NBR Transcripts- June 25, 2008
Wednesday, June 25, 2008Interest Rates Remain Unchanged
SUZANNE PRATT: The Federal Reserve today held interest rates steady, signaling the central bank has entered a new phase of monetary policy. The decision ends a series of sharp rate cuts, as the Fed shifts its attention from boosting economic growth to dealing with rising inflation. As Scott Gurvey reports, the key Federal funds rate remains at 2 percent.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The interest rate decision was as expected, but changes in the wording of the open market committee's policy statement left Fed watchers wondering what lies ahead. Although downside risks to growth remain, the statement reads, they appear to have diminished somewhat and the upside risks to inflation and inflation expectations have increased. Economist David Greenlaw of Morgan Stanley says it is not clear if the Fed is more worried about growth or inflation.
DAVID GREENLAW, CHIEF US FIXED INCOME ECONOMIST, MORGAN STANLEY: The market continues to want to price in some near term tightening. Although in the wake of the statement today, which didn't appear to provide a clear trigger for that tightening, the market has reined in somewhat its expectations for the next few meetings. I think the next move will be a tightening, but I don't think it's going to come until next year.
GURVEY: In deciding to leave the target Fed funds rate unchanged at 2 percent, the Fed ended a dramatic series of rate cuts which began on September 18 of last year with the funds rate at 5.25 percent. The Fed made six additional cuts for a total of 3.25 percent, as it struggled to combat the credit crunch brought on by the failure of sub-prime mortgage loans. But critics charge the cuts have had little effect on the housing market, where home values have plummeted and loans remain difficult to get. And they say the low rates have fueled inflationary pressures which began in the energy sector but are now moving into the general economy. Strategist Steven Ricchiuto of Handelsbanker Capital Markets says the Fed has told us what guideposts it will watch in the months ahead.
STEVEN RICCHIUTO, ECONOMIST, HANDELSBANKER CAPITAL MARKETS: They specifically emphasized the fact they think the downside risks to growth have diminished. And they specifically also indicated that they think the liquidity problem in the banking industry has improved. The combination of those two events tells a lot about what they're thinking and what to look at. By the same token, they continue to indicate that their concerns about inflation are really based on commodity prices, and that's why we have to see how those continue to move as we go forward.
GURVEY: The Fed statement says inflation is expected to moderate by the end of the year. But it also says uncertainty regarding the outlook is high. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
PRATT: Joining us now for further discussion of the Fed's decision are Michelle Girard, senior economist at RBC Greenwich Capital Management and Mike Holland of Holland and Company. Nice to see both of you again.
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hi, Suzanne. PRATT: Before we begin, I also want to just apologize to everyone for the noise behind me. There's a party on the floor of the exchange maybe celebrating monetary policy, who knows. But let me start off by addressing my first question to you Michelle. Were you at all surprised with the Fed's statement today?
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: No, I expected that they would acknowledge the downside risk to growth and the fact that there were upside risks to inflation, but not directly compare the two. That would have been, what would have been really insightful was if they had said which one was the dominant concern and they didn't and I think that that was a signal while they're edging closer to perhaps thinking about hiking interest rates, their finger is not on the trigger.
PRATT: What about you, Mike? Do you think the markets expected the type of statement that we got today from the Fed?
HOLLAND: Yes, Suzanne and I think that the market response was exactly what Ben Bernanke would have hoped for. The stock market had some gains and kept those. And more important to the viewers, the bond market looked to be satisfied and relieved with not only the action was or wasn't but also the words. So I think the last comment that Scott Gurvey made about the Fed's comment, that the outlook for inflation was uncertain, I think was a key part of it.
PRATT: Michelle, some economists say after seeing the statement today, that policy makers may be too upbeat about economic growth, maybe minimizing the risk to growth. What your feeling about that?
GIRARD: Well, I think they certainly upgraded the characterization of the economy, but, quite honestly between the last meeting and now, we've seen the news -- it's not that it's gotten a whole lot better, but it hasn't gotten worse. The payroll declines have mitigated. We've seen consumer spending holding up surprisingly well, in part because of the rebate checks. So I think that the Fed acknowledgement that there are downside risks to the economy but they're diminishing I think is actually fairly accurate.
