NBR Transcripts-July 7, 2008
Monday, July 07, 2008The Greenback Shows Some Gusto As Oil Prices Slide
SUSIE GHARIB: Oil prices dropped sharply today, briefly trading below $140 a barrel. By the close of New York trading, August crude futures fell $3.92 or 3 percent to $141.37. The sell-off came as officials in Iran made conciliatory comments about the country's nuclear ambitions while those lower crude prices encouraged dollar traders in currency markets. The U.S. dollar surged in early trading today, but then declined against major currencies late this afternoon. Scott Gurvey has more on the outlook for America's greenback.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The battered American dollar has found some firmer footing in recent days following an indication from the European central bank that it does not intend to raise interest rates a lot in the months ahead. World leaders at the G-8 meeting in Japan are expected to express a desire to see the dollar strengthen further and to call on the Federal Reserve to boost American interest rates to help make that happen. Meeting yesterday with the Japanese prime minister, President Bush said the U.S. believes in a strong dollar policy. But currency strategists, such as Meg Brown of Brown Brothers Harriman, say they do not expect to see a much stronger dollar any time soon.
MEG BROWNE, SR. CURRENCY STRATEGIST, BROWN BROTHERS HARRIMAN: The Fed, yes, it's shifted to a rate hiking stance, but the U.S. economy is still fairly subdued. It's growing, it's picking up, but it's still at below trend growth. The Euro zone economy is beginning to come lower, but we really need a bigger shift in order for intervention to work. The market has to believe that the euro has peaked and it doesn't yet.
GURVEY: What the markets do expect is a wide trading range for the dollar, particularly against the euro, as the cloudy economic picture unfolds in both regions. Adding to the uncertainty is the fact that the relative value of the dollar and the price of oil have become tightly linked. That's because energy contracts are denominated in dollars. As energy prices move in response to geopolitical events, the dollar tends to move in the opposite direction. Strategist Michael Woolfolk of Bank of New York Mellon says the combination of high prices and sluggish growth puts the Federal Reserve in a difficult situation.
MICHAEL WOOLFOLK, SR. CURRENCY STRATEGIST, BANK OF NEW YORK MELLON: The Fed would have very little alternative but to try to head off the rise in inflationary expectations, which would further cripple growth here in the states. The higher interest rates, however, would be looked upon favorably with respect to the U.S. dollar.
GURVEY: Lower U.S. growth would also mean lower growth worldwide, which in turn would reduce the demand for commodities, resulting in lower prices. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Robert Hormats, Vice Chairman of Goldman Sachs International
SUSIE GHARIB: The dollar is just one of many issues on the agenda of world leaders meeting this week in Japan for the G-8 summit. Joining us now with more analysis, Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHAIRMAN, GOLDMAN SACHS INTERNATIONAL: Hi, Susie.
GHARIB: As we said all eyes are on the dollar. Do you expect the G-8 leaders the make any comment about the dollar and what can be done to strengthen it?
HORMATS: I think they will probably not make any comments about the dollar. If they do, they'll be very general. The heads of state traditionally tend not to talk about currencies. They're certainly not going to negotiate an agreement. They may echo what President Bush said and that is that a strong dollar is in the interest of stability in the global economy. But my guess is they're not going to say anything that is going to go into any detail at all.
GHARIB: Many analysts have -- are hoping that the dollar is going to strengthen now that the European central bank suggested on Friday that it won't be raising interest rates again any time soon. What do you think?
HORMATS: I think that the European central bank's comments, Trichet's comments in particular were helpful and were dollar bullish, but I don't think that we can permanently rule out another increase by the European central bank. They'll probably wait a little bit of time, perhaps several months, but they want to make sure that inflationary expectations are anchored there and they by no means have given up the opportunity to raise rates if, in fact, they see inflation picking up. Nor I think can we count on as certainty that the Fed's next move any time soon at least is going to be on the upside, which would be also dollar bullish because we have a weak employment picture, manufacturing is weak, the housing market is weak and financial markets remain weak. So for the moment, I think there's the possibility of stability. But if you look down the road, there are a number of risks after these rebates are finished in the United States, is the consumer going to be strong or is the consumer going to get weaker? Is European inflation going to pick up requiring the ECB to raise rates? Those are big question marks.
