NBR Transcripts - September 9, 2008
Wednesday, September 10, 2008Lehman Brothers Suffers a $4B Loss
SUSIE GHARIB: Concerns continued to mount today about the future of Lehman Brothers. The venerable Wall Street brokerage reported a third- quarter loss of almost $4 billion, the biggest loss in the firm's 158-year- history. That included more than $5.5 billion in write-downs, over twice what analysts expected. In an effort to boost investor confidence, Lehman will cut its dividend and auction off a majority stake in its asset management group, including crown jewel Neuberger Berman. Lehman shares tumbled another 7 percent today to $7.25 and have plunged 90 percent this year. Scott Gurvey has more on Lehman's battle to repair its balance sheet.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lehman's plan for asset sales and a spin-off of most of its commercial real estate business drew mixed reactions on Wall Street. S&P analyst Matthew Albrecht says Lehman can survive, at least in some form, if the moves clean up the balance sheet.
MATTHEW ALBRECHT, EQUITY ANALYST, STANDARD & POOR'S: They have a run-rate going forward, a pretty solid run-rate. You know, they claimed it was about $13 billion a year, you know, which, if you look at it, they can certainly be profitable in that kind of an environment. I think it does make them a little bit more susceptible to some type of take-over, because if they get those troubled assets off their books, they're a much smaller organization now and I think we could see an outside buyer step in. And that would -- you now, for shareholders may be a good solution.
GURVEY: But most analysts caution against buying shares on takeover speculation. S&P has Lehman on negative credit watch and it lists the shares as a hold. David Ritter of Argus Research today downgraded his rating of Lehman from buy to hold. He writes, quote: "With volatility in the stock now at extremely high levels, we can no longer recommend the shares until concerns over Lehman's capital and liquidity are resolved." Analyst Lauren Smith of Keefe Bruyette & Woods writes, quote: "The jury is still out. As much as we may want to recommend the shares of Lehman at these levels, there is still significant risk to equity holders should there be some government-assisted deal." Citi analyst Preshant Bhatia is more optimistic, writing, quote: "We would not be surprised if management raises capital to build a margin of safety and to improve perception, which we would view as positive and as more than discounted in the stock. S&P's Albrecht expects Lehman shares to remain under pressure until investors see results.
ALBRECHT: The fact that they came out with this plan today, it's not a lot of new information, a lot if it had been talked about in the market. So until they actually execute some of that, I wouldn't expect a huge move in the stock.
GURVEY: While some are comparing Lehman's situation to that of Bear Stearns, there are differences. Most significantly, many of Bear's counterparties virtually stopped doing business with the firm. In contrast, several major money managers and competitors, including Morgan Stanley (MS) and Goldman Sachs (GS), have publicly expressed their confidence in Lehman. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Richard Bove of Ladenburg Thalmann
SUSIE GHARIB: What's next for Lehman Brothers? Joining us now with his analysis, veteran banking analyst Richard Bove of Ladenburg Thalmann. Hi, Dick. How are you doing?
RICHARD BOVE, BANKING ANALYST, LADENBURG THALMANN: Good, Susie.
GHARIB: All right. So, does Lehman survive or does it go out of business?
BOVE: I think the company survives. I think it will be here 50 years from now, but I honestly believe that a hostile takeover is quite likely in this situation.
GHARIB: A hostile takeover? Why do you say hostile?
BOVE: Well, because Dick Fuld, the CEO of the company, got up and made his presentation today. He tried to make it a powerful presentation. He tried to convince the market that his company had the equity, had the liquidity, was able to function in the marketplace. But clearly he failed to achieve his goal. He did not convince investors that the company was in sound condition because the stock, toward the end of the day, started to plummet. And I believe it's going down in after-market trading. So it would seem to me that you need to get a management team in there that can provide credibility to investors. And I don't think that's going to come from internally.
GHARIB: Who could buy a Lehman? What banks, for example, or private equity firm, is in a position to buy Lehman?
BOVE: Well, first off, it's very cheap, right? In other words, the 700 million shares outstanding and the price of the stock is roughly $7.25, so the price of this company is under $5 billion. And that means just about any private equity firm worth it's -- what have you, is able to do it. And I think that a number of them are taking looks at Lehman. I think companies like Lazard (LAZ) or Greenhill (GHL) who know how to structure deals of this nature might be interested. I think Bank of America (BAC) would be interested. I think the Canadian banks, the Japanese banks, you know, would show some degree of interest, because Lehman Brothers, despite all of its difficulties, is still a first rank underwriter in the United States and around the world. And it's, I think, a very high quality company.
