NBR Transcripts-May 19, 2008
Monday, May 19, 2008Landmark Housing Rescue Legislation Is Building
SUSIE GHARIB: Two top Senate lawmakers said late today they have a deal on a housing rescue bill. The chairman of the Senate Banking Committee, Christopher Dodd and the committee's ranking Republican, Richard Shelby, agreed on a landmark housing assistance bill. The legislation is aimed at preventing foreclosures and creating more affordable housing. It also calls for a new regulator for government-sponsored enterprises Fannie Mae and Freddie Mac. The senators say key to the plan is a fund to buy distressed properties, which will be paid by Fannie Mae and Freddie Mac, not taxpayers.
Well, while a deal to help troubled homeowners is in the works on Capitol Hill, the outlook for the economy remains cloudy. Some economists see signs of improvement, but the National Association for Business Economics today cut its forecast for economic growth. Stephanie Dhue looks at how the economy is shaping up.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Meeting today with Treasury Secretary Henry Paulson, President Bush said the U.S. is working through tough times. But he dismissed the idea of a second stimulus plan, saying the current tax rebate checks should help weather the storm.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: It should help our economy and more importantly, help people pay their bills. And we hope people use that money and take care of their families and shop.
DHUE: Economists agree that the stimulus checks should help boost economic growth in the third quarter. A new survey of business economists says the worst of the credit crunch is over and the housing slump is nearing an end. Lynn Reaser of Bank of America helped put the survey together. She thinks the economy is turning toward a gradual saucer-shaped recovery.
LYNN REASER, ECONOMIST, BANK OF AMERICA: The general forecast is that this will be the worst quarter in the cycle in terms of the slowing growth pattern and that credit markets will slowly start to improve and that housing is in the process of bottoming out, although it may take a number of months for that bottom to be clearly established.
DHUE: But the stimulus checks may distort the view a bit. Nigel Gault of Global Insight thinks the economic recovery will look more like a "W," rising as consumers spend their checks and falling after the money's gone.
NIGEL GAULT, ECONOMIST, GLOBAL INSIGHT: The question's going to be when we look at the third quarter, if the numbers are showing an improvement in growth, we're going to have to try and disentangle whether this is the start of the real recovery? Is this the start of a sustained upturn or are we indeed just in the middle part of this "W" that we're expecting to see?
DHUE: Still, some economists see the combination of declining home prices, higher oil prices and shaky credit markets taking a bigger toll on the economy. AEI's Desmond Lachman says the odds are good for a more prolonged economic downturn.
DESMOND LACHMAN, ECONOMIST, AEI: Any one of those factors would be enough to cause the U.S. economy trouble. Why, if we've got three of those factors working together and the magnitude of the shocks being so large, why is this going to be just an ordinary recession?
DHUE: The shape of an economic recovery depends on a lot of unknowns, including whether rising food, energy and commodity prices raise inflation overall. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The Inflation Impact on Bonds
PAUL KANGAS: Inflation concerns have recently been putting pressure on bond prices. Today, the benchmark 10-year note traded higher, while its yield fell to 3.84 percent. But with the yield on the 10-year nearing 4 percent, investors are wondering what's in store for bonds this year. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In recent weeks, a bit of a battle has been brewing in the bond market. Some experts believe economic growth will remain sluggish in the second quarter, making Treasuries a desirable investment. Others however, are more concerned about inflation as oil and commodity prices surge. For that reason many investors have been bailing on bonds. Lehman Brothers' Jack Malvey says inflation has surpassed the credit recession as the biggest worry for fixed income investors.
JACK MALVEY, CHIEF FIXED INCOME STRATEGIST, LEHMAN BROTHERS: I think it's really given rise to a sense that over the course of the next one to two years that the ability of this global economic deceleration to completely vanquish inflation may not be as quick as we had originally hoped.
PRATT: Investors may ask why hold a 10-year Treasury that yields 3.9 percent, when inflation is running near 4 percent? Since March, Treasury bond prices have fallen sharply. Yields, which move in the opposite direction to price, have pushed higher. The yield on the benchmark 10-year Treasury note is approaching 4 percent, its highest level since late last year. While bond yields have been climbing, stocks have been moving higher too, a sign that money moving out of bonds has been going into equities. It's evidence that the flight to quality in Treasuries has dissipated as calm returns to credit markets. Miller Tabak's Tony Crescenzi says the belief the Federal Reserve is done cutting interest rates is also driving bond yields higher.
ANTHONY CRESCENZI, CHIEF BOND MARKET STRATEGIST, MILLER TABAK: The more likely scenario is that rates will go up in the future, maybe early 2009. So it's probably not the best place to be right now, treasuries or any bond instrument.
