NBR Transcripts August 26, 2008
Tuesday, August 26, 2008The State of the Nation's Banks... Dismal
JEFF YASTINE: The number of troubled U.S. banks is at its highest level in five years. Today, the chairman of the FDIC, the Federal Deposit Insurance Corporation, said there are now 117 problem banks, up about 30 percent in the second quarter and she expects more banks to join that list. So far, nine American banks have failed this year. As Darren Gersh reports, the cost of those failures has the FDIC considering changing its requirements for banks.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In one word, FDIC Chairman Sheila Bair summed up the banking industry's spring performance -- dismal. So bad, the Federal deposit insurance fund lost $7.6 billion, forcing Bair to announce the FDIC would soon consider plans to charge banks more to back their deposits.
SHEILA BAIR, CHAIRMAN, FDIC: I do believe we can do this in a way that will not be harmful to the industry. A strong deposit insurance fund strengthens the industry because it strengthens public confidence and depositor confidence in our banks.
GERSH: The FDIC says now that it has taken a closer look at Indymac bank, it expects to lose $8.9 billion on the government takeover. That's about a billion more than estimated after the bank failed last month. With all the losses, policy analyst Jaret Seiberg expects the FDIC will be forced to triple or quadruple the premiums it charges banks, which works out to a $7 to $10 billion hit.
JARET SEIBERG, POLICY ANALYST, STANFORD GROUP: There isn't a doubt -- you raise the price in this environment, it's going to be painful. But it's medicine they probably have no choice but to take.
GERSH: With bank failures rising, the FDIC clearly needs the money. Its list of problem banks jumped from 90 to 117 in the second quarter. The assets held by institutions on that problem list tripled, rising from $26 billion to $78 billion. If there is good news in this story, the FDIC says it's that 98 percent of banks still meet or exceed the highest regulatory capital standards. While that's true, analysts still expect many more bank failures. At Institutional Risk Analytics, Christopher Whalen offers what might be considered the worst-case scenario.
CHRISTOPHER WHALEN, MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS: We've got an estimate of 110 banks, $850 some odd billion in assets, failed by next year. So that's less than 10 percent of the industry. It's a severe crisis. It's much worse than the early '90s and I think the variable is how long do we continue to see loss rates go up.
GERSH: It's very clear after listening to the FDIC today that banks are going to have less cash to lend. Not only are banks going to pay more to insure their deposits, the FDIC also says bank domestic deposits shrank by $40 billion in the second quarter, the biggest decline in six years. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
David Blitzer of Standard & Poor's Offers His Outlook on Housing
JEFF YASTINE: Fresh data on the housing sector today and that picture is mixed. The Commerce Department reported sales of new homes nationwide rose 2.4 percent in July, less than economists expected. Meanwhile, home prices, according to the S&P Case-Shiller index, fell a record year-over-year 15.9 percent during June. And joining us now to analyze the outlook for housing is David Blitzer, chairman of the index committee at Standard & Poor's and David, welcome back to the program.
DAVID BLITZER, INDEX COMMITTEE CHAIRMAN, STANDARD & POOR'S: Good evening.
YASTINE: Toss us a bone of good news here. Is there any shred of good news, just a tiny bit in this data here?
BLITZER: Yes, there is some good news. It maybe a tiny bit. Home prices as you mentioned, continue to go down. But they're not going down quite as fast as they have been going down in the last few months. So we're beginning to see the rate of the Fed moderating a little bit which is really, hopefully the first signs of stability. As we look across the 20 cities we tracked, we see nine of those cities actually saw prices rise month to month. And in fact for the last three months we've have had seven to nine cities seeing prices rise. You go back more than three months and usually nobody saw prices rise; maybe once in a while one or two did. So the underpinnings are beginning to look a bit better.
YASTINE: Of course, this next question is a crystal ball question. But do you feel like there is a sense of a bottom here? Or certainly when I look at the home builder stocks, those have stopped going down. But what is your sense here on home prices?
