NBR Transcripts-August 8, 2008
Friday, August 08, 2008Oil Price Slide Fuels Wall Street Rally
SUSIE GHARIB: Falling oil prices ignited a big rally on Wall Street today. The Dow soared 302 points or about 3 percent. The NASDAQ gained 58 points or just over 2 percent. Over in the oil markets, September crude futures tumbled almost $5 a barrel closing at $115.20. Oil has now fallen 8 percent this week and is down 21 percent from its high set last month. Fueling today's oil sell off, a surging U.S. dollar on concerns that European economies could be headed for trouble and hopes the U.S. economy could be over its tough times.
Fannie Mae Continues To Falter
SUSIE GHARIB: But times are still tough in the housing market and that's putting pressure on Fannie Mae. The mortgage giant posted a massive second quarter loss today and expects credit losses to double over the next six months. Fannie lost $2.3 billion or $2.54 a share, almost four times bigger than estimated $0.68 loss. As Darren Gersh reports, some analysts think it could take eight years before the housing market fully recovers.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae's second quarter ended in June and it was a bad one. And CEO Daniel Mudd said on today's conference call the news got even worse in July.
VOICE OF DANIEL MUDD, PRES & CEO, FANNIE MAE: We experienced higher defaults and higher loan loss severity in markets that were experiencing the steepest home price declines and that gave us higher charge-offs than we had experienced in any month in the second quarter.
GERSH: Fannie charged off $1.3 billion in bad loans and foreclosure expenses in the second quarter and the mortgage giant expects its credit losses will double over the next six months. Experts say that would translate into charge-offs of roughly $4 to $5 billion over the rest of the year. Analyst Gary Gordon figures Fannie Mae has reported only a fraction of its likely total losses from the housing crash.
GARY GORDON, MANAGING DIRECTOR, PORTALES PARTNERS: Fannie Mae probably loses $30 to $40 billion over the next five to eight years. Housing cycles can take a long, long time and will be suffering from this - - people could be losing their homes because of this five, seven years from now.
GERSH: Almost half of Fannie's credit losses in the quarter were on so-called alt-A loans, many of which were taken out to buy investment properties. But at the end of June, Fannie still had $340 billion worth of alt-A loans on its books. Today's loss from Fannie Mae and a gloomy report from Freddie Mac on Wednesday underscore why Congress moved to rescue the two mortgage giants. Housing finance expert Alex Pollock says bond buyers around the world needed to know the $5 trillion in debt Fannie and Freddie back will be honored.
ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE: The real capital of Fannie and Freddie is not what you find in the balance sheet. It's this explicit ability of the government to lend or invest in Fannie Mae and Freddie Mac without limit.
GERSH: Fannie Mae expects its credit losses will peak this year, but just in case, it is once again raising the fees it charges to insure mortgages. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with David Rosenberg, Chief North American Economist at Merrill Lynch
SUSIE GHARIB: With the credit crisis now a year old, Wall Street is assessing the state of the economy and we checked in with one of the nation's most prominent economists. David Rosenberg, chief North American economist at Merrill Lynch was one of the first to forecast a recession for the U.S. This morning, I asked him to describe the health of the economy now.
DAVID ROSENBERG, CHIEF NORTH AMERICAN ECONOMIST, MERRILL LYNCH: The economy right now is in the middle of a recession that started off with housing, morphed in to credit and now it's gone in to the consumer arena which is 72 percent of GDP. So right now we're in to a new chapter. It's the consumer side of the equation. And recession started in January in my opinion, probably is not going to end until the mid part of next year.
GHARIB: David, a lot of people are talking about a second stimulus package by the government. Does that make sense to you? Will it boost growth?
ROSENBERG: If the question is, will the government come out with some RTC-style of package to take the bad assets out of the financial system to help re-stimulate credit growth, that is a fiscal package that will get me excited. Another temporary tax rebate, I'm sorry. That's a band-aid that will last two months.
