NBR Transcripts- July 28, 2008
Monday, July 28, 2008Treasury Secretary Henry Paulson's Bond Bailout Plan
JEFF YASTINE: With foreclosures increasing and no end in sight to the credit crunch in the mortgage market, the Bush administration is looking for solutions. Treasury Secretary Henry Paulson unveiled the latest idea today, covered bonds. Stephanie Dhue looks at what they are and why regulators want to create a market for them.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson gathered support from bank regulators and the nation's four largest banks to help kick start the U.S. market for covered bonds.
HENRY PAULSON, TREASURY SECRETARY: I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions by providing a new funding source that will diversity their overall portfolio.
DHUE: Covered bonds are similar to mortgage-backed securities, but instead of selling the package of loans outright, the banks keep the underlying loan risk on their balance sheet. If the underlying loans default, they must be replaced with other assets. Because the banks retain the credit risk, they have an incentive to make sure the underlying loans can be repaid. Covered bonds are a $3 trillion market in Europe, but are nearly nonexistent in the U.S., in part, because the laws governing them here have been unclear. Today the FDIC and the Treasury introduced a standard of best practices for their sale. Jeff Brown of Bank of America called it a significant step forward.
JEFF BROWN, CORPORATE TREASURER, BANK OF AMERICA: These statements help the legal, regulatory and market framework necessary for the development of a robust U.S. covered bond market.
DHUE: But banking analyst Bert Ely says the FDIC needs to go further before investors will embrace covered bonds.
BERT ELY, BANKING ANALYST, ELY & CO.: It has still not provided the absolute assurance that the covered bond market needs and that investors in covered bonds need to know that no matter what happens to the bank, they will get paid.
DHUE: Analysts doubt there will be enough demand for covered bonds to help the mortgage market. Treasury Secretary Paulson acknowledged that may the case.
PAULSON: I don't think there's anything we can put forward as the potential answer, but that certainty would be no excuse for not looking for alternative steps that can be taken that can make a difference.
DHUE: A banking executive says covered bonds could become a significant portion of the $11 trillion U.S. mortgage market, but analysts don't expect that to happen until after the housing market recovers. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The Food Sector Offers A Smorgasboard of Quarterly Earnings
PAUL KANGAS: Big names from the food sector reported quarterly earnings today. The results were hot and cold. Kraft Foods reported better than expected second quarter earnings of $0.48 s a share. Wall Street expected only $0.40. It was a different story at Tyson Foods, where higher grain prices pretty much wiped out profits. The world's largest meat packer earned only $0.03 a share in its third quarter. On a whole, the food sector has been hard hit by rising commodity costs. But as Scott Gurvey reports, it is weathering the storm.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big run-up in commodity prices has created a nightmare for the food and beverage sector. Analysts say companies have had to pass on their higher materials costs to consumers. Kraft was forced to raise prices for many of its products, especially cheese, which is made with milk. Wholesale dairy prices have soared along with the rising price of feed for livestock and increases in transportation costs. Analyst Terry Bivens of JPMorgan says consumers tolerated the higher prices, but are changing their buying habits.
TERRY BIVENS, FOOD MANUFACTURER ANALYST, JPMORGAN EQUITY RESEARCH: There is some evidence to suggest that consumers are shopping for cheaper price points overall. That seemed to be particularly true in Kraft's cheese section this time and we've seen some trade downs in other sectors as well -- cooking spices, for example and even with commodity milk.
GURVEY: Analysts expect this trend to continue as input prices continue to rise. They say consumer trade downs are most likely to occur on items like natural cheese, packaged meat, baked bread and in categories where there is a strong store brand presence. But there are categories where brand loyalty is strong. In past recessions, for example, consumers have stuck by their favorite breakfast cereals, a factor which bodes well for Kellogg and General Mills as well as Kraft. There are also indications that consumers are cutting back on eating out. David Palmer is a restaurant analyst with UBS, which does business with General Mills, Heinz and most of the other companies in the food sector. He says while only a quarter of our meals are eaten away from home, we spend half our food dollars in restaurants.
