NBR Transcripts-September 19, 2008
Friday, September 19, 2008Government Involvement Builds Confidence On Wall Street
SUSIE GHARIB: A collective sigh of relief on Wall Street today as stocks surged after the government announced a sweeping plan to rescue the nation's ailing financial system. The Dow soared 368 points, closing at 11,388, more than 1,000 points above yesterday's intra-day low. The Nasdaq jumped 75. The rally capped an extraordinary week in which the Treasury, the Federal Reserve, and the Securities and Exchange Commission took unprecedented actions to restore investor confidence. They're setting up a fund to buy troubled mortgage-related securities, moving to insure money market funds and temporarily banning short-selling of almost 800 financial stocks. We have two reports looking at the government's proposal and Wall Street's reaction to it. We begin with New York bureau chief Scott Gurvey.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT NEW YORK BUREAU CHIEF: The opening on Wall Street was simply explosive. The Dow Jones Industrial Average gaining 400 points in a matter of minutes. Trader Theodore Weisberg says it was all in response to government actions to end what he sees as one of the worst financial crises in history.
THEODORE WEISBERG, TRADER, SEAPORT SECURITIES: People were as close as you could get to being in panic mode than I've seen since '87. So I would say, you know, it's always a different catalyst, but the emotional aspect of it is always the same because I think 80 percent of stock trading is basically driven by human emotion and you can't legislate or control what people do. When people get nervous and they start to panic, you know, it's difficult to stop that train.
GURVEY: It is difficult to comprehend just how complete that panic had been. Following the Lehman Brothers (LEH) bankruptcy, the credit markets literally stopped working. It was impossible for businesses, including financial sector titans, to raise capital. The flight to safety was so complete, interest rates on two-year Treasuries fell to zero. David Katz of Matrix Asset Advisors notes that even some money market funds were at risk.
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS: The government stepping in and basically insuring money markets that follow certain rules takes that off the table. That takes a tremendous risk out of the equation. The fact that they're helping eliminate bear raids on companies takes the risk of a Goldman Sachs (GS) imploding in a two-day period off the table. That helps free up the whole commercial paper market again. It allows banks to lend to on another again. So we think as costly as the moves that the government has made today, you're really talking about $0.10 on the dollar about problems that it saves six months out or even two weeks out.
GURVEY: That was the clearly the consensus of the markets as a two-day rally saw the S&P 500 gain 8.5 percent. Still, Mike Ryan of UBS Wealth Management says it is too early to tell if the crisis is over.
MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: The devil is in the details. We don't know much about what institutions will be covered. We don't know much about the magnitude of the program. We also don't know what they're going to do in terms of taking what types of assets into it. So again, I think it's a very, very encouraging step. It's certainly necessary in this process, but it's still too early to tell exactly how the market is going to react overall long term to this.
GURVEY: In the short term, the markets ended a tumultuous week on huge volume and, ironically, from last Friday to today's close, with the major averages virtually unchanged. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: This is Darren Gersh in Washington. Treasury Secretary Henry Paulson's argument for a massive fund to buy up toxic financial assets came down to this: Wall Street had to be rescued in order to save Main Street.
HENRY PAULSON, TREASURY SECRETARY: I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.
GERSH: While Wall Street surged, Washington reeled. Lawmakers were stunned by the magnitude of what they have been asked to do in just a few weeks. With so much money on the line, Senate Banking Committee Chairman Chris Dodd says the new legislation has to go to the root of the problem.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: My hope is that this plan will not only allow it to deal with illiquid debt obligations out there, but also focus as well on bringing to a closure the foreclosure problems.
GERSH: The Treasury plans to limit the new "Troubled Asset Relief Program" to U.S.-based institutions. The thinking now is that hedge funds would not be eligible for help. Asset managers will be hired to help run the program. But it is still unclear exactly what assets will the U.S. government will buy, and at what cost to taxpayers? While Paulson is talking about hundreds of billions of dollars, other analysts are looking at a trillion or more. ISI Group's Tom Gallagher says it depends on what the government is willing to pay for assets the market no longer wants.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: So I think where the price is, is really an important consideration here. The higher the price for the asset, the better for the financial institution, but the worse it is for taxpayers. So something that is really effective is going to be really costly and therefore controversial.
GERSH: Amazing as it is to say, the entire U.S. financial system now has a direct lifeline from Uncle Sam. Look what happened in just 24 hours: The Treasury began insuring $2 trillion in deposits at money market funds; the Federal Reserve began pumping money into banks to keep the asset-backed paper that funds credit cards and auto loans from shutting down; regulators ordered Fannie Mae (FNM) and Freddie Mac (FRE) to buy up more mortgage- backed securities, potentially as much as $140 billion worth; and the Securities and Exchange Commission banned short sales in 799 financial stocks, effectively shutting out speculators. While the federal government is putting taxpayers on the hook for potentially enormous losses, the president suggested the ultimate cost should be manageable.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time.
