NBR Transcripts-June 26, 2008
Thursday, June 26, 2008The Dow's Drastic 358 Point Dive
SUZANNE PRATT: A triple digit loss for the Dow today takes the blue chip index to its lowest close since September 2006. The Dow plunged 358 points and the NASDAQ lost nearly 80. Equities got hammered by a range of factors, including a downgrade of U.S. brokers and oil prices barreling through $140. Crude futures surged $5.09 to settle at a record $139.64 a barrel as Libya threatened to cut output and OPEC's president said prices may reach $170 this summer. General Motors also weighed heavily on stocks today as Goldman Sachs advised investors to dump shares of the troubled company. GM stock fell almost 11 percent to close at $11.43. Scott Gurvey has the outlook for the nation's largest auto maker.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: General Motors is still the world's largest maker of cars and trucks, but its market share has been steadily eroding. Today's downgrade to "sell" by Goldman Sachs is just the latest blow. Goldman says deteriorating fundamentals raise liquidity concerns. As a result some stock traders reported a near panic in the automotive sector today. But GM CEO Rick Wagoner assured investors his company has enough money on hand and many options for raising cash. Traders were also worried about privately held Chrysler which found it necessary to deny rumors of a cash crunch which could lead to bankruptcy. Auto analyst Kevin Tynan of Argus Research says his view of the road ahead does not include that prospect for the American auto makers.
KEVIN TYNAN, AUTO ANALYST, ARGUS RESEARCH: I don't think there's any possibility. I think there would be a lot of steps before that would actually happen, be it partnerships, an acquisition, a merger somewhere. I don't think that these companies would run all the way into bankruptcy. I think there would be anything from private equity money to foreign investment coming in and grabbing an immediate foothold in the U.S. market.
GURVEY: GM has been scrambling to change its product mix in response to higher gasoline prices. Ford sells a greater percentage of trucks than GM and if anything will have a bigger challenge to change its product mix. Ford shares fell in today's trading. The auto makers also face the rapidly rising cost of materials and the sluggish economy which is cutting into consumer willingness to spend. GM sales are down 16 percent so far this year. The companies will need money to convert their assembly lines and auto analyst Rebecca Lindland of Global Insights says GM will need money for marketing to remake its image.
REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: People don't think of GM as having fuel efficient cars and fuel efficient crossovers also. They aren't just about the Suburban anymore. So it's a matter of, when people think of fuel efficiency, they don't necessarily think of GM, fairly or unfairly in many cases.
GURVEY: Competitors face the same challenges as Detroit's big auto makers. But some, notably Toyota and Honda, have newer plants which are easier to convert from trucks to cars. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
PRATT: Joining me now with his analysis of today's market activity is Stuart Freeman, head of equity strategy at Wachovia Securities. Stuart, good to see you again.
STUART FREEMAN, EQUITY STRATEGIST, WACHOVIA SECURITIES: Thank you. Good to see you.
PRATT: So, what happened today? Walk us through some of the trading activity, if you will.
FREEMAN: Well, I mean, I think what we had today was you know, another perfect storm. We had a number of downgrades in earnings estimates in the financial area and the consumer cyclical area. The two areas that have been the toughest the last two quarters for earnings already and I think it's not really a change in the qualitative market, but it's just, you know, another sign that the quantitative nature of the downside is greater than been expected in the financial area and the lending area and in the consumer cyclical area. So, again, oil prices hitting a new high. Again, another quantitative -- not a new issue, but another quantitative high and all of it came together on the same day as we're going into the end of the quarter.
PRATT: Now, you have been through a lot of tough days on Wall Street, a lot of down days like this one. Is this more or less troubling to you?
FREEMAN: You know, (INAUDIBLE) capitulation type of behavior. It's investors not feeling the bottom yet in the fundamentals. The stocks are reeling on that. You know, I think that we probably are going to still have a couple quarters of tough numbers in the financial industry. I think we are going to have some slowing in the consumer cyclical industry, but as we move through the end of the year and into next year, I think we're going to see -- there are going to be easier comps and the low interest rates, housing affordability as a result of the house prices coming down and rates still being low, are going to slowly kind of in a U-shape pull things out. So, I wouldn't say this is a terribly unusual type of a day, but it's a capitulation day. It was a panic day and I think there is a good chance that we'll see by the end of tomorrow, some lift after today.
PRATT: So, are you a buyer of anything at these levels right now?
FREEMAN: We have been for the last couple of years very defensive. We have been buying companies that have stable growth, not highly cyclical earnings growth. PRATT: Such as?