BLITZER: I don't think we're quite at the bottom yet. I think we're beginning this process of, instead of the prices rushing even more this month than last month, they have sort of trying to catch their breath and still going down but at less rapid a pace and so on. Plus there's a clear schism breaking out in the country where the sunbelt continues to be devastating. The numbers coming out of the sunbelt continue to be shocking, home prices down 30 to 33 percent from their peak of a year or two ago. The rest of the country the numbers are not at all as shocking.
YASTINE: David, put some perspective in this for us. How much of what we're seeing is just your basic supply and demand issue and the overhang of so many foreclosures on the existing home market and how much does the problems that we see and we have the news on all the time here from Fannie Mae and Freddie Mac and the rest of the financial and loan situation that the regulators are still trying to struggle through?
BLITZER: What we're seeing is really the dark side of an incredible home price boom we had from 1998 or 2000 through the summer of 2006. Home prices did anything from doubling to tripling during that period of time, whereas in the previous hundred years they pretty much kept up with inflation. They never done a whole lot more for any sustained period of time. And all of a sudden they exploded upwards. Now we're in the dark side where we come down. The places where they went up the most, which is the sunbelt, they're coming down the most. Part of that explosion was euphoria from people thinking home prices would never go down, very low interest rates and a lot of creative mortgages. Ironically what Fannie and Freddie were doing at the time was probably looking at the better mortgages. Going forward Fannie Mae and Freddie Mac are a concern. Fannie Mae is going to keep part of the U.S. mortgage and home building infrastructure for literally six, seven, eight decades. And now they're now in some difficulty. It's going to be harder for them to support things going forward.
YASTINE: David, let me just interrupt for one second. Do we need to see stable home prices to get like a true turnaround in the U.S. economy and of course in the real estate economy itself.
BLITZER: I think we need -- there are really two keys to the U.S. economy over the next year or two. One is substantially better situation in housing. Stable home prices would be a good part of it. Working off the inventory getting all those foreclosures stalled. All of that needs to come together. Getting home construction back online. Housing starts are probably half of the long-term norm right now. The other half is in the credit markets without a doubt. The difficulty that started with the home prices and started with the decline of home prices have spread to a lot of other parts of the credit market and they have made people very reluctant to take risks, banks very reluctant to lend money. There is really a credit crunch and it is still there as seen in the Fed minutes that were mentioned earlier.
YASTINE: And a continuing story that we will be having to chat about through the next number of quarters. David, thank you for your time on the program.
BLITZER: Thank you. Good evening.
YASTINE: Our guest David Blitzer of Standard & Poor's.
David Semple, Director of International Equity For Van Eck Global Takes Stock In Russian Investments
JEFF YASTINE: Russian stocks fell sharply today after the Kremlin officially recognized Georgia's breakaway provinces of south Ossetia and Abkhazia as independent states. Russia's move drew strong criticism from the U.S. and Europe and it's the latest blow for managers of Russian- related stock funds, like the market vectors Russia ETF, managed by Van Eck global. Earlier today, I spoke with Van Eck's director of international equity, David Semple and began by asking when the pain would be over for investors.
DAVID SEMPLE, DIR. OF INTERNATIONAL EQUITY, VAN ECK GLOBAL: It's obviously a very tough question to answer. We've got a lot of bad news reflected in the market, (INAUDIBLE) down 50 percent approximately from the high. There is certain amount of risk out there and investors are just very unforgiving for any kind of risk, whether it's geopolitical, interference in companies or anything else. So, I think it's -- we have seen a lot of the pain already reflected. But nobody I think is -- very few people will be willing to jump in right now. You know longer term I think the story still stands up very well.
YASTINE: David, break it down for us. We have a chart of your fund. The symbol is RSX, the market vector, Russia, ETF. You can see the decline since the May/June highs. How much of what we are seeing is related to Georgia and how much of it is really just related to the declines we've seen in the oil markets over the past few months or is it just a lack of confidence in the Russian way of doing business these days?
SEMPLE: It's obviously a combination of all three. It doesn't help with the headlines coming across the wire -- I frequently on very geopolitical issues. But mostly people invest more on the earnings basis. And obviously the dependency on natural resources is extremely high in the Russian market. You know there is a certain capriciousness from the outside it appears a certain capriciousness in terms of the dealings with individual companies. So, I think it's, you know, we have seen a lot of it in the market is my bottom line.
