44 gain.
Lehman Brothers (LEH) down $2.01. Oppenheimer brokerage downgraded it from "out perform" to just "perform."
And then CIT Group (CIT) rebounded $3.40 after losing about $2 a share last Thursday on reports it was having funding problems. Today the "Wall Street Journal" reported the firm is talking to an overseas bank in hopes it'll come to the rescue. Stiffel Nicolas brokerage upgraded the stock from "hold" to a "buy" on CIT Group.
Monsanto (MON) up $7.13. UBS financial upgraded it from "neutral" to a "buy" recommendation.
Then Potash Saskatchewan (POT), the big fertilizer firm, up $6.54. RBC Capital upgraded it from "out perform" to "top pick" rating and CIBC upgraded it from "sector perform" to "out perform."
Abitibibowater (ABH), the forest products company, gaining $3.79. The Fairfax Financial Corporation is going to invest $350 million in convertible bonds of Abitibibowater.
On the downside, we have Medco Health Solutions (MHS) off $2.49, I'm sorry, $2.46. RJ Financial, Raymond James that is, downgraded it from "out perform" to just a "market perform."
Cambrex Group (CBM) losing $1.06. The company says that customers recalling a product for which it supplies the active pharmaceutical ingredient and this could affect 2008 results materially.
Walgreen (WAG) up $1.83. Second quarter earnings nicely higher, $0.69 versus $0.65 last year, $0.02 above the Street estimate.
And Tiffany & Co (TIF) had a good day, up $4.05. Fourth quarter earnings, $1.27, up from $1.07 last year, $0.06 above the Wall Street estimate.
And then the discount retailer Big Lots (BIG) up $1.89. The company got an upgrade from "buy" to "strong buy" from the Webush Morgan brokerage.
Apple (AAPL) topped the NASDAQ active list, up $6.26.
Google (GOOG) up $27.01. The company says it found a new way to enter the wireless market through white space. It's kind of complicated.
Baidu.com (BIDU) up $32.10. The company hired Jennifer Lee as its new CFO. She was with GM China.
Research in Motion (RIMM) up $6.89.
Cisco Systems (CSCO) $0.87 gain there.
Microsoft (MSFT) lost a penny.
Intel (INTC) $0.38 advance.
First Solar (FSLR) up $15.84.
Qualcomm (QCOM) gained $1.62.
And Oracle (ORCL) edged up $0.69 a share.
XM Satellite Radio (XMSR) up $1.85. The Department of Justice as we touched on, has approved the merger, but the FCC still has to give up approval and Sirius was up $0.25 a share incidentally.
Synplicity Inc (SYNP) up $2.53. Synopsis Corp. will acquire this firm for $8 a share in cash or $227 million.
Those are the stocks in the news tonight.