GERSH: Will it work? Today's market rally suggests it might. But the financial system is now being run out of Washington and many answers will depend on the fine print and the political process. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
A Roundtable Review of The Rescue Plan
SUSIE GHARIB: More analysis now on that government rescue plan and this week's historic events on Wall Street and in Washington. Joining Paul and me, NBR's New York bureau chief, Scott Gurvey, and our Washington bureau chief, Darren Gersh. Hey, guys, TGIF. Wow, what a week this was. You know, I think a lot of people feel better today.
GERSH: Is it over?
GHARIB: Yes, you never know with these weekends. All of these crises, it might still be going on. But I think a lot of people I talked to today were feeling a lot better about this government plan. And -- but on Monday, Tuesday, and Wednesday, almost everybody I talked to, pretty shaken up and fearful about the future. Darren, I don't know what it's like in Washington. What were you hearing in the corridors of the Beltway?
GERSH: I don't think most policymakers knew what was coming. I mean, they looked pretty stunned today when they started to get a sense of the price tag. But people I was talking to who did work in financial circles, I mean, it was a near-death experience. And sort of they were crushed on Wednesday and felt like they had been given a reprieve today.
GHARIB: Well, you know, we've all covered these financial crises before. Scott, Paul, you know, we've covered these. And we've seen, you know, meltdowns. And we've seen firm goes out of business. But there was something about this weekend, of seeing Lehman Brothers, Merrill (MER), maybe Morgan Stanley (MS), and Goldman Sachs (GS), in quick success like kind of a domino effect, you know, change every night. I mean, what do you guys think about this new era?
KANGAS: I think that we.
GURVEY: Well, there was this.
KANGAS: Go ahead, go ahead, Scott.
GURVEY: All right. I was going to say that there was a sense of fear on Wall Street that I hadn't seen before. In 1987, the markets froze too but they were the derivative markets, the futures markets. In this case, you know, you had all of these collateralized debt instruments, you had the swaps. And a lot of times when Wall Street comes up with these instruments they have complex formulas for what things should be worth and what they should trade for. But they never are able to quantify what happens when people just get scared. When people get scared, they stop trading. And that's what happened. And there was a real sense of fear, I think, the early part of this week because the market literally wasn't working at all.
GERSH: You know, that complexity is a really an important point because basically what has happened, and I don't think Wall Street realizes it yet, but you know, there has been a takeover. The federal government has taken over much of the financial system. And basically they are not going to like the fact that there were these complex instruments that these wiz kids and smart guys came up with that they didn't understand how they were going to work. And so what's going to happen going forward, we're going to have a massive change -- a massive regulatory change. And we're going to have a much more plain vanilla financial system going forward.
KANGAS: I think we have some of the best minds in the world at work trying to get this plan together. And I think that the American people, especially the investing public, have to have a lot of faith and confidence in the plan they will come up with. I'm sure it's going to be a winner, there is no alternative, it's as simple as that. (CROSSTALK)
GERSH: We don't know all the details yet.
KANGAS: I know, we'll learn them but.
GERSH: They are working on the plan right now. And so it is not done.
GHARIB: And there are a lot of criticisms.
GURVEY: Well, and my point is that.
KANGAS: I have confidence the plan will work.
GURVEY: I think the people going to -- I think the people are going to dictate that there is a simplification of a lot of these complex things that go on, because there is a big difference between this and '87. In '87, about six months later, the economy was going along just fine. Main Street really hadn't been singed. In this case, because mortgages were involved, I think Main Street is going to feel this and is going to suffer for a few years. And I think that is going to demand that there really be change here.
GHARIB: You make a very good point, Scott. But also from the Wall Street point of view, there is a lot of passion and energy that the government is breaking the rules of the free market system. And we had a guest on the other night who said that -- felt that the Fed's pristine balance sheet has now turned into a pawnshop.
GHARIB: No reaction? No reaction. Let's talk about next week.
GURVEY: True.
GHARIB: What do you guys think is going to happen next week. Are we going to have another Sunday night crisis?
KANGAS: I don't think so. I think that as the details of the plan unfold, people will gain confidence and the fact that it will work and cooperate. I think politics will be put aside. And I'm confident that this is going to work. The RTC plan in the long run worked. I don't see any reason why this one shouldn't.
GHARIB: In Washington, Darren.
GURVEY: Yes, this is going to have to be put in.
GHARIB: Go ahead, Scott.
