NBR Transcripts-September 3, 2008
Wednesday, September 03, 2008Consumers Get Down To Basics
SUSIE GHARIB: The Federal Reserve says the U.S. economy remains slow, as consumers focus their spending on essentials. That's the upshot of the central bank's latest Beige Book survey of regional economic activity. The survey of the Fed's 12 districts shows household spending was slow across the nation last month. Most areas reported pressure to raise prices because of higher commodity costs. And housing remained soft in most areas. The Beige Book also noted labor market conditions were somewhat softer amid a general pullback in hiring. The Fed's interest rate setting committee meets September 16th. It's expected to hold rates steady at 2 percent. Well, the weak economy is also weighing on the stock market. The Dow and S&P are both down 13 percent so far this year, and September is off to a slow start. As Erika Miller reports, many Wall Street experts don't expect a market rally anytime soon.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Individual investors are not the only ones growing anxious about the outlook for stocks. Even professionals like Alec Young of Standard & Poor's are finding it difficult to forecast market direction.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: There's tremendous uncertainty about whether the U.S. economy will or won't, enter recession, when corporate profits will bottom out, how the housing market, the job market, the credit markets will all fare as we move through the end of the year.
MILLER: The calendar may also be increasing anxiety. According to the Stock Trader's Almanac, since 1950, September has been the worst-performing month for the Dow and the S&P 500, posting average declines of 1 percent and 0.6 percent, respectively. 2008 is also an election year, layering on more uncertainty. Surprisingly, the stock market does not seem to be benefiting much from a big drop in energy prices.
YOUNG: I think equity investors are taken aback by the magnitude of these drops in crude oil, and the fact that they really do reflect a very dire global growth outlook.
MILLER: That helps explain why many strategists, including Tony Dwyer, think it will be difficult for stocks to mount a sustainable rally this year.
ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: In our view, what will really get the stock market on solid footing is: number one, when the election is over; and number two, the credit market -- most importantly, the credit market improves. We are an economy that is based on debt.
MILLER: But some investment strategists, like Abby Joseph Cohen of Goldman Sachs, remain steadfastly bullish. She expects the S&P 500 to rise nearly 10 percent between now and the end of the year.
ABBY JOSEPH COHEN, PRES., GLOBAL MARKETS INST., GOLDMAN SACHS: First of all, the economic data, while are not good, we think are already priced into the stock market. The economy is growing a little more rapidly overall than many people had feared because of strength in exports, technology and so on.
MILLER: In addition, the bulls say falling energy prices should help mute inflation concerns as well as give consumers more discretionary dollars. There's even hope for the beleaguered housing market.
COHEN: The most recent data make it very clear that there are many different real estate markets within the United States, and in many of them, prices seem to be flattening out somewhat.
MILLER: Near term, however, the August employment report is expected to drive market direction. Friday's data will provide an important indication of hiring, as well hint at the outlook for consumer spending. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
The HELOC Lockdown
SUSIE GHARIB: More fallout from the housing crisis for GMAC Financial Services. It is closing all 200 of its retail mortgage offices and laying off 60 percent of the workforce or about 5,000 employees. Most of those layoffs will come from the mortgage lending division, Residential Capital, also known as ResCap. That was one of the nation's largest sub-prime mortgage lenders. It has lost $7 billion over the past seven quarters.
PAUL KANGAS: Even before today's announcement, GMAC's ResCap unit was closing home equity lines of credit. The firm says the closings affected customers in areas where home values were falling. But as Stephanie Dhue reports, consumers say mortgage lenders are now arbitrarily shutting down credit lines in places that haven't borne the brunt of the housing slump.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Jeremy Epstein has good credit, a good job and a home in a good neighborhood. So when he received a notice suspending his home equity line of credit, he was mad.
JEREMY EPSTEIN, HOMEOWNER: How can these people be so stupid? They don't understand anything. They clearly didn't look at the values.
DHUE: Epstein's lender, GMAC, told him that according to its automated valuation model, his home is worth half as much as when he first took out the line of credit five years ago. Epstein says a 10 to 15 percent decline is more like it.
EPSTEIN: In the computer business, which is where I work, we say garbage in, garbage out. Their model seems to me to be garbage in, garbage out. They're assuming everything in my zip code, or something like that, is basically the same.
DHUE: GMAC refused to be interviewed for this story, but in an e-mailed statement said: "Our counselors evaluate every home equity loan on a case- by-case basis, leveraging detailed models. While models are involved, they provide a data point used by counselors to make individual decisions." Epstein is one of a growing number of homeowners caught in the deepening credit crunch. The FDIC reports $31 billion worth of home equity lines of credit were shut down in the second quarter. After a sharp rise in complaints, regulators at the Office of Thrift Supervision warned banks not to shut down credit arbitrarily. Consumer Protection Director Montrice Godard Yakimov says banks must prove their models are realistic.
MONTRICE GODARD YAKIMOV, OFFICE OF THRIFT SUPERVISION: Our job as regulators is to make sure that there's a reasonable, explainable, defensible approach that they can demonstrate when we go on site and we will be checking in on that.