GHARIB: Is there anything that the Federal Reserve can do to get us out of this rut?
ROSENBERG: There is more that the Fed can do. Ben Bernanke is an absolute expert on monetary policy. He's a student of the great depression. I'm sure that the Fed has not used up all the bullets in its chamber. And I think the next stage is probably going to be more non- conventional measures to stimulate credit growth and probably is going to mean that they're going to have to expand their balance sheet and more dramatically inflate (ph) the economy. I expect to see that over the course of the next 12 months.
GHARIB: In terms of interest rates, what can we expect from the Federal Reserve as the next move? Is it going to be a hike in rates or is it going to be a cut?
ROSENBERG: I think it's going to be a cut. But even that's up in the air right now. There surely not going to raise interest rates. To raise interest rates irrespective of inflation which is a totally backward looking indicator, to be raising interest rates in this very tentative and very fragile economic environment I think would be a huge policy mistake. So my sense of that, once credit developments become more positive, the Fed is probably going to cut interest rates and then I think we'll see lower interest rates through most of 2009. But I think the Fed is basically for the next six months just on hold.
GHARIB: Let's talk about inflation because everybody has gotten kind of worried about this including the Federal Reserve. How serious a problem is it?
ROSENBERG: I don't think it's a very serious problem any more now that the commodity bubble has been popped. I think the commodity cycle is over. And we don't have any significant monetary growth, there's no credit growth, there's no wage growth. So the question is, how do you get a sustained inflation environment with no wage growth, no monetary growth, no credit growth, pretty difficult. So I think that now that the commodity bubble has been broken, the near of deflation is going to start to show up more visibly I think over the next 12 months. (INAUDIBLE) we'll be talking about deflation 12 months from now, not inflation.
GHARIB: Are you saying that high oil prices are no longer a threat to the economy?
ROSENBERG: What I'm saying is that oil prices are probably not going to be going up any more than they already have. They're probably going to come down. So oil has been a problem. It's a problem now in terms of what some of the auto sector, what it's done probably to spending. And now what's happening is spending on energy is contracting. Oil prices are going down. What I'm saying is that the fact that oil prices going down is going to feed right into lower inflation, much lower inflation over the course of the next 12 months. So it comes back to your previous question about inflation. I think inflation is yesterday's story.
GHARIB: Are you saying that deflation is going to be the next concern? Tell us why?
ROSENBERG: I'm not sitting here saying that the CPI is going to go negative. But what I am saying is that the same factors that gave us the deflationary backdrop back in 2002, which is widening excess capacity in the labor market, widening excess capacity in the product market and weak commodity prices, alongside what's happening in terms of asset deflation is going to be a fundamental backdrop next year. So one of the reasons why I think interest rates end up being a lot lower than they are today.
GHARIB: Tell us about the job market. When do you see businesses ramping up to hire again?
ROSENBERG: We can see housing bottom out and we have to see the credit situation improve. And then we're going to start to see the hiring. And I expect that is going to be a 2010 story. I don't think it's going to be a 2009 story. If you are going to ask me do I think that we're going to see an employment rate growing about 6 percent towards 7 percent in the next 12 months, I'd be braced for that.
GHARIB: Why do you see the unemployment rate going up to 6-7 percent?
ROSENBERG: Because I think companies are going to be forced to cut their payrolls more aggressively over the course of the next 12 months. In light of the fact that we've morphed from housing recession to a credit crunch to now the consumer, this is a very big deal. The U.S. consumer is 72 percent of GDP. Sp if the consumer starts to spend less, that has feedback impacts right through back into the credit market, back to the housing market.
GHARIB: David, thank you very much for your time.
ROSENBERG: Thanks for inviting me back.
