NBR Transcripts- Tuesday, July 22, 2008
Tuesday, July 22, 2008Washington Mutual & Wachovia's Losses Didn't Slow The Financial Sector's Gains
SUSIE GHARIB: Financial stocks soared today, despite huge losses from two big banks: Wachovia and Washington Mutual. First, Washington Mutual -- it reported a much steeper than expected quarterly loss late this afternoon. Excluding more than $2 billion in write-offs, the nation's largest savings and loan lost $3.34 a share in the second quarter, far more than the $1.05 loss that analysts had expected. But Wamu said that it has quote, sufficient capital to manage through what it calls a challenging period. However, Moody's said it is reviewing the bank for a possible downgrade. Looking ahead, Wamu expects its total residential loan losses to approach $19 billion. Some analysts had feared the number would be even worse. It was a similar story at Wachovia. The bank's shares skyrocketed more than 27 percent today, despite a quarterly loss of $8.8 billion, including over $6 billion in write-downs. Excluding those write-downs, Wachovia lost $1.27 a share in the second quarter, $0.03 better than analysts had expected. Wachovia also slashed its quarterly dividend and says it will eliminate almost 11,000 jobs. We'll talk about Wachovia and Wamu a little later in the program with banking analyst Richard Bove of Ladenburg Thalmann.
Crude Futures Fall
SUSIE GHARIB: Over in the oil markets, crude prices fell sharply as worries about hurricane Dolly diminished. In New York trading, August crude futures fell $3.09 to settle at $127.95 a barrel. Forecasters say the storm is unlikely to threaten oil supplies. As Suzanne Pratt reports, with Mother Nature cooperating, traders are now refocusing on the demand picture for oil.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Just a few weeks ago, it seemed that nothing would stop oil prices from spurting to new highs almost every day. On July 11, crude reached an intraday record $147.27 a barrel and some pundits said $200 was possible before year end. Since then, however, it has fallen 13 percent on indications that the price of oil may finally kill demand, especially in the U.S. Trader Tom Reilly says today, in addition to the news on hurricane Dolly, investors are now concerned about consumption.
TOM REILLY, OIL TRADER, SCS COMMODITIES: They're focusing on demand. Definitely demand is down in America, but it's a matter of -- question of whether it's down all over the world. Some people think it's not, in which case, we'll see.
PRATT: So what happened to all the speculators that were supposedly driving up prices and ignoring fundamentals? Today, futures regulators said an interagency task force has found that supply-demand fundamentals are the best explanation for the recent run-up in oil prices, not excessive speculation, as some lawmakers believe. Many economists and analysts agree that fundamentals, mostly strong demand from India and China, have been the primary price driver, as well as stagnant supplies. But those fundamentals may be changing. Economist Carey Leahy says investors are waking up to the idea that slowing U.S. growth and other global factors could result in a big drop in demand.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: That, combined with the sense, almost as importantly, that China's growth is slowing, there will be a reduction in oil demand in China once the Olympics are out of the way, that you could have an oil price that's too high relative to fundamentals. And so, oil prices slipped about $20 a barrel and I wouldn't be surprised if they don't slip another $20 a barrel.
PRATT: On the flip side, experts say falling oil prices could also breathe some life into the U.S. economy, which many believe is in recession.
LEAHEY: For every $10 oil prices swing, you can add two or three tenths to global growth. So, a drop of $25 is worth half to three quarters a percentage point on global growth. So that's not to be sniffed at.
PRATT: Tomorrow, oil investors will get new information on supply- demand fundamentals when the government releases its weekly inventory numbers. If there is another dip in supplies, experts predict oil prices will continue to slide. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Did Minorities Get Submarined By The Sub-Prime Mortgages?
PAUL KANGAS: A proposed White House plan to backstop mortgage giants Fannie Mae and Freddie Mac could cost American taxpayers $25 billion. That's according to a new report from the Congressional Budget Office, which puts the likelihood of such a bailout at less than 50 percent. At a speech in New York today, Treasury Secretary Hank Paulson stressed the importance of restoring confidence in Fannie and Freddie. Paulson said they play a vital role in how fast the U.S. housing market recovers and Fannie and Freddie's health is critical to calming volatile financial markets.
HENRY PAULSON, TREASURY SECRETARY: The sooner we work through the housing correction, the sooner home prices will stabilize and uncertainty about the values of mortgage-related assets will be more easily determined. So now, more than ever, we need Fannie and Freddie out there financing mortgages.