PRATT: Let me throw out this next question to both of you. Do you have more or less clarity after you saw the statement today about when the Fed is likely to move and what that move is going to be?
HOLLAND: Go ahead, Michelle.
GIRARD: I would just say I think we have less clarity. I think that it's -- I don't think there was any indication about timing from the statement. We think it will be in early 2009.
PRATT And what about you, Mike?
HOLLAND: I think it's a great question Suzanne, because I believe the Fed with its statement, using, again, Scott Gurvey's last word of the description, the outlook is uncertain. They have actually adopted, I think, under Bernanke, some humility about their lack of ability to predict and the -- I think they put us on notice that they will be responding to data as it comes in and they are not telling us that the next move is going to be an increase in 25 basis points before the end of the year. They didn't do that and I don't think they had any intention of doing that. I think Bernanke is doing a great job right now.
PRATT: And Mike, what do you think the market is anticipating in terms of when that rate hike will come? Is there a better sense today now?
HOLLAND: I think as Michelle alluded to before, nothing before the end of the year is probably in a lot of people's minds because the outlook remains uncertain for inflation. It could get better. The Fed said it hoped it would. We could plod along here with 1 percent kind of growth in the GDP until year end and maybe and then take another look.
PRATT: Michelle, what kind of economic conditions would we need to see in the next few months for the Feds to hike rate soon or sooner rather than later?
GIRARD: I think it's not about growth as much as it is about inflation and not even actual inflation, but inflation expectation. If people really begin to expect that the inflation run-up we have seen is longer lasting, then I think the Fed will respond. They want to ensure that the public understands that it's their job to keep inflation contained and they will do what's necessary. And if that credibility gets called into question, for me, that's the trigger, even if the economy has to suffer.
PRATT: What date-
HOLLAND: Suzanne, if I could just follow on with what Michelle just said, I think that's exactly right. And therefore the early indicator was the bond market's reaction today which said they're doing the right thing in their inflation stance and they're going to be very vigilant about inflation. The bond market, which hates inflation, said, OK, we believe them.
PRATT: Let me just throw this in. Does that mean Mike that the big focus for the market going forward is only inflation data, if you're looking at CPI, PPI and things that give us a good reading on inflation?
HOLLAND: I think it will be important, Suzanne, but I think the other two parts here -- growth in the economy, including jobs, and then the other thing, we haven't mentioned it all is the credit turmoil that occurred in March and April. The credit markets are still not fully healed. They're not in as bad a shape as they were then, but that was mentioned by the Fed. They're watching that. The credit markets have to work. Otherwise people can't buy their homes.
PRATT: OK, let's leave it there. Thank you both for joining us.
GIRARD: Thanks Suzanne.
PRATT: My guests this evening Michelle Girard and Mike Holland.
The SEC's New Rules For Credit Rating
PAUL KANGAS: The nation's top investment cop wants to wean investors and Wall Street from an over reliance on credit ratings. The Securities and Exchange Commission proposed new rules for the agencies today, sparked by complaints that Standard & Poor's, Moody's and Fitch contributed to the credit crisis by carrying high ratings on risky sub-prime securities. As Stephanie Dhue reports, the SEC wants investors big and small to do more due diligence.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Just as investors rely on credit ratings to assess risk, so too, does the Securities and Exchange Commission. It has 44 rules that use credit ratings. Today it proposed changing 38 of them. SEC Chairman Christopher Cox says the goal is to encourage investors to make their own judgments.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: The recommendations we consider today are designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security.
DHUE: The proposed rules include letting money market fund managers invest in short-term debt without a credit rating. Fund managers would have more leeway in figuring out an investment's liquidity, volatility and risk of loss. Commissioner Paul Atkins says ratings have become a crutch for investors and regulators.
PAUL ATKINS, COMMISSIONER, SEC: Blind reliance on ratings is not something that the SEC should foster. Unfortunately by putting them in our rules, we did just that. It's the inevitable law of unintended consequences.
DHUE: But critics say an unintended consequence of the proposed changes could be that money market portfolio managers move into riskier securities. The AFL-CIO's general counsel Damon Silvers says the proposed rule takes away an external check.
DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-CIO: It's rather like saying after you've de-funded the fire department, it's rather like saying oh, we were over-relying on the fire department, you ought to buy a bucket.
