NBR Transcripts -August 22, 2008
Friday, August 22, 2008Fed. Chairman Ben Bernanke & Oil Prices Inspire a Wall Street Rally
SUSIE GHARIB: A big rally on Wall Street today, thanks to a big slide in oil prices and encouraging words about inflation from Ben Bernanke. The Dow surged almost 200 points and the NASDAQ rose 34. Speaking in Jackson Hole, Wyoming, the Federal Reserve chairman said he believes inflation will moderate in the months ahead and into next year due to a stronger U.S. dollar and lower oil prices. But if that doesn't happen, Bernanke said the Fed is prepared to raise interest rates to achieve quote medium term price stability. Economist Cary Leahey of Decision Economics believes the current environment makes any move in interest rates very unlikely.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: If the Fed is truly worried about inflation, will they actually lift rates? I don't think they will until they get a sense the economy is stronger, meaning the unemployment rate is no longer rising. At the same time the financial markets, which continue to lurch from disaster to disaster, they have to feel better too and that just isn't happening yet.
GHARIB: Bernanke acknowledged those concerns, saying the year-old credit crisis is not over and has become a drag on economic growth. He also called for better regulation of the financial system to help protect the economy from the impact of market turmoil.
Fannie Mae & Freddie Mac's Stock Status Gets Downgraded
PAUL KANGAS: There's good news for shareholders of Fannie Mae and Freddie Mac tonight. The trading week is over. But there's bad news: trading starts again Monday. The common shares have been punished by Wall Street this week and today, Moody's downgraded Fannie and Freddie's' preferred stock to just above junk status. The rating agency is concerned the firms won't have enough money to pay a preferred dividend. Stephanie Dhue looks at what's next for the mortgage finance giants.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Paulson has described his new congressional authority over Fannie Mae and Freddie Mac as a bazooka -- something that gave him a lot of firepower. He has also made it clear he doesn't expect to pull the trigger. Now, after a week of beating down shares of Fannie and Freddie, investors want to know exactly how Treasury will use the newest weapon in its arsenal. ISI analyst Andy Laperriere doubts investors will get the clarity they seek.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The precedent that the Treasury is trying to avoid is having the Treasury secretary say that the Federal government, the taxpayers of the United States stand behind the debt of a private company, so that's why they are very reluctant to provide the clarification that the market wants.
DHUE: Fannie and Freddie's financial situations are unsustainable, with losses exceeding revenues. Observers say regulators may not step in as long as the firms can manage their debt and provide liquidity to the mortgage market. Analyst Josh Rosner says the government is more concerned about the broader economy than what happens to Fannie and Freddie.
JOSH ROSNER, MANAGING DIRECTOR, GRAHAM-FISHER: What makes you have to act now if the concern is the add-on effect, the knock-on effect to the broader housing market and if we are not seeing higher interest rates and not seeing higher mortgage rates.
DHUE: The Treasury Department says it is on top of the situation and is talking with the two companies, their regulator and the Federal Reserve. Laperriere says the Feds have a good reason not to pull out the bazooka.
LAPERRIERE: If the Treasury were to provide capital to the GSE's, it really opens up a whole new can of worms, both politically and policy-wise and I think they want to avoid that.
DHUE: Treasury and regulators would have to decide things like whether common and preferred shareholders get wiped out or if there's a bailout plan that would eventually make shareholders whole; what happens to subordinated debt; and whether Fannie's CEO Daniel Mudd and Freddie's CEO Richard Syron, will manage the firms in the future.
ROSNER: Do I think that they are going to hand a blank check to Syron at this point to help keep him afloat? No, I don't think that's likely. I think Treasury would actually probably want significant controls over the company, its actions and its management before they would do anything.
DHUE: The next stress test for Fannie Mae and Freddie Mac will come in mid-September, when the companies have to refinance $223 billion of maturing debt. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
DNC Preview
SUSIE GHARIB: Democrats gather in Denver on Monday to kick off the national convention nominating Barack Obama as their presidential candidate. Washington bureau chief Darren Gersh has been an election point person and he joins us now with a preview. Hi, Darren.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hey Susie, finally, huh?
GHARIB: Finally and everybody is waiting eagerly for Senator Obama to name his running mate, so once he makes that announcement, what will this vice presidential pick tell us about Obama?
GERSH: Well, I think that is the key. I mean, what does it say about Obama is really the issue here, so it is kind of his first governing decision, so it is kind of tells us a little bit about how he is as a manager, how he makes decisions. It looks like he is pretty disciplined about the decision and it didn't leak out, which is what reporters care about. Yes, really. Also, I think it says a little bit about maybe how he wants to run the White House, if he wins. You know, Susie, does he want somebody who's maybe independent and loud about their opinions like Delaware's Joe Biden or does he want somebody who is kind of a team player. It might also tell us a little bit about how Obama sees his own weaknesses that he wants somebody with foreign policy experience. Does he want somebody who helps with a key constituency, say, women.
