NBR Transcripts July 31, 2008
Thursday, July 31, 2008The Stimulus Checks Stimulated the 2nd Quarter
SUSIE GHARIB: Wall Street's two-day winning streak ended today on news that the U.S. economy grew slower than expected in the second quarter. The Commerce Department reported gross domestic product or GDP expanded at a rate of only 1.9 percent. And the government lowered the GDP reading for the fourth quarter of last year, saying the economy shrank by 0.2 of a percent, the first contraction since the 2001 recession. That look back signaled that the economy might be in worse shape than previously thought. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The performance of the American economy in the second quarter was about as expected, driven in good part by consumers spending their economic stimulus checks. Exports were also up and imports down, a function of the weak dollar. Economist David Wyss of Standard & Poor's expects to see similar trends for the third quarter.
DAVID WYSS, CHIEF ECONOMIST, STANDARD AND POOR'S: Consumer spending was actually a little bit lower than we thought it was going to be, but business investment was stronger. Inventories were a little bit lower. Exports were quite a bit stronger. All of that means, if anything, we've got a little more momentum in this economy than we thought we did and that's good news for the third quarter, as well.
GURVEY: But the negative factors remain. Energy prices, while well off their peaks, are still much higher than a year ago. Inflation, mainly a result of those energy prices, is being felt throughout the economy. The GDP's key inflation index stands at 4.2 percent, well above the Fed's comfort zone. And economist Jim O'Sullivan of UBS notes the credit crunch and housing crisis are far from over.
JAMES O'SULLIVAN, SR. U.S. ECONOMIST, UBS: Certainly, when you look at the housing sector, which is the root cause of the weakness in the economy, there's no sign yet of a turnaround. Home prices are still falling and, of course, the stock market is near its low, as well. So I think, in general, the risks over the next couple quarters are tilted to the downside.
GURVEY: While there are mixed forecasts for the third quarter, most economists see weakness in the fourth. A revision of last year's data released today shows an actual contraction for the fourth quarter of 2007 and David Wyss sees a negative fourth quarter this year, as well.
WYSS: Even though they aren't consecutive, that's probably enough to qualify this as a recession and I think when it's all done, which probably won't be until next spring, we'll say this was a long but mild recession. And sort of a lazy "W" pattern, appropriately enough, to end the president's term, because the rebate checks gave you a little kick in the middle.
GURVEY: The committee of economists which officially determines recessions defines them as a significant decrease in activity over a sustained period of time. It usually declares a recession six to 18 months after it begins. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Steve Preston, U.S. Secretary of Housing and Urban Development
SUSIE GHARIB: Now that the massive housing rescue bill is law, one person who will be overseeing its implementation is Steve Preston. He's the U.S. Secretary of Housing and Urban Development. Earlier today, I talked to Preston and asked him if he thinks the new housing legislation will really help 400,000 homeowners, as the Congressional Budget Office has estimated.
STEVE PRESTON, HUD SECRETARY: It's tough to tell really until we open up the program. I think the Congressional Budget Office did the best it could in estimating the number of people, but there are a lot of complexities in getting these loans restructured and refinanced and so at this point, we really don't know if that's a good number. We won't know until we begin to see the applications coming in.
GHARIB: Mr. Preston, how confident are you that the home owners who are going to be getting assistance will be able to make their payments on the new loans and stay out of financial trouble?
PRESTON: That's something we are concerned about. The way this works is this portion of the bill is specifically designed for homeowners who got loans that are greater in value than the price of their homes. So the lenders must write down the loans to 90 percent of the home value before they can be refinanced. And in addition to that, they should be doing credit work to ensure that those are credit-worthy borrowers. I would say however that the Congressional Budget Office did estimate in its report that roughly a third of those people would end up in foreclosure again and the funding we've received for the program anticipates that number.
GHARIB: So some of these people are still going to be in trouble and even the ones who do manage to make their payments, is that going to be really enough to make a difference in the whole housing and mortgage market because there's some estimates out there that three million homeowners are on track to face default this year.
PRESTON: None of us should look at this at the only solution out there. I think it's very important to recognize that at FHA which is part of HUD, we've already expanded our refinancing programs to begin helping people who have already gone into delinquency and we estimate that since we launched the expansion of our program at the end of August last year, by the end of this year we'll have refinanced about a half a million people. In addition to that, the industry has come together through something called the Hope Now Alliance and they've announced that they've helped modify or restructure almost two million loans already. Those are borrowers that they would have expected to go into foreclosure. So there are many efforts underway. Banks are working. FHA has a program that's much bigger than the one Congress passed already in place. So this is - we think this could help people on the margin. It's one more step forward but if people are having an issue right now repaying, they shouldn't wait for this bill. They should come to fha.gov or hud.gov, find a counselor and let us help you work out a better situation between you and your lender.
GHARIB: The FHA, the Federal Housing Authority, do the financial problems at Fannie Mae and Freddie Mac put more pressure on the FHA to extend mortgage credit and is it prepared to meet these new demands?