PRATT: So where do yields go on the 10-year in the near term? Some experts say 4.5 percent is realistic this year, while others think even higher.
MALVEY: It could be 5 percent on a worst-case basis, depending upon the speed with which the U.S. economy shakes off this credit recession of 2007 and 2008 and also depending upon actually what are those realized inflation pulses over the course of the next seven months.
PRATT: If the price of crude oil climbs to $150 a barrel this year, it's likely to fuel underlying inflation. Experts say that's one more reason bonds may not be such a good investment in 2008. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Mohamed El-Erian, co-CEO , Pimco
SUSIE GHARIB: Back now to our top story, the outlook for the economy and the bond market. Joining us now, Mohamed El-Erian, co-CEO and co-chief investment officer of Pimco, the world's largest bond fund company. Mr. El-Erian, it's a pleasure to have you on NIGHTLY BUSINESS REPORT.
MOHAMED EL-ERIAN, CO-CHIEF EXECUTIVE OFFICER, PIMCO: Thank you, Susie.
GHARIB: Let me begin by asking you where you stand on this debate of what's the bigger concern for the economy right now. Is it recession and slow growth or is it inflation? What do you think?
EL-ERIAN: It's both. I mean, this is why it's such a confusing time for investors is that there's a tug of war between higher inflation and lower growth. And within the growth picture, there's a tug of war between an easing of the credit crunch and the fact that the consumer is getting under more pressure. So it's a difficult and fluid time for investors right now.
GHARIB: We're seeing in the bond market that yields, you heard our report, that yields are creeping up towards 4 percent. It seems like the bond market is signaling that inflation is the bigger concern. What do you say to that?
EL-ERIAN: I say that that's right. The bond market had fallen in love with the flight to quality and now there's realization that inflationary pressures are going up around the world and we've seen a re- pricing of the bond market consistent with the fact that inflationary pressures are higher.
GHARIB: So where do you see yields going in the near term, given that you believe that if these two scenarios are both happening at the same time, slow growth and inflation?
EL-ERIAN: You know, whether it's in the bond market or the equity market, people want to rush to one extreme or the other. It's a little bit like in sports you either want to play defense or offense. The reality is it's the middle ground that matters right now. So in terms of the yield curve your question, the front end of the yield curve is pretty well protected because it is unlikely that the Fed will hike aggressively. The longer end of the yield curve is vulnerable because it will re-price inflationary expectations. So it is absolutely essential for investors to go beyond the question of where are yields going and make it very specific to where on the yield curve they're talking about.
GHARIB: You wrote in a recent report that the Federal Reserve does not have the tools to deal with the housing crisis and rising consumer prices. What do you mean by that?
EL-ERIAN: The hardest thing for central bank is when it has good inflation and asset price deflation because the central bank does not have good instruments for that. The good news for the U.S. is what you said in the beginning of your show that the fiscal agency, in this case, the housing bill is starting to make its way out of Washington, DC and that can help the Fed but left on its own, this is a very heavy burden for the Fed to carry on its own.
GHARIB: So are you saying that this housing crisis could bring down the economy?
EL-ERIAN: I'm saying the housing crisis will be the fourth head wind that the consumer faces. The consumer already faces higher prices, declining employment and a credit crunch. And facing a housing crisis would put tremendous pressure on the consumer so it's very important for Washington to move and try to alleviate some of the pressures coming from housing.
GHARIB: I take it that you're in favor of this housing bill that we just talked about that may be coming out of the Senate?
EL-ERIAN: You know, one of the problems of being in a crisis -- and the U.S. has been in a crisis -- is that there are no first bests. You're dealing with second, third or fourth best. In that context, it's important to have a housing bill come out of Washington to help the process. It is not a first best but it's better than the alternative.
GHARIB: Real quickly given this economic environment, what's your investment strategy at Pimco?
EL-ERIAN: Be selective. Invest in areas that are recapitalizing, so the financial systems, the banks, the investment banks and play special teams. Don't go one way or the other but be very selective in terms of what value you should pursue until there's greater clarity as to this tug of war between higher inflation and lower growth.
GHARIB: Enjoyed hearing your insights tonight. Thank you. I hope you'll come back again.
EL-ERIAN: Thank you, Susie.
GHARIB: My guest tonight, Mohamed El-Erian, co-CEO and co-chief investment officer of Pimco.
"Get Your Finances Ready For Retirement"-How Much Do You Need To Retire?
