NBR- Transcripts March 31, 2008
Monday, March 31, 2008The Plan To Repair Financial Regulations Garners Mixed Reactions
SUZANNE PRATT: Treasury Secretary Henry Paulson today laid out plans for a sweeping overhaul of the nation's system of financial regulation. Calling the proposal an aspirational model, Paulson said it would take two to eight years for some of the measures to be implemented. Under the blueprint, the Federal Reserve would oversee market stability, with the authority to probe risks across markets. A new Federal mortgage commission would set standards for mortgage brokers and the plan would also bring insurance companies under Federal regulation.
We have two reports tonight analyzing the administration's proposal and taking a look at early feedback on the plan. We begin with Darren Gersh in Washington.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Speaking in the ornate cash room where clerks once weighed out gold and silver, Treasury Secretary Henry Paulson suggested doing away with regulatory offices that in some cases date back to the civil war. But Paulson cautioned his reforms would not stop the cycle of boom and bust followed by financial distress.
HENRY PAULSON, TREASURY SECRETARY: I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change.
GERSH: The first question indicated how hard reform can be. Former Congressman Dan Mica now represents credit unions. He asked Paulson why the Treasury wanted to put them out of business, which he says is what would happen if credit union regulators are combined with bigger, more powerful bank regulators.
DAN MICA, CEO, CREDIT UNION NATIONAL ASSOCIATION: The banks, in essence, have opposed credit unions in any expansion, any existence for as long as we've been around, since the early 1900s. It would be a lot like putting the chickens under the guardianship of the fox.
GERSH: Paulson said he isn't trying to put anyone out of business. But the question shows why regulatory fights are the toughest in town. And by proposing Federal regulation of insurance, Paulson has stepped into a heavyweight bout. The blueprint calls state insurance regulation inefficient, but Bob Rusbuldt, who represents independent insurance agents, says the current system needs a tune up, not an overhaul.
BOB RUSBULDT, CEO, INDEPENDENT INSURANCE AGENTS OF AMERICA: You look at the whole sub-prime mortgage problem we have now. That was under the watch of Federal regulators. So why they want to take a system that has worked well for consumers and policyholders for years and transfer it to the Federal government is counter-intuitive.
GERSH: At the U.S. Chamber of Commerce, David Hirschmann argues back streamlining regulation is critical to keeping U.S. financial markets competitive.
DAVID HIRSCHMANN, CTR. FOR CAPITAL MARKETS, U.S. CHAMBER OF COMMERCE: I think the answer today is to no longer to simply try to patch over our regulatory structure. It's really to modernize and simplify the entire regulatory structure. Band Aids won't do any longer.
GERSH: The Treasury blueprint would also merge the Securities and Exchange Commission with futures regulators, transferring investor protection duties to a new regulator of financial products. That concerns former SEC Commissioner Annette Nazareth, though she called the overall blueprint a good first step.
ANNETTE NAZARETH, FORMER SEC COMMISSIONER: The more important issue is do investors have equal protection whether a product is sold by a bank, an insurance company or an investment bank? The answer should be yes. I think today the answer is not necessarily.
GERSH: Key Democrats were less than encouraging. Senate Banking Committee Chairman Chris Dodd called the Paulson blueprint a wild pitch. Instead of focusing on long-run reforms, Dodd said the administration should be addressing the immediate pain of the foreclosure crisis. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller in New York. Treasury Secretary Henry Paulson's plan to better police Wall Street was met with yawns by many professional investors. Money manager Mike Holland does not expect changes in the way the Street does business anytime soon.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: There's no reason for any of the viewers to get excited about it or nervous about it or positive about it because nothing is going to happen in a presidential election year. Politicians are going to stay away from doing anything of any significance.
MILLER: But many top executives at major brokerage firms, including Tom James, the CEO of Raymond James, say reform is long overdue.
THOMAS JAMES, CEO, RAYMOND JAMES FINANCIAL: I thought they identified all the appropriate issues and they responded to a lot of the problems and they tried to adapt some of the rules. For example, the merger of the regulators for our savings and loans and for our banks, that's pretty politically difficult to deal with. But the fact is, in today's world, probably a sound recommendation.
MILLER: Portfolio manager Jim Awad thinks the best part of the plan is expanding the Federal Reserve's power.
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: From a Wall Street perspective, what it does is it centralizes a lot of the new authority with the Federal Reserve, which is highly respected, intellectually and in practice and is really the least political of the government institutions.
MILLER: At the New York Stock Exchange, veteran floor trader Ted Weisberg says restructuring oversight should help encourage investment in U.S. securities.