YASTINE: What is your sense regarding this situation as far as Russia as a friendly place for capitalists. We've seen episodes over the past number of years with the Putin government as far as Yukos and other efforts to sort of reclaim oil assets that are, you know, previously been shared with Exxon and the rest. Is Russia still a place where investments can be made and not feel like they're going to be expropriated by the government as soon as they start to bear some value?
SEMPLE: In any country that you invest in, developed and emerging markets, sometimes there is a risk of windfall taxes in one form or another or where a company has a monopoly and that monopoly is withered away by courts or by government or whatever. It's still a great place to invest in terms of commodity exposure and that's the bottom line. You can flow through from that in terms of cash flow generated from that into the broader economy. So things like stock market, super markets like media companies and they're all doing very, very well. Earnings are strong there.
YASTINE: And it sounds like what you're saying is that in the last 30 seconds or so the main story still holds up on Russia, in that if you're making a play on oil and higher prices for oil at some point later than sooner vice versa, that oil and Russia is the way to play.
SEMPLE: Definitely that's the highest correlation. There's no question about that, but you know you have to look on a medium term basis rather than the short-term. Even the oil price at this level, there is obviously a very healthy cash flow being generated in the economy and for oil companies in particular.
YASTINE: David we will end it there. We appreciate your time on the program.
SEMPLE: You're welcome.
YASTINE: Our guest David Semple, director of international equity at Van Eck Global.
"Commentary"-TV Land Economic Lessons
JEFF YASTINE: Tonight's commentator says there's a lot Ozzie and Harriet could teach us about frugality. He's Rick Newman, chief business correspondent at "U.S. News & World Report."
RICK NEWMAN, CORRESPONDENT, US NEWS & WORLD REPORT: Most Americans probably think they're pretty frugal. But we're not. We buy bigger homes and cars than we need, we run the air conditioning when were not even home and when we need to boost our spirits, we go shopping. But now, that's ending. Soaring energy costs, a housing meltdown and a lame economy are reining in our overspending. It's called the new frugality-- just like the old frugality, back when Ozzie and Harriet were a model family and Americans had never heard of a latte. Back then, they didn't have everyday luxuries like Tuscan bread and high-thread-count sheets. Most people only had a couple pairs of shoes. It was a treat to go out for dinner once a month. Consumer spending was less than 60 percent of GDP in the 1950s. Today, it's about 70 percent. So we still need to give up a lot of things we've grown entitled to. We've started by getting rid of big SUVs and buying more stuff at Wal-Mart. So what else are we going to give up, flat-screen TVs, the iPhone? I also wonder what will fuel our optimism. Ozzie and Harriet might seem frugal to us, but they didn't know they were frugal. In fact, after the privations of a great depression and war rationing, they probably felt that a house filled with matching furniture was downright extravagant. That kept their spirits high -- they spent more. But giving stuff up makes us feel bummed out. And if we don't have retail therapy, how will we make ourselves feel better? Go bowling? Get to know our neighbors better? Maybe we really will discard two generations of acquired habits and discover our inner spendthrift. But if the new frugality holds, it might be a good time to invest in a psychotherapy franchise. I'm Rick Newman.
"Last Word"- Eco Friendly School Supplies
JEFF YASTINE: And finally tonight, it's the latest trend in back to school shopping, eco-friendly school supplies. Many stores are offering green products. There are eco-friendly notebooks which are made from sugar cane. In addition there are binders, recyclable paper and school bags and some people are even buying eco friendly school products which show kids how to save the planet. I suppose if you really got hungry you could maybe gnaw a piece of paper from the notebook.
KANGAS: That will help save the planet.