GHARIB: I want to ask you a little bit about the European economy because the weaker dollar has helped bolster U.S. exports. But now we're hearing a lot of forecasting that the European economy is slowing down. It may go into a recession. What impact would a real slowdown in the European economy have on U.S. exports and, you know, additionally on the U.S. economy?
HORMATS: It would certainly be negative for American exports because Europe is a big market for American goods. But fortunately we see a lot of other countries doing reasonably well, in fact in some cases quite well, maybe slowing down somewhat because of tightening interest rates in east Asia, for instance, but those are still good markets for American manufactured goods and, agricultural goods and services. I think one of the important elements of our current picture is that exports are giving this economy a very necessary, in fact, critically important, boost. Without big improvements in the export picture which we've seen, our economic outlook would be far worse than it is today.
GHARIB: Bob, let's talk a little bit about high oil prices and this G- 8 meeting. Do you expect the G-8 leaders to say anything about the oil crisis and what can be done to bring oil prices down?
HORMATS: Well, I hope they do. And I hope they say more than simply urging the oil producers to produce more oil. That would be a nice thing. But it's not the fundamental answer to our problem. What we need to do -- and we shouldn't forget that these summits started in the 1970s in the aftermath of the oil crisis of 1973-1974 and they did make a major effort and pressed one another to increase production and improve conservation, improve oil efficiency. Now I think what they need to do in addition to encouraging more production elsewhere is do a lot more at home to invest in alternative sources of energy in a much more aggressive basis than they have in the past. That would be very helpful.
GHARIB: Bob, just to wrap it up, next year, next summer at the next G- 8 meeting, the United States will have a new president. What will he be facing in terms of challenges, in terms of the global economy?
HORMATS: Well, several things. The United States is now a lot more dependent on imported capital from the rest of the world than it was when George W. Bush took over the presidency just because our savings rate is low. We're a lot more dependent on foreign markets and the emerging economies of the world are playing a much greater role. The bricks in particular, much greater role in commodity markets, financial markets and in the trading area. So we've got to maintain an attractive environment for foreign capital which we need. We've got to do a lot at home to improve our competitiveness so we can take advantage of growth in foreign markets. We've got to work a lot more closely with the Chinas, the Brazils, the Indias, the Russias and other emerging economies to give them a greater stake in the global system and to help them to make the kind of improvements along with us to make the global financial system work better. We need to cooperate with these countries. It's a different world from even eight years ago.
GHARIB: Huge agenda. Thank you so much for your thoughts on that subject. I really appreciate it.
HORMATS: Thank you for having me, Susie.
GHARIB: My guest tonight, Robert Hormats, vice chairman of Goldman Sachs International.
The SEC/Federal Reserve Information Sharing Pact
SUSIE GHARIB: In Washington today, the Federal Reserve and the Securities and Exchange Commission announced a wide-ranging, information-sharing agreement covering investment and commercial banks. The move is aimed at heading off potential risks to the nation's financial system and preventing another Bear Stearns type of meltdown. NBR's Stephanie Dhue sat down with SEC Chairman Christopher Cox this afternoon and began by asking him what the pact will accomplish.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: If we're going to get a grip on what's going on in these markets, how best to regulate them and how best to anticipate and deal with systemic risk across the entire economy, it's really important that we share this information in real time and get a picture of all of the risk and all of the market activity.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT: Investor advocates are concerned more generally that the SEC ceding is ceding its regulatory authority to the Fed and that you'll be less well positioned to protect investors.
COX: In recent years, the SEC has put together a voluntary program that permits us to take a look not just at the broker-dealer subsidiary, but the entire consolidated entity. With this arrangement with the Federal Reserve, we'll now have the same opportunity to look at the consolidated holding company level for commercial banks that have broker-dealer subsidiaries and the SEC will be in a much better position to perform our function as consolidated supervisor of investment banks.