"Green Options"-The Nichia Effect
SUSIE GHARIB: Cell phones are one of the biggest users of energy efficient light emitting diodes or LEDs, a major advance in lighting technology. Commercial development of LEDs didn't happen at a Japanese tech powerhouse like Sony or Toshiba, but at the tiny Nichia Corporation barely known even in Japan. As we continue our series "Green Options," Lucy Craft reports from Nichia's headquarters.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The verdant rice paddies of southern Japan don't seem like a launch pad for global revolution. And yet Shikoku Island was the setting for a dramatic technological breakthrough at a modest maker of electronic chemicals, called Nichia Corporation. Takashi Sakamoto is a manager.
TRANSLATION OF: TAKASHI SAKAMOTO, MGR, LED BUSINESS PROMOTION SECTION, NICHIA CORP.: We are basically simple country people. Instead of academic debates, our approach is to just jump in and try it out. This may be not be a very efficient way to operate, but we tend to experiment first and analyze later.
CRAFT: Nichia's isolation from the mainstream may have given it an edge in the worldwide race to create what's considered the holy grail of lighting: the blue diode. Ignoring conventional wisdom, the company bet that a substance called gallium nitride was the secret to making blue diodes, the key to creating white light. Yves Lacroix, whose company makes LED manufacturing equipment, says Nichia's triumph in 1993, would forever transform the global lighting industry.
YVES LACROIX, PRESIDENT, Y SYSTEMS LTD: It was a revolution everybody had been waiting for. Obviously, it was the missing link between just displays and light, because you needed the three basic physical colors for the human eye to make white. Making white means you could make every possible colors. Everybody had been trying to do that in one way or another.
CRAFT: Yet at first, Nichia's own engineers didn't grasp the commercial implications of their discovery.
SAKAMOTO: The first white LEDs were rather dim. We didn't know what to do with them and we used to joke, maybe we could use them for the sign on a funeral home.
CRAFT: But it soon became clear that gleaning white light from semiconductors was a potential gold mine. Nichia now had the means to replace not just traffic signals and street lights, but literally anything: in transportation, in factories, even in the home, that requires illumination, starting with back-lit displays on cell phones and computers to glowing gauges in jet cockpits and car dashboards and even auto headlights. Nichia's fortunes have exploded in line with the surging popularity of LED lighting. To hang onto its lead, the company will have to fend off low- cost rivals in places like Taiwan and take a more aggressive role in setting standards for the emerging industry before its competitors do. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokushima, Japan.
"Market Monitor"- Richard Lehmann, President of Income Securities Advisors
PAUL KANGAS: My guest "Market Monitor" this week is Richard Lehmann, president of Income Securities Advisors, based in Miami Lakes, Florida. Richard, welcome back to NIGHTLY BUSINESS REPORT.
RICHARD LEHMANN, PRESIDENT, INCOME SECURITIES ADVISORS: Thank you Paul.
KANGAS: Your specialty is fixed income but in this low interest rate environment, are you having difficulty in finding high yielding but safe securities?
LEHMANN: Actually, not. It's a surprise, because there's so much risk aversion these days that anything that isn't triple-A, people discount in this marketplace.
KANGAS: They're yielding despite their triple-A rating, yielding high?
LEHMANN: That's right. We're going to see that some examples that you give today.
KANGAS: OK. Now I understand you believe there will be a lot of bond defaults occurring in the not too distant future. Elaborate on the reason for this.
LEHMANN: Bond defaults is a cyclical thing. It tends to come in waves. We had one in '91. We had another one in 2001 and we're over due for this one now. The reason for it is that basically it's banks that cause these waves because they tend to contract credit during hard economic times and in this particular instance because of the fact that they are under pressure themselves to clean up their books and get some of the bad loans off and consequently, we're seeing -- we're predicting that we're going to see a 10-12 percent default rate among the low investor grade category.
KANGAS: And the overall impact on the financial community, serious?
LEHMANN: The impact on the financial community won't be there because of the fact that these securities have already been rated as if they were going to default, mainly in the B-minus and triple-C category. That's where most of these defaults will come. And when it does come, about half of them will go down.