DAVID PALMER, FOOD PRODUCTS AND RESTAURANT ANALYST, UBS: That's a lot of dollars to source from if you're a packaged food company. So many of the packaged food companies that have convenient meal options are doing particularly well these days, General Mills or Heinz in particular. They're seeing some very nice volume trends of over 3 percent and with pricing on top of that.
GURVEY: Palmer says the so- called trade down risk is greater in Europe than in the U.S. because there are more private labels overseas. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Beijing Gears Up for the Olympic Advertising Game
JEFF YASTINE: With 12 days until the start of the summer Olympics in Beijing, companies are revving up their marketing campaigns. It's a chance to win a gold medal in brand recognition and attract consumers in China's emerging middle class. Shannon Van Sant reports from Beijing.
SHANNON VAN SANT, NIGHTLY BUSINESS REPORT CORRESPONDENT: While athletes train for the games, corporations are preparing advertisements that capture the excitement of the Olympics and a fierce desire to win. Tom Doctoroff, CEO of advertising agency JWT Greater China, says the games mean something different to Chinese consumers than they do in the west.
TOM DOCTOROFF, CEO, JWT CHINA: We tend to associate the Olympics with universal brotherhood and very soft values, togetherness. But I think ultimately in China the Olympics is about winning.
VAN SANT: For corporations, the Olympics are also about winning market share in China. And increasingly, Chinese companies are competing, too, like the sportswear manufacturer Anta, which is rolling out ads like this one. While not a sponsor, Anta features Olympic athletes in its campaign, and is one of JWT's Chinese corporate clients. Within the last six years, JWT's revenue from mainland Chinese corporations has quadrupled. JWT has four assignments to create television and print ads for Chinese companies that will appear during the summer Olympics and their campaigns capture China's national pride. For example, television ads for Yili, China's largest dairy company and a national sponsor of the games, encourage consumers to drink milk to make China strong.
DOCTOROFF: So it's fueling your greatness, fueling China's greatness. So it's really propelling you on an individual level to achieve and perform athletically. And then it ladders up to the entire nation and making China strong.
VAN SANT: Coca-Cola's Olympics advertising isn't about making China strong. It focuses on physical and spiritual refreshment. Marketing director Andres Kriger says Coca-Cola is tailoring its advertisements for Chinese consumers.
ANDRES KRIGER, MARKETING DIRECTOR, COCA-COLA: We do run a specific program for China, because the realities of the Chinese market and the passion and some of the things that are happening are very particular to China.
VAN SANT: Athletes like Liu Xiang, an Olympic hurdler, are featured in Coca-Cola ads like this one, where his parents come to visit for Chinese New Year. China is Coca-Cola's fourth largest market and executives say it will eventually be number one. The company is creating drinks specifically tailored to the Chinese market, like original leaf tea which Coca-Cola launched earlier this year. Marketing director Andres Kriger says Olympics advertising will help the company bond with consumers.
KRIGER: It puts us in a position of saying we were there, this was your very, very special moment, probably a moment that will never come back and Coke had a very special role within that moment.
VAN SANT: That's a role many corporations are vying for this summer as they compete for consumers and a part in China's economic rise well into the future. Shannon Van Sant, NIGHTLY BUSINESS REPORT, Beijing.
"Get Your Finances Ready for Retirement"-Reducing Risk in Your Retirement Portfolio
JEFF YASTINE: For baby-boomers, amassing a nest egg for retirement, that's just the beginning. To make sure those funds last through retirement, the next step is often a plan to grow the nest egg through investments. But of course investing always involves risk. And as we continue our series "Get Your Finances Ready for Retirement," Connie Hicks looks at ways to minimize that risk in your retirement portfolio.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ivan and Alfrieda Reent worked hard their entire adult lives on their Iowa farm. So a few years ago they decided to retire, meaning less work, more travel.
ALFRIEDA REENTS, RETIREE: I'm looking forward to the trip to Kentucky.
HICKS: When they sold their land, they were advised to put the proceeds into investments that happened to have a high degree of risk. The result:
REENTS: We had lost some money and other investments weren't doing as well as we thought investments should be doing.