GHARIB: Well, let's talk about what the big issue is for voters and that's the economy. At the convention next week, what are we going to hear about Obama's economic platform? Will there be any specifics?
GERSH: A lot of specifics, a lot of talk about how the middle class is hurting, a lot of talk about how the economy isn't working for a lot of people. You are going to hear a lot about how people need immediate relief. This is all key. In fact, when I talked to Obama's economic advisor Jason Furman, I asked him to define Obamanomics and this is what Jason Furman had to say.
JASON FURMAN, ECONOMIC POLICY DIRECTOR, OBAMA CAMPAIGN: Obamanomics is a real belief that the way to generate growth in this country is from the bottom up, by empowering families to succeed and the economy and drawing on an eclectic set of ideas to implement that broad guiding vision.
GERSH: You know, I think that the eclectic set of ideas is kind of interesting there, because Obama is saying you know, look, I am a pro market guy. He says that I am in favor of free trade but at the same time he is saying he's for progressive ideas and using the tax code to, you know, help middle class incomes and redistribute incomes and that is the divide in the Democratic party, Obama is trying to combine those two messages. It is not an easy thing to do.
GHARIB: But Darren, do you think that he is going to have some fresh innovative ideas on how to turn around the economy?
GERSH: Policy wonks like me, we're always hoping for a lot of new ideas in presidential campaigns and we are always disappointed. And that is not knocking Obama or McCain because they do have people who are very good economic advisors who have new ideas, but I have come to the conclusion that presidential campaigns are not about new ideas, in fact,, you know, an historian told me that Franklin Roosevelt used to tell his people, look, campaigns are not exercises in adult education. They are about winning and you don't want to take a risk on a new idea, you want to win, so you don't tend to (INAUDIBLE), but if the economy gets worse, we might see more new ideas.
GHARIB: Let's talk a little about John McCain because there is a lot of speculation I am sure you heard it, that, who is he going to pick as his vice presidential pick. "Time" magazine is reporting that McCain has chosen Mitt Romney as his running mate. If that is true, what does this say about McCain's strategy?
GERSH: I heard that and I was really surprised, because it is my understanding that to be very blunt, that John McCain does not like Mitt Romney very much, that he was not a fan of the campaign that Mitt Romney ran. He thought Romney did not do a good job and personally didn't like the kind of campaign that Romney ran. If that is true, I think what it says is that McCain still feels the need to shore up his credentials with economic conservatives, with business voters who are a key Republican constituency and after all the people who voted for Mitt Romney.
GHARIB: All right. We have got to wait for all of these announcements to come out and then come back and have you brief us again.
GERSH: The text message, right?
GHARIB: That's right. Thanks, Darren. Thanks for the update and we look forward to seeing more of your "Economic Choices '08" coverage as we get closer to the November election. And we have been speaking with Darren Gersh, NBR's Washington bureau chief.
GERSH: Thank you.
Investors Are Buying Into Retail Stocks
SUSIE GHARIB: Retail stocks also did well today. Some investors are becoming more optimistic about the sector, which has performed poorly this year. As Suzanne Pratt reports, the back-to-school season should offer retailers and investors clues about the crucial Christmas holiday shopping period.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: At K-mart in midtown Manhattan, the back-to-school season is in full swing. Store manager Charlie Moore says consumers have been opening their wallets.
CHARLES MOORE, STORE COACH, KMART: It is a travel destination, so we do get a lot of tourists in the store, but overall the back-to-school shopper is definitely in the store in the last couple of weeks.
PRATT: But many analysts are seeing different patterns and are pessimistic about back-to-school. Sales estimates for the July through September period range from down a few percentage points to up a few percentage points. Citigroup analyst Kimberly Greenberger says slow mall traffic in August points to a sluggish season.
KIMBERLY GREENBERGER, SPECIALTY RETAIL ANALYST, CITIGROUP: Budgets are tight. Energy prices are still high even with the recent declines in gasoline prices and food costs are going higher. So consumers are feeling the pinch in their household budget and they're probably deferring any of that back-to-school shopping expenditure that they can.
PRATT: The back-to-school season is the second busiest period of the year after the winter holidays. Retailers look to the new school year for insight about how much shoppers might spend during the holidays and what they might buy. Experts say there is a strong correlation between back-to- school and holiday sales. And with back to school looking weak, expectations are low for this year's holiday season. Analysts say retailers are prepared for the worst.
GREENBERGER: Inventories are being very tightly controlled and most companies and most retailers are managing their expense budgets, assuming that sales will be tough.