DHUE: Back in 2003, the SEC tried to make similar changes, but the effort was widely criticized and the rules never adopted. Observers say the same thing could happen again. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Green Options"-Governor Charlie Crist's Climate for Change Conference
SUZANNE PRATT: Florida Governor Charlie Crist convened his second annual climate change conference in Miami today. One of the big announcements from that meeting is about solar power and Florida's largest publicly held utility FPL Group. The sunshine state has no commercial solar power installations. But as we continue our ongoing series "Green Options," Jeff Yastine reports that's about to change in a very big way.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Florida has lots of sun, but it also has lots of clouds, which interrupt how much electricity a solar power plant can produce. That's why the Mojave desert and other arid, cloudless regions of the southwest are home to most of the nation's major solar power plants. Now FPL wants to build not one, not two, but three solar power installations in the state, with more than on hundred megawatts of capacity. Which begs the question: if Florida was thought to be inefficient for commercial solar because of its clouds, what changed? Flower Power and Light says there are two reasons -- high oil prices and a belief that carbon dioxide emissions from smokestacks like those will soon be regulated. That means that carbon dioxide will no longer be free. It will be a cost to FPL's bottom line. And that's why FPL VP of development, Eric Silagy says commercial solar power in Florida now makes business sense.
ERIC SILAGY, VP DEVELOPMENT, FLORIDA POWER & LIGHT: Carbon legislation, which we believe will pass this year and next year and we believe it should pass, then you'll see also an additional value to the customers, in so far as the value of the project will be greater and the cost will be less.
YASTINE: Less because solar power plants, unlike coal or gas-fired plants, have no greenhouse gas emissions. Climate and energy analyst Peter Fusaro says if it makes sense in Florida.
PETER FUSARO, CHAIRMAN, GLOBAL CHANGE ASSOCIATES: It actually makes sense in every state. For example, Germany did not have a solar industry in 1990. They now have the most progressed solar industry and they don't have a lot of sun. The have a lot of cloud cover, intermittency issues.
YASTINE: Advancements in solar power technology are also at play in FPL's decision, says Ernst & Young's clean technologies director Joseph Muscat.
JOSEPH MUSCAT, DIR. OF CLEANTECH, ERNST & YOUNG: You can think of it as comparable to the semiconductor industry, where what they we really trying to do was stuff more transistors onto a particular wafer. So I think you're seeing the very same activities within a square centimeter with a solar panel. How much electricity equivalency can you get out of that?
YASTINE: FPL expects regulatory approval soon and hopes to start construction by year's end, finally turning the sunshine state into the solar power state. Jeff Yastine, NIGHTLY BUSINESS REPORT, Fort Lauderdale.
"Money File"-Uncovering Affordable Travel Deals
SUZANNE PRATT: With gasoline prices at record highs, tonight's "Money File" looks at ways to save on your summer vacation. Here's Terri Cullen, personal finance columnist at the "Wall Street Journal."
TERRI CULLEN, COLUMNIST, THE WALL STREET JOURNAL: Summer's finally here, but with soaring gas prices, it's tougher than ever for families to find an affordable vacation. And if you need to fly to your destination, you may pay even more. Airlines have been hit hard by soaring gas prices, too. So as a result, travelers are being asked to pay more for everything from checked luggage to drinks on the flight. And recently, a number of air carriers announced plans to cut back on their fleets later this year, starting in September. What that means is more travelers will be competing for fewer seats and that probably means much ticket prices for everyone. But you can still find vacation deals if your travel plans are flexible and you act fast. Where you live matters. You'll find the lowest fares near major hub airports, where competition from low-cost carriers is still keeping prices in check at the major airlines. Where you're going matters, too. For example, if you have a Caribbean vacation in mind, you'll find fares to the Bahamas are up sharply from last year, while fares to the U.S. Virgin Islands are actually down a bit. So shop around. Being flexible about when you travel also may get you better deals. If you're planning on going to a hot vacation spot, compare prices for flights during the week instead. And if you know you'll be traveling for the holidays later this year, book your seat now while prices a still relatively low. Finally, try checking with a travel agency, which may have already locked in lower rates on air fares earlier this year. I'm Terri Cullen.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened higher despite investor caution ahead of the Fed's rate announcement. A decline in oil futures prompted some of the early buying. A rally in the tech sector also helped the blue chip Dow post a 70-point gain after two hours of trading with the NASDAQ up 38 points. When the Fed's decision came at 2:10 p.m., the Dow was up 40 points. It eased a bit and then rallied to an 83-point gain, only to give most of that back by the final bell. The Dow Industrial Average closed up just 4.40 at 11,811.83. The NASDAQ rose a solid 32.98 points to 2401.26. Standard & Poor's 500 gained 7.68 to 1321.97. In the bond market, the 10- year note held steady at 98 6/32, leaving the yield at 4.10 percent.