KANGAS: So this is sort of clear the air, so to speak?
LEHMANN: Yeah.
KANGAS: During your last visit with us in March of 2007, you gave our viewers four "buy" recommendations of high yielding securities. Let's see how they have done since then. We see Enerplus Resources (ENR) down only 1.9 percent. All that time it's been yielding how much, roughly?
LEHMANN: 12 percent.
KANGAS: And the same for Penn West Energy Trust (PWT) which is actually up on a principal basis 2.2 percent, not bad.
LEHMANN: That's right. The price movements here is not what you're looking for. You are looking - you're buying these for the interest.
KANGAS: OK. You had two others that were kind of clinkers, unfortunately. And (INAUDIBLE) from Ford and General Motors, we know what happened to those two corporations. Are you still with these?
LEHMANN: Yeah, I am, despite the fact that they -- they're trading down as if they were bankrupt already.
KANGAS: Would you buy them at these depressed levels?
LEHMANN: I would buy them, yes. I think that both these companies are going to survive. I think if need be the Federal government would give them a loan guarantee to get through this crisis and change in models because there's so much union support for it.
KANGAS: Now they're yielding how much at these depressed prices?
LEHMANN: We're talking about 17-18 percent.
KANGAS: My goodness. That usually denotes extremely high risk.
LEHMANN: Again, part of that is because the issues from these companies are so many and so large.
KANGAS: How about some new recommendations, Richard?
LEHMANN: OK. I think as a general category, there's a lot of good paper out now with these banks that have had to issue preferred shares to boost their capital. First one is Citibank.
KANGAS: Citigroup (C-M) in this case?
LEHMANN: Or Citigroup which is yielding an extraordinary 9 percent, an A-rated company. And of course Citigroup is not something that would ever fail.
KANGAS: Looks like it did there for awhile looking at that chart.
LEHMANN: The price there was more attractive. In effect so erratic is it shows how sensitive this market is.
KANGAS: We have time for another choice.
LEHMANN: Yeah. The Royal Bank of Scotland (RBS-S) which is yielding slightly less. It's also A-rated. But it's eligible for the 15 percent tax treatment, which is a real plus for somebody that's in the high tax bracket.
KANGAS: That's a good point, 15 percent max tax.
LEHMANN: On 8 percent.
KANGAS: That's right. Do you personally own any of these securities or have other disclosures to make?
LEHMANN: I have clients who own these securities. But I myself don't.
KANGAS: OK. All right. Richard, I want to thank you very much for being with us again and sharing your insights.
LEHMANN: Thank you, Paul.
KANGAS: My guest, Richard Lehmann of Income Securities Advisors.
"Last Word"-Crazy 8's
SUSIE GHARIB: And finally, seven is supposed to a lucky number but it seems more people are taking a chance with triple-8's. Today is August 8, 2008 or 888. Thousands of couples are getting married because the three "8"s are good luck in many cultures. Wedding website theknot.com has seen a 400 percent increase in ceremonies scheduled for today. It's also the start of the Beijing Olympics, which kicked off at 8:08 p.m. China time. Still, others are trying their luck with lottery tickets, playing the numbers 888. Many states are expecting a huge increase in sales. And, Paul, the triple-eight won't roll around again until August 8, 2088.
KANGAS: And to top it all off, that's 80 years from now.
GHARIB: I won't be here, Paul.
KANGAS: I'm not worrying about it.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened with a sizzling rally as investors ignored Fannie Mae's huge loss and focused on that steep slide in oil prices and a strong dollar. An hour into trading, the Dow was sporting a 197-point gain with the NASDAQ up 43 points. The rally continued without pause spearheaded by the airlines and retailers as oil and other commodity prices showed further weakness. The major averages went on to end near the day's best levels at the final bell. The Dow Industrial Average closed up 302.89 points at 11,734.32. This week, it fell twice, rose three times and had a net gain of exactly 408 points. The NASDAQ Composite jumped 58.37 to 2414.10 today. It also fell twice and rose three times this week, gaining 103.14 points overall. The Standard & Poor's 500 Index advanced 30 1/4 points exactly, closing at 1296.32 today and for the week overall, it gained 36.01 points. Over in the bond market, the 10-year note lost 4/32 to par and 16/32, putting the yield at 3.94 percent.