PRATT: Consumers are heading to discounters and electronics stores for back-to-school items -- popular shopping destinations all year. Experts predict that trend will continue during the holidays. UBS analyst Brian Nagel believes consumer electronics will be one of the few bright lights when Santa comes to town.
BRIAN NAGEL, RETAIL ANALYST, UBS: When I think about consumer electronics, I think we're still in a very healthy product cycle, to the extent that people are buying gifts either for themselves or for other people I think consumer electronics stands out as a purchase. We have a solid gaming cycle, with gaming hardware and software doing well. I think TV's are still quite popular with consumers.
PRATT: Experts say the lack of a hot fashion trend this year is one more reason back to school and holiday shopping may be lackluster. A must- have item can sometimes inspire shoppers to ignore economic headwinds. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Market Monitor"-Frank Cochrane, President of Investment Timing Consultants
PAUL KANGAS: My guest market monitor this week is Frank Cochrane, president of Investment Timing Consultants, a financial advisory firm based in Bloomfield Hills, Michigan. Welcome back to NIGHTLY BUSINESS REPORT, Frank.
FRANK COCHRANE, PRESIDENT, INVESTMENT TIMING CONSULTANTS: Great to be here, Paul, thank you.
KANGAS: Since early this year when the Dow was around 12,500 and the Standard & Poor's 500 around 1330, you have been very bearish on the stock market and indeed, it has been no bowl of cherries. You predicted their would be many sharp rallies on the way down. So the question is, was today's upturn just another pause in what is still a long-term bear market, in your opinion?
COCHRANE: Yes, Paul, I think longer term we are definitely in a protracted bear market that will extend into late next year, early 2010. However, that being said, for the very short-term and I am talking about into the late September, perhaps early October time frame, I think the market will go considerably higher, I think the Dow could move up 1,000 to maybe 1,500 points.
KANGAS: What are the main positives, Frank, setting the stage for this short-term rally? What are the main positives?
COCHRANE: Well, certainly oil, oil is the big thing. Based simply on a chart pattern, I am not an oil analyst, it suggests to me that oil, and if you look at today the biggest dollar drop since 1991, I think it is headed back towards say 90 to 100. I think that is a big thing. If you look at the dollar, the other side of that trade, the dollar to me appears as though it has broken out and appears in a significant up trend. Whether it is long-term only time will tell. Sentiment is still very, very negative and therefore from a contrary standpoint, that a bullish thing and the inflation statistics, although at 27 year highs, I think we are going to find that over the next few months and the market being a leading indicator reacting before that, we will see the inflation specifics go lower and therefore not be a big a concern to the Fed which right now is neutral. I think the Fed is not going to do anything throughout the rest of the year and into next year given the overall economy.
KANGAS: What would change your outlook to bullish for the long-term?
COCHRANE: Housing. I think housing is the key here. With housing goes the financials and with the financials goes the stock market and so on, sort of a domino effect. I don't think the overall picture in housing is completely bottomed yet. It wouldn't surprise me to see another 10 to 15 percent move down and one more leg down as we go into 2009 so I think that is going to be the last straw, if you will, for the market for the stock market, and the economy as we go into 2009 and then after that, also we are going to have the election results as well.
KANGAS: OK. On your last visit in late February you gave our viewers two recommendations. Let's see how they have done since then. These were trading recommendations, and the silver trust shares (SLV), they had a 10 for one split, I understand, was a lot higher than this but they're still down 32.6 percent from where you recommended them back in February.
COCHRANE: That is a position that we were out of long, shortly after that recommendation and the commodities to me basically are imploding here. I think that is going to continue. I would not be buying gold or silver here. Certainly if you look at for example the situation that went on with Georgia and Russia and the metals react the way they typically do that is telling you that things are not going the right way, at least for the gold and silver bears.
KANGAS: And you were short an ETF back in February too and that's up about a tenth of a percent. Are you still with these securities?
COCHRANE: We trade in and out of them, Paul. That particular one, the SDS is one that we bought, because it is an inverse two times the S&P 500.
KANGAS: Frank, how about some new recommendations. We just have a minute.
COCHRANE: Given the fact that I think that the dollar is on an upward trajectory if you will, I would go with the FXE, which we're going to short that particular one and that is going to be shorting of the euro dollar. I think that right now is at $1.48 and change. That could move down to say the $1.30, $1.35 area and if it breaks out, it will go lower.
KANGAS: Quickly now, a second choice.
COCHRANE: UYG, this is a turbocharged one of the financials. I believe that the financials will bottom short-term, a trade up to say 25 to 27 area, certainly if it gets up there you want to lighten up on that one, but I think we are seeing some type of bottom process and certainly with the news of Lehman today too, that helps.
KANGAS: OK.
