NBR Transcripts-September 29, 2008
Monday, September 29, 2008Washington Tanks Wall Street
SUSIE GHARIB: The House rejected the government's bailout plan today, sending shock waves through financial markets. The Dow suffered its biggest one-day point drop ever, plummeting 777 points, or 7 percent. It is now at its lowest level in nearly three years. The NASDAQ plunged 200 points, or more than 9 percent, and the S&P 500 tumbled 106 points, or nearly 9 percent. Treasury prices soared as investors sought the safety of bonds. Now those dramatic moves came after lawmakers in the House of Representatives voted 228 to 205 against the $700 billion financial rescue plan. We have two reports tonight looking at what happened on Capitol Hill and on Wall Street. We begin with Stephanie Dhue in Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a stunning defeat, President Bush told reporters he's disappointed and will discuss options his economic team.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Our strategy is to continue to address this economic situation head on. And we'll be working to develop a strategy that will enable us to continue to move forward.
DHUE: Treasury Secretary Paulson emerged from a meeting with the president to say he will continue to work to protect the financial system.
HENRY PAULSON, TREASURY SECRETARY: We have significant tools in our tool kit, but they're not sufficient. And so we're going to continue to work with what we have until we get from Congress what we need.
DHUE: Analysts say those tools include using the FDIC to help sell weak banks to stronger banks. Of course there may be fewer stronger banks now. The Federal Reserve can continue to use its resources to pump liquidity into the system and use Fannie Mae and Freddie Mac to aggressively buy out mortgages. But AEI economist Vince Reinhart says lawmakers just made dealing with the crisis harder.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: Last week, government officials said, we are one step away from the abyss, if you don't take these actions. The Congress just said, take a step forward.
DHUE: Despite impassioned pleas from both Democratic and Republican leaders. Two-thirds of Republicans and 40 percent of Democrats voted against the bill. House Speaker Nancy Pelosi promised to keep working.
REP. NANCY PELOSI (D-CA), SPEAKER: What happened today cannot stand. We must move forward, and I hope that the markets will take that message.
DHUE: Republican Whip Roy Blunt also pledged to counter the financial fallout.
REP. ROY BLUNT (R-MO), MINORITY WHIP: We're going to be talking to our members and see how we can come together in the next few days to reverse whatever negative impact there may be in the economy over the next few days because Congress has failed to act.
DHUE: Democratic Caucus Chairman Rahm Emanuel says after a week of negotiations and high stakes political theater, the center did not hold.
REP. RAHM EMANUEL (D-IL), CHAIRMAN, DEMOCRATIC CAUCUS: We thought we had found the very basis of both principle and politics; the principle being that we were going to calm the markets, and what we saw as legislators, the insurance to protect the taxpayers.
DHUE: ISI analyst Andy LaPerriere says the key to building a majority will be adding Republican support.
ANDY LAPERRIERE, ANALYST, INTERNATIONAL STRATEGY & INVESTMENT: Probably the best way to do that would be to shrink the size of the package, to give the Treasury a certain amount of money up front and then the Treasury would have to come back to Congress and ask for more money in order to get the full $700 billion.
DHUE: While lawmakers promise to keep working on a bill, it may not happen quickly. Republicans caution they will not be driven by a one-day dive in the Dow. House Democratic leaders say they'll be back at work on Thursday. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Suzanne Pratt in New York. In a matter of minutes today, it went from bad to horrible for the stock market. Investors dumped shares of U.S. companies, many of which had been surprisingly resilient in the face of the most serious banking crisis since the Great Depression. All of the major stock market indexes got clobbered. But the S&P 500 and the NASDAQ suffered the greatest losses, each plummeting about 9 percent. At the heart of the matter, credit markets that are likely to remain frozen. Stock market analyst Art Hogan says investors were trying to calibrate what the world would look like without a government bailout.
ARTHUR HOGAN, CHIEF MARKET ANALYST, JEFFERIES & COMPANY: We're afraid that, you know, one after another, we're going to see financial institutions disappearing and going under the waves, and a complete lack of confidence in the American financial institutions. So, it would be very difficult for businesses to do business with each other, institutions to lend money to each other, or investors to invest.
PRATT: While stocks tanked, Treasuries rallied, as investors rushed for the safety of government debt. Credit market expert Andrew Brenner was not surprised by today's massive flight to quality.
ANDREW BRENNER, CO-HEAD OF CREDIT PRODUCTS, MF GLOBAL: People are more concerned right now of return of capital than return on capital. And that actually makes sense because you are -- right now I think you are in the face of a deflationary environment.
PRATT: Even before today's failed vote in the House,, the Federal Reserve was trying to work its own magic in the credit markets. The Fed, in conjunction with central banks around the world, unveiled a coordinated effort to pump an extra $600-plus billion into the global banking system. While economists and financial market experts cheered the Fed action, it did little to unlock credit or restore confidence. And many experts still say the Fed's additional liquidity and the bailout plan only address the symptoms of the economy's major ailment.
BRENNER: The issue still is housing prices. We need to get government action into stabilizing housing prices and to get housing prices to come back up.
