NBR Transcripts April 1, 2008
Tuesday, April 01, 2008Wall Street’s Rally Is No April Fool’s Joke
SUSIE GHARIB: Wall Street kicked off the new quarter with an impressive rally and the best second quarter start since 1938. The Dow jumped 391 points and the NASDAQ rose 83. Leading today's big rally, UBS and Lehman Brothers. Lehman stock surged almost 18 percent after the firm raised more than $4 billion and shares of UBS leapt nearly 15 percent, even after the Swiss bank said it would write down another $19 billion in mortgage-related losses. Suzanne Pratt looks at whether today's rally signals a real turnaround for the market or just an April fool's joke.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: On a day when investment bank UBS announces a massive write down, it would stand to reason that the stock market might sell off, and sell off sharply. That's exactly the opposite of what happened today. Not only did the Dow slap on nearly 400 points, but financials led the charge. Analysts say investors were big equity buyers because they see a light at the end of the sub-prime tunnel. Veteran strategist Joe McAlinden says today's market activity suggests the light may be a bright one.
JOSEPH MCALINDEN, CHIEF INVESTMENT OFFICER, CATALPA CAPITAL: I think that this is a signal that the worst is over. And, you know, I think it could make sense to be putting money back into the market and in particular I think in the areas where you are seeing emerging leadership.
PRATT: Others, however, are less confident that the days of massive write downs from mortgages and related assets will soon be over. Some investment pros believe home prices need to bottom before balance sheets at financial firms can truly recover and stock prices as well. Edward Jones analyst Tom Kersting says it's hard to say when the turmoil for financials will end.
TOM KERSTING, FINANCIAL SERVICES ANALYST, EDWARD JONES: We do expect more bad news and more write downs with the upcoming first quarter earnings results. However, having said that, we do see a lot of value and we believe a lot of this bad news is priced into the financial services stocks right now.
PRATT: Still others believe write downs, big or small, at financial firms will take on less significance for equity investors in the coming months. Many pros say instead they expect the economy to take center stage on Wall Street. Raymond James strategist Jeffrey Saut echoes that belief and says what really matters is that we're still in a bear market that began last July.
JEFFERY SAUT, CHIEF INVESTMENT STRATEGIST, RAYMOND JAMES: Bear markets tend to last 15 to 18 months, so, you know, I am not of the belief that we are in a new secular bull market. But I am of the belief that the news is so negative here, sentiment is so negative here, that we could get a pretty decent tradable rally off of these lows.
PRATT: Several big banks will release first quarter results in a few weeks. More write downs are expected. Experts say just how the market responds to those write downs will tell us a lot about whether today's rally is for real. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Hugh Johnson, Chairman of Johnson Illington Advisors
SUSIE GHARIB: Joining us now with more analysis on today's big rally, Hugh Johnson, chairman of Johnson Illington Advisors. Hi, Hugh.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: So tell us, what changed between yesterday and today? What happened?
JOHNSON: You know, I think the biggest change, Susie, is confidence. I think particularly with Lehman being able to successfully raise $4 billion in the credit markets told us that it's not likely that a major investment banking institution or bank for that matter is going to go out of business. If they run into trouble, they can raise money in the financial markets. That's very positive. And what that did is increase confidence at least for one day, confidence that we weren't going to get sort of blind sided by a major bankruptcy of an important financial institution, an institution that's important in the whole process of creating credit for our economy. So I think it was confidence that was the number one thing today.
GHARIB: But we've seen this pattern before, a big rally, then a big sell-off, a big write down, another shoe to drop. Is the worst really over?
JOHNSON: No, I think it's premature to say that. Obviously I'm encouraged, as I think everybody is encouraged, by not only what happened with Lehman today but the performance of the markets over the last five weeks, not just today. And we've seen signs, for example, we've seen some of the so-called bull market sectors that performed well. We've seen small company stocks outperform large company stocks over five weeks. That never happens unless investors are starting to take on more risk, are willing to step out and take more risk on. That's a real positive sign, but even based on five weeks or one day, I think it's premature to jump to the conclusion that this is the so-called restart of the bull market or the start of a new bull market. We need a little bit more.
GHARIB: Also I guess one has to take into consideration that the outlook for earnings is not very good. The outlook for the economy is so poor, so how can anyone really make a strong case to be buying stocks right now?
JOHNSON: Well, it's almost a leap of faith. So you've asked the right question. The outlook for the economy is not good. You look at leading indicators for the economy that tell us where the economy is going. They've been down for five successive months. That's not a pretty picture. You know there is going to be, as was stated, more write offs for major banks and major investment banks. a lot more write offs. That's not particularly promising. I suspect we're going to get better economic numbers and earnings numbers in the third quarter, but it's only a suspicion. The evidence isn't strong yet. So you're actually right. That's why it's probably a little bit premature to jump to that so-called bullish side of the aisle.