COCHRANE: The third one is certainly a fallen angel and one that is not widely liked but being from Michigan I think General Motors (GM), although it may take an L-shaped bottom and may bump along here a little while, I think GM around $10 a share is extremely cheap, attractive and it is a good stock longer term.
KANGAS: Do you personally own any of the securities, yes or no?
COCHRANE: From time to time, Paul, yes, we do.
KANGAS: OK. Frank, thanks for being with us, once again.
COCHRANE: Thank you, Paul.
KANGAS: My guest Frank Cochrane, president of Investment Timing Consultants.
Paul Kangas' Stocks in the News
PAUL KANGAS: The decline in oil prices and a strong dollar got Wall Street off to a running start, sending the Dow soaring nearly 200 points by 11:00 a.m., while the NASDAQ Composite was up 28 points. The market maintained most of its gains over the next several hours thanks to Fed chief Bernanke's hint that any hike in interest rates was not probable. When oil prices showed no sign of rebounding, stocks went on to close near the day's best levels. The Dow Industrial Average ended up a hefty 197.85 points at 11,628.06. This week it fell twice and rose three times, still had a net loss of 31.84 points. The NASDAQ was up 34.33 ending at 2414.71 today. It rose twice and fell three times this week and fell 37.81 points overall. Standard & Poor's 500 rose 14.48 points, ending at 1292.20 today and it dropped exactly six points this week overall. In the bond market, the 10- year note fell 12/32 to 101 1/32, putting the yield up to 3.88 percent.
Big board volume leader on 16.6 million shares, Freddie Mac (FRE) down $0.35, another 11 percent loss.
And then came Fannie Mae (FNM), second day in a row closed with a gain, up $0.15. You heard the news of course on the two.
Then came Lehman Brothers (LEH) a $0.69 advance on the close, but it traded as high as $15.86. Word making the rounds a Korean development bank is reportedly considering making an investment in Lehman Brothers.
Citigroup (C) moved up $0.67.
And Ford Motor Co (F) a nickel gain.
Wachovia (WB) was down $0.29.
Bank of America (BAC) rose $1.17.
Pfizer (PFE) $0.38 gain there.
Wamu (WM) a $0.07 drop.
And then Kraft Foods (KFT) was a $0.09 loss, tenth in volume.
These are some of the Dow stocks that helped the average attain nearly 198 point advance today. Boeing (BA) up two points and incidentally, Boeing said it may withdraw from bidding on the tanker refueling contract unless it gets more time to come up with its estimate.
Caterpillar (CAT), IBM (IBM), Procter & Gamble (PG) and United Technologies (UTX) all doing well in helping that Dow attain nearly a 200- point gain.
The airlines dropped of course very strong on a pull back in oil. AMR (AMR), Continental Air (CAL), UAL Corp (UAUA) and US Airways Group (LCC) all doing well and they were higher than this during the day, most of them.
Gap (GPS), the apparel retailer, up $0.87, traded as high as $20.22. Second quarter earnings out, $0.32, up from $0.19 last year, its healthy margins and cost cutting offset a 10 percent drop in same store sales.
Another apparel maker, Chicos Fas (CHS) moving up $0.36. It traded as high as $5.02 today after Goldman Sachs upgraded it from "sell" to a "neutral" rating.
And then Toro Co (TTC) a $2.96 advance there. After the close yesterday, third quarter earnings came in at $0.99, down from $1.02 last year, but $0.04 better than the Street was expecting.
Denbury Resources (DNR) down $1.55. The oil and gas exploration firm was cut in target price from $43 down to $33 a share by Credit Suisse.
And then Noah Education Holdings Ltd (NED) lost $0.77. Oppenheimer downgraded it from "market outperform" to "market perform" despite yesterday's better than expected results, but the company did give a disappointing outlook and that hurt the stock certainly.
Apple (AAPL) topped the active list on NASDAQ, gaining $2.50.
Research in Motion (RIMM) $0.85 loss.
Microsoft (MSFT) edged up $0.66.
CME Group (CME), that's the former Chicago Mercantile Exchange, up $5.07. It completed its acquisition of Nymex today, up $15.07 I should say.
$4.06 gain in Google (GOOG).
Intel (INTC) $0.44 rise.
Cisco Systems (CSCO) gained $0.48.
$0.06 rise in Dell (DELL).
And Qualcomm (QCOM) $0.70 gain there.
Amgen (AMGN) was up $0.20, tenth in NASDAQ volume.
Pacific Sunwear of California (PSUN) down $1.98, big percentage loss. Second quarter earnings came in at $0.06, down from $0.13 last year and the company cut its second half outlook. That hurt as well.
And finally we see Akamai Technologies (AKAM) rising $1.08. Takeover speculation making the rounds, nothing specific.
And those are the stocks in the news tonight.