FREEMAN: That includes drug companies, companies like Procter & Gamble, companies like Pepsico and I think that's where we are. We are at a turning point in this market. I think as we move forward and look forward a year, year and a half, I think that it's the more cyclical stocks that have been hit that will perform the best.
PRATT: Any disclosure on those stocks?
FREEMAN: Nope. Don't own either of those stocks.
PRATT: What troubles you the most about the market right now? What is the major pressure point do you think for investors? Is it oil prices?
FREEMAN: Yeah, I think it needs - I think oil prices are certainly an issue. Consumers, investors hear about oil prices every day. It needs a couple of catalysts. One of the catalysts I think is a little bit better news in housing, you know, May housing sales were up. The prices are still dropping but because they're down, they're starting to move up from time to time. I think more days like that, more months like that is going to help and then also just a deceleration in the decline in some of the charges in the financial industry. I think once we start to see those things, investors will look beyond the -- the nadir.
PRATT: OK, some very good points. Thank you so much for joining us.
FREEMAN: Thank you so much.
PRATT: My guest this evening, Stuart Freeman of Wachovia Securities.
Commerce Secretary Carlos Gutierrez Talks About The Economy's Slow Growth
SUZANNE PRATT: The economy is still growing although ever so slowly. That's the word from the Commerce Department which reported its final reading on first quarter GDP showing just a 1 percent growth rate. Stephanie Dhue talked with Commerce Secretary Carlos Gutierrez about the economy and began by asking which poses the greater risk, slow growth or inflation.
CARLOS GUTIERREZ, U.S. COMMERCE SECRETARY: Well, you know for an economy to be healthy, we have to have three things. One is growth. The other one is manageable inflation, low inflation and then employment. And we have always said, the president always said we have to have all three. That's really the challenge is not doing one, but having it all in place. Right now, we need to confront energy prices and what the president has said is that we need to do a lot of things. There isn't one single big action that we can do. And that means exploring and producing more of our own -- of our own oil. We can't be asking the world to produce more and to drill more and we're not willing to do it.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: To what extent do you think that institutional investors or speculators have played a role in the run-up of oil prices?
GUTIERREZ: We believe that this is a fundamental market problem, that demand has been growing faster than supply. Wanting to see other issues other than supply and demand can be a huge distraction. And we need to either increase supply and that is alternative sources as well as domestic oil production or we need to reduce demand. And there is a bit of an inclination to want to blame things other than the fundamentals of how a market works.
DHUE: Well, some people have a hard time explaining the fundamentals say between $80 a barrel and $140.
GUTIERREZ: You know, supply has remained pretty static and in some cases we know that some countries are going to reduce their production. They're not able to produce more. The other thing that has an impact around the world is where demand is growing very rapidly. Subsidies are in place. Price controls are in place. Ironically, what we have seen is that that also has an impact on consumption and that also could have an impact on prices.
DHUE: Here in the U.S., to what extent do you see falling home values and these rising fuel prices impacting consumer spending.
GUTIERREZ: Interestingly in the first quarter, the two biggest benefits to the economy, the two biggest contributors to our growth were consumer spending and exports. So consumer spending continues to grow, not at the pace we'd like to see, because consumer spending is growing at 2.5, 3 percent before that. But it's still growing.
DHUE: We've been speaking to Commerce Secretary Carlos Gutierrez. Thanks for joining us.
GUTIERREZ: Thank you.
"Just Price Solutions" Could Open The Door To Home Ownership For First Time Buyers
SUZANNE PRATT: Sales of existing homes edged up a bit in May, rising 2 percent as people tip-toed back into the market. Still, many would-be buyers are having trouble qualifying for loans in the tight credit environment. Now, there's a glimmer of hope for first time homeowners. David Brancaccio of "Now on PBS," introduces us to a California couple using a new lending system that gives buyers a helping hand.
DAVID BRANCACCIO, NIGHTLY BUSINESS REPORT CORRESPONDENT: Devon and Stacey Wilson have a good credit score, over 700. A couple of years ago they could have gotten a half dozen exotic mortgages, but not today.
DEVON WILSON, PROSPECTIVE HOMEOWNER: Banks want 20 percent. They want the down payment. It's not like before where you can walk up and sign a paper and get a loan approval to a house.
BRANCACCIO: The Wilson's have only $20,000 to put down and Devon's starting salary as a landscape architect is $60,000 a year, not bad right out of college, but when Stacy Wilson plugged that into a mortgage calculator...
STACY WILSON, PROSPECTIVE HOMEOWNER: Even at our best guess we were still only coming in at around $200,000, where like you can't get a house in California for $200,000.
