NBR Transcripts-August 19, 2008
Tuesday, August 19, 2008Wholesale Numbers & Housing Starts Spark The Latest Wall Street Sell-Off
SUSIE GHARIB: More selling on Wall Street today following two discouraging reports on the economy: a big drop in housing starts and a big jump in wholesale inflation. First, that bigger than expected rise in inflation. The Labor Department reported that the producer price index rose 1.2 percent in July. Excluding food and fuel costs, wholesale prices rose 0.7 of one percent. But as Suzanne Pratt reports, most economists think those hot inflation pressures will begin to cool in the coming months.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The latest data on wholesale inflation is alarming. A sampling of wholesale costs showed car prices revved up 1.4 percent in July; beef prices rose 7.4 percent, the biggest gain in nearly five years; and prices for soft drinks fizzed up 2.4 percent. In total, producers paid nearly 10 percent more for goods in July this year than in July of '07 and it was the highest annual increase in the producer price index since 1981. Economists like Jerry Webman are quick to point out the July data do not reflect the recent huge drop in oil or commodity prices.
JERRY WEBMAN, CHIEF ECONOMIST, OPPENHEIMER FUNDS: These are backward looking numbers and we need to be cautious about overreacting. And the market's not overreacting to them, but there are some price pressures in the pipeline.
PRATT: Those pressures are evident in the annual core PPI, which excludes food and energy. It jumped 3.5 percent from a year ago, the biggest increase since 1991. Still, UBS economist Jim O'Sullivan expects inflationary pressures to ease in the coming months as the economy slows.
JAMES O'SULLIVAN, SR. U.S. ECONOMIST, UBS: Clearly, headline inflation is going to slow because of the drop in oil, but even the core numbers are likely to slow. Core inflation tends to lag growth. Unemployment is rising, slack is increasing and historically that has been the recipe for slowing inflation. And I don't expect this time to be any different.
PRATT: If inflation does cool off, experts say it means less pressure on the Federal Reserve to raise interest rates.
WEBMAN: The Fed is not going to be changing interest rates in the near future, probably not before the end of the year. It's been our opinion all year that they'd be on hold throughout 2008. I'm not surprised to see that they are still there.
PRATT: Economists say the Fed is also focused on the fragile state of financial markets. So even though price pressures are worrisome, some believe the credit crisis currently outranks inflation. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Money Market Mutual Funds May Have To Manage More Scrutiny
SUSIE GHARIB: The Securities and Exchange Commission plans to issue new rules to address short-selling abuses. The SEC issued a temporary emergency ban last month against short sales of Fannie Mae, Freddie Mac and 17 investment firms that act as primary dealers of Treasury debt. Now, SEC Chairman Christopher Cox says the commission will issue permanent rules in the next few weeks to curb so-called naked short selling abuses. Separately, the commission is also beefing up its electronic database of corporate filings to include data tagging software. Eventually, it will switch from the current system known as Edgar to a fully interactive database, making it easier to search filings and compare data. PAUL KANGAS: Several banks and investment firms have filed disclosure forms with the SEC during the past year regarding their money market funds. But many investors may have overlooked the filings that showed firms pumping in billions of dollars to shore up their funds. As Stephanie Dhue reports, with the credit crisis in full swing, money market funds are now facing greater scrutiny.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bruce Bent was one of the creators of money market funds in the 1970s. The idea was simple -- to give people safe, liquid investments they don't have to worry about. But in recent years, as money market funds chased higher returns, they got into sub-prime and structured investment vehicles that pushed safety limits. Bent says some fund managers lost sight of what he calls the money fund mantra.
BRUCE BENT, FOUNDER AND CHAIRMAN, THE RESERVE: It's supposed to be a mantra. Every morning, every night, a money fund provider should be safety of principle, liquidity, a reasonable rate of return and a sound night's sleep. And they forgot the mantra.
DHUE: During the past year, at least 17 money market management firms have quietly unwound their riskier investments to prevent what's known as breaking the buck. That's when investors don't get a dollar-for-dollar return on their investment. For example, Suntrust put up $1.4 billion to remove structured investment vehicles from two of its money funds in December. Bank of America purchased $1.56 billion of SIV securities and pledged $760 million to shore up several of its Columbia Management funds and Wells Fargo entered into a capital support agreement to cover potential losses in commercial paper holdings. Bent thinks the worst is likely over.