DHUE: Mortgage Bankers Association Chief Economist Jay Brinkman says the market is forcing banks to be conservative.
JAY BRINKMANN, CHIEF ECONOMIST, MORTAGE BANKERS ASSOCIATION: They cannot afford to have a lot of loans out there that aren't supported by asset values, since this is essentially is an asset-based loan.
DHUE: Brinkman says banks are also worried about putting customers into loans they cannot afford, but Epstein isn't buying that.
EPSTEIN: I can't remember the exact words they used, but they said, we're doing this to help you. That sort of reminds me of when parents used to spank their kids and say, this hurts me more than it hurts you.
DHUE: Epstein appealed to GMAC and was denied. He was told if he paid for his own appraisal, they made reconsider. He told me he's more likely to look for a new loan elsewhere. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Hilary Kramer, Chief Market Strategist at GreenTech Research
PAUL KANGAS: Tonight's "Street Critique" guest says this is one of the worst bear markets she has ever seen. She's Hilary Kramer, chief market strategist at GreenTech Research. Hilary, good to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Thank you, Paul. Thank you for having me on tonight.
KANGAS: We're still seeing a lot of volatility in this market and you said in recent visits that we're gearing up for a major capitulation this time this fall. Are you still predicting that?
KRAMER: Absolutely, Paul. I'm expecting to see the market take another major step down. We have a lot more news to come through. Retail, for example, the specialty retailers, high-end, transportation, there's so much more that needs to work through the pipeline. And even companies like some of the insurance companies we haven't even seen yet the kind of hits that they are going to be taking.
KANGAS: Well, your theme for tonight is stocks that are poised for a comeback. What do you look for in beaten-down issues?
KRAMER: Paul, I look for companies that are market leaders, especially in areas where there's growth and there will be contracts and there is demand for the particular product that's made. And in this market, I also look for volatility, because it's a trader's market. It's a trader's world right now. So I look for stocks we get in and get a few points, and make a few dollars, and call it a day.
KANGAS: OK. So you do focus on sustainable growth, correct?
KRAMER: That's absolutely where I focus, because if you get trapped long, as we say, then you're still sitting in a stock that ultimately will go up.
KANGAS: All right. Let's see what your first selection might be. What's your time frame and price target on it?
KRAMER: OK. Badger Meter (BMI), the ticker symbol is B-M-I, is a $47 stock right now, and I have a $65 target on Badger Meter, and that is because I believe Badger Meter will be acquired and taken over, even though it has been a company since 1905, based in Milwaukee, that makes water meters, but because they do remote water metering, high-end technology, there are a number of companies that will want to buy Badger Meter, BMI, and it came off sharply, it came down 10 points in the last few weeks.
KANGAS: And you think that they'll get that much back if it's a buyout bid?
KRAMER: Absolutely. And BMI is one of those companies that just went down because hedge funds de-leveraged and people had to throw out the good with the bad.
KANGAS: We just have a minute, how about another selection?
KRAMER: Sure, Zoltek. Zoltek, Z-O-L-T, this is a company I do not own, but it's $17.56. It's an opportunity. Zoltek has been as high as $48 this year in the past 52 weeks. I believe Zoltek will go back to at least $30, and Zoltek makes the carbon fires for the wind turbines. And so all of these wind farms are being installed and so Zoltek will benefit from that. The stock has come off sharply because they also make the fire-resistant fibers for the brake pads for the aerospace industry, and we all know what has happened to Boeing (BA) recently. So I think we'll see Z-O-L-T at least recover to $30.
KANGAS: Quickly, time for one more.
KRAMER: American Superconductor, A-M-S-C, one of my favorite stocks, the short sellers love it. The stock is down -- back down to the low 20s, $23, and we should see it head back to $35.
KANGAS: Hilary, do you own any of the stocks you've mentioned or have other disclosure to make?
KRAMER: Yes, I own Badger Meter, B-M-I, and American Superconductor, A-M- S-C. I do not own Zoltek, Z-O-L-T.
KANGAS: Thanks for sharing your insights with us once again.
KRAMER: Thank you, Paul.
KANGAS: My guest, Hilary Kramer of GreenTech research.
"Money File"-The SIPC Greenback Guardian
SUSIE GHARIB: In the "Money File" tonight, investor protection. Here's Eric Schurenberg, managing editor at Money Magazine.
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: If your bank fails, you know the FDIC will protect you. But what if your brokerage goes under? The answer is, relax. Brokerages have custody of your money, but unlike banks, they don't use it for their own purpose. That makes your risk far lower. And even if a broker fails, there is a safety net not unlike the FDIC. That safety net is the Securities Investor Protection Corporation, or SIPC. It protects stocks, bonds, and mutual funds worth up to $500,000. Look for the words "member SIPC" on your brokerage's Web site to make sure it offers the protection. Now unlike the government-sponsored FDIC, SIPC is a private nonprofit funded by member firms. While that may not sound as safe, there are a couple of reasons to feel confident. First, if it's just a case of the business going sour, SIPC might not even need to get involved. The broker itself might transfer your holdings to another firm. If it's fraud or bad record-keeping, SIPC would replace the missing securities up to that $500,000. Now included in the half mil is coverage for up to 100 grand in cash. Not covered are futures contracts or other assets not registered with the SEC. Also, remember that SIPC replaces lost securities, not lost value. So if your broker runs off with your 100 shares of Microsoft (MSFT), SIPC will replace the shares at the current market value. It doesn't matter if you paid more for them. The bottom line, worry about the markets, but not your brokerage. And these days, one less thing to be concerned about is one more thing to be grateful for. I'm Eric Schurenberg.