GHARIB: And yet there's still speculation that the Federal Reserve might not come to the rescue of Lehman. This might be the one that the Fed lets it go down just to show to everybody that it doesn't bail out everybody. What do you think about that?
BOVE: Well, I think it would be a horrible thing if the Federal Reserve came to bail out Lehman Brothers. I think the time for the Federal Reserve or the Treasury stepping in to bail out financial institutions hopefully is over. These companies have got to solve their problems on their own in the private sector without the assistance of the government. And I think it's very possible for Lehman to do that because, remember, Lehman has $42 billion worth of liquidity, or enough money to take care of its cash obligations for the next 18 to 24 months.
GHARIB: Dick, next week we get quarterly results from Goldman Sachs and from Morgan Stanley. What kind of shape are they in?
BOVE: Well, I mean, the earnings are going to be terrible, right? I think that we're well aware of the fact that just about every core business that these companies operate in, whether it's trading fixed-income securities, equities, whether it's underwriting new issues, whether it's mergers and acquisitions, whether it's getting performance fees on investment management, all of it is just terrible. There's no decent amount business coming from any area. So I think next week it would be a surprise if either of those firms showed us decent earnings. They're going to have very poor numbers.
GHARIB: You know, Dick, it has been quite a week for the financials this week. You know, we've had the news about Fannie (FNM) and Freddie (FRE). You know, this news now about, you know, the questions about Lehman's future, speculation about what happens to Washington Mutual (WM). What does all of this tell us about the health of the American financial system? BOVE: Well, it tells you that that portion of the financial system that is associated with the housing/mortgage market is in deep trouble. I think that all of the firms that you've mentioned are associated with the mortgage market. Clearly Fannie and Freddie are. Lehman is. Bear Stearns was. You know, Washington Mutual is the biggest thrift in the United States. So all of the issues that are arising to create these problems are in the mortgage sector. If you look beyond the mortgage sector to the total banking industry, the second-quarter numbers showed pretty clearly that there's more equity, there's more reserves in the industry, that deposits are at record levels, loans are at record levels, and margins are increasing. So you have on one hand this bipolar -- well, you have this bipolar industry. On the one hand, you have these tremendous loan-losses and these horrible stories coming out of these companies, but on the other hand, the core business of the industry is very healthy.
GHARIB: All right. Well, fascinating. And that's a positive note to end off on. Dick, thank you so much for coming on the program. BOVE: Thank you, Susie.
GHARIB: My guest tonight: Richard Bove, bank analyst at Ladenburg Thalmann.
The Defense Dept Delays The Refueling Tanker Decision
PAUL KANGAS: The race between Boeing (BA) and Northrop Grumman (NOC) to win a lucrative defense contract has hit another speed bump. The Defense Department again delayed a decision on a contract to purchase airborne refueling tankers. It had planned to make a final decision by January. But as Stephanie Dhue reports, the seven-year-long contract dispute will continue.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: As if real wars in Iraq and Afghanistan aren't enough, Defense Secretary Robert Gates is also in the middle of a lobbying war. On one side Boeing, on the other the team of Europe's EADS and Northrop Grumman for what could be a $100 billion deal to provide refueling tankers to the Air Force. Today, Gates retreated from the battle and left the decision to the next administration.
ROBERT GATES, DEFENSE SECRETARY: We cannot complete a competition that would be viewed as fair and competitive in this highly charged environment.
DHUE: Boeing welcomed the news, while Northrop was concerned about the impact of further delay. Alabama Senator Richard Shelby's state stands to gain jobs from an EADS/Northrop contract. He says the Defense Department put business interests ahead of military needs.
SEN. RICHARD SHELBY (R), ALABAMA: Our tankers, some of them are close to 50 years old, will they last a few more years by gluing them together? I'm sure. But sooner or later the Air Force is really going to have to face up to making the decision and staying with it.
DHUE: The Pentagon's decision gives Boeing another chance at the contract. But one of the company's biggest critics could be the next president. Five years ago, as chairman of the Senate Armed Services Committee, John McCain threw out a tanker deal with Boeing, because there was no competition. Still, former Assistant Secretary of Defense Larry Korb expects the deal to be less politicized next time.
LARRY KORB, SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS: This deal has been so messed up so many times that so many people are going to be looking on it, and it's going to be very hard not to make the best cost-benefit decision.
DHUE: But with billions of dollars on the line, jobs at stake, and a political issue of European control, defense analyst Brett Lambert expects the lobbying battle to intensify. He also expects a compromise.
BRETT LAMBERT, MANAGING DIRECTOR, CIVITAS GROUP: Politically, what's acceptable is a split buy, smaller tankers from Boeing, larger tankers from Northrop and EADS. And it'll cost the taxpayer several hundred million more, but given how this process has gone, that's probably where we're going to end up.
