NBR Transcripts August 6, 2008
Wednesday, August 06, 2008Freddie Mac Is Still Struggling
SUSIE GHARIB: More grim news from Freddie Mac today, as it reported a huge quarterly loss and drastically cut its dividend. Shares of the mortgage finance giant plunged 19 percent and the decline also dragged down Fannie Mae's stock by almost 15 percent. Fannie reports quarterly results on Friday. Freddie lost $821 million in the second quarter or $1.63 a share, four times wider than estimates. As Stephanie Dhue reports, Freddie's executives warned investors today that the housing market is far from stabilizing.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Freddie Mac's future is tied to the housing market, a market that its top executives admit is in deep trouble. CEO Richard Syron expects home prices to decline another 10 percent.
RICHARD SYRON, CHAIRMAN & CEO, FREDDIE MAC: We think we're about halfway through this housing cycle, which is certainly the worst housing cycle we've had since the great depression.
DHUE: Along with the loss, Freddie also plans to slash the third quarter dividend from $0.25 a share to a nickel or less. And Freddie repeated its intention to raise $5.5 billion to increase capital, but in an SEC filing said it may not meet capital regulatory requirements. The company expects losses to continue through the end of the year. Analysts see losses continuing into next year. Credit Suisse has an "under perform" rating on the stock. Analyst Moshe Orenbuch says a shortage of capital will outweigh any gains Freddie may make on new mortgage business.
MOSHE ORENBUCH, ANALYST, CREDIT SUISSE: The shortage of capital will do two things. Number one, it will slow the pace of the old business turning into new business and I think it will add more shares and therefore the current owners will probably own a smaller percentage of the company when all is said and done.
DHUE: Freddie Mac and its corporate cousin Fannie Mae will also be shaped by the government's housing rescue law which boosts regulation of the firms. Mike House is a partner at the law firm Hogan and Hartson. He led the lobbying effort for more regulation of the mortgage giants.
MIKE HOUSE, PARTNER, HOGAN & HARTSON: The Congress now is much more involved in this matter. The administration is involved, but more importantly is the Fed and the Treasury are going to be heavily involved as an advisor under the legislation, so their people looking over their shoulder. The main thing we need right now is stability.
DHUE: But it's an open question if Fannie and Freddie will make it through the crisis in their current quasi-public form.
HOUSE: I think you really have to get through the next what I term the next year and a half. The rest of this year and next year to really have any sense of where it's going to be.
DHUE: Before the housing market turned sour, Freddie and Fannie posted returns of better than 20 percent. Analysts say if the firms survive, future returns won't break the single digits. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Can Oil Prices Clean Up The Economic Picture?
PAUL KANGAS: Oil prices fell to a new three-month low today, after mixed news on crude and gasoline supplies. September crude futures lost $0.59 to settle at $118.58 a barrel in New York trading, after nearing $117 earlier in the session. Crude oil inventories rose by 1.7 million barrels last week, while gasoline stockpiles fell 4.4 million barrels. As Suzanne Pratt reports, even though energy prices have fallen sharply in recent weeks, experts say the U.S. economy is still in a tough spot.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: World oil markets appear to be in a state of slip-n-slide. Since hitting a high of more than $147 a barrel in July, oil prices have fallen nearly $30 or 20 percent. Some experts credit evidence of weakening oil demand for the pullback in prices. But UBS global economist Jan Stuart says he does not believe the fundamental supply-demand picture has changed all that much and as a result does not think prices are collapsing.
JAN STUART, GLOBAL OIL ECONOMIST, UBS: I think that it's the counterpart to a pretty extravagant or pretty steep run-up from $120 to $147. It's almost a mirror image of that run-up and now we're back down to $118 or $120, in any case in that range. And I suspect that the bottom is quite near.
PRATT: Concern about softening economies in the Euro zone and emerging markets is also causing other commodities prices to crack. Gold is below $900 an ounce for the first time since June, while corn is at a four-month low. The Reuters-Jefferies CRB Index, which tracks a basket of 19 commodities, has tumbled 15 percent from its early July high. The multi-trillion-dollar question for the U.S. economy is whether the pullback in prices is enough to breath life into consumer spending. Citigroup economist Bob Diclemente says it will ease some of the pain.
ROBERT DICLEMENTE, CHIEF ECONOMIST, CITI: It helps, but it won't be enough to really spark a strong consumer. It will mitigate some of the constraints on consumers that are I think still out there.