THEODORE WEISBERG, PRESIDENT, SEAPORT SECURITIES: I think hopefully with some direction from smarter people than a lot of the mortals that run around the floor of the New York Stock Exchange every day, that will bring some clarity and therefore some confidence back to the financial markets, which clearly we need.
MILLER: Experts say part of the reason financial markets didn't react much to the proposal is the expectation that it will undergo a major overhaul by Congress.
HOLLAND: I think at the end of the process here, a couple of years from now we'll probably end up with something that's somewhat more efficient. But I think at the end of the process we'll have a much changed product than we have right now, simply because of the political reality.
MILLER: Experts say the reform plan will likely be only a momentary focus on Wall Street. They predict that by tomorrow, investors will turn their attention back to more immediate concerns like housing, recession and quarterly earnings. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Corn Crops Are Being Swaped For Soybeans
SUZANNE PRATT: Corn prices rallied today at the Chicago Board of Trade following the release of the government's latest crop report. According to the report, U.S. farmers expect to plant less corn this year and a record amount of soybeans. But as Diane Eastabrook reports, commodities analysts note that farmers don't always do exactly what they say.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Traders sent corn futures prices toward $6 a bushel in a fast market this morning, after hearing that U.S. farmers plan to grow fewer acres of corn this summer than expected. Even though prices retreated later, veteran corn trader Victor Lespinasse of grainalyst.com thinks they will bounce back quickly.
VICTOR LESPINASSE, CORN TRADER, GRAINANALYST.COM: I think we're going to see continued mercurial markets for a long time to come, especially if the weather continues to give us some cause for concern.
EASTABROOK: In a survey by the U.S. Department of Agriculture, farmers said they'll plant 86 million acres of corn this summer. That's about a million and a half fewer acres than analysts had forecast. The government also said there is a lot less corn in storage than many analysts had thought. Even before today's report, corn futures prices were double what they were a year ago. Soaring corn demand from developing countries and the grain-based ethanol industry is part of the reason. But analysts think the grain market could find a cure for higher corn prices. Terry Roggensack, co-owner of commodity research firm Hightower Report says slaughtering livestock to reduce feed consumption is one way. But that could take many months.
TERRY ROGGENSACK, CO-OWNER, HIGHTOWER REPORT: And that's going to take another six months or so before that works its way into the system as far as lower pork production.
EASTABROOK: James Bower, president of Bower Trading, says reducing government ethanol targets or mandates is another way.
JAMES BOWER, PRESIDENT, BOWER TRADING, INC.: Certainly if corn goes I would say above the $6.50 mark, heading, let's say, in a drought toward $8, they would absolutely have to look at the mandates. There is no question about it. Because the supply demand table just could not handle it.
EASTABROOK: Finally, farmers could always plant more corn than they said they would. If farmers decide they want to plant more corn, they don't have much time to do it. Analysts say that crop need to be in the ground by the end of April and with wet weather forecast over the next couple of weeks, that window of opportunity is narrowing. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
1st Quarter Review with Sam Stovall of Standard & Poor's Equity Research
PAUL KANGAS: Joining me now to wrap up Wall Street's first quarter performance is Sam Stovall, chief market strategist at Standard & Poor's equity research. And what a quarter it was, Sam, welcome back to NIGHTLY BUSINESS REPORT.
SAM STOVALL, STANDARD & POOR'S EQUITY RESEARCH: Hello, Paul, good to see you again.
KANGAS: This first quarter was downright ugly and volatile. Tell us a little about what happened.
STOVALL: Well, Paul, you are absolutely right. I think we got a running start in the latter part of 2007 with November and December being down. Investors were increasingly concerned that the U.S. economy would be slipping into recession and at the first half earnings report would be weaker than expected.
KANGAS: Well, there we see all three major averages, the Dow, S&P 500 and NASDAQ 100 down fairly large percentages.
STOVALL: That's right, it was the worst quarter since 2002 and I think investors are scratching their heads wondering if there is any reprieve in sight.
KANGAS: Uh-huh. Let's get right to the individual winners and losers and Wal-Mart (WMT) was the big winner among the blue chips. Is that because more consumers are trying to trim their bottom line by shopping at the big discounter?
STOVALL: Well, I think that is certainly the reason why investors are gravitating toward Wal-Mart is because the company posted favorable, comparable stores reports in February and the expectation that people will be trading down as times get tougher.
KANGAS: Then we have Caterpillar (CAT) that is doing well all over the world thanks partly to the weak dollar.
STOVALL: That's right and the company recently reaffirmed its 15 to 20 percent earnings growth target through 2012.
KANGAS: How did IBM (IBM) slip in there in the winner's column?
STOVALL: I think here we are talking about consistency from a global growth standpoint because of a diversified mix of hardware, software and services.