KANGAS: Meanwhile, the latest data from Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight, show home prices keep heading lower. Prices fell three-tenths of a percent from April to May, down almost 5 percent year over year. Falling home prices have been tied to the meltdown in the sub-prime mortgage market. As Stephanie Dhue reports, now there are questions about whether those loans targeted minority buyers.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With millions of homeowners at risk of foreclosure, the Neighborhood Assistance Corporation of America, a non-profit, set up this mobile servicing operation in Washington to help struggling borrowers adjust their loans. Here, counselors work with borrowers and servicers to keep people in their homes. Paul Cato came to work out a mortgage on his D.C. condo.
PAUL CATO, WASHINGTON, DC HOMEOWNER: I had an interest-only loan-- interest-only loan, wasn't paying anything toward principle, insurance, anything. We was able to negotiate with my servicer an interest rate that I could live with.
DHUE: Cato says when he took out the mortgage two years ago, the interest-only loan was the only product he was offered.
CATO: They give me no other option. They just told me, you know, take it or leave it.
DHUE: Nationwide, African-Americans and Hispanics hold twice as many sub-prime loans as whites. Sub-prime loans are also concentrated in minority neighborhoods. George Washington University sociologist Gregory Squires has researched sub-prime loans issued around the country. He says borrowers' credit worthiness doesn't explain the disparity.
GREGORY SQUIRES, SOCIOLOGIST, GEORGE WASHINGTON UNIVERSITY: There's now statistical evidence that shows that even after you take into consideration economic factors like income and credit rating, that there's still a racial effect.
DHUE: The mortgage industry says sub-prime loans were given to people with low income and poor credit, regardless of race. A Federal Reserve study found minority communities have less access to traditional lenders, but Squires says there's more to it than that.
SQUIRES: If minority borrowers are being steered to high-priced services and whites aren't, this doesn't explain away the problem of discrimination in markets; it helps us explain the discrimination that's going on.
DHUE: NACA President Bruce Marks blames mortgage brokers for putting people in unsustainable loans and blames investment bankers for buying those loans without asking questions. Marks thinks the foreclosure problem is widespread.
BRUCE MARKS, NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA: They targeted people who were the most desperate for an affordable mortgage, most desperate for homeownership. So, yes, you see a disproportionate of African-American and Hispanic homeowners, but you also see the whole range of homeowners here.
DHUE: The Federal Reserve has moved to curb sub-prime lending abuses, issuing new rules governing those loans and a dozen states have also passed legislation to crack down on predatory mortgage practices. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Richard Bove, Banking Analyst at Ladenburg Thalmann
SUSIE GHARIB: Joining us now with more analysis, Richard Bove, banking analyst at Ladenburg Thalmann. Hi, Dick.
DICK BOVE, BANKING ANALYST, LADENBURG THALMANN: Hi, Susie.
GHARIB: Dick, before we get into talking about the bank stocks, I want to just ask you about this lawsuit that Bank Atlantic lodged against you yesterday over a research report that you did called "Who's Next" regarding which banks and thrifts might collapse. And they're accusing you of using faulty methodologies to determine whether a bank or thrift is near collapse. We'd like to get your comments on that. BOVE: I would love to give them to you also. I would love to talk about the subject for the next half hour, but the lawyers who are handing the case told me that I'm not allowed to speak about it in any fashion, but believe me, at some point I wish I could talk about it.
GHARIB: Lawyers do say that. We do hope you'll come back on our program and talk when you're allowed to do. So let's move on and talk about the news of the day, Washington Mutual. It reports a huge loss. The stock in after hours goes up as much as 16 percent. It trims back. What kind of shape is Washington Mutual in, in your view?
BOVE: It's in very bad shape. I think that if you take a look at the earnings report that came out for the second quarter, you know, people were encouraged by the fact that Washington Mutual was able to increase its capital ratios and it was able to put more money into the reserve. But when you take a look at its non-performing assets, they went up by $2 billion in the quarter. So despite the fact that they wrote off $2 billion in bad loans, they actually still increased the non-performing assets by $2 billion, which means that the non-performing assets are growing at a faster pace than they can write them off. That is not a good sign.
GHARIB: And Moody's is saying that it's putting the company under review for a possible downgrade. Let's say that they do or whatever, is this - is Wamu going to make it? Is it going to survive?