DHUE: You've also been investigating credit-rating agencies. A recent poll found 11 percent of financial advisors witness credit rating agencies changing ratings under pressure from either an investor, an underwriter or an issuer. Is that consistent with the SEC's findings?
COX: What we've found, for example, is that as a result of rapid increase and sustained increase in work flow, big burdens placed on the staffs of these firms to analyze a lot of new sophisticated products, they sometimes deviated from their own models and their own procedures. They cut corners. These problems are serious and we are dealing with them in real time in two main ways. First the firms themselves are addressing these shortcomings with changes in their own procedures. Second, the SEC has proposed sweeping new rules in a number of areas focused on how the credit rating agencies do their business.
DHUE: There's been a lot of discussion about fair value accounting and that fair value accounting has actually made the credit crisis worse, as banks have had to write off massive losses. What is the SEC's thinking on that right now?
COX: There's a real lively debate about whether or not fair value accounting is making things worse and speeding up the cycle of prices drying up, markets disappearing and being unable to produce reliable price information for assets. And then it becomes even more difficult for people to sell what increasingly is worthless on their balance sheets. We're going to have for this reason a round table at the SEC in just a few days focused on fair value accounting. We are not questioning market-to-market accounting or fair value accounting in so far as it applies wherever there's an active market. The concern is where there is no market. There's no price information and people are using strictly models, are we getting the best numbers? Are we doing it in the best way?
DHUE: You've come under fire for not seeing the signs of Bear Stearns' near collapse and coming out just days before and saying their capital position was strong. Looking back, what would you have done differently?
COX: As we now know looking back on that, Bear Stearns' capital was not the problem. They had a lot of capital. They had a loss of confidence and effectively a run on the bank, the first time that this had occurred in anyone's experience in the investment banking space. We don't want to have a system of perpetual bailouts and so what we'll do and what we're already doing as regulators is focus on the problems in evaluating the position of investment banks, the problems in being able to see through where the risk lies. Some of this is accounting. Some of this is regulation of capital and liquidity. And make sure that were an investment bank to go over the edge because of unsound practices or risk-taking or what have you, that its demise wouldn't automatically spread problems throughout the markets. That's not where we were with Bear Stearns. That's where we expect to be in the future.
DHUE: We've been speaking to Chris Cox, chairman of the Securities and Exchange Commission. Thank you.
COX: Thank you.
"Commentary"-Oil vs. Healthcare
SUSIE GHARIB: Tonight's commentator says while oil prices are grabbing headlines, healthcare costs are the real worry for the U.S. economy. She's Alice Rivlin, senior fellow at Brookings and former vice chair at the Federal Reserve.
ALICE RIVLIN, SENIOR FELLOW, BROOKINGS: With attention focused on skyrocketing oil prices, rising health care costs have dropped from view. But health spending is soaring, fueled by an aging population, torrents of new drugs and medical techniques and failure to control wasteful, ineffective spending. Health care has more potential to wreck our economy than oil. If current trends persist, health care will consume 20 percent of total spending in less than a decade. If we don't find a way to slow its growth, health care will bust all our budgets -- Federal, state, corporate and personal alike. We can't do much to change the oil price, which reflects rising world demand pressing on a limited supply, but we can do more to get more health care for the dollars we spend. If Medicare, the country's largest payer, takes the lead, private payers will follow. Medicare should pay for best practices, not unnecessary tests and procedures, insist on electronic medical records, require competitive bids on medical equipment and stop paying extra for the Medicare advantage program. Private payers should also move aggressively to improve efficiency. The argument that we can't control costs until we cover the uninsured is nonsense. We will never get universal coverage until we slow the growth of total spending and we had better start now. I'm Alice Rivlin.
