NBR Transcripts -July 11, 2008
Friday, July 11, 2008Freddie Mac & Fannie Mae Continue To Fan Fears On Wall Street
SUSIE GHARIB: Fear and uncertainty dominated trading on Wall Street today as worries about the future of Fannie Mae and Freddie Mac heated up. The stock value of the mortgage finance giants has been sheared in half, just this week alone. They're now trading at their lowest level in 15 years. Well, those pressures sent the Dow plunging over 250 points at one point in the day, but the index managed to cut that closing loss, ending the day down 128 points. Aiding the comeback was a report by Reuters that the Federal Reserve would let Fannie Mae and Freddie Mac tap the discount window for funds. But after the close of trading, a Fed spokeswoman told NIGHTLY BUSINESS REPORT while it's watching the situation closely; there have been no conversations between the Fed and the companies. Also late today, Freddie Mac said it has adequate capital and is highly liquid. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street's big fear is that the two government-sponsored mortgage companies could go under or require a government bailout. Art Hogan of Jefferies says the prospect of either scenario has investors nervous.
ART HOGAN, CHIEF MARKET ANALYST, JEFFERIES & CO.: In the financial sector, people are concerned that there's another shoe to drop out there, so first it's Bear Stearns, and then comes Freddie and Fannie, and then, who's next?
MILLER: Roughly 70 percent of all U.S. mortgages pass through Fannie Mae and Freddie Mac's hands. Together they own or guarantee over $5 trillion in U.S. mortgage assets. For that reason, they are widely seen as critical to the recovery of the U.S. housing market and the overall economy. At a meeting with his economic team this morning, President Bush addressed the Fannie/Freddie crisis.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: First of all, Secretary Paulson came by this morning to brief me on the financial markets. Freddie Mac and Fannie Mae are very important institutions. We spent a fair amount of time discussing these institutions. He assured me that he and Ben Bernanke will be working this issue very hard.
MILLER: In addition, Treasury Secretary Henry Paulson issued his own statement, saying: "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission." A source familiar with the administration's thinking says that statement is designed to quash speculation the government could nationalize the two public companies. But it was comments from Chris Dodd, the chairman of the Senate Banking Committee, that Wall Street found comforting.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: These are very strong, viable entities today. The capital they have is good, it's in excess of what's required under federal law. This is not a time to be panicking about this.
MILLER: The market staged a comeback on what turned out to be an unfounded report that the Fed was going to extend its emergency discount window to Fannie and Freddie. But after the close, a Fed spokesperson said there has been no discussions with either company about that. Most Wall Street analysts believe the risk of either Fannie or Freddie going under is slim. But many do think the companies will require heavy infusions of capital. Investors are selling now, asking questions later. Fannie Mae shares plunged 46 percent this week alone. Freddie Mac even more. S&P market strategist Alec Young says it will be difficult for stocks to advance until there is clarity on the Fannie/Freddie crisis.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: This is an issue for everyday investors because Fannie and Freddie's inability to function as they normally due means that its going to be harder to get a mortgage, home prices are going to stay weaker for longer, and bank profits and write- downs are going to be weaker than expected. And because of all those factors, Wall Street is likely to be under a cloud for a while.
MILLER: The turmoil at Fannie Mae and Freddie Mac is the latest turn in the year-old credit crisis. Just a few months ago, Wall Street was hoping the worst might finally be over. Now, it seems the troubles are growing. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices 2008"-McCain Economic Adviser Douglas Holtz-Eakin Forecasts The Future of Fannie Mae & Freddie Mac
SUSIE GHARIB: The Fannie Mae and Freddie Mac situation was front and center for the presidential candidates today. While not commenting on specifics, Democrat Barack Obama's campaign said he recognizes Fannie and Freddie are essential and that as president, Obama would do what's need to keep housing affordable. Republican contender John McCain said government assistance would likely be needed for Fannie and Freddie because their failure would ripple through the economy. As we continue our "Economic Choices '08" coverage, Washington bureau chief Darren Gersh sat down with McCain's chief economic adviser today, Douglas Holtz-Eakin. Darren began by asking him whether Senator McCain thinks regulators and the Bush administration are doing enough to support Fannie Mae and Freddie Mac.