PRATT: Diclemente says the consumer is also battling eroding home values and rising unemployment, both of which he expects will continue to limit spending. On top of that, there's not a lot of conviction that oil prices will continue to fall.
DICLEMENTE: Supply and demand for energy products, at least fossil fuels, is on a course toward higher prices. So what we're getting here is some relief that's temporary.
PRATT: Temporary or not, some economists say because we use gasoline every day, a drop in prices could have a disproportionate and positive effect on consumer psychology and perhaps consumer spending. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Freddie Mac CEO Richard Syron Talks About The Stock Slide
SUSIE GHARIB: Washington bureau chief Darren Gersh spoke with Freddie Chairman and CEO Richard Syron this afternoon. Darren began by asking Syron why shareholders in Freddie Mac should stick with the stock.
RICHARD SYRON, CHAIRMAN & CEO, FREDDIE MAC: Well, Freddie is obviously a company that's been quite volatile recently. Candidly, owning Freddie shares is in a way a bet on the U.S. economy and on the U.S. housing market. And I think that both those things are valued, at least the housing market pretty low right now and that they'll come back.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: But the company right now has said it wants to go out and raise $5.5 billion in capital.
SYRON: That's correct.
GERSH: But the market is valuing the company right now at about $4.4 billion. So how do those numbers work?
SYRON: First of all, we didn't say we wanted to raise $5.5 billion in pure equity capital. We said it would be some mix of the two. The other is that we've said that we're not under any imminent pressure to raise capital today or tomorrow and that we want to do so at the time that's most auspicious for us, for the financial markets as a whole because that's going to influence the economy. So --
GERSH: But how do you do it when you're trying to raise more capital than a company is worth right now, at least in the marketplace?
SYRON: You know, well, that -- that -- that valuation you gave is the valuation of the common shares, right? It doesn't take into consideration of preferred stock etcetera, right? So not saying we want to do this, but just the pure arithmetic of it, say the company were to raise $2 billion in common shares, not saying we're going to do it at this price but say -- that would be about half of what the company -- little less than half of what the company is valued at. The preferred shares are valued at substantially more at this point in time.
GERSH: So you could issue more preferred?
SYRON: Yes, sir.
GERSH: OK. On your conference call, there was a discussion that Freddie is one of the only games in town when it comes to the mortgage market right now, but you're going to be not growing your mortgage portfolio anymore. And one of the reasons that Congress kicked in with rescue plan to keep you guys going was the idea that you would stay engaged in the housing market. So aren't you in a way saying you're going against what Congress was hoping would happen here?
SYRON: No and maybe we didn't make that clear enough on the call. We have two ways that we're involved in the housing market. One is called our guarantee portfolio which is when people get mortgages essentially, they originate as salesmen. We package them and they become securities and sold around the world. We've said that that's been growing around 10 percent. We expected that to continue growing around 10 percent. Then, we're also involved in something called our retain portfolio which is when we buy mortgage securities, right? We've increased that quite dramatically in order to bring spreads in in the market. In fact, we increased it about $100 billion. And what we're saying at this point in time is that that hasn't grown as strongly as it has. We expect that we'll match run-off with new purchases but we will --
GERSH: To keep it flat?
SYRON: -- grow more slowly.
GERSH: But keep it flat. But doesn't that mean the mortgage market's going to be tighter? And isn't that why Congress wants companies like Freddie and Fannie out there?
SYRON: You raised a very good question because this all has to do with trade offs. Now we have specified capital ratio. As you just pointed out, you know, raising a lot more capital at these kinds of prices could be quite dilutive to our shareholders, so we have to balance the interest of our shareholders, call out the price. The interest of our regulator, call that the capital ratios and the interest of our mission which you're dead spot on in helping the market. They often -- in fact, most often conflict. What we're saying is we believe we can continue to support the market --
GERSH: You probably see this question coming but I will ask you. Why didn't you see more of this coming? A lot of people said, look, Freddie should have seen this coming. You should have seen this coming. You should have been prepared. There was a lot of evidence, concern that the housing market might -- the bubble might burst and your company would be left holding the bag to mix metaphors.
SYRON: Well, I think quite candidly and people have said that I was one of the most bearish people on the housing market, but I wasn't as bearish as what eventuated. If you go sort of through this by years, go back to when I first came to the company in '04, our loss ratio at that point was .86 of one basis point. So it was 8600s of 100th of a percent. Now when you get into '06 and '07, actually we did pull our horns in a little bit. We reduced our market share during that period and that was a period in which as you may know, a lot of the quote/unquote Street came into the market with candidly, extremely liberal terms.