GURVEY: I was going to say, this apparently going to be put -- and Darren can speak to this, is going to be into place very quickly. And Congress is already on board. And you know, when you make -- when you make something up like this, doing it in a short period of time is not always the best bet. So I also think that after the election, after we have a new president, one way or another, some of these things that get put in place in the next week, they may have to rethink.
GHARIB: And you bring up a point, I wonder to what extent Americans have been affected by this financial crisis this week. And will it change the way they vote and who they vote for in November?
KANGAS: I would say so far it's in favor of Obama because it happening under a Republican administration. But it goes -- the roots of this problem go way back into several administrations, actually, so it's not fair.
GHARIB: You're absolutely right about that. We're going to have to leave it there. Thanks, Darren. Thanks, Scott. Hope you have a good weekend.
"Market Monitor"- John Dorfman, Chairman of Thunderstorm Capital
PAUL KANGAS: My guest "Market Monitor" this week is John Dorfman, manager of the Dorfman Value Fund and chairman of Thunderstorm Capital, an investment advisory firm based in Boston, Massachusetts. Welcome back to NIGHTLY BUSINESS REPORT, John.
JOHN DORFMAN, CHAIRMAN, THUNDERSTORM CAPITAL: Thank you very much, Paul.
KANGAS: When you named your advisory firm Thunderstorm Capital, you must have had a premonition of things to come on Wall Street, is that true?
DORFMAN: Well, in a way, it is true, because we like to buy when things look frightening. But then we think they are likely to get better. So that's what we had in mind with the name.
KANGAS: OK, well, appropriate recently. Anyway, does the stock market's positive reaction to the government's intervention to our capital markets tell you that a bottom has been reached or is there more downside ahead?
DORFMAN: I would like to think that a bottom has been reached. I think we're near a bottom but not necessarily at one. I'm guessing jagged market action for the next month or two. And then I'm anticipating most likely a good rally in the fourth quarter.
KANGAS: OK. When you were last with us in March, I asked if the stock market's volatility would continue. And you said yes in a big way. And boy, you were right on the money. Do you see any relief from the volatility ahead?
DORFMAN: Most likely not, Paul. But I do think that people should keep in mind that this volatility may present opportunities to find good buying points for stocks that you intend to hold for three or five years or even longer. And most investors, in my opinion, that is what they should be doing. So volatility can mean opportunity.
KANGAS: Is this a good time to buy some of these depressed financial stocks?
DORFMAN: In my opinion, yes. Dorfman Value Fund is overweight financials. I just think there are bargain-priced stocks in this sector including some very good, well-run companies.
KANGAS: What other sectors are attractive now?
DORFMAN: Well, I like the pharmaceuticals. I think that, you know, they add a lot of value and are selling pretty cheaply now. I like metals and energy, which I had liked for years. And in the spring they seemed to be getting expensive, but now they have been slammed and they are cheap or inexpensive again, so I like those.
KANGAS: Last March when you were with us, you gave our viewers five stock recommendations. Let's see how they've done since then. The first one, AstraZeneca (AZN), up 20 percent. Nice call, are you still with it?
DORFMAN: Yes, I certainly am, Paul. I think they have a good drug pipeline.
KANGAS: OK. And then Columbia Sportswear (COLM) gained 5 percent since then, are you still with that, would you buy it here?
DORFMAN: Yes, yes, no debt, good products. I continue to like Columbia Sportswear.
KANGAS: OK. Devon Energy (DVN) you liked, and it's up 9.6 percent. Still with it?
DORFMAN: Yes. Devon I have held for years and at the moment I see no reason not to hold it for several years more.
KANGAS: Mm-hmm. The big clinker in your recommendations, Goldman Sachs Group (GS), down 27.7, you said at the time you are taking a chance and you did.
DORFMAN: Yes. I bought a little more for the fund on Monday, and I continue to think they have a tremendous pool of talent. And I like Goldman.
KANGAS: OK. And the other one was a short sale recommendation, Vail (MTN), and since it's down 6.4 percent from where it was when you said short it, you have a profit of 6.4 percent. Are you out of that position, you've covered?
DORFMAN: I had a profit on TV, but in real life, we had a loss and we were forced to cover.
KANGAS: OK. We are have just a minute left. Let's have some recommendations if you have some new ones, quickly.
DORFMAN: I would like to start out with a new one, Oshkosh Corp. (OSK). They make military transport vehicles as well at fire engines and cement mixers.
KANGAS: OK.
DORFMAN: The stock has been slammed and I think it is a good value.
KANGAS: O-S-K on the Big Board. OK. Next, moving along.
DORFMAN: Next is Apache (APA) or A-P-A, another good solid energy stock with a nice balance of oil and gas.
KANGAS: OK, 30 seconds left, John.
DORFMAN: I would like to re-recommend AstraZeneca for the reasons I said, a strong pipeline. And then a fourth recommendation is a real contrarian one, Gannett (GCI), the newspaper company. They're an information company that can sell a lot of ways besides newspapers.