DOUGLAS HOLTZ-EAKIN, SR. POLICY ADVISER, MCCAIN CAMPAIGN: Well, one never knows exactly what is going on behind the scenes, but from what we've seen in the markets and from what we've seen on the ground in the housing market over the past 18 months or so, the senator absolutely understands the need to make sure that Fannie and Freddie are given support so they don't fail. You don't want to see a financial system that faces further threats from the kind of shock this would produce. And the housing markets needs support at this time. That's obvious. So take the steps necessary to give them short-run liquidity, take the steps necessary to support acquiring more capital -- there's no substitute for more capital, and at every step in that process, let's get reforms so we that have good regulatory oversight and good market discipline for these institutions. You don't want to take the step of always putting the taxpayer as a backstop to these two companies.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: But when Senator McCain said that they can't be allowed fail, it seemed to imply that he would support putting government funds into these companies to make sure that the government would do whatever it took to make sure they stayed afloat. So would he support putting money in -- taxpayer money, if necessary?
HOLTZ-EAKIN: Well, the circumstances would dictate the right response. There are lots of steps between where we are today and the actual act of writing a check from the Treasury to these companies. So, again, there is a lot of evidence. They have high quality instruments on their books, they can use those to generate liquidity.
GERSH: But many Republicans have been concerned that we would come to this, that these companies would require federal funds. And it sounded like Senator McCain was saying that if necessary, he would, indeed, do that.
HOLTZ-EAKIN: There is a longstanding concern that there is an implicit guarantee behind Fannie Mae and Freddie Mac, because of all of the special...
GERSH: Did he make it explicit?
HOLTZ-EAKIN: . ones. Explicit ones come from actually writing checks. And we haven't crossed that threshold. The senator doesn't want to see further disruption of financial markets, very undesirable at this point in time, and we certainly don't want to see anymore downward pressure on housing markets. So what he has stated is the clear objective of making sure that there is a path through the current turmoil that involves reforms, involves more capital in these institutions, and thus insulates the taxpayer in the long run.
GERSH: A lot of the economists I've talked to, a lot of people in the markets I've talked to have said, look, this kind of situation shows that the credit crunch is deepening, and that the economy is going to be softer over the next six months. Is that what you're telling Senator McCain? Is that what he is expecting in the economy?
HOLTZ-EAKIN: There is no reason to rule out the fact that the economy might be softer going forward. There has been a lot of evidence of downward pressure in the housing markets. We've seen consumers hold up remarkably well, but there are obvious reasons for concern. The big problems the U.S. economy faces are energy prices and the housing market. And the senator has taken on those both of those problems aggressively. He has got a Lexington Project for energy prices, and a plan to address the need for refinancing by some homeowners. The latter is unlikely to make it through, so he would like to see the bill that is actually moving get done quickly. And on energy prices, we need to take control of our energy future. Those are good ways to address what's ailing the U.S. economy, and then move to the bread and butter of getting jobs for Americans.
GERSH: What about a second stimulus? I mean, the last stimulus checks went out today. So the stimulus effectively -- we're not going to see much more of it. If the economy looks like it is going to get softer, don't we need a second stimulus?
HOLTZ-EAKIN: Well, you want to look at the economy and see if you can address the problems it faces. Simply writing checks doesn't uniformly solve problems. The underlying problems are energy and housing. The senator has proposed a gas tax holiday. You could leave $50 billion in the hands of American consumers very quickly by not collecting a gas tax.
GERSH: Top economic adviser to Senator McCain was Phil Gramm, who said we're in a "mental recession,: and that people were whining about it -- some people were whining about it. Is he going to have any role going forward in economic policy in Senator McCain's campaign?
HOLTZ-EAKIN: Senator McCain made it very clear that Senator McCain speaks for Senator McCain. He doesn't endorse or in any way show any sympathy for those comments. And he said that, you know, Senator Gramm is now high on the list of candidates to be the ambassador to Belarus, so I think...
GERSH: That's very funny, but is he going to be talking to Senator Gramm? Is he going to have any role?
HOLTZ-EAKIN: Obviously, the senator doesn't endorse those views and he is not going to promote anything that looks like a mindset that suggests we don't understand that Americans are suffering. They need jobs, and the senator is focused on those kinds of efforts.
GERSH: Is Senator Gramm still giving advice to Senator McCain?
HOLTZ-EAKIN: No.
GERSH: No.
HOLTZ-EAKIN: At -- I haven't spoken to Senator Gramm since the comments took place, and I'm not expecting to.
GERSH: Doug Holtz-Eakin, economic adviser to John McCain, thank you.