KANGAS: And the Dow's big loser and today it was a significant loser, Merck (MRK) down almost 35 percent.
STOVALL: Well, the shares were crushed on a negative clinical trial that reported limited therapeutic value of Vytorin Zetia beyond a traditional statin.
KANGAS: And Citigroup, of course we know why that's down and they cut their dividend also.
STOVALL: You've answered the question. That is the reason why, investors continue to be concerned about the prospects for this company.
KANGAS: How about AIG (AIG)?
STOVALL: Again, I think its worries -- investors are worried about the company's outsized exposure to the sub-prime area through its number of large number of businesses.
KANGAS: OK. Let's now take a look at the Standard & Poor's 500. Big Lots (BIG), the winner.
STOVALL: Well, I think Big Lots as well as the second-best performer were the biggest gainers due to bargain helpers looking for oversold issues. Also Big Lots widening of operating margins as it closed a lot of its unproductive stores.
KANGAS: How did Pulte Homes (PHM) get in there, a home builder?
STOVALL: Well, the group was down 56 percent in 2007. It's up more than 12 percent as a whole, but I think some people believe that Pulte has a strong balance sheet with more than $1 billion of cash on the books.
KANGAS: Standard & Poor's 500 big losers were lead by Bear Stearns (BSC), I guess we know the story there.
STOVALL: We sure do, a $10 stock that last year was trading at $172.
KANGAS: Unbelievable and Ambac (ABK) of course caught in the mortgage mess.
STOVALL: Exactly. Here, you don't have a $95 stock going down to $5 unless you are worried about its survivability.
KANGAS: OK. Let's take a look at NASDAQ quickly now, Celgene (CELC) the winner.
STOVALL: Recovered from a very steep market overreaction in late 2007 because of increased competition concerns.
KANGAS: And Yahoo!
STOVALL: Yahoo! shares jumped on the Microsoft buyout offer.
KANGAS: OK and then on the downside NASDAQ 100, Garmen (GRMN).
STOVALL: I think Garmen shares are down sharply as a result of ongoing concerns about economic softness, price competition and its newly introduced (INAUDIBLE) phone.
KANGAS: OK and Nvidia (NVDA).
STOVALL: Nvidia I think again people are concerned about economic softening conditions and increased competition.
KANGAS: Sam, we only have about a half minute left. But where do we see stocks headed in the second quarter and maybe toward the end of the year.
STOVALL: I think it is going to be a second half story. We will have recession in the first half of the year, but improving economic results because of a sugar rush by U.S. consumers for the tax rebates. I think earnings should increase in the mid-teens from a technical standpoint, 1270 looks as if that level held from a technical standpoint. And historically you don't fight the Fed for too long.
KANGAS: All right, a sugar rush. I like that. Thanks very much for joining us.
STOVALL: You are welcome, Paul.
KANGAS: My guest Sam Stovall of Standard & Poor's.
"Kevin McCormally's Tax Tips"-How Best To Spin Spin Offs
SUZANNE PRATT: If you haven't started work on your 2007 tax return, there's no time like the present. There are just about two weeks left until April 15, the Federal tax filing deadline. And we're here to help. In tonight's tax tips, our tax guru Kevin McCormally, editorial director of "Kiplinger's Personal Finance," explains how to handle share spin offs and investment settlements.
KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tax time probably does more than misbehaving markets to make investors wish you just kept your cash in a mattress. Consider the viewer who wrote last week about a spin off that presented him with shares of Kraft Foods. How was he supposed to report it on his tax returns, as a gift, an inheritance? What? Of course, he doesn't have to report the shares at all, unless he sold them in 2007. And if he did sell, he has the mind-boggling task of figuring out his tax basis in the Kraft shares. That means splitting the basis of the original shares -- Altria, in this case -- between Altria and the spun off Kraft shares.
The proper division depends on the ratio of the price of both companies right after the spin off. In this case, about 76 percent of the basis stayed with Altria, 24 percent migrated to Kraft. Now, if you received shares in a spin off, look to the shareholder services offices for help on this thorny issue.
And then there's the viewer who received a check last fall as the settlement of a security fraud lawsuit against Royal Ahold. Since he no longer owned the stock, he assumed he should report the money as other income and pay tax on it in his top bracket. But that would be a costly mistake. He should actually report the settlement as a capital gain and include a note with his return that it's a recovery related to a sale reported on an earlier return. If you get such a settlement while you still own a stock, you report nothing that year, but you're supposed to reduce your basis by the amount of the settlement.
Now, please remember I don't make the rules. I just try to explain them. I'm Kevin McCormally.