PRESTON: Well, I would say that FHA is really incremental product to what Fannie Mae and Freddie Mac are doing. We work together as two parts of the market place so there's some overlap at times, but I think we're really an incremental player. Now the other thing I'd tell you is our demand for refinancing has already increased five times since what it s two years ago. Our demand for new mortgages for people buying new homes has gone up a multiple. So our volumes have already increased very dramatically. We're handling that volume and we think this bill would increase it further, but we're prepared for the increase in scope and responsibility at FHA.
GHARIB: One thing that's worrying a lot of taxpayers is that all this credit risk that the FHA is taking on, that at some point that they're going to be on the hook for all of it.
PRESTON: Well, I think that's a very fair concern and people should be concerned about that. However, FHA has a 73-year history of assessing risk and ensuring loans based on some tried and true methodologies. Our delinquency rates this year are no higher than they were last year and I think there are very few lenders or insurer out there that can make that claim right now.
GHARIB: Just to wrap it up, what do you think is the single most important thing that policymakers need to do that would help the housing market going forward?
PRESTON: I think policymakers need to be focused on the economy and growth. All of these provisions are helpful on the margin, but the bottom line is we need new home buyers in the marketplace buying up this inventory and we need a strong economy to be able to do that. I think housing is a very essential underpinning of our economy and so it's a much broader issue than just what any one bill or any one program can do.
GHARIB: All right. Mr. Preston, thank you very much for your time.
PRESTON: Thank you.
Layoffs Lead Workers Back to School
SUSIE GHARIB: The number of Americans filing first-time claims for unemployment benefits rose by 44,000 last week to the highest level in more than five years. Experts say some out-of-work people may never find positions again in the industries they left, leading them to look for ways of re-training. As Diane Eastabrook reports, many former workers are already sprucing up their job skills with the help of local colleges.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At United Airlines, anxiety is rampant among the carrier's 55,000 employees. Buffeted by high fuel prices and a sluggish U.S. economy, the carrier recently announced plans to cut 7,000 jobs. At a recent meeting of United's pilots union, furlough coordinator Todd Coomans discussed employment possibilities for the nearly 1,000 United pilots likely to lose their jobs. Coomans thinks he'll be among them and is weighing his options.
TODD COOMANS, PILOT, UNITED AIRLINES: Through my union work and stuff like that, I have all the office skills and management skills that I can do, but trying to convert that or convince a potential employer of what that could bring to them is pretty difficult, especially at a time when jobs are scarce.
EASTABROOK: According to the outplacement firm Challenger, Gray and Christmas, U.S. firms cut nearly 476,000 jobs in the first half of this year. That is a 21 percent increase over the same period last year. The hardest hit industries have been financial services, automotive, government/non- profit, transportation and retail. Chief Executive Officer John Challenger says, for many workers in those fields, retraining may be their only option.
JOHN CHALLENGER, CEO, CHALLENGER, GRAY & CHRISTMAS: If you're in sales or admin or technology, you can move to another industry and we see about 40 percent of the people make those changes; maybe more, in a real decline in your industry. But if you're an airline pilot or a bond trader, much more difficult, because those skills just can't be moved to other types of jobs.
EASTABROOK: Forty-eight-year-old Linda Morse is among those laid off workers headed back to the classroom. Morse enrolled in a business administration program at Harper College last year after losing a job with a financial planning firm. She says her decade of experience didn't compensate for her lack of a college degree when interviewing with prospective employers.
LINDA MORSE, STUDENT: I think when they are comparing me to someone who has that four-year degree, I'm just not rising to the top.
EASTABROOK: Morse will get an associate's degree through Harper College's fast-track program. Fast track allows students to complete their degree by attending classes one night a week. Fast track is among a handful of new programs Harper is launching to help non-traditional students update their job skills or retrain for new careers. Nancy Wajler, Harper's adult learning specialist, says many colleges are offering innovative programs to accommodate a crush of non-traditional students.
NANCY WAJLER, ADULT LEARNING SPECIALIST, HARPER COLLEGE: They want to do well. They have seen the world work and they know they need this education. And they are also incredibly busy people, so they want to be able to have us accommodate their busy schedules.
EASTABROOK: Some experts think the U.S economy will continue to shed jobs for at least another year, making job retraining even more essential for many workers. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
"Commentary"-Finding The Right Fund & Manager
SUSIE GHARIB: In tonight's commentary, picking the right type of investment fund and the right type of money manager. Here's Allan Sloan, senior editor at large for "Fortune."