GHARIB: All right. Are you seeing, though, enough positive signs that you are changing your investment strategy?
JOHNSON: I'd like to, you know. My emotions tell me gee, I'd like to get on board this. It looks fairly real, fairly strong. My disciplines tell me you don't do that yet. I'm not making any changes. I'm keeping a meaningful cash position in portfolios. I still own sectors of the market that are so-called defensive, safer sectors like consumer staples and utilities and I own a lot of large-cap companies, not small-cap companies. So I'm still pretty defensive in waiting for just more evidence. I need more days like we had, not necessarily like today, but somewhat similar to today before I'm convinced.
GHARIB: Also, I mean, what are you seeing that's going on in the credit markets? Are the credit markets operating more efficiently now?
JOHNSON: No, they're not. And that's the most important question you've asked, the most important variable to watch -- the spreads. It gets pretty tricky and technical, but spreads between credit market instruments like junk bonds and U.S. Treasuries. They've been widening out and they've been telling me that investors are not willing, as yet, to meaningfully take more risk in the credit market. And unless the credit markets are working much more smoothly, unless we get that logjam broken in the credit market, then an economy that runs on money and credit is not going to do very well. So you got to break the logjam in the credit markets and you'll see it if those spreads start to narrow and it shows that investors are willing to take more risk in the credit markets. As yet I don't see that.
GHARIB: All right, Hugh. You've given us a lot to think about. Thank you so much.
JOHNSON: You're welcome.
GHARIB: My guest tonight, Hugh Johnson, chairman of Johnson Illington Advisors.
Democrats & Republicans Join Together To Search For A Solution To The Housing Crisis
PAUL KANGAS: The housing crisis took center stage in Washington today, with Senate Republicans and Democrats agreeing to work together to craft a solution to the wave of foreclosures sweeping the nation. As Stephanie Dhue reports, a blueprint is in the works and could be on the table by tomorrow.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With rising foreclosures and freezing credit markets, lawmakers pledged to work together to forge a housing solution. By midday tomorrow, Senators Chris Dodd and Richard Shelby are expected to outline a bill that addresses the mortgage meltdown. Senator Dodd says the package will deal with the core issues in the housing market.
SEN. CHRIS DODD, CHAIRMAN, SENATE BANKING COMMITTEE: The most important word in all of this is the restoration of confidence in my view, not only for homeowners, but others involved in the financial services sector of our country.
DHUE: The most controversial proposal the Democrats support would change bankruptcy laws to let judges modify interest rates and terms for primary homes. Eric Halperin of the Center for Responsible Lending says that proposal is critical because many times different parties own parts of mortgages. Bankruptcy judges can force everyone to work together.
ERIC HALPERIN, CENTER FOR RESPONSIBLE LENDING: Bankruptcy is a key part of it, because if you don't have that program that gives people a recourse, that gives the court the ability to order it, we're not going to be able to get rid of all these obstacles to modifications.
DHUE: The industry calls bankruptcy loan workouts cram downs. The Mortgage Bankers Association says cram downs would lead to higher interest rates for all borrowers. Nevada Republican John Ensign agrees.
SEN. JOHN ENSIGN (R) NEVADA: Banks are going to have to take into account risk on loans and if they think that bankruptcy judges in the future can raise or can lower interest rates, it increases their risk. It increases the cost to them.
DHUE: Other proposals that may be included in a bill, funding counseling programs for struggling homeowners, money for states and local governments to buy foreclosed properties and an expanded role for the Federal Housing Administration to refinance bad loans. While there is disagreement on the specifics of just how to address the housing crisis, both parties seem to agree at this point something has to be done. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Rising Gas Prices & The Economy Are Stalling Car Sales
SUSIE GHARIB: Well, the nation's auto makers usually count on spring and summer to heat up car sales, but that might not happen this year. As Diane Eastabrook reports, a troubled economy and high gasoline prices are curbing buyer enthusiasm.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The calendar says it's spring, but at many Chicago area auto dealerships, it feels more like winter outside and inside showrooms. Spring typically brings out eager new car buyers, but at Arlington Heights Ford, General Manager Tony Guido is seeing more skeptical buyers.
TONY GUIDO, GENERAL MGR., ARLINGTON HEIGHTS FORD: People are walking in here looking for a new Taurus. They're looking for a new F-150 or a Ford Mustang. We'll be looking at that one- or two-year-old vehicle, possibly a three-year-old vehicle, because you can still certify it. You get an extended warranty with the vehicle, special financing and in most cases, that vehicle can be thousands less.