BRANCACCIO: But then they had a stroke of luck. Their real estate broker sent them here, to the Cabrillo Home Ownership Center and a counselor has enrolled them in a new program called just price solutions. It's a revolutionary mortgage lending software invented by online banking pioneer, Brian Cosgrove and his team.
BRIAN COSGROVE, PRES., JUST PRICE SOLUTIONS: How can we remake mortgages so that, so that we don't have to use sub-prime, if you will in that process? How can we redo this and come up with something that's sustainable and works and pays everybody that's involved in the process?
BRANCACCIO: They did it by updating a little known government outfit with an impressive success rate, Neighborhood Housing Services of America, whose borrowers have a foreclosure rate of just about 1 percent, even during the sub-prime crisis. Their winning formula? Along with a fixed rate loan, all borrowers get matched up with an in-person homeownership counselor in their community.
COSGROVE: We needed somebody to step in that could advise people without a, without a purely economic incentive.
BRANCACCIO: Today the Wilson's counselor uses the JPS system to instantly approve them for several grants and loans. Then he divides their mortgage in two so their payments are reduced to a fixed rate just above 6 percent, about the same terms as those with the best credit and a full down payment.
ELIZABETH WARREN, PROF., HARVARD LAW SCHOOL: $297,000 is what the loan amount that you will be making payments on, total payment $2,269.
BRANCACCIO: And that means after tax rebates, they'll be paying almost exactly what they've been paying in rent. JPS, a non-profit, has pulled in funding from Fannie Mae, Citibank and State Farm, among others and through software fees is striving to become self sufficient. Elizabeth Warren, professor of bankruptcy law at Harvard, is encouraged by the program.
DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC & POLICY RESEARCH: The number one retirement plan in America is pay off your house and live on your Social Security. If you can't put a single dollar away in retirement funds, if you were able to buy a home and get it paid off, you'll have a relatively secure retirement.
BRANCACCIO: But just how far should policymakers push the idea of owning a home? Dean Baker is an economist at a nonpartisan think tank.
COSGROVE: We're talking about low and moderate income people. They don't have a lot of money to throw around. So if we're talking about spending more money on housing costs than necessary, that's coming at the expense of health care for their kids of, you know, getting good food, child care.
BRANCACCIO: However, Brian Cosgrove says if we want this foreclosure crisis to end, we need to promote sound ways to encourage home ownership.
COSGROVE: Now when a community breaks, it's just as important for those of us who are lending in there to step in and say, look, I don't want all the capital to come flying out of here. Let me find another borrower.
BRANCACCIO: For NIGHTLY BUSINESS REPORT, I'm David Brancaccio in New York.
PRATT: For more on the mortgage crisis and possible solutions, watch "Now on PBS" airing tomorrow night on most public television stations. Check your local listings.
"Bill of Health" -Robo Replacements
JEFF YASTINE: Millions of Americans are facing total knee replacement surgeries. It's a major operation involving the removal of the entire knee joint and months of rehabilitation. As my latest "Bill of Health" explains, advances in robotic technology are making less-invasive surgeries with minimal recovery time available to more people. Watching total knee replacement surgery. Well, it's a lot like watching a mechanic work on a car, with lots of sawing, drilling and hammer-tapping. And the rehabilitation can take up to three months. Dr. Maurice Ferre, CEO of Mako Surgical, believes his firm's FDA approved robotic arm will make a less-invasive technique, partial knee resurfacing, a more popular alternative.
DR. MAURICE FERRE, PRESIDENT & CEO, MAKO SURGICAL CORP.: The burr will guide its way through and it will lock itself in. And once it's locked as you can see here, it creates a wall. So you can't go beyond these borders. So the surgeon actually is looking at the screen here that showing what he has to burr out.
YASTINE: The surgery is done through a small cut in the knee, so a color-coded virtual rendering of the patient's knee guides the surgeon's bone- removing tool. When the burring stops, a pair of metallic implants are glued in on the upper and lower knee to replace damaged bone and cartilage. Morningstar analyst Bradley Kay says the key to the Mako device is that it allows more surgeons to do what is otherwise a very delicate surgical technique.
BRADLEY KAY, ANALYST, MORNINGSTAR: Those at the moment can only be performed by the very best and most skilled surgeons out there. Medical robotics really takes those techniques which save money and allows all surgeons to perform them, by making them much more accessible.
YASTINE: The Mako system is new, so only about a half dozen hospitals and clinics use the robotic devices, which the company builds at its facilities in Davie, Florida. Medical robotics itself remains a somewhat controversial subject, with some critics questioning whether robotic devices are really worth the cost. But with active, arthritic and aging baby boomers and a broader industry trend toward less costly, minimally- invasive surgeries, Mako's CEO sees a bigger trend unfolding.