Paul Kangas' Stocks in the News
PAUL KANGAS: Investors on Wall Street were cheered by the sharp drop in oil prices and the early strength in the dollar this morning. Their buying lifted the Dow 100 points at the outset of trading, while the NASDAQ jumped 31 points. The early rally faded over mid-session as the financial sector sold off sharply on concerns about more possible write-downs and questions about capital at Fannie Mae and Freddie Mac. At 1:00 p.m. the Dow posted a 140-point loss. The blue chips then jumped back briefly to a modest gain, only to slump again into the close. The Dow Industrial Average ended the day down 56.58 points at 11,231.96. The NASDAQ lost 2.06 ending at 2243.32, while the Standard & Poor's 500 Index fell 10.59 ending at 1252.31. Over in the bond market, the 10-year note gained 21/32 to 99 24/32, putting the yield at 3.91 percent.
Big board volume leader on 30 1/2 million shares, Citigroup (C) down $0.42 in a very weak financial sector and we'll explain some of the reasons shortly.
Bank of America (BAC) lost $0.87.
General Electric (GE) moved up $0.19. The company's NBC Universal unit along with Bain Capital and Blackstone Group are in a deal to buy The Weather Channel, reportedly for about $3.5 billion.
Then Wachovia (WB) down $0.99 in that weak banking sector.
And Freddie Mac (FRE) plunging $2.59. Both it and its sister Fannie Mae were down on concerns that the mortgage finance giants may need to raise up to $75 billion because of a pending accounting change which would force them to keep larger potential loss reserves. A Lehman analyst however thinks that the companies will be granted an exemption to that accounting change.
Let's have a look at the sister and that's Fannie Mae (FNM) down $3.04.
Pfizer (PFE) moved down $0.36.
EMC Corp (EMC) edging $0.09 higher.
Wells Fargo (WFC) was down $0.40.
And then Ford Motor Co (F) a nickel gainer
Merck & Co (MRK) down $1.85. UBS financial downgraded it from "buy" to "neutral" in the belief the stock won't do much over the near term or it'll be range bound as they say these days.
Another Dow stock, Disney (DIS) losing $0.82. Lehman Brothers downgraded it from "equal weight" to "under weight" in the belief digital downloading could be as harmful to the movie and TV industry as it was to the music industry. Media stocks generally weak today.
Moving along to our next loser of the day, we're stuck on Disney. There we go, Marshall & Ilsley (MI) down $1.64. The company expects to take a second quarter loan and lease loss provision of up to $900 million or $2.22 a share, but the company will continue to pay its $0.32 quarterly dividend.
Cash America Intl (CSH), the pawn shop companies are doing very well in this troubled economy and this one boosted its second quarter earnings guidance from its previous level of $0.51 to $0.54, all the way up to $0.62 to $0.64 due to the booming pawn shop industry in this troubled economy.
Dyncorp Intl (DCP) up $1.15. The Stiefel Nicholas brokerage upgraded it from "hold" to a "buy."
And Kindred Healthcare (KND) rising $2.12. Friedman, Billings, Ramsey brokerage upgraded it from "market perform" to "out perform."
On the downside, Furniture Brands Intl (FBN) losing $1.12. Raymond James financial brokerage downgraded it from "out perform" to just "market perform."
Apple (AAPL) topped the NASDAQ active list with a gain of $5.04.
Research in Motion (RIMM) up $0.62.
Google (GOOG) did well, up $6.91.
There you see Yahoo! (YHOO) moving up $2.56 on possibly renewed talks with Microsoft (MSFT) which itself gained a nickel.
Then moving along in the NASDAQ actives, Cisco Systems (CSCO) down $0.55.
Baidu.com (BIDU) up $11.89.
Teva Pharmaceuticals (TEVA) was down $4.02. Late stage trials of the company's multiple sclerosis treatment showed an increased dosage of it had little positive impact if any.
Intel (INTC) a nickel gainer.
And then came Qualcomm (QCOM) with a $0.31 gain.
Broadcom (BRCM) moving up $1.87. Piper Jaffray upgraded it from "neutral" to "buy."
And APP Pharmaceuticals (APPX) a nice gain of $5.37. A German firm called Fresenius will acquire this company for $23 a share cash and if certain profits are achieved over the next two years, the price would go up to $29 a share.
Those are the stocks in the news tonight.