BENT: It's now a year since it hit the fan, as far as the credit markets are concerned. And that, indeed, unless we have a total fool situation -- and frankly, I'm not aware of total fools that are money fund providers -- that they have gone through and checked these things out five times to Sunday. So if investments had to be bailed out, my opinion is that they have been done.
DHUE: The Securities and Exchange Commission quietly gave firms the go ahead to shore up their money market funds. The disclosures were made after-the-fact. Mercer Bullard, the founder of the investor advocate group Fund Democracy, wants money market funds to provide real-time disclosure of their holdings to regulators.
MERCER BULLARD, LAW PROFESSOR, UNIVERSITY OF MISSISSIPPI: What this crisis shows is that often what seem to be highly liquid, easily priced securities turn out not to be. And real-time disclosure would, if it included the right information, allow the SEC to look at the bona fides of the prices at which these funds are valuing their portfolio securities.
DHUE: The SEC considered doing just that in the late 1990s but the proposal didn't go anywhere. The SEC's investment management director, Buddy Donahue, says the credit crisis has pushed the commission to reevaluate the idea.
BUDDY DONAHUE, DIR., DIVISION OF INVESTMENT MANAGEMENT, SEC: It's caused us to go back and look at whether or not there's information that we might have had available to us that would enable us to deal with issues. And that's certainly something that we're doing, going back and looking at whether we get enough information in a timely fashion.
DHUE: Some firms are already making more than the required quarterly disclosures of their investments. For example, Deutsche Bank's DB Advisors money market fund now reports its holdings twice a month. Kevin Bannerton, the fund's manager, says the change was driven by investors.
KEVIN BANNERTON, MANAGING DIRECTOR, DB ADVISORS: I think it's critical to stay vigilant within this environment and that's what we want to do is provide information so that investors can feel that not only they're comfortable with the investments, but to provide tools that they can conduct surveillance on an on-going basis.
DHUE: Experts say the risk of losing principle in a money market fund is remote. Still, it's important to know that not all those funds are created equal. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Working for Balance"-The Motley Approach
SUSIE GHARIB: There are about 155 million people working in the United States and almost a third of them work more than 40 hours a week. So between 24-7 access to email and phone calls from the office, putting in a few extra hours at work and making time for family, there never seem to be enough hours in a day. The stress that results is costing employers plenty -- over $300 billion a year. So tonight, we kick off our four-part series "Working for Balance" with Erika Miller's look at one company's efforts to combat the high cost of stress in the workplace.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Maybe it's the people doing yoga in a conference room during the workday or the workers playing board games in another. Come to the Motley Fool offices in Alexandria, Virginia, and you'll notice immediately the work environment is unusual. The media company best known for its online financial website, encourages staff to take frequent breaks, whether it's to play ping pong or video games, shoot hoops or get a massage. The company also gives workers unlimited paid sick days as well as unlimited paid vacation days, provided they clear it with their managers. The company deters abuse of those policies by doing performance reviews three times a year. In the firm's Hawaiian-themed meeting area, CEO Tom Gardner explains that all this goofing off is part of a well thought out business strategy to reduce stress, boost productivity and keep turnover to next to nothing.
TOM GARDNER, CEO, THE MOTLEY FOOL: When you give people the flexibility, you give them an opportunity to really love the place that they work. And when they start loving where they work, they start performing better. It's actually a very economic decision on our part. We've thought through all the implications of what we're doing in developing our culture and they have economic underpinnings to them.
MILLER: You probably think it's expensive for Motley Fool to offer employees all these perks, but the company says its benefit costs are leaner than most, just 25 percent of worker salary versus an average of 33 percent for similarly sized companies. The company credits its anti-stress culture with keeping down medical costs.
GARDNER: Last year, our health premiums were down 8 percent. So our insurance costs actually went down last year in an environment where the average company is paying 10 to 15 percent more.
MILLER: Analyst Tim Hanson says the playroom and company-sponsored basketball league do more than relieve stress, they encourage teamwork and the exchange of ideas.