DHUE: Experts predict it will be next summer at the earliest before the new administration makes a decision on the tanker contract. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Patrick O'Hare, Chief Market Analyst, Briefing.com
PAUL KANGAS: Tonight's "Street Critique" guest looks at the markets from a contrarian's point of view. He's Patrick O'Hare, chief market analyst at the financial information Web site briefing.com, and he's the author of the site's "Bargain Hunting" column. Patrick, welcome back to NBR.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Hi, Paul. Nice to be back with you.
KANGAS: Well, it has been a very scary time for investors. What is your current take on this market now?
O'HARE: Well, it has been really more of the same, which is to say, it has been very volatile given the prevailing sense of uncertainly on a number of fronts. It seems likely to remain the case certainly leading up to the election. But ultimately we continue to believe the market is in store for better performance overall over the course of the next year and think investors should stick with the dollar cost averaging approach.
KANGAS: Very good. Now before we get to your latest stock selection, let's take a moment to review some of your previous picks. When you were with us in late April, you liked Sysco (SYY), that's with an S, the food distributor. And it's up over 19 percent. That's a great call. Do you still like it here?
O'HARE: We do still like it. It's probably overdone a little bit on a short-term basis, but this is a very well-managed company. And despite that recent run, the stock still trades at a significant discount to the 10-year historical P/E average. So investors should maintain a position of some sort, even if they decide to take some money off the table here.
KANGAS: All right. Now in mid-June, you liked Target (TGT) stock, the big retailer. And it's up almost 12 percent. Another great call. And in a market like this, those are great picks. Are you still holding this one or taking some profit?
O'HARE: Well, first of all, thank you. And secondly, we do still like this name. It is probably, like Sysco, overdone on a short-term basis. It's up about 35 percent off the July low. But this is a very well-managed retailer and the stock also still trades at a significant discount to its historical P/E average. So we continue to hold it.
KANGAS: All right. Fair enough. Now how about a new selection?
O'HARE: Sure. Monster Worldwide (MNST). The symbol is M-N-S-T. This is a multinational company whose fortunes are tied to online job recruitment and advertising. Now that's not a great mix when you take into account that international growth is slowing, the U.S. labor market is deteriorating and advertisers have been more discreet with their spending. But if you look at the stock chart, it's evident that the market is very aware of that troublesome situation.
KANGAS: It has had a "monster" decline, hasn't it? Indeed. (LAUGHTER)
O'HARE: That it has, from its 2006 high, it's down about 70 percent. And frankly, with macro conditions being what they are, it seems probable that you're likely to see further downside here. Yet this stock draws some attention to us as a contrarian play because we think its long-term return prospects outweigh that near-term downside risk.
KANGAS: What kind of upside potential.
O'HARE: The stock -- company's.
KANGAS: . do you see here price-wise?
O'HARE: Well, if you take the 2009 earnings estimate of $1.49 and you apply a 20 multiple to that, which is roughly in-line with the projected long-term earnings growth rate, that produces a price of just under $30 per share, which suggests you get about 50 percent upside potential possibly from current levels.
KANGAS: That's very nice indeed. Pat, do you own Monster shares or any of the other stocks we've talked about tonight?
O'HARE: No, I do not.
KANGAS: OK. I want to thank you for being with us once again.
O'HARE: Great, thank you, Paul.
KANGAS: My guest, Patrick O'Hare of briefing.com.
"Money File"-ETF Investing 101
SUSIE GHARIB: In the "Money File" tonight, the ABCs of ETF investing. Here's Jason Zweig, personal finance columnist at The Wall Street Journal.
JASON ZWEIG, PERSONAL FINANCE COLUMNIST, THE WALL STREET JOURNAL: If you think it's time to buy an exchange-traded fund, what should you look for? These portfolios, also called ETFs, have taken the investing world by storm, roughly tripling since 2005. There are now nearly 800 ETFs managing roughly $600 billion. These portfolios hold many different investments in a single package, just like a traditional mutual fund. But the package itself trades on an exchange just like a stock; you can buy or sell any time. Here are three simple guidelines when you are looking to invest in an ETF. A, be sure the ETF is very diversified. Find out how many stocks the ETF owns by checking its portfolio holdings. I would avoid ETFs that own fewer than 50 stocks. B, see how much the ETF will cost you by looking up its annual expense ratio. You should almost always be able to find an ETF that charges less than one-half of 1 percentage point in annual expenses. C, whatever you do, stay away from any ETF that uses what's called "leverage" in the hope of beating the market. Watch for code words like "ultra," "inverse," or "2X," which definitely deliver more risk but give no guarantee whatsoever of a higher return. Those are the ABCs of ETFs. I'm Jason Zweig.