SUSIE GHARIB: These days, Americans are more concerned about whether they'll be able to afford to retire. A new study by the American Society of Actuaries found rising health care costs and inflation have people worried that they'll run out of money during retirement. So if you're in your pre-retirement years, how can you tell if you're financially prepared to retire? In tonight's installment of our ongoing series "Get Your Finances Ready for Retirement," reporter Connie Hicks says it's a matter of considerable disagreement, even among financial planners.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Maybe this is your idea of retirement or perhaps it's traveling extensively to exotic or tropical destinations. Either way, you'll need to find a way to pay for your lifestyle. Deborah and Walter Byars (ph) are doing just that. They've been planning for their retirement for years by meeting with their financial planner, Gerald Grant. Their goal is to come up with the magic number: how much money they'll need to retire comfortably.
UNIDENTIFIED MALE: Retirement is like a permanent vacation.
HICKS: But vacations don't always cost what they're supposed to, so coming up with the right magic number for retirement can be tricky. The idea is to make sure your retirement expenses are covered by your retirement income. That's usually what you get from Social Security or a pension, plus the amount you can take out of a 401k account and other savings. Where do you start? Here's one method. Begin with your annual earnings when you retire. Now, figure out how much money you'll have coming in during a year in retirement. Some financial planners say the two numbers should almost match. But author Jonathan Pond says you should be able to live on far less than 100 percent of your pre-retirement income.
JONATHAN POND, AUTHOR, "YOU CAN DO IT!: I think where many financial planners say you have to have 80, 90 percent, 100 percent-- I've even seen 110 percent -- are too high for most people. Because if you really look at the expenses that will be reduced after you retire and it requires putting pencil to paper, but if you look at that, I think the number to maintain your lifestyle is more around 65 percent of your income.
HICKS: Wealth manager Patty Houlihan disagrees. She says living on two-thirds of your pre-retirement income is risky.
PATRICIA HOULIHAN, PRESIDENT, HOULIHAN FINANCIAL RESOURCE GROUP: Another rule of thumb a lot of people suggest you need only 70 percent. The reason I say 100 percent is because I know how people are. I've worked with clients for over 25 years in what I do and it's just I don't find them wanting to cut back. For example, they'll argue with me. They'll say, oh, Patty, we're going to sell the big house; we don't need all this room. Yeah, but they're going to get a condo with a view on the ocean, so the house that they sold is going straight into the condo that they're buying.
HICKS: Still Terry Savage, who's written a book on this subject, says it's vital to figure out where you stand in terms of your retirement finances. Savage suggests using an online retirement calculator to help you do the math.
TERRY SAVAGE, AUTHOR/FINANCE COLUMNIST: There's a wonderful website put up by the Employee Benefit Research Institute. It's called choosetosave.org and when you get there, you can click on something called the ballpark estimate and that will allow you to put in things like your income now and how much you've saved and what year you plan to retire and what percentage of your income you might want to replace in retirement along with an estimate of what you think inflation will be.
HICKS: Of course, seeing how your retirement finances stack up is just the starting point. You still have to plan carefully to make sure your money will last 20 or 30 years.
GERALD GRANT, JR., DIR. OF FINANCIAL PLANNING, AXA ADVISORS: The biggest concern that most people have is whether or not they will outlive their money.
HICKS: Gerald Grant says the Byars are in good shape because they've thought long and hard about their retirement financial needs. And he says others can learn from their example.
UNIDENTIFIED MALE: See, if you do it right, your retirement should be the best years of your life.
HICKS: Connie Hicks, NIGHTLY BUSINESS REPORT, Kendall, Florida.
GHARIB: Join us for more of "Get Your Finances Ready for Retirement" this coming Monday. It's our Memorial Day special edition. The web is also a big part of our efforts to help you get ready for retirement. On our web site, nightlybusinessreport@pbs.org, you'll find an extensive array of resources, information and tools you can use. The site will be updated frequently with new multimedia materials, including podcasts of our stories and specials, as well as extended interviews. So check out the "Get Your Finances Ready for Retirement" section of NIGHTLY BUSINESS REPORT at pbs.org.
"Commentary"-Spending Restraint
SUSIE GHARIB: Tonight's commentator says there are two key words this presidential election year: spending restraint. He's Glenn Hubbard, dean of Columbia University's school of business and former economic advisor to President George W. Bush.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIV: In this presidential campaign, some candidates argue that large tax increases are necessary to fund the nation's priorities. These arguments assume, of course, that current and planned future spending levels reflect those priorities. But that is a big assumption. The Federal government has been on a bipartisan spending binge for a decade. Compared to the 1997 level, adjusted for inflation and homeland security spending, actual non-defense spending was $125 billion higher in 2007 or $900 billion excess for the decade.