"Last Word"-Olympic Gold Pays Off For More Than The Athletes
SUSIE GHARIB: And finally tonight, after the Beijing Olympics, it's no surprise that 14-time gold medal winner is fielding numerous endorsement deals. But now his mother has a deal of her own. Debbie Phelps signed today a year-long deal to be a spokesperson for clothing retailer Chico's (CHS). Phelps will get a salary in the low six figures. She will be dressed by Chico's for her public appearances, and could appear in a Chico's catalog. Which, Paul, isn't a big stretch for her, apparently she has been a fan of the retailer for some time, bought all of the clothes for her trip to Beijing at Chico's. And it's being marketed as the Debbie Phelps Collection.
KANGAS: A true "stroke" of marketing genius. (LAUGHTER)
GHARIB: She deserves a gold medal, right?
KANGAS: Yes, absolutely.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street edged slowly lower this morning as uncertainty about the economy kept potential buyers on the sidelines. Adding to the selling, the growing view that further weakness in oil prices is a sign of slowing demand due to recession. That had the Dow down 85 points by noon and the NASDAQ was off 24 points. A firm dollar helped the blue chips move into positive ground this afternoon, while the broader market trimmed its losses, leading to a mixed close. The Dow Industrial Average ended with a gain of 15.96, at 11,532.88. The NASDAQ Composite, however, lost 15.51, ending at 2,333.73. While the Standard & Poor's 500 was down 2.60, ending at 1,274.98. In the bond market, the 10-year note rose 8/32 to 102 14/32, putting the yield at 3.70 percent.
The most active New York Exchange issue, trading 12.6 million shares, Corning (GLW), down $2.45. The company cut its third-quarter earnings guidance from a high of $0.51 a share down to $0.45 a share at best. The company blamed lower-than-expected shipments of its LCD glass.
Bank of America (BAC) moved up $0.97.
And then Citigroup (C) with a $0.50 gain.
Ambac Financial (ABK) up $1.58, good percentage move there. As we reported yesterday, the company got a Wisconsin regulatory approval to capitalize and reactivate its Connie Lee Financial Guarantee subsidiary.
Freddie Mac (FRE) up $0.20, fifth in Big Board volume.
Then Ford Motor (F), there you see it, edging up $0.06 despite the lower sales.
Companhia Vale (RIO) down $0.24.
Pfizer (PFE), a $0.03 gainer. The company is in a pact with Medivation Incorporated (MDVN) to develop and commercialize a treatment for Alzheimer's and Huntington's disease. Medivation stock, in NASDAQ trading, was up $3 even at $29.03. GE (GE) in there with a $0.04 gain.
And then Qwest Communications (Q) moved up $0.26 a share.
Forest Laboratories (FRX) down $5.19. Results for the company's treatment of chronic obstructive pulmonary disease suggests dosage should be reexamined. That will take some more testing. Credit Suisse downgraded the stock to just neutral, and that hurt it, of course.
ConAgra Foods (CAG) off $1.83. The company sees first-quarter earnings lower than expected at around $0.26 to $0.27. And that's due to its underperforming consumer food segment. JPMorgan downgraded the stock from overweight to just neutral.
MEMC Electronic Material (WFR) down $5.62. The company is cautious on its third-quarter outlook because of soft demand from some of its chief semiconductor customers.
Ethan Allen Interiors (ETH), the furniture company, off $1.27. The company sees first-quarter earnings around $0.20 to $0.26 a share. That's way below the Wall Street estimate of $0.48 to $0.49. The company says July- August sales this year was substantially lower than a year ago.
Cabot Corporation (CBT) gaining $2.30 after the KeyBanc brokerage upgraded the stock from hold to a buy.
And financial services company Waddell & Reed (WDR) down $3.30. Sandler O'Neill brokerage downgraded the stock from hold to a sell.
NASDAQ's most active was Apple (AAPL) with a gain of $0.77. Then Research In Motion (RIMM) down $3.57.
Google (GOOG) fell $0.84.
Intel (INTC), a $1.04 loss.
Microsoft (MSFT) was down $0.20. The company did confirm it will cut its Xbox 360 prices this Friday.
Moving along on the active list, Qualcomm (QCOM) down $1.91, JPMorgan cut the company's forecast for mobile phone sales for the year 2008, this year.
Cisco (CSCO), a $0.44 drop there.
Baidu.com (BIDU) fell $15.29.
Oracle (ORCL), a $0.36 loss.
And then Dell (DELL), a $0.52 drop there.
And finally Joy Global (JOYG) sank $12.70 a share, the mining equipment- maker delivered better-than-expected third-quarter profits. But its shared plunged to a seven-month low on a disappointing drop in operating margins at its surface machinery unit.