EASTABROOK: Analysts say a credit crunch, stagnant housing market, a sluggish economy and high gasoline prices could make 2008 the worst year in a decade for U.S. auto sales. Global Insight predicts U.S. vehicles sales could dip below 15 million units this year, following consecutive sales declines over the last few years. While rebates and cut-rate financing have revived flagging sales in the past, Global Insight auto analyst Rebecca Lindland doesn't think they'll be as effective this time because many consumers are cash strapped for down payments.
REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: You've got a consumer that is worried about how are they going to make their house payment, how are they going to make their utility bill payment, how are they going to make their college kid's tuition payment, because they don't have their home equity to tap into anymore.
EASTABROOK: Still, some dealers, like Kurt Schiele at Elmhurst Auto Group, think high gas prices could actually help sales of some vehicles. He says some of the customers coming into his showroom are interested in buying hybrids or other more fuel efficient vehicles.
KURT SCHIELE, V.P., ELMHURST AUTO GROUP: Say they were looking at that large maybe SUV, maybe they're looking at a smaller SUV. Maybe they'll trade down to a sedan. You know, we've had instances where people will trade in their full-size SUV in on a Toyota Yaris or a Toyota Prius.
EASTABROOK: Analysts don't think the head winds facing the auto industry will blow the U.S. companies off course in their recovery efforts, but they do think it could take those companies a bit longer than expected to turn a profitable. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Arlington Heights, Illinois.
"Of Mutual Interest" - Christine Benz, Director of Mutual Fund Analysis For Morning Star
PAUL KANGAS: In tonight's "Of Mutual Interest" segment, we're taking a look back to see what happened to mutual funds in the first quarter. As usual, helping us out is Christine Benz, director of mutual fund analysis for Morningstar. Christine, welcome back to NIGHTLY BUSINESS REPORT.
CHRISTINE BENZ, DIR., MUTUAL FUND ANALYSIS, MORNINGSTAR: Hi, Paul. It's great to be here.
KANGAS: As everyone knows, it wasn't a great quarter for the stock market. So were there any mutual fund categories that came out ahead?
BENZ: Generally it paid to be defensive. So one category that did very well is the category of bear funds and these are funds that take short positions in stock. Some high-quality bond funds also did well, as did the precious metals category. So generally defensive was a good place to be during a tough quarter.
KANGAS: Let's see which individual funds with assets of more than $50 million did the best in the quarter. It's no great surprise that they're all bear market funds. These funds did have gains that far exceeded the average for the group, ranging from almost 20 percent to just about 32 percent. How did they manage that Christine?
BENZ: Well, Paul, these are funds that are bearish, meaning that they typically take short positions in stocks and they also use leverage that essentially magnifies their gains or losses. During a down quarter, it magnified their gains.
KANGAS: They did well, the ones we're looking at. A let's move on to the fund with the best gain over the past year.
BENZ: Right. This is a Latin America fund. Again, a fund that attracts the market index but uses leverage, essentially borrowed money to magnify its gains. Here it's mirroring very strong returns from Latin America. This is a fund that has fallen back a little bit for the year to date, but did have a terrific year in 2007.
KANGAS: Going back three years, it's much of the same story with T. Rowe Price Latin America fund (PRLAX) taking the honors, right?
BENZ: Right, a perennial winner. This fund also has a very good five-year track record. For investors who bought this fund five years ago, they're sitting on an average gain of 50 percent per year. So for those of you who bought it, enjoy your retirement. It's a really good pick.
KANGAS: Now looking at the performance of the largest funds in the first quarter, we can see that bigger was not necessarily better with all ending well in the red, except for one bond fund in the group, the Pimco Total Return Fund (PTTAX).
BENZ: Right. Pimco came into this year very well positioned for an ongoing tough market for credit. It was positioned somewhat defensively and has reaped the rewards. The stock funds, as you said, Paul, have not performed well with Vanguard 500 Index (VFINX) being particularly hard hit due to its holdings in financials and technology.
KANGAS: Right. Now, Christine, in market like the one of the past few months, the judgment of the fund manager is put to the test. So did managed funds do better than the benchmarks, the market indices?
BENZ: Surprisingly, they didn't do all that well Paul or perhaps not surprisingly, depending on your perspective on active management. What we found was that something like 38 percent of large cap funds actually managed to beat the S&P 500 Index during the quarter. So that's not particularly great rate of out performance, in my opinion.
KANGAS: Christine, very interesting and as always thank you for your insights.
BENZ: Nice to be here, Paul. Thank you.
KANGAS: My guest, Christine Benz, director of mutual fund analysis at Morningstar.
“Last Word”-What Does $37 B Buy?