Some of the binge is pure pork, for political pet projects. Citizens Against Government Waste tells us that that we are wasting $18 billion this year alone with a like amount in recent years. In not too many years, we face an avalanche of spending to pay for growth in Social Security and Medicare. And the spending binge and pork projects cast doubt on the notion that any tax increases would be saved for the future.
A better course, as with our present spending woes, would be to slow the growth of spending -- in this case by trimming entitlement benefits for the better off and improving health care markets. If we go this route, we avoid the economic costs in growth and jobs of large tax increases. Question for candidates urging tax increases: is our government so fit and trim that no spending diet is possible? I'm Glenn Hubbard.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened higher with the tech-laden NASDAQ leading the way after Goldman Sachs upgraded the chip stocks. The blue chips joined the rally on a stronger dollar and an unexpected 0.1 percent rise in April's leading economic indicators. By early afternoon, the Dow was up nearly 150 points and the NASDAQ up 22 points. The market lost its luster this afternoon when heavy selling undermined that tech sector, while a surge in oil futures pressured the Dow. June crude futures closed at a record high, $127.05 a barrel and that helped send stocks to a mixed closing. The Dow Industrial Average ended up just 41.36 at 13,028.16. The NASDAQ actually 12 3/4 points to 2516.09, while the Standard & Poor's 500 Index gained 1.28 closing at 1426.63. In the bond market, the 10-year note rose 5/32 to par and 11/32, putting the yield at 3.84 percent. Big board volume leader on 18 1/4 million shares, Pfizer (PFE) moving up $0.20. Followed by Citigroup (C) $0.13 drop.
GE (GE) $0.27 gain.
EMC (EMC) up $0.25.
And Wells Fargo (WFC) lost $0.47.
Ford Motor (F) a $0.09 drop.
Bank of America (BAC) lost $0.07.
SprintNextel (S) up a dime.
Then Motorola (MOT) a $0.13 gainer.
AT&T (T) was up $0.44 per share.
Three major investment firms had their earnings for the second quarter cut by Citigroup today. Goldman Sachs (GS), Lehman Bros (LEH) and Morgan Stanley MS) stocks all down on the news. And we must apologize for now charts tonight. We had some technical difficulties, but we'll move along nevertheless.
Texas Instruments (TXN) up $0.74. Goldman Sachs thinks the chip makers should outperform the market after underperforming it for years and also Citigroup did upgrade Texas Instruments from "hold" to a "buy."
Then Lowes Corp (LOW) down $0.64, traded as low as $23.88 after reporting first quarter earnings fell to $0.41 from $0.48 a year ago. Same store sales down 8.4 percent, all this due of course to the housing slump.
Amer Axle & Manufacturing (AXL) fell $1.13, although the company and its union workers are in a tentative contract which could well end an 11- week strike and General Motors (GM) moved up $0.19. It buys a lot of products from American Axle.
Mastec (MTZ) up $1.20. Management is confident about the company securing $50 million in wind system contracts this year.
Shaw Group (SGR) up $2.25. One of the company's units got a remedial action contract worth up $150 million from the naval command in Norfolk, Virginia.
And Giant Interactive (GA) falling $1.35. This Chinese online gaming company will suspend all games until this Thursday to express its deep condolences for the victims of the devastating earthquake in China.
Campbell Soup (CPB) fell $2.25. First quarter - or third quarter earnings excluding items $0.43, a penny below the Street estimate and down from $0.45 last year. All this despite a 7.4 percent rise in revenues.
And BCE Inc (BCE) down $2.19. "New York Times" reports the $34.8 billion buyout of the company is in trouble because the bankers want to change the financing terms.
Apple (AAPL) topped the NASDAQ's most active list with a loss of $4.02.
Google (GOOG) down $2.55.
Baidu.com (BIDU) up $6.41.
Research in Motion (RIMM) down $2.73.
And Microsoft (MSFT), you heard the news, down $0.53.
Amazon.com (AMZN) fell $5 or gained $5.83. Goldman Sachs added the stock to its conviction "buy" list and boosted its price target from $75 to $98 a share, all on the belief the company will take market share away from eBay.
And then Yahoo! (YHOO) a $0.02 gain. I heard a joke today that if Yahoo! and Microsoft do get together, the new company could be called Micro-hoo.
Intel (INTC) was a $0.12 loser.
And then Qualcomm (QCOM) $0.45 gain.
First Solar (FSLR) plunged $15.24, some heavy profit taking there.
Pacific Ethanol (PEIX) up $1.94. First quarter earnings of $0.06. The Street was expecting an $0.08 per share loss. Sales for the company during the period up 63 percent.
And Pinnacle Gas Resources (PINN) down $1.19. Quest Resource Corporation terminated its stock buyout offer for Pinnacle, down went the stock.
And those are the stocks in the news tonight.