TIM HANSON, SENIOR ANALYST, THE MOTLEY FOOL: We rent a gym every Thursday night. We play outside on Mondays. And that's great because it's nice to get outside with people from work in a non-work environment. You make a lot of friends. We've got a real collegial atmosphere around here and I think that's really an important part of it.
MILLER: And don't be fooled, online managing editor Luann Dicosmo says she and her colleagues work every bit as hard as they play.
LOUANN DICOSMO, ONLINE MANAGING EDITOR, THE MOTLEY FOOL: We definitely are a performance-based culture, but we're not a clock-based culture. I would say, for us, it's more about the quality of the work being done.
MILLER: The toll of excessive stress on the body has been well documented, including stomach problems, high blood pressure and headaches. Columbia University psychiatrist Harold Pincus says the psychological effects can be equally as serious.
DR. HAROLD PINCUS, NYPH/COLUMBIA UNIV. MED. CTR.: It affects their daily functioning. If you are under tremendous amounts of stress, it affects your sleep. It affects your ability to concentrate. It affects your ability to interact with colleagues and family. It makes you more irritable.
MILLER: The American Institute of Stress estimates worker stress costs U.S. businesses $300 billion a year due to factors like medical costs, turnover and absenteeism. The institute's President, Paul Rosch, says that's probably a conservative estimate.
DR. PAUL ROSCH, PRESIDENT, THE AMERICAN INSTITUTE OF STRESS: There are a lot of hidden costs because when employees are absent or there is turnover, it's necessary to train new employees. The break-in time varies. It could be up to a year in some cases and there's a tremendous loss of productivity.
MILLER: To help reduce stress levels, Kathleen Hall of the Stress Institute recommends that workers try to get more exercise and improve their diet. She also suggests taking mental breaks like playing online board games and puzzles.
KATHLEEN HALL, FOUNDER, THE STRESS INSTITUTE: We're seeing that there are simpler, easier ways to de-stress yourself. You can play for five minutes and it actually re-stabilizes the brain. It changes you. It reduces your stress. You get more creative and more productive.
MILLER: A certain amount of stress in life is unavoidable and not necessarily a bad thing. It keeps life from becoming dull. The challenge in today's fast-paced world is to make stress work for you, instead of against you. Erika Miller, NIGHTLY BUSINESS REPORT, Alexandria, Virginia.
"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "USA Today."
SUSIE GHARIB: In tonight's "Of Mutual Interest," a silver lining for investors in the mortgage market mess. Here's John Waggoner, mutual fund columnist at "U.S.A. Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you follow the financial news, you know that the banking industry gave out whopping big mortgages to everyone, lost a lot of money and is very, very sorry. But the banking industry's indiscretions could be your gain, particularly if you're investing for income. Why? Well, because mutual funds that invest in very good mortgages are offering decent yields these days, provided you choose a fund with low expenses. Just a few years ago, when loan officers were lending like wild animals, investors could get very high yields from packages of sub-prime mortgages, home loans made to people with poor credit ratings. Thanks to the housing collapse, however, sub-prime loans are going the way of the dinosaurs. They're just not making them anymore. The only mortgages available now are those that meet the lending criteria set by Freddie Mac and Fannie Mae or those guaranteed by their cousin, Ginnie Mae. And even though many lenders have shut down, demand for mortgage-backed securities has fallen, pushing their yields up. Funds that invest in government-guaranteed pools of Ginnie Mae mortgages, for example, yield about 5 percent today. In contrast, 10-year Treasury notes yield about 3.8 percent. Five percent may not seem like much, but it's more than double what you'd get from a money market fund. When yields are this low, you need to find funds with the lowest expenses. At these levels, one percentage point of expenses cuts your yield by 20 percent. Ginnie Mae funds aren't as stable as money funds. Their share prices do rise and fall, but if you can put up with some modest ups and downs, you'll be able to benefit just a little bit from the banking industry's woes. I'm John Waggoner.