"Last Word"-April Fool's Fun
SUZANNE PRATT: And finally tonight, if you're thinking about fooling around in the office tomorrow on April fool's day, think twice. A new survey of executives shows it won't go over well. A study of marketing and advertising brass, done by The Creative Group, shows that 71 percent of those polled think April fools' jokes are unsuitable for the office. Very few think pranks are appropriate in a workplace. So Paul, even though I really like April 1st and April Fool's Day, don't worry, you'll be safe from me tomorrow.
KANGAS: And I will keep the whoopee cushion at home, I promise.
PRATT: Thank you.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's blue chips spent the morning bouncing between modest losses and modest gains reflecting a mixed news background. A sharp drop in oil futures however gave the Dow a 63-point gain by noon with the NASDAQ up 16 points. A stronger-than-expected Chicago purchasing managers' index added to the market's firm under-footing, as did buying linked to end of quarter window dressing, all of which resulted in a positive close. The Dow Industrial Average ended up 46.49 points at 12,262.89. The NASDAQ Composite was up 17.92 ending at 2279.10, while the Standard & Poor's 500 Index rose 7.48 to 1322.70. Over in the bond market, the 10-year note gained 8/32 to par and 23/32, putting the yield at 3.41 percent.
As a matter of fact, the big board volume leader on 34.3 million shares was Schering-Plough (SGP) losing $5.06, traded as low as $14.10 on that cholesterol news. Then Citigroup (C) slipped in there with a $0.59 gain. Citigroup is reorganizing its consumer group into two global businesses and consolidating its U.S. and international credit card businesses into a single global business.
Pfizer (PFE) in there with a $0.43 gain.
And then Merck & Co (MRK) of course, the partner with Schering-Plough in those shortcomings of the cholesterol drugs down $6.56.
ExxonMobil (XOM) on the lower oil futures, down $0.64.
General Electric (GE) moved up $0.40.
Then Micron Tech (MU) pretty good percentage gain at $0.51 advance. Speculation that memory chip prices are in the process of bottoming out.
Ford Motor Co (F) $0.13 gain there.
Bank of America (BAC) down $0.16.
Wells Fargo & Co (WFC), tenth in volume, was down $0.25.
Caterpillar (CAT) moving up $1.20. The company will triple its investments in emerging markets, especially China over the next three years and said sales in China are expected to hit about $2 billion this year alone.
Lehman Brothers (LEH) closed down $0.23 after trading as high as $39.49 this morning after the company filed a lawsuit to recover $352 million from the Japanese trading house called Marubeni and that's in the wake of a finance scam involving forged documents. After the close, Lehman said it's issuing $3 billion worth of convertible preferred shares representing dilutions of course of earnings. In after hours, the stock dropped $1 from the price you see here.
Spin off, first day of trading, Philip Morris International (PM) down $0.48, traded as high as $54.21, a low of $50.44.
Abbott Labs (ABT) up $2.08. The failure of the Merck and Schering- Plough's Vytorin and Zetia cholesterol drugs could benefit Abbott's Simcor drug, that according to an analyst at Goldman Sachs.
Bentley Pharmaceuticals (BNT) up $2.51. Teva Pharmaceutical will acquire this company for $15.02 in cash. That's about $360 million worth.
Fortune Brands (FO) up $5.64. The company plans a 15 million share buyback of its own stock in the wake of its failed buyout bid for the maker of Absolut vodka.
Another good gainer, Methode Electronics (MEI) rising $1.59. The Robert Baird brokerage upgraded it from "neutral" an "over weight" rating.
And Pall Corp (PLL) down $3.18. Second quarter earnings were higher than year, $0.46 versus $0.35, but a penny below the Street estimate and its gross profit margins were a bit lower.
NASDAQ's most active, Apple (AAPL) up $0.49.
And then Research in Motion (RIMM) down $3.11.
Google (GOOG) up $2.39 today, but for the first quarter, Google was down 36 percent and incidentally, Apple was down 27 percent for the first quarter.
baidu.com (BIDU) a loss of $7.48, $0.58.
And then Microsoft (MSFT) a $0.47 gain.
A penny rise in Cisco Systems (CSCO).
Intel (INTC) $0.39 advance.
First Solar (FSLR) up $2.46.
Qualcomm (QCOM) gained $0.86.
And Oracle (ORCL) tenth in volume, up $0.19.
Ansoft (ANST) moved up $7.10. Ansys Incorporated will acquire it for cash and stock worth about $31 a share, $16.25 of that in cash.
And finally, we see Vertex Pharmaceuticals (VRTX) jumping $5.23 after Standard & Poor's repeated buy on the promising results from the company's hepatitis C treatment.