New York exchange volume leader on 25.8 million shares, Citigroup (C) showing no change on the day.
Followed by Bank of America (BAC) with a penny loss.
And then Countrywide Financial (CFC) down $0.08. You heard the news there.
General Electric (GE) $0.40 gainer.
And then Washington Mutual (WM) a $0.26 loss.
Pfizer (PFE) edge up $0.19.
Wachovia (WB) gained a penny.
AT&T (T) rose $0.20. Sanford Bernstein brokerage upgraded it from "market perform" to "out perform."
Ford Motor Co (F) an $0.08 loss.
And then JPMorgan Chase (JPM) with a $0.19 gain.
American Express (AXP) down $1.16 even though Mastercard will pay the company $1.8 billion over 12 months to settle a lawsuit that alleged Mastercard blocked banks from issuing American Express credit cards. AXP stock still fell mainly because it said the credit conditions have weakened more than expected.
On the other hand, Mastercard (MA) jumped $9.42 despite settling with that huge payment, but it does remove an overhanging uncertainty as to how the lawsuit would impact Mastercard, so the stock moved up and also helping a Standard & Poor's upgrade of Mastercard from "hold" to a "buy."
On the downside, Boeing Co (BA) losing $5.15. Goldman Sachs downgraded it from "neutral" to "sell" on concern that up to one third of its new jet aircraft orders could be canceled because of soaring fuel prices. Goldman Sachs put a $60 a share target on the stock over the next six months, but the news from Boeing had a very weak aerospace group today.
Honeywell Intl (HON), Precision Cast (PCP), Spirit Aerosystems (SFD) and Textron (TXT) all multiple point losers.
Rockwell Automation (ROK) down $6.42. It issued a 2008 earnings warning and Standard & Poor's downgraded it from "buy" to just a "hold."
Even Monsanto Co (MON), which has been so strong down $4.27 despite higher third quarter earnings of $1.45 versus last year's $1.02, $0.09 better than the Street expected, but as you can see, the stock has had a huge run up, so it was susceptible to profit taking and we saw some of that today.
American Greeting (AM) down $4.26, sharply lower first quarter earnings, $0.27, way down from $0.54 a year ago.
Best Buy Co (BBY) edged up $0.63 a share. The company will boost its quarterly dividend by 8 percent to $0.14 a share.
Darden Restaurant (DR) had a good day, up $2.16. Fourth quarter earnings higher, $0.72 versus $0.67 last year. Same store sales up 20 percent. The company sees fiscal 2009 earnings growing by 14 to 15 percent.
Nokia (NOK) up $1.44. "Wall Street Journal" reports the company is buying full control of the British software firm Simbian (ph) for $410 million, positive reaction to that news.
Apple (AAPL) topped the active list up $4.14 on optimism over the iPhone outlook.
Then Research in Motion (RIMM) closed up $1.86 after the close out with first quarter earnings, $0.84, well above last year's $0.39, but a penny below the Street estimate and the company's outlook fell short of Street expectations. In after hours trading, I saw the stock as low as about $129.77, so it dropped sharply after hours.
Google (GOOG) in there with an $8.70 gain.
Microsoft (MSFT) edged up $0.62.
baidu.com (BIDU) $25.37 advance there.
Oracle (ORCL) up $0.32. After the close, fourth quarter earnings, $0.47, $0.03 above the Street estimate, but it fell about $1 in after hours trading.
Then Intel (INTC) $0.24 gain.
$0.89 advance for Qualcomm (QCOM).
Cisco Systems (CSCO) a $0.22 rise.
And First Solar (FSLR) was up $1.91.
Those are the stocks in the news tonight.