Paul Kangas' Stocks in the News
PAUL KANGAS: Falling oil prices were a positive for stocks early today, as was Wall Street's reaction to the Lehman Brothers news this morning. The Dow rose 81 points in the first hour of trading while the NASDAQ gained 18 points. Around midday, Lehman's stock gave up its early gain and the market faded. Stocks rallied again, led by a rebound in the commodity sector this afternoon. At 3 p.m., the Dow was up 105 points, but then investor uncertainty cut the gains by the final bell. The Dow Industrial Average closed up 38.19, at 11,268.92. NASDAQ rose 18.89, ending at 2,228.70. And the Standard & Poor's 500 was up 7.53 at 1,232.04. Over in the bond market, the 10-year note fell 17/32 to 103 1/32, putting the yield at 3.64 percent.
Most active Big Board issue on 24.5 million shares, Washington Mutual (WM) down another $0.98 at an 18-year low. Yesterday, as we reported, Standard & Poor's changed the company's ratings outlook from stable to negative.
Then Lehman Brothers (LEH) down $0.54 on the close, traded as high as $9.10 and as low as $6.93. You heard most of the news, the company is slashing its dividend 93 percent, from $0.68 to only a nickel annually. And Moody's said that the bank will have to take action beyond the steps it announced today to avoid a ratings cut.
Citigroup (C) in there with a $0.20 loss.
American International Group (AIG) dropping $0.87.
Bank of America (BAC) down $0.12. The company has agreed to buy back $4.5 billion of illiquid auction rate securities, settling a probe led by Massachusetts state regulators.
Moving along in the actives, GE (GE), a $0.03 loss.
Followed by Wells Fargo (WFC) with a $0.53 gain.
JPMorgan Chase (JPM) down $0.07.
Wachovia (WB) fell a $1.16.
And Companhia Vale (RIO) was up a $1.12 per share, 10th in volume.
FedEx Corp. (FDX) up $3.11, traded as high as $89.08 today. After the close yesterday, as we reported, the company forecast first-quarter earnings at $1.23. And that's $0.28 better than the Street was expecting. Rails strong today. Norfolk Southern (NSC) up $2.91. UBS Financial upgraded it from neutral to buy.
And did the same for Burlington Northern (BNI), which was up $2.98.
And the other rails followed suit with gains in CSX (CSX), Genesee & Wyoming (GWR), Kansas City Southern (KSU), and Union Pacific (UNP) a nice gain of $3.03.
International Rectifier (IRF) gained $1.47. Vishay Intertechnology (VSH) has sweetened its buyout bid from $21.22 a share up to $23 a share in cash. Robbins & Myers (RBN) gained $3.95. Two brokerages, namely BB&T and Sidoti, both issued buy recommendations on RBN today.
Sunrise Senior Living (SRZ) dropping $1.82. Second-quarter loss out today, $0.63 in the red versus earnings of $0.15 last year. And the company cut its earnings guidance.
Webster Financial (WBS) dropping $1.49. Stifel Financial brokerage downgraded it from hold to a sell recommendation. And then PNC Financial (PNC) losing almost $2. The company expects to report significant third-quarter write-downs on the ownership of preferred stock in Fannie Mae (FNM) and Freddie Mac (FRE).
And finally, Ultra Petroleum (UPL) up $6.33. Standford Research upgraded it from sell to hold in the belief the company can boost its reserves 20 percent this year.
Apple (AAPL) down $0.07.
Google (GOOG), a $4.50 loss.
Research In Motion (RIMM) up $5.31. Second-quarter earnings are due out on the 25th of this month for RIMM. And the company got some pretty good analyst fanfare today about its new BlackBerry flip-phone.
Microsoft (MSFT), a $0.34 gain.
Intel (INTC) down $0.17.
Moving along, Qualcomm (QCOM) up $1.12.
Oracle (ORCL) fell a penny.
Cisco Systems (CSCO), a $0.02 gain there.
First Solar (FSLR) up nearly $11.
And Baidu.com (BIDU) gained $9.97.
ImClone Systems (IMCL) gaining $4.29. The company said a large pharmaceuticals firm it didn't name has proposed to acquire it for $70 a share. ImClone told Bristol-Myers Squibb that its $60 a share buyout bid was inadequate.
And finally, shares of American Community Bancshares (ACBA) soared $3.51 on news it was being acquired by Yadkin Valley Financial (YAVY) for $12.35 per share cash or 0.8 per share in Yadkin stock, and that stock tumbled $4.45 to $12.54 per share.