Paul Kangas' Stocks in the News
PAUL KANGAS: The slump in housing starts and the jump in producer prices combined to lead Wall Street broadly lower at the opening. Home Depot's disappointing earnings and outlook added to the selling, as did a surge in oil prices to above the $114 a barrel level. So, by noon, the Dow was off 155 points, NASDAQ down 31 points. With stagflation talk making the rounds this afternoon, there was hardly a hint of a rally and stocks ended near their lows of the session. The Dow Industrial Average closed off 130.84 points at 11,348.55. The NASDAQ Composite was down 32.62 ending at 2384.36, while the Standard & Poor's 500 Index fell 11.91 to 1266.69. Over in the bond market, the 10-year note lost 5/32 to 101 11/32, putting the yield at 3.84 percent.
Most active New York exchange issue on 14 million shares, Citigroup (C) down $0.43. Goldman Sachs recommended shorting Citigroup stock. Goldman today also expects or downgraded, cut earnings estimates or downgraded most of the major investment banks.
Freddie Mac (FRE) in there with a $0.22 loss after dropping 25 percent yesterday.
Bank of America (BAC) in the weak group, down $1.22.
Pfizer (PFE) fell $0.30.
Kraft Foods (KFT) in there with a $0.01 loss.
American Intl Group (AIG) lost $1.28. Goldman Sachs cut its price target from $30 to $23 in the belief the company's financial products unit will have more cash losses. Goldman Sachs recommended investors not buy AIG stock right now.
General Electric (GE) $0.64 loss.
Wells Fargo & Co (WFC) down $1.01.
Ford Motor Co (F) fell $0.17.
And completing the blizzard of minus signs, JPMorgan Chase (JPM) off $1.16.
Lehman Brothers Holdings (LEH) lost $1.96. JPMorgan sees another third quarter loss for Lehman and the "Wall Street Journal" reported the company approached potential bidders about buying a piece of its investment management group to raise more money apparently.
Home Depot (HD) down exactly $1. Second quarter earnings fell to $0.71 from $0.81 last year, but that was about $0.10 above the Street estimate, although the company is very cautious about the outlook and that seems to be what hurt the stock the most.
Target (TGT) down $0.33. Second quarter earnings a bit higher, $0.82, versus last year's $0.80, $0.06 above the Street estimate, but profits at its credit card operations fell 65 percent and like Home Depot, Target is also cautious about the outlook.
American Express (AXP) down $1.26. Analysts concerned that the high inflation data out today, along with the low housing report, portends poor business conditions for American Express and other credit card firms.
Wellcare Health Plans (WTG), finally a gainer, up $4.13. The company's $35 million payment to U.S. authorities regarding accounting errors is an indication to investors apparently the company is moving to put a government probe behind it and that's a positive.
Federated Investors (FII) up $1.30. The board has declared a special $2.76 percent (ph) cash dividend, bringing its total third quarter payments to $3 even. The board also approved a new five million share stock buyback.
Las Vegas Sands (LVS) tumbling $5.40. Macau casino stocks are down on reports China may again tighten visa restrictions on its citizens visiting Macau. That could hurt Las Vegas Sands because 60 percent of its revenues are from the Macau operation.
Albany International (AIN) off $4.41. Eclipse Aviation, a major customer, is cutting production of its Eclipse 500 jet and reducing purchases of components from a subsidiary of Albany International.
And Saks Inc (SKS) down $0.93, traded as low as $9.60, widened its second quarter loss to $0.23 a share versus a loss of $0.17 last year.
NASDAQ's most active, Apple (AAPL) down $1.86. The company is working to fix a connection problem in its iPhone with a patch.
Intel (INTC) $0.42 loss there.
Google (GOOG) down $7.80.
Research in Motion (RIMM) fell $1.06.
Microsoft (MSFT) more minus signs, down $0.26.
Staples (SPLS) was off $1.03. It issued a profit warning for the second quarter and also cut full year earnings estimates.
Cisco Systems (CSCO) down $0.25.
Baidu.com (BIDU) bucking the trend with $1.59 gain.
Qualcomm (QCOM) off $0.55.
UAL Corp (UAUA) down $1.37, the higher oil prices hurt the airlines.
Finally, Concurrent Computer (CCUR) losing $1.27, big percentage drop. The company had a fourth quarter loss of $0.12 a share on a 9 percent drop in sales. The Street was looking for $0.12 in earnings, not a loss.
Those are the stocks in the news tonight.