GERSH: Let me ask this. You were quoted in the "New York Times" as saying if you had perfect foresight, you wouldn't have taken this job but you're looking for a new CEO. So how are you going to recruit a new CEO for a job that you now say you wish you hadn't taken?
SYRON: Well actually I didn't say I wish I hadn't taken it. I mean, that was somewhat tongue-in-cheek in saying no one has perfect prescience. You know, if someone said to you, do you want to take a job managing essentially a portfolio of insurance and assets that goes down -- expect to go down around 20 percent in the next period of time, I think you'd scratch your head and say whether or you want to do this or not. Now I think the situation for someone coming in now is entirely different because they're coming in near what I think is going to be if not the bottom of the trough, approaching the bottom. There are some straws in the wind, preliminary signs that housing is turning around in some parts of the country.
GERSH: You've got some prospects for the CEO? Discussions you've been 7turned down a couple of times?
SYRON: You know, you talk to people. Some people are interested in being a draft choice and other people aren't.
GERSH: Richard Syron, Freddie Mac, chairman and CEO. Thank you very much for your time.
SYRON: Thank you, sir.
"Street Critique"-Hilary Kramer, Chief Market Strategist at Greentech Research
PAUL KANGAS: Tonight's "Street Critique" guest says cash is still king, especially in a market like this. She's Hilary Kramer, chief market strategist at Greentech Research and author of "Ahead of the Curve" and Hilary, good to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Thank you, Paul, it's nice to be here tonight.
KANGAS: Back in early July, you said the markets were gearing up for a major capitulation this fall but that we might see some strong rallies over the short term. Do you still believe that?
KRAMER: I absolutely do and it's come to be. The proof is in the pudding, because we've had that this week but Paul, we're still in for some rough patches. The individual investors especially need to know that in many ways this is a head fake and there's still bad news coming just like there was some bad news from AIG tonight.
KANGAS: What about the recent easing in oil prices? Isn't that enough to support the market?
KRAMER: The easing in oil prices is because we have a recession and now there isn't as much demand. So it's really a result of a poor global economy, not a stronger one.
KANGAS: Since you still think cash is king, tonight, you brought our viewers stocks that pay cash, namely dividends paying utility stocks. What's the first on your list?
KRAMER: FPL, Florida Power and Light. I talked about this one before. I own Florida Power and Light. It's a core holding I've held for years. I bought more today at $57. It's really a bargain. It's been as high as $73. FPL is a utility that has a large business in both nuclear, solar now, was an announcement and one of the largest wind operators and wind businesses in the country. You can't go wrong and you have a 3 percent dividend yield.
KANGAS: You liked it last fall when it was $59. It's held up pretty well, a little over $57. How about another selection?
KRAMER: Well, Pinnacle West Capital, the ticker symbol is PNW. Pinnacle West is $33. It's been as high as $44.50 in the last 52 weeks and this is Arizona's utility and it's pretty hot in Arizona. A lot of customers will be paying a lot of money to PNW and the stock is very depressed right now. There's overhang because they have this very small real estate division and many people think of it as a real estate play. So it came down with the home builders and the housing drop.
KANGAS: And a big dividend, over 6 percent.
KRAMER: 6.4 percent. You can't go wrong.
KANGAS: Next pick, please.
KRAMER: Constellation Energy. The ticker symbol there is CEG. This is a Baltimore, Maryland-based merchant energy company. They're in the regulated businesses. They provide wholesale energy and I love Constellation Energy, especially here at $74.
KANGAS: CEG on the big board. We have time for one more.
KRAMER: OK, Southern Company, SO, an Atlanta-based utility. Again, here, you have a dividend 4.8 percent. The stock's at $35 and everybody has sold off these utilities, Paul, because everyone is out there especially big institutional investors. They're going for more risky stocks and also because they think rates are going to go up, not down. They tend to gear away from the utilities in this kind of environment.
KANGAS: Hilary, do you own the stocks you've mentioned or have other disclosures to make?
KRAMER: Yes, FPL Group and Pinnacle West, both stocks I own now and I have owned for a long period of time. I'm watching the other utilities and will be buying some.
KANGAS: All right, thanks for joining us, once again.