HOLTZ-EAKIN: Thank you.
"Market Monitor"-Ashwani Kaul, Director of Research for Thomson Reuters
PAUL KANGAS: My guest "Market Monitor" this week is Ashwani Kaul, director of research for Thomson Reuters. And welcome to NIGHTLY BUSINESS REPORT, Ashwani.
ASHWANI KAUL, DIRECTOR OF RESEARCH, THOMSON REUTERS: Nice to be here, Paul.
KANGAS: Because this is your first visit with us as a "Market Monitor," I would like you to tell our viewers about your firm and its major objectives.
KAUL: Absolutely. Thomson Reuters -- specifically Thomson Reuters Markets is a leading provider of financial information, content, analysis, and technology to financial professionals all around the world. We have over 50,000 employees in 93 countries.
KANGAS: Reuters is very big, and when they joined up with Thomson, it is even bigger.
KAUL: Absolutely.
KANGAS: Well, you know, obviously the big news this week is the Fannie Mae and Freddie Mac problems. Give us your thoughts on what's going on there.
KAUL: You know, there is a lot of conflicting reports out there from liquidity and solvency issues. I do feel that the market perception has changed on these two, even though they are government-backed. I think, you know, the coming days will really tell what role the government will play. There were some rumors today circulating that they were going to allow Freddie and Fannie to borrow from the discount window. You know, from a market perspective, it seems like a good idea, but it also raises the question that if anybody can raise capital, since they are government- backed, it should be Freddie and Fannie. It tells me that they're having concerns about raising capital. So I think once we get the full information next week, because I think there is a lot of conflicting reports out there, we'll get a better indication on the state of Freddie and Fannie.
KANGAS: OK. Now obviously the financial stocks have been the worst performer so far this year. Will the selloff go on much longer or do you see some chance of recovery in the second half of the year for this group?
KAUL: It is really tough to say. I mean, I think the consensus was we hit a financial bottom a couple of months ago. That's not the case. We actually dropped even further once we had that little rally in financials. I think there is more room for drop in financials. I think the sector is poised to post the lowest growth for the second quarter upcoming, according to Thomson Reuters data. We expect that trend to continue in the third quarter. We're looking for a 9 percent drop right now. If there is any sort of recovery, I expect it to be late in the year, around December 10th.
KANGAS: OK. What other groups look vulnerable here, Ashwani?
KAUL: Consumer discretionary, obviously. We're at or approaching all-time highs for oil. There is a lot of inflationary pressure. The consumer has been tapped to the maximum. So I see a lot of weakness in consumer discretionary. Those are the two sectors that I'm really looking at, financial and consumer discretionary.
KANGAS: Now I know you don't recommend individual stocks, but what stock sectors do you believe have the most potential for gains for the rest of this year?
KAUL: I mean, technology. I mean, I think technology has been a bit oversold. If you look at the earnings growth numbers, we're looking at 16 percent growth for technology for this coming quarter. In the third and fourth quarter, we're looking for double-digit gains, once again, and these estimates have really held up. Whereas we've seen sharp downward revisions in almost all sectors, except for energy, we've actually seen a spike up in technology revision estimates. I do anticipate technology earnings to cool off a little bit, but still in positive territory and strong. Within technology, I'm looking at semiconductor to post some strong earnings gain, IT consulting, and computer hardware.
KANGAS: All right. Very interesting. And, Ashwani, any parting thoughts? We have about 30 seconds.
KAUL: Well, no, I mean, I think the markets are going to continue to this upward and downward revisions. I do think valuations don't count anymore. We're at all-time lows in valuations according to Thomson Reuters data, once again. Forward multiples are at 12, 20-year lows, but I don't think valuations matter in this marketplace right now. I think visibility is the key.
KANGAS: OK. Very good. Ashwani, I want to thank you for sharing your insights with us.
KAUL: Nice to be here, Paul.
KANGAS: My guest, Ashwani Kaul, director of research at Thomson Reuters.