HICKS: So the couple turned to Jerry Egermier, a certified financial planner in Omaha. He thought the Reents had been talked into questionable investments for a retirement portfolio. One was an IPO, the initial public offering of a company's stock.
JERRY EGERMIER, EGERMIER RETIREMENT & FINANCIAL SERVICES: Generally we wouldn't normally recommend to do that because of the fact that an initial public offering many times is of a higher risk nature. You're concentrated into one investment and you either live or die by what happens with that company and unfortunately in this particular case, the company failed and all of that money was lost.
HICKS: Many retirees regard investing in any stocks as too risky, but while an IPO or a single stock could be something of a gamble, investing in a diversified basket of stocks is not the same thing as putting your money in a slot machine. In fact, history proves stocks as a whole tend to do better than other investments over the long term. But the stock market can also go down for extended periods and Moshe Milevsky, an expert on financial risk management, says that poses a problem for many retirees.
MOSHE MILEVSKY, PH.D., FINANCE PROFESSOR, YORK UNIVERSITY, TORONTO: When you're accumulating wealth, the bull markets and the bear markets tend to even out. In the long run you end up ahead. When you're in retirement, you don't have time for the bull market to cancel out the bear market and anybody that retired in the last five or 10 years is experiencing this.
HICKS: So how can you avoid the risk of having to sell stocks just when prices are plummeting? Wealth manager Harold Evensky deals with this situation by keeping two years of a client's expenses in cash at all times along with three years of expenses in short-term bonds.
HAROLD EVENSKY, PRES., EVENSKY & KATZ WEALTH MANAGEMENT: That's where are five year comes from -- between the two year that we carve out in cash and the short end of our bond portfolio, our clients can weather a five- year bear market in stocks and bonds and never be forced to sell something at a loss or certainly not a substantive loss.
HICKS: Besides investment risk, retirees face longevity risk: the possibility of outliving your money and inflation risk, which happens when you don't plan for the impact of rising prices. Financial planner Ergemier says keeping stocks out of a retiree's portfolio can increase those risks.
EGERMIER: There's a lot of different types of risks out there. Inflation risk is one of the biggest and that's obviously where your purchasing power is going -- you're going to have less and less each year, so you have to be invested in some things that are going to grow in value, such as stocks, mutual funds and different types of growth investments and so you can't be too conservative.
HICKS: The Reents periodically review their portfolio with Ergemeier to be sure the risks and returns are acceptable. That lets Ivan and Alfreida do just what they planned to do - relax. Connie Hicks, NIGHTLY BUSINESS REPORT.
"Commentary"-A Different Stimulus Plan
JEFF YASTINE: Tonight's commentator has some thoughts about a new economic stimulus plan. He's Glenn Hubbard, dean of Columbia University's school of business and former economic advisor to President George W. Bush.
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIV.: Signs of weakness now and for the balance of the year in the U.S. economy have led to calls for Congress to enact a stimulus package. We've had one already. Can we do better this time? Yes. There are three policy actions that would provide immediate relief. First, we should address the housing crisis directly. Congress should temporarily expand the Federal Housing Administration's authority. The FHA should be able to make larger loans to home owners who live in their own homes. Why? Many creditworthy homeowners got trapped in adjustable rate mortgages and couldn't refinance. Borrowers who can document their income should be able to refinance. And with the FHA's new loans, they'll be able to. Second, we should offset the credit crunch's negative effect on business investment with investment incentives. Greater expensing of investment offers an immediate, front-loaded stimulus. Cutting the high U.S. corporate tax rate would also help. Third, we should forestall the negative effect on consumer spending of a tax increase. The expiring 2001 and 2003 tax cuts represent the largest increase in personal income taxes in a generation. Raising dividend and capital gains taxes, as proposed by one presidential candidate, would be particularly harmful, with negative effects on both the stock market and investment in a fragile economy. Cries for stimulus offer a chance for serious discussion. Let's hope this election season permits that. I'm Glenn Hubbard.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street stumbled as the new week began amid growing concerns about the health of the economy after Federal regulators closed down two more western regional banks late Friday. By noontime, the Dow fell 131 points and the NASDAQ was down 21 points. With buyers a scarcity ahead of a host of upcoming economic reports, the market continued to decline this afternoon. With the financial sector leading the way lower, stocks ended the day at their worst levels. The Dow Industrial Average closed off 239.61 at 11,131.08. The NASDAQ Composite lost 46.31 to 2264.22, while the Standard & Poor's 500 Index fell 23.39 points, ending at 1234.37. Over in the bond market, the 10-year note rose 26/32 to 98 30/32, lowering the yield to 4.01 percent.