BOVE: I think it's a touch-and-go situation, but when I work out the numbers, it strikes me that over the next three years, they have access to $42 billion either from earnings, reserves or the capital infusion that they got a short time ago and it seems to me that they've got about a risk of $32 to $35 billion in losses. So that would seem to suggest that they will make it. So I do believe they'll make it. However, I wouldn't certify it because it is a touch-and-go situation.
GHARIB: What's your take on Wachovia's outlook and its news today?
BOVE: Well, Wachovia had a horrible earnings result also and Wachovia also showed an increase in the non-performing assets despite writing off a significant amount of bad loans. The difference between the two companies is that Wachovia has a huge retail bank, which is very, very profitable and that retail bank, which is the largest bank on the east coast of the United States and the fourth largest in the United States is producing enough profit that Wachovia is not in any trouble whatsoever, even though its earnings are simply horrendous.
GHARIB: We've seen financial stocks really taking off over the last couple of days. Are you recommending any of your clients or investors to start putting new money into financial stocks?
BOVE: I absolutely think -- certainly we are not recommending Washington Mutual and we are not recommending Wachovia, but for Bank of America, Citigroup or PNC Financial, for BB&T, UnionBanCal, U.S. Bancorp, Wells Fargo, I think that they represent incredibly good values. I think that these stocks became massively oversold because of the hysteria of the past couple of months whereby it was believed that financial companies across the United States could not survive the current downtown turn in housing. We're now seeing in these earnings numbers is not only are they going to survive it, but that they show profits and in the case of some of the banks I mentioned, I'm sorry, they're showing increased profits.
GHARIB: So what is your level of confidence in banks and financials these days compared to a year ago, real quickly. We just have 20 seconds.
BOVE: I think that they're in much stronger and better condition because they have more cash flows that are positive and they have more capital.
GHARIB: All right. We'll leave it there. Thank you so much for coming on the program. My guest tonight, Richard Bove, banking analyst at Ladenburg Thalmann.
"Of Mutual Interest"- Penelope Wang of Money Magazine
PAUL KANGAS: In tonight's "Of Mutual Interest" segment, boldly going where few investors have gone before -- into what are called frontier markets. Joining us now to explain what they are and whether you should invest in mutual funds in frontier markets is Penelope Wang, senior writer at "Money" magazine.. Penny, welcome to NIGHTLY BUSINESS REPORT.
PENELOPE WANG, SENIOR WRITER, MONEY MAGAZINE: It's great to be here, Paul.
KANGAS: So just what are frontier markets?
WANG: Well, frontier markets are small, fast-growing countries that don't yet qualify for emerging market status, but they have new stock markets, new companies to invest in and they can be found all over the world, especially in Africa and Asia, Latin America and eastern Europe.
KANGAS: What kinds of companies are putting together mutual funds that invest in these markets?
WANG: Well, there are a number of funds and ETFs on the drawing board. But two companies that have already come out with funds that invest primarily in frontier markets are T. Rowe Price and Fidelity.
KANGAS: I think let's have a chart of T. Rowe Price. There we go. The symbol is TRAMX, correct?
WANG: That's right.
KANGAS: And it's had a pretty good move up, hasn't it?
WANG: Yeah. It's had quite a run. It's been up I guess since it launched in September almost 30 percent or so and for the year, it's up 1 percent, which doesn't sound great, but in this market it really is.
KANGAS: Let's have a look at that second selection of yours and we have a chart on it. It's a relatively new frontier investment, Fidelity adviser emerging markets (FEMEX).
WANG: That fund just launched in May. So there's really not much of a track record there yet.
KANGAS: Right. Now, are these pure plays for frontier countries only?
WANG: Well, no, actually, these funds invest in emerging markets, as well as frontier markets. Again, part of the problem is that it's tough to find liquidity in some of these smaller countries, so they hold pretty big stakes in for example some of the Gulf states have banks and financial services companies and they account for a good portion of their portfolio.
KANGAS: We just have 30 seconds left, but are these types of funds for all investors?
WANG: Absolutely not. Though it may sound enticing to want to get in on the ground floor of the next China or India, these are very risky funds and you have to have a very long time horizon and a pretty high tolerance for risk before you consider investing in them. So you should think of them for only a very small portion of your portfolio, if at all.