Paul Kangas' Stocks in the News
PAUL KANGAS: Deepening worries about the fate of Freddie and Fannie, coupled with the surge in oil prices sparked a steep opening selloff on Wall Street. After an hour of trading, the Dow was off 171 points and the NASDAQ down 30 points. A reflex rally attempt failed heading into the midday period, and the Dow fell back down to a 230-point deficit at 11:30 a.m. And that put it just below 11,000. As we mentioned, late in the session, the market snapped back to slightly positive ground on false reports Fannie and Freddie could borrow from the Fed discount window. But then the markets slumped again at the close. So the Dow Industrial Average ended off 128.48 points at 11,100.54. This week it rose twice and fell three times, had a net loss of 188 points exactly overall. Today the NASDAQ fell 18.77, closing at 2,239.08. It also rose twice and dropped three times this week, losing 6.30 points overall. The Standard & Poor's 500 closed down 13.89, ending at 1,239.50 today, and for the week it lost 23.41 points overall. Over in the bond market, the uncertainty surrounding Freddie and Fannie possibly tapping the discount window hit Treasuries hard. The 10-year note slid 1 12/32 to 99 9/32, lifting the yield off a seven-week low up to 3.96 percent.
Big Board volume leader on 48.6 million shares was Fannie Mae (FNM). The stock closed down $2.95, but it traded as low as $6.68 during the day on investors' questioning the viability of these government-sponsored enterprises like Freddie Mac (FRE), which closed down only $0.25, but believe it or not, traded as low as $3.89 today.
Citigroup (C), a $0.09 loss there. The company cut earnings estimates and price targets on most of the major banks.
Lehman Brothers (LEH) down $2.87.
Bank of America (BAC), one of those on the list from Citigroup, downgraded, $0.69 loss.
Wachovia (WB) fell $1.59.
But General Electric (GE), bucking the trend, with a $0.02 gain. GE out with second-quarter operating earnings of $0.54, right in-line with Street estimates. Revenues up 11 percent, a little better than expected. And the company reaffirmed its full-year guidance of $2.20 to $2.30 in earnings per share.
JPMorgan Chase (JPM) down $1.35.
Wells Fargo (WFC) fell $0.61.
And Ford Motor (F) managed to gain $0.28, 10th in volume.
Chevron (CVX) down an even $4, although the company sees a big boost in second-quarter earnings due to the record high oil and natural gas prices. But it said refining margins will suffer and could even have a loss in the second quarter. Of course, oil was very strong today, as you saw earlier.
Anheuser-Busch (BUD) moving up $5.29. The big Belgian brewer InBev has sweetened its buyout bid by $5 a share to $70 a share. Golds were strong amidst all the turmoil in the markets today, up $2.49 on Barrick (ABX). And the New York August gold contract was up $18.60 an ounce at $9.6060 an ounce.
Hercules (HPC), the chemical -- specialty chemical company, up $4.29. Ashland Corp. (ASH) will acquire it for $3.3 billion. It works out to $18.60 a share in cash, and 0.9 of an Ashland share. Today that's a value of just a little under $23. Ashland's stock tumbled $6.31, to $41.10 a share on that news.
URS Corp. (URS) up $2.66. It's in final negotiations to be awarded a contract for a nuclear complex in West Cumbria, England.
Moving along, and we see Syniverse Holdings (SVR). This is a wireless services company. The Baird brokerage upgraded it from neutral to outperform.
And then Jacobs Engineering (JEC) up $3.29. Goldman Sachs added it to the buy list, said the stock is oversold at this level.
DineEquity (DIN), used to be called IHOP, tumbling $7.34. The story here, the company said its cutting its 2008 sales forecast for its IHOP and Applebee's restaurant chains.
Also on the downside, Webster Financial (WBS) down $2.43. It's doubling its provision for second-quarter losses to a total of $25 million. FTN Midwest Securities downgraded it from buy to neutral. Apple (AAPL) down $4.05, as you heard, had some problems activating the new phones.
Research In Motion (RIMM) down $7.34. When Apple gets those phones working, it's going to be tough competition for the BlackBerry from Research.
Google (GOOG) down $6.77.
A $0.20 loss in Microsoft (MSFT).
Baidu.com (BIDU) lost $24.23.
Intel (INTC), a $0.02 gain.
Cisco (CSCO) down $0.31.
Qualcomm (QCOM) a $0.16 advance.
Oracle (ORCL) was down $0.33.
But Wynn Resorts (WYNN) snapping back, $8.20 after losing $7.62 yesterday on lower Las Vegas casino earnings. But after the close the company said it's going to buy back an additional $500 million worth of its own stock and was up sharply today.
Finally, Teva Pharmaceuticals (TEVA) down $3.22 on the threat of competition for its multiple sclerosis drug from a company called Momenta Pharma and that they've developed a generic treatment.
And those are the "Stocks in the News tonight.