New York exchange volume leader on 21 1/2 million shares, Washington Mutual (WM) bucking the overall trend with an $0.11 gain.
Then some more weak banks, Citigroup (C) off $1.52 - 42.
And then Bank of America (BAC) $1.52 deficit.
Ford Motor Co (F) fell $0.30.
And then General Electric (GE) down $1.02 per share.
Wachovia (WB) fell $0.87.
Followed by JPMorgan Chase (JPM) off $1.86.
American Intl Group (AIG) losing $3.28.
And there you see Kraft Foods (KFT) up $1.45. As you heard, second quarter earnings of $0.58, $0.08 above the Street estimate. The company also boosted its 2008 earnings guidance by $0.02 a share to at least $1.92.
Tenth in volume was Wells Fargo (WFC) losing $1.16.
Alcoa (AA) moved up $0.85. Highfields Capital plans to boost its stake in Alcoa from 2 percent to 8 percent.
Lehman Brothers (LEH) down $1.78. Merrill Lynch said the company will post a third quarter loss. Lehman says it's keeping it's $0.17 quarterly dividend, but the whole brokerage sector was weak. Goldman Sachs (GS) down $5.76.
Merrill Lynch (MER) dropped $3.19. After the close, Merrill's entered into a pact with XL Capital to eliminate its $11 billion exposure to U.S. asset-backed CDOs. It'll also take a $5.7 billion write down on the third quarter for losses on mortgage assets and it's going to sell $8.5 billion in stock.
Another weak brokerage, Morgan Stanley (MS) down $1.79.
American Axle (AXL) down $1.13. Friday the company reported a second quarter loss of $1.33. Today Keybanc downgraded it from "buy" to just a "hold" recommendation. Mine Safety Appliances (MSA) tumbling $8.25. Second quarter earnings were higher, $0.55 versus $0.48 a year ago, but a nickel below the Street estimate. The company says weakness in municipal spending is tempering its expectations.
Teledyne Tech (TDY) losing $3.59. Jefferies brokerage downgraded it from "buy" to a "hold."
And then Verifone Holdings (PAY) down - up $1.51 on news it'll restate financials for the last several quarters and first two quarters of this year. I think this was kind of a relief rally from investors now that they're going to do that.
Alberto Culver (ACV) up $2.22. Third quarter earnings, $0.31, up from $0.24 last year. Sales up 12 percent. The company will buy back up to five million of its own shares.
Apple (AAPL) topped the NASDAQ's most active, losing $7.72. Dow Jones reported the company's expected to continue cutting prices on its popular cell phones. That'll help market share, but it'll hurt its profit margins.
Amgen (AMGN) up $6.56. After the close, second quarter earnings for Amgen, $1.14, $0.12 above the Street estimate and the company also announced that results were positive for the treatment of - that is has for postmenopausal osteoporosis.
Google (GOOG) down $14.86.
Microsoft (MSFT) A0.66 drop.
Research in Motion (RIMM) down $3.92.
Qualcomm (QCOM) fell $1.03.
Intel (INTC) $0.34 drop there.
baidu.com (BIDU) bucked the trend with almost a $2 gain.
Cisco Systems (CSCO) $0.45 loss.
And amazon.com (AMZN) down $2.33.
Energysouth (ENSI) up $9.44. Sempra Energy will acquire this company for $61.50 a share in cash.
And Ryanair Holdings (RYAAY), the Irish airline, down $8.68. The company's first quarter profits tumbled 85 percent as its fuel bill almost doubled from last year. The company sees full year just break even, maybe even a loss.
And those are the stocks in the news.