KANGAS: OK. And you have a short sale recommendation, you say.
DORFMAN: I do. This time I would like to recommend for people who do short, Illumina (ILMN), which makes supplies for the biotech industry. It is just a very expensive stock and there has been some insider selling lately.
KANGAS: Do you own any of these that you have recommended?
DORFMAN: I own all the ones that I have recommended. And in one of our programs we are short Illumina.
KANGAS: Thanks very much for being with us again, John.
DORFMAN: You bet.
KANGAS: My guest, John Dorfman of Thunderstorm Capital.
Paul Kangas' Stocks in the News
PAUL KANGAS: As we mentioned, the federal bailout plan launched a rollicking opening rally on Wall Street. The Dow rocketed 425 points at the outset of trading, while the NASDAQ vaulted 70 points. There were some minor pullbacks during the middle part of the trading session. But optimism that the federal intervention will work kept the rally very much alive right on through to the closing bell. The Dow Industrial Average ended up 368.75 points at 11,388.44. This week it fell twice and rose three times, but had a net loss of 33.55 points. The NASDAQ Composite soared 74.80 to 2,273.90 today. It also fell twice and rose three times this week, gaining 12.63 points overall. Standard & Poor's 500 jumped 48.57 today, ending at 1,255.08, and for the week it rose 3.38 points. Over in the bond market, the 10-year note lost 2 3/32 to 101 18/32, putting the yield at 3.81 percent.
By far and way the most active Big Board issue, trading 90.5 million shares, American International Group (AIG), rebounding $1.16. Major shareholders are trying to pay off a big federal loan before government takes an 80 percent equity stake, which of course, would heavily dilute their stake.
Citigroup (C) was up $3.82 on the strong financials. Standard & Poor's upgraded Citigroup from hold to a buy.
General Electric (GE) in there with a gain of $1.83.
Bank of America (BAC) doing well up $6.90. Standard & Poor's upgraded it from sell to a buy, quite a change.
Washington Mutual (WM), a $1.26 gain, big percentage move there.
Wachovia (WB) did well, up $4.25.
Pfizer (PFE), a $0.56 rise.
And Wells Fargo (WFC) gaining $2.80.
JPMorgan Chase (JPM) up $6.75.
Exxon Mobil (XOM) up $1.86 as oil prices moved $6 higher and then some today.
General Motors (GM), a Dow stock doing well, up $1.68. The stock up on rising hopes the government will approve a $25 billion loan package to help the troubled U.S. auto industry.
Some other strong Dow stocks: American Express (AXP), Chevron (CVX), DuPont (DD), IBM (IBM), and 3M (MMM) all nicely higher in today's rally.
Texas Instruments (TXN) edged up $0.82. The company plans to boost its quarterly dividend 10 percent to $0.11 a share.
On the downside, major casualty Ambac Financial (ABK) losing $2.80. Moody's said that it may downgrade the financial strength of this bond insurer due to mounting mortgage losses. It did the same downgrade on another bond insurer, MBIA (MBI), which fell $1.12.
Genworth Financial (GNW), that's a GE spinoff of some time ago, up $6.10. After the close yesterday, the company says it has had $900 million cash in its holding company, and an additional $4 billion cash or cash equivalence in its operating company.
Aegon (AEG) up $1.42. The company says it does not hold a common equity stake in American International Group.
IHS (IHS), and this is an info company, down $10.90. Third-quarter earnings came out higher, $0.56 versus $0.43. But revenues were a real shortfall, $270 million in the period. The Street was looking for $214 million.
OfficeMax (OMX) losing $2.12. Friedman Billings Ramsey brokerage downgraded it from outperform to market perform. On the other hand, Friedman Billings upgraded McAfee (MFE) from underperform to market perform.
Apple (AAPL) topped the NASDAQ actives, up $6.82.
Google (GOOG) did well, up $10.07.
Microsoft (MSFT) down $0.10.
Research In Motion (RIMM), a $5.26 advance.
Cisco Systems (CSCO) rose $1.49.
Intel (INTC), $0.03 loss there.
Qualcomm (QCOM) gained $2.04.
Oracle (ORCL) rising $1.32. After the close yesterday, as we reported, Oracle's first-quarter earnings, $0.29, up from $0.22 a year ago, $0.02 above the Street estimate. Today Standard & Poor's repeated a strong buy on Oracle.
Dell (DELL), a $0.62 loss there.
And Amazon.com (AMZN) up exactly $4.50.
eTelecare Global Solutions (ETEL) up $3.35 on news that Ayala Corp. had started a $9 a share cash tender offer.
And those are our "Stocks in the News" tonight.