Most active New York exchange issue trading 17.7 million shares,
General Electric (GE) participating in the rally, up $1.07.
Then Citigroup (C) up $0.92.
Bank of America (BAC) edged up $0.73.
Then a new issue, Rackspace Hosting (RAX), this is a web hosting company, went public today, 15 million shares offered at $12.50, not a great debut. It opened at $10, had a high of $11 5/8 and then slumped back to $10.01, down $2.49 from the offering price.
SprintNextel (S) was up $0.93.
Moving along in the active list, Amer Intl Group (AIG) recouping some of its recent losses, up $1.03.
Wash Mutual (WM) down $0.39.
Ford Motor Co (F) edged up $0.40.
Pfizer (PFE) $0.63 gain.
And then JPMorgan Chase (JPM) with a gain of $1.26.
McDonalds (MCD), one of the stars of the Dow, up $3.81. The company said July global same store sales up 8 percent. US same store sales up 6.7 percent.
Now let's look at some of the other big Dow winners that accounted for that 302 point gain in the Dow. Boeing (BA), Caterpillar (CAT), Proctor & Gamble (PG), 3M Company (MMM) and United Tech (UTX) all nice gainers.
Live Nation (LYV) up $3.53, almost a 28 percent rise there. It's a concert promoter and second quarter earnings came in at $0.02, down from $0.15 last year, but the Street was looking for a loss of $0.20 a share, so a lot better than expected.
Landry's Restaurants (LNY) up $2.37. Second quarter operating earnings $0.92, more than double last year's $0.45 and revenues were up 1.1 percent.
Then World Fuel Svcs (INT), aviation fuels company, up $3.43, nice second quarter earnings, $0.71 up from last year's $0.58 and revenues jumped up 73 percent.
Then a software firm, Pros Holdings (PRO) down $3.27. Second quarter earnings came in at $0.08, above last year's $0.06 but the company sees flat second or third quarter earnings of about $0.78 and Jefferies brokerage downgraded the stock from "buy" to just a "hold" recommendation.
Carriage Svcs (CSV), which is in the funeral business, down $1.64, losing a lot of its value. Second quarter earnings was just break even, versus earnings of $0.10 last year. The company blames lower profit margins.
Par Pharmaceuticals (PRX) losing $2.62. Second quarter loss reported, $0.60 in the minus column versus $0.08 in earnings last year. The Street was looking for $0.12 a share in earnings.
And Hormel Foods (HRL) down $1.96. The company cut its 2008 earnings guidance from a high of $2.40 to $2.28 a share at best.
Apple (AAPL) topped the NASDAQ active list, moving up nearly $6.
Research in Motion (RIMM) up $6.50.
Microsoft (MSFT) gained $0.74.
And Google (GOOG) up $15.89.
Qualcomm (QCOM) rose $0.48 a share, fifth in NASDAQ volume.
Intel (INTC) $0.56 advance.
Cisco Systems (CSCO) $0.67 advance there.
Oracle (ORCL) gained $0.77.
Amazon.com (AMZN) had a pretty good day, up $3.56.
And Dell (DELL) edged a penny higher.
Congent Communications (CCOI) tumbling $2.72, almost 25 percent drop. The company reported a second quarter loss of $0.12 a share, not as bad as the $0.19 per share loss a year ago, but it was $0.02 worse than the Street consensus.
And on the upside, Fuel System Solutions (FSYS) jumping $12.22, second quarter earnings $0.29, way up from $0.03 last year and $0.02 better than the Street was expecting.
And those are the stocks in the news tonight.