SUSIE GHARIB: And finally tonight, what if the $37 billion of write downs taken by UBS over the last year could have been put to another use? For example, you could buy over six million Rolex watches or more than two million tons of Swiss chocolate or more than 4,100 tons of fine caviar. You could fund the U.S. military campaign in Iraq with the money for 74 days. You could pay the bill for the Olympic games in London in the year 2012 twice. Or Paul, the bank could have bought almost 140,000 houses in the U.S. at an average price of $265,000 each. So what do you think of that?
KANGAS: Just think how many cars that would buy. It would give Detroit a little boost.
GHARIB: And just think what use we could put that to here at NIGHTLY BUSINESS REPORT.
KANGAS: Yeah. It could help me pay my taxes.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks took flight at Wall Street's opening bell today as bullish confidence soared in the belief this latest string of huge write downs signaled the worst of the credit crunch was over. The heavy upside trading volume and highly positive market breadth convinced many investors the market had seen a bottom. By midday, the Dow posted a hefty 314-point gain. The NASDAQ Composite was up 63 points. It was up, up and away for the rest of the day, thanks to a rally in the dollar and some frantic short covering. The Dow Industrial Average vaulted 391.47 points, ending at 12,654.36. The NASDAQ Composite jumped 83.65 points to 2362.75, while the Standard & Poor's 500 Index soared 47.48 to 1370.18. Over in the bond market, the 10-year note slid 1 6/32 to 99 15/32, putting the yield at 3.56 percent.
Familiar name at the top of the active list, Citigroup (C) trading 37.8 million shares and up a hefty $2.42. That's a gain of almost 11 1/2 percent. Citigroup was the best gainer in the Dow and today, Bear Stearns repeated an "out perform" rating. Altria Group (MO) lost $0.05. Morgan Stanley downgraded it from "over weight" to just "equal weight."
General Electric (GE) did well in the Dow stock, up $1.42.
And Schering-Plough (SGP) edging up $0.34 after dropping over $5 yesterday on news its cholesterol drugs are not effective.
Bank of America (BAC) did well, up $2.95.
And then JPMorgan Chase (JPM) certainly participating in the rally, up $4.05.
Ford Motor Co (F) up $0.25.
SprintNextel (S) down a penny.
Pfizer (PFE) moved up $0.45.
And then came Lehman Brothers (LEH) with a nice gain of $6.70. The company sold more than expected, $4 billion in convertible preferred stock with a 7 1/2 percent dividend and it's convertible into common stock at a price of $49.87.
Let's have a look at some of the other investment banks and how they did today, Bear Stearns (BSC) edging up $0.36.
A big gain in Goldman Sachs (GS), almost $11.50.
Merrill Lynch (MER) and UBS Ag (UBS) did well. Incidentally, Deutsche Bank repeated a "buy" on UBS.
Fannie Mae (FNM) up $5.18. Anything to do with the finances and mortgage markets did well. Incidentally, Fannie Mae's cousin, Freddie Mac, was up $3.90.
One of the best percentage gainers was CSK Auto (CAO), rising $2.39. O'Reilly Automotive will acquire this company for $12 a share; $11 of it will be in O'Reilly stock and $1 in cash. O'Reilly stock edged up $0.89.
Media General (MEG) up $1.96. The company received $58 million from the sale of its SP newsprint company and it'll use the proceeds to pay down debt. It also intends to sell up to five of its TV stations and that should bring in about $100 million.
American Vanguard (AVD), an agricultural company, down $1.67. The company sees first quarter earnings below year-ago levels due to bad Midwest weather conditions.
And then KKR Financial Holdings (KFN) down $1.10. The company plans a public offering of 20 million shares. That means some earnings dilution apparently. Bear Stearns downgraded it from "out perform" to "peer perform."
Topping the NASDAQ actives, Apple (AAPL) rebounding $6.03 after declining 27 percent in the first quarter.
Google (GOOG) up $25.24. It fell 36 percent in the first quarter of this year.
Baidu.com (BIDU) big gain, $33.62.
Research in Motion (RIMM) up $5.25.
Microsoft (MSFT) up $1.12. Microsoft says it will not sweeten its $31 a share bid for Yahoo! Yahoo! stock fell $0.43.
Cisco Systems (CSCO) $0.89 gain.
$0.79 rise in Intel (INTC).
Qualcomm (QCOM) up $1.22.
Oracle (ORCL) edged up $0.85.
And First Solar (FSLR) had a good day, up $6.39.
Ebay (EBAY) up $1.57. Goldman Sachs repeated a "buy" on it.
And then we see Intermune (ITMN) up $2.71 on promising trials for its hepatitis C treatment.
And finally on the American Exchange, Travel Centers of America (TA) slid $2.60 after posting a wider than expected fourth quarter loss of $4.86 per share versus a profit of $0.78 per share a year ago. Analysts figured the loss would only be $1.13 per share.