FERRE: When you are trying to do minimally invasive surgery, what you are giving up is access, visualization. The use of robotics specifically for dexterity, for the ability to do very specific tasks, it works extremely well.
YASTINE: Analysts believe there's a potentially large market for publicly traded Mako's surgical robot. About 50,000 partial knee resurfacings are done nationwide each year now. That number could go much higher using the less invasive, robotic procedure.
Paul Kangas' Stocks in the News
JEFF YASTINE: Maximum pain seems to be the best two words to describe today's market action. The slide was greased by that addition of GM to Goldman Sachs' sell list and Goldman's downgrade of Citigroup, warning of bigger losses at the banker. Record high oil prices of course did not help. By noon, the Dow was off 210 points, the NASDAQ down 56. The markets continued to stair step lower all the way to the end of the session. The Dow dropped 358 points to 11,453.42 and the NASDAQ plunged almost 80 to 2321 and the S&P 500 dropped below 1300 for the first time since March, closing off 38.82 to 1283. And in the bond market, the 10-year note rising 18/32 to 98 24/32 and the yield at 4.03 percent.
And Citigroup (C) topping the list, down $1.18. Goldman Sachs delivering a warning shot that Citigroup may write off another $9 billion and cut its dividend yet again. Goldman put the stock on a "sell" list and today's drop put Citi shares below the multi-year low set in mid-March.
Look at some other hard-hit financials today, Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), Morgan Stanley (MS), Raymond James (RJF), each settling near their lows of the day. Merrill setting a new five-year low with today's activity.
Countrywide Financial (CFC) slipping $0.16.
And then there's its suitor, Bank of America (BAC) down $1.80 and a new low for the year, dropping more than $1. The banking giant promising to eliminate 7500 positions after it absorbed Countrywide next week.
And a four-year low for General Electric (GE) losing $1.46.
Ford Motor Co (F) falling a fraction.
Pfizer (PFE) slipping $0.71.
Washington Mutual (WM) continuing with those financials, down $0.50.
And Wachovia (WB) down nearly $1.
Multi decade lows for General Motors (GM) if you account for the Delphi spinoff and all the other financial engineering over the years. Reuters says this is the lowest price for the shares since the mid-1950s. Now those charts show it matching the lows of 1974, all this on that "sell" recommendation from Goldman Sachs. The analyst questioning GM's financial liquidity putting the shares on its "sell" list. CEO Rick Wagoner says his company has adequate cash positions and could raise even more if needed.
SprintNextel (S) one of the two going to the upside today. And there's a look at auto parts makers all to the downside, American Axle (AXL), Goodyear Tire (GT) and Lear Corp (LEA) all down significantly low
Then as we see there, SprintNextel (S) up $0.29.
And then a peek at some other blue chips couched in the red, American Intl Group (AIG) a 52-week low there.
American Express (AXP) continuing aftershocks from the fallout the credit markets.
3M (MMM), United Technologies (UTX) all down significantly lower as well.
If there's one bright spot in today's action, it was in the precious metals stocks. Gold bullion topping to a one-month high, rising nearly $33 to over $915 an ounce and there you see the action in the gold stocks, Agnico Eagle (AEM), Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC) and Yamana Gold (AUT) all doing very nicely.
Lennar (LEN) fell over $1, greater than expected second quarter losses.
Oshkosh (OSK) skidding over $11 damaged by the heavy truck maker's forecast for the third quarter as you see it there.
And then in other news, a bungee jumper shares of Nike (NKE) tumbling $6.50. Worries that the economic slowdown will hurt Nike's growth prospects in the U.S., fourth quarter profits did rise by 12 percent.
On to the NASDAQ where Research in Motion (RIMM) tumbled almost $19. First quarter profits just shy of forecasts and the company also warned second quarter profits would also be disappointing.
Apple (AAPL) sliding more than $9.
Google (GOOG) down more than $22.
Microsoft (MSFT) off a fraction.
And then Oracle (ORCL) dropping $1.13 or 5 percent.
So did Intel (INTC).
And then moving onto Cisco Systems (CSCO) falling $0.88.
Qualcomm (QCOM) down more than $2.
Baidu.com (BIDU) dropping more than $17.
Amazon.com (AMZN) losing more than $4 caught in today's downdraft and some worry that Amazon's sales and profits might be hurt if states beginning levying sales taxes when products are purchased online.
And finally, Bed Bath & Beyond (BBBY) among the few standouts. The home goods retailer delivering stronger than expected results and also touting expansion plans for Mexico and Canada and that may help offset the slack in sales from the U.S. housing slowdown.
Those are our stocks in the news tonight.