KANGAS: Very interesting Information and I want to thank you for joining us tonight, Penny.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks were weak at the open, but they didn't finish that way. Weakness in American Express and Merck shares led the way lower at the start of trading, but stocks soon rebounded on that drop in oil prices. By noontime, the Dow posted a 57 point gain and the NASDAQ was off just a fraction. The airlines spearheaded a strong afternoon rally and the financials joined in after Deutsche Bank said it's adopting a quote, not so negative stance on that sector. The Dow Jones Industrial Average surged to a closing gain of 135.16 points at 11,602.50. The NASDAQ gained 24.43 to 2,303.96 while the Standard & Poor's 500 Index rose exactly 17 points to close at exactly 1,277. Over in the bond market, the ten-year note fell 16/32 to 98 5/32, putting the yield at 4.11 percent.
New York exchange volume leader on 30 3/4 million shares, Bank of America (BAC) having a good day, up $3.79. After the close yesterday as we reported, second quarter earnings came in at $0.72, $0.19 better than the Street expected.
Citigroup (C) participating in the banking rally, up $1.20.
And then Wachovia (WB) up $3.61. As you heard, second quarter loss of $1.27 but $0.03 above the Street estimate. The company is cutting its quarterly dividend from $0.375 all the way down to $0.05 a share and is going to slash nearly 11,000 jobs.
Wells Fargo (WFC) up $2.89.
General Electric (GE) in there with an $0.81 gain.
Moving along in the actives, Washington Mutual (WM) was up $0.34 at the final bell.
Merck (MRK) down $4. After the close yesterday as we reported, second quarter earnings came in at $0.82, but that was a penny below the Street estimate and investors are concerned about the future of Merck's Vytorin drug.
Freddie Mac (FRE) $0.95 gain.
Texas instruments (TXN) off $4.17. After the close yesterday, its second quarter earnings were $0.44, $0.02 below the Street estimate. Down goes the stock today.
JPMorgan Chase (JPM) participating in the bank rally, up $2.21.
American Express (AXP) down $2.91, traded as low as $36.01 today. It after the close yesterday had second quarter earnings of $0.56, $0.27 below the Wall Street consensus.
Dupont Co (DD) moving up $1.16. Second quarter earnings came in at $1.18, up from last year's $1.04 and sales were up a respectable 12 percent.
Caterpillar (CAT) up $1.75. Second quarter earnings out today, $1.74 versus last year's $1.24. That was $0.20 better than the Street consensus.
Bluegreen (BXG), look at that percentage gain, up $5.60. It builds resorts and residential communities and the company signed a non-binding letter of intent to be acquired by Diamond Resorts International for a price of $15 a share.
PepsiAmericas (PAS), the big bottling company, up $4.54, $0.72 in second quarter earnings, up from last year's $0.61, sales up 12 percent and it boosted its 2008 earnings guidance overall.
Wellcare Health (WCG) up $7.02. The company's restating earnings from 2004 to 2007 due to accounting errors and Oppenheimer said today that restatement will show that the problems are not as severe as Wall Street thought.
Assured Guaranty Ltd (AGO) tumbling $7.43. Moody's put the company's top rating on review for a possible downgrade and JPMorgan downgraded the stock from "over weight" to "neutral" today.
VMWare (VMW) up $1.03. After the close, second quarter earnings out, $0.13, up from $0.10 a year ago, but the stock fell to $32.20 after hours and the company's third quarter revenue estimate of about $465 million. The Street was looking for $497 million.
Apple (AAPL) topped the NASDAQ actives, down $4.27. Yesterday's earnings better than expected but the outlook not at all.
Microsoft (MSFT) up $0.16.
Google (GOOG) $8.31 gain.
Research in Motion (RIMM) fell $1.50.
Foundry Networks (FDRY) moving up $4.42. Late yesterday, second quarter earnings came in at $0.17. That was $0.03 above the Street consensus, nice move in the stock today.
Intel (INTC) no change there.
Qualcomm (QCOM) down $1.18.
$0.06 gain in Cisco Systems (CSCO).
First Solar (FSLR) down $14.73. And Applied Materials (AMAT) a $0.42 gain.
UAL Corp (UAUA) look at that gain, up $3.42, second quarter loss of $1.19. The Street was looking for a loss of $2.05. Standard & Poor's upgraded it from "sell" to "hold." This news bolstered the whole airline group.
AMR (AMR), Continental Air (CAL), Delta Air (DAL), US Airways Group (LCC) All doing well and by the way, US Airways also reported a smaller than expected second quarter loss of $1.11 versus the Street estimate for minus $1.30 per share.