KRAMER: Thank you so much, Paul.
KANGAS: My guest, Hilary Kramer of Greentech Research.
Paul Kangas' Stocks in the News
PAUL KANGAS: Freddie Mac's big loss set a negative tone for early trading on Wall Street today. By 11:00 a.m., the Dow posted a 76 point loss and the NASDAQ was off 14 points. As oil prices retreated, stocks recovered nicely. Tech stocks were also strong thanks to Cisco's solid results out last night. At 3:00 p.m., the Dow was up 68 points, but it did falter a bit in the last hour. So the Dow Jones Industrial Average closed up 40.30 at 11,656.07. The NASDAQ Composite gained 28.54. The Standard & Poor's 500 rose 4.31 to 1289.19. Over in the bond market, the 10-year note lost 10/32 to 98 17/32, putting the yield up to 4.06 percent.
Big board volume leader on 17 million shares, SprintNextel (S) losing $1.21 after reporting a second quarter loss of $0.12 a share versus earnings of a penny a year ago. Revenues actually fell 11 percent and the company plans a $3 billion offering of convertible preferred stock which would be dilutive to earnings of course.
Ford Motor (F) a $0.15 drop.
Pfizer (PFE) up $0.04.
Wachovia (WB) fell $0.65.
Bank of America (BAC) down $0.13, taking off a little what they gained yesterday.
Wells Fargo (WFC) off $0.89.
$0.25 drop in General Electric (GE).
Motorola (MOT) a nickel loss.
Ambac Financial (ABK) down $1.12. After the close, the company said its second quarter results, excluding one-time gains, when they had a loss of $1.83 a share. Standard & Poor's repeated a "sell." The stock in after hours trading dropped about a nickel a share.
And Freddie Mac (FRE) down $1.55. As you heard, second quarter loss of $1.63, plans a big dividend cut from $0.25 down to a nickel quarterly.
Freeport McM Copper & Gold (FCX) nice move up, $8.67. Citigroup added it to its top pick list, repeated a "buy" with a $142 a share target price. But later in the day, Deutsche Bank cut its target price from $145 to $135.
Computer Sciences (CSC) down $2.04. First quarter earnings nicely higher, $0.79 versus $0.61 a year ago, but the Stiefel Nicholas brokerage later in the day downgraded it from "buy" to a "hold" recommendation.
Time Warner Cable (TWC) off $1.56. Second quarter earnings flat, $0.28, same as last year. The Street estimate was $0.04 higher than that.
Fidelity Natl Info Svc (FIS) up $3.53. Second quarter earnings $0.36, nicely above $0.29 last year. Sales were up a very good 27 percent.
Resmed (RMD) up $4.84. Fourth quarter earnings $0.40, up from last year's $0.35 and a 23 percent rise in revenues.
Then we see Plains Exploration (PXP) gaining $3.98. Second quarter earnings jumped to $1.84 from only $0.35 last year, $0.23 better than the Street was expecting. Standard & Poor's upgraded the "hold" to "buy."
Quanta Services (PWR) up $1.93, $0.26 in second quarter earnings up from $0.18 a year ago and revenues jumped over 70 percent in the period.
National Financial Partners (NFP) tumbling $4.53. Second quarter earnings $0.25, a penny less than last year and the company sees challenging life insurance underwriting market for high net worth sector in the second half of this year.
Apple (AAPL) topped the active list on NASDAQ, up $3.55. Yesterday it was up over $7 on a UBS "buy" recommendation.
Research in Motion (RIMM) up $5.32.
And then Cisco Systems (CSCO) $1.28. Pacific Growth Securities brokerage upgraded it from "neutral" to "buy," mainly because of yesterday's solid earnings report.
Microsoft (MSFT) up $0.81, plans a big stock buyback.
Google (GOOG) up $6.49.
Moving along in the active list on NASDAQ, we see Intel (INTC) down $0.22.
Followed by Oracle (ORCL) up $0.65.
Qualcomm (QCOM) down $0.17.
Baidu.com (BIDU) gained $8.51.
Priceline.com (PCLN) tumbling just over $20 a share. Second quarter earnings were nicely higher, $1.55 versus last year's $1.11, but Citigroup cut its price target from $142 down to $130 a share on the company's lower than expected third quarter bookings estimate.
And finally Isolagen (ILE) soared $1.08 or 208 percent on news its wrinkle treatment met all primary endpoints in late stage trials.