YASTINE: And save our hunger.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street showed little movement in early trading. But buyers appeared after both August consumer confidence and July new home sales posted increases. At 11:00 a.m., the Dow was up 43 points, NASDAQ up 10 points. The rally evaporated when oil prices surged on worries about hurricane Gustav. After dipping to a 40-point loss this afternoon, the blue chips did bounce back after minutes from the latest Fed meeting were released, suggesting that the rates are likely to remain steady for some time to come. The Dow Industrial Average ended up 26.62 at 11,412.87. The NASDAQ Composite was down 3.67 to 2,361.97, while the Standard & Poor's 500 Index gained 4.67 closing at 1,271.51. Over in the bond market, the 10-year note gained 1/32 to 101 26/32, putting the yield at 3.78 percent.
Big board volume leader Fannie Mae (FNM) on 23 million shares, that is the fourth consecutive closing gain for Fannie Mae.
Things looking up a little bit for Freddie Mac (FRE) too, up $0.68.
Then SAIC (SAI) or SAIC I think it's pronounced, this is a company that provides the U.S. military with engineering and technical services. The stock was today added to the Standard & Poor's madcap 400, replacing CF Industries, which is going from the 400 to the Standard & Poor's 500.
Then Ford Motor Co (F) you just heard about the conversion of that plant, down $0.06.
Pfizer (PFE) a $0.23 loss there.
Moving along in the actives, Citigroup (C) gained $0.23.
Bank of America (BAC) a $0.06 advance.
General Electric (GE) $0.05 loss.
Wamu (WM) off a penny.
And then American Intl Group (AIG) finally with an uptick on that stock.
Anadarko Petroleum (APC) did well, up $3.70. After the close yesterday, as we reported, the company plans to buy back $5 billion of its own stock and the stock is also up on a rise in oil today on concerns that hurricane Gustav may cut supplies from the Gulf of Mexico.
There were other energy stocks doing well, like EOG Resources (EOG) up $5.55. Threat of a rise in oil is helping that stock. And also researchers at Bernstein Research see the outlook for natural gas prices more favorable than for crude oil. Therefore they upgraded EOG from "under perform" to "out perform."
Let's have a look at some other strong energy stocks. Comstock Resources (CRK), Exco Resources (XCO) and Range Resources (RRC) doing well and incidentally, the Howard Wile (ph) analyst started coverage on Range Resources with an "out perform" in the belief the company's poised for enhanced profit margins and growth.
Coach (COH) up $1.78. The board has approved a $1 billion stock buyback which will be completed by June 26 in the year 2010.
Darden Restaurants (DRI) tumbling $4.01. The company sees first quarter earnings of $0.60 to $0.62, well below the Street estimate of $0.75 and it also cut its 2009 full year same store sales estimate to just flat or maybe up only 1 percent at best.
Big Lots (BIG) losing $2.34. Second quarter earnings $0.32, well above last year's $0.22 and a nickel above the Street estimate, but the company sees second half same store sales trading (ph those of the first half, not good news there.
Apple (AAPL) topped NASDAQ's most active with a gain of $1.09.
Google (GOOG) down $8.85. Inventor Judah Klausner is suing Google and Verizon and some other companies on alleged patent infringement of his e- mail invention.
Research in Motion (RIMM) was up $0.15.
Microsoft (MSFT) $0.39 drop there.
Intel (INTC) $0.18 gain.
More active stock, baidu.com (BIDU) down $12.28.
Cisco Systems (CSCO) lost a dime.
Qualcomm (QCOM) $0.38 loss.
Marvell Technology Group (MRVL) down $1.04. Jefferies brokerage downgraded it from "buy" to just a "hold" rating.
And then Dell (DELL), which was up $0.13.
Sanderson Farms (SAFM), the big poultry producer, losing $4.28. Third quarter out today with a loss of $0.18 versus earnings of $1.51 a year ago and that had the whole food sector under some pressure today.
Let's have a look at some other poultry and food producers, Pilgrim's Pride (PPC) down $2.67.
Smithfield Foods (SFD) losing $1.62. Smithfield itself had a first quarter loss of $0.21 a share.
And then Tyson Foods (TSN) down as well.
Broadcom (BRCM) losing $1.25. Oppenheimer downgraded it from "out perform" to "market perform."
And that's our look at stocks in the news tonight.