ALLAN SLOAN, SR. EDITOR AT LARGE, FORTUNE: We tend to talk about hedge funds and buyout funds and venture capital funds as if they're all similar. But they're not. The range of returns of funds in the same category is huge, which means that, while some of the fund managers are worth the enormous fees they charge, many of them aren't. Consider these amazing numbers from Cambridge Associates, a Boston firm that has tracked individual fund performances for years. You can get average returns in lots of places, but Cambridge's numbers go way beyond that. For example, more than half the 493 venture capital funds in Cambridge's database lost money over the last 10 years. That's right, they lost money -- after fees and expenses, of course. Even a S&P index fund did better than that. The average VC fund return was about 1.7 percent a year, probably less than the manager's fees. But you did really well if you picked the right manager. The top 5 percent of the funds earned more than 27 percent a year. The bottom 5 percent lost more than 22 percent a year, so there's a 50 percent a year difference from top to bottom. There were similar swings between the top and bottom in real estate funds and buyout funds. The point of all these numbers? To show that to make money, you need to pick the right manager, not just the right asset class. As always, people matter-- a lot. I'm Allan Sloan.
Paul Kangas' Stocks in the News
PAUL KANGAS: That earnings shortfall from Exxon led Wall Street's blue chips to open lower and that was coupled with some profit taking after a 450-point run-up in the Dow in the previous two days. The Dow fell 65 points at the outset of trading, but the NASDAQ Composite was up 22 points on Bristol-Myers proposed buyout of ImClone, which we'll detail later. After a midday rally attempt failed, the blue chip losses widened as the smaller than expected GDP growth and a surprise jump in jobless benefit claims raised recession fears. The result was a broadly lower market close. The Dow Industrial Average ended down 205.67 points at 11,378.02. The NASDAQ Composite however lost only 4.17 ending at 2,325.55, while the Standard & Poor's 500 Index fell 16.88 to 1,267.38. In the bond market, the 10-year note rose 24/32 to 99 12/32, putting the yield at 3.95 percent.
Big board volume leader Washington Mutual (WM) on 39 1/2 million shares, moving up $0.59.
Followed by Citigroup (C) with a $0.20 gain.
General Electric (GE) lost $0.68.
Motorola (MOT) moved up $0.96, good percentage move. Second quarter earnings excluding charges, $0.02 per share. The Street was looking for a $0.03 loss. The company sees third quarter break even to earnings of $0.02 a share.
Pfizer (PFE) down $0.21.
Bank of America (BAC) fell $0.71.
Wachovia (WB) edging up $0.19.
AT&T (T) dropped a dime.
ExxonMobil (XOM) down $3.95. As you heard, second quarter earnings, $2.27, up from $1.83 last year, but that was $0.25 below the Wall Street consensus.
EMC Corp (EMC) in their tenth in volume with a $0.03 loss.
Altria Group (MO) , parent of Phillip Morris, was up - I should say down $1.35. Second quarter earnings excluding one-time items, $0.46, a penny above the Street.
The company affirmed its 2008 guidance of as much as $1.67. The sharp drop you see on that chart represents the spin off of Phillip Morris from Altria.
Moving along, Eastman Kodak (EK) down $1.13. Second quarter earnings excluding a big tax gain, resulted in a $0.13 per share loss. The Street was expecting $0.16 in profit from Kodak.
Intl Paper (IP) moved up $3.40. Second quarter earnings preliminarily, $0.56, up from $0.52 a year ago, $0.16 above the Street estimate. Revenues up nearly 10 percent.
Aetna (AET) a $0.69 gain there, traded as high as $42.66 today after reporting second quarter earnings of $0.94, up from $0.83 last year and a penny above the Street estimate. Revenues up 15 percent.
Prudential Financial (PRU) $2.29 gain there. Second quarter operating earnings $2.02, up from last year's $1.84. Standard & Poor's repeated a "buy." The company said it'll buy back up to 2.5 billion of its own stock before the end of this year.
Mastercard (MA) plunging $26.58, traded as low as $237.48 today after reporting a second quarter loss of $5.74 a share. That includes a $1 billion after tax litigation charge in its antitrust settlement with American Express.
Consol Energy (CNX), the coal miner, down $14.11. Second quarter earnings dropped to $0.54 from $0.83 a year ago, $0.26 below the Street estimate and the company notes that its coal operating costs are rising substantially.
Marathon Oil (MRO) up $4.34. The company is considering splitting its oil and gas production operations from refining and marketing operations into two separate companies.
And then Mastec (MTZ) up $2.36, quarter (ph) earnings, $0.25 versus $0.24 a year ago, $0.04 above the Street estimate.
And on the downside, Stoneridge (SRI) down $4.92. Second quarter earnings, $0.20, $0.02 below the Wall Street estimate.
NASDAQ's most active, Apple (AAPL) down $0.93.
Research in Motion (RIMM) was up $3.60.
Microsoft (MSFT) fell $0.51.
First Solar (FSLR) $0.03 gain there.
Google (GOOG) down $8.95 a share.
Imclone Systems (IMCL) there you see up $17.49. As you heard, Bristol-Myers Squibb is bidding $60 a share for the 84 percent of the stock that it doesn't already own.
Cisco Systems (CSCO) $0.18 drop.
Qualcomm (QCOM) fell $0.30.
Intel (INTC) a $0.04 loss.
And Akamai Tech (AKAM) down $7.91. The CEO acknowledged the slowing economy is impacting the company's business even though its second quarter earnings were higher, $0.19 versus $0.12 last year.
Those are the stocks in the news tonight.