PRATT: Despite the steep sell-off in stocks today, there's still some guarded optimism about a bailout plan. The belief is that Congress will ultimately reach a deal. How deep the damage will be by then is anyone's guess. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Hugh Johnson of Johnson Illington & Mark Zandi of Moody's Economy.com Analyze The Bailout Rejection & Stock Slide
SUSIE GHARIB: Joining us now with more analysis: Hugh Johnson, chairman of Johnson Illington; and Mark Zandi, chief economist at Moody's Economy.com. Hi, guys.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Hi.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi.
GHARIB: Mark, let me begin with you. What happens next for the economy?
ZANDI: Well, I think this is a body blow to the economy. I think if Congress doesn't pass legislation by the end of the week, and legislation that's pretty close to what they rejected today, I think we'll be in a very severe recession very quickly. If they -- even if they pass legislation, it's going to be a tough economy, but without it, I think credit markets will remain frozen, businesses will have difficulty making payroll in two, three, four weeks, and we'll be in a deep recession.
GHARIB: Hugh, what happens next for the markets tomorrow, overseas, and on Wall Street?
JOHNSON: Well, first of all, overnight overseas I think they are going to probably follow the lead from Wall Street and they will be down sharply. It's hard for me to believe, Susie, that with a 770-point decline in the stock market today that we're not going to get some recovery in the stock market tomorrow. So I wouldn't be surprised to see a recovery particularly because, you know, we're starting to think about, well, look, they didn't pass this package, but they haven't given up, they are likely to pass a package. Obviously the Senate has got to vote on it on Wednesday. And maybe by Thursday they'll pass a package. So I think just with that hope or expectation, maybe we get a little bit of a bounce-back. But Mark is right. Look, there is not going to be a lot of bounce-back so long as the outlook for the economy is so dark as a result of their failure to respond to clear signals.
GHARIB: Mark, let's get more from you. You are saying that the economy is going to be in trouble or recession. Treasury Secretary Paulson said late this afternoon that our tool kit is substantial but insufficient. If Congress doesn't come through, what else can Treasury and the Fed do to solve this problem?
ZANDI: Well, they can do what they've been doing. In the case of the Treasury, when you do have failures -- financial failures, they can take it one at a time, decide whether the institution is too big to fail. And if it is too big, come in and provide help. Or it could turn it over to the FDIC. If you are in the Federal Reserve, you can do more of what you have been doing, and that is providing as much liquidity to the financial system as you possibly can. So those are the things they have been doing. Obviously it's not working. I mean, they've been doing that now for the better part of a year. And over the past four weeks, they've been doing a lot of it. And it's not enough. And it's very clear that they do, in fact, need more tools in that tool kit. And this legislation that was rejected today, I think, would have been -- would be very effective in going to the heart of the problems that we face. And it needs to be passed.
GHARIB: Hugh, we know that liquidity is the lifeblood of the economy. What does all of this mean on the corporate side? Tomorrow the third quarter ends. We're going to start getting earnings reports from corporate America. What can we expect to hear from companies and big companies and small companies?
JOHNSON: You know, we -- well, the first thing they're going to say is their earnings were terrible in the third quarter. The second thing they're going to say, which gets to what Mark was -- is worried about and was talking about is that they are not getting -- it's not easy to raise money in the short-term credit markets in order to pay their bills to meet payrolls. And because of that then the outlook for the economy is pretty dark. So they are going to say those two things : earnings are lousy and prospects for earnings under current conditions are not good, which is essentially saying, look, the Congress has got to get their act together and has got to pass either this bill or something that's pretty close to it, and do it pretty soon.
ZANDI: Susie, can I say, you know.
GHARIB: Hugh, let me ask you -- oh, go ahead.
ZANDI: I was just going say, you know, I have a lot of clients, big clients, clients with names that you would know. And I'm getting calls from them telling me that they're having trouble getting working capital. That is the cash they need to make payroll to go out and finance the inventories, to finance exports. And it's not in just one industry, it's in lots of different industries. And it's not just small companies. It's big -- it's very large companies. So this highlights the stress.
GHARIB: And, Mark, and we've been hearing about this split between Wall Street and Main Street. What do you think the American people need to hear to know that all of this does impact them? I mean, bottom line, what would you say simply?
ZANDI: Bottom line, credit is the mother's milk of economic activity. Without it the economy doesn't function and that credit comes from Wall Street and the financial system more broadly. And if Wall Street is not working, neither will Main Street. And it's not next year, it's really next month.
GHARIB: All right. Real quickly, Hugh, we just have a few seconds. What should people do with their portfolios tomorrow and this week?
JOHNSON: You know, well, unfortunately, I have been saying, sit tight, hold tight and sit tight, and if you can't sleep at night, maybe you take a little bit off the board. In other words, you reduce your exposure to stocks some. Make sure on the fixed income side you stick with quality or stick with Treasuries. So the point is, is play it very safe and wait for the markets -- and important economic numbers, but wait for the markets to give you the all clear sign. And clearly they haven't done that yet.
GHARIB: All right. We hope we get that all clear sign soon. Thank you so much, gentleman. Appreciate you coming on the program.
ZANDI: Thank you.
JOHNSON: You bet.
GHARIB: My guests tonight: Hugh Johnson chairman of Johnson Illington; and Mark Zandi, chief economist at Moody's Economy.com.
John Bogle, Vanguard Group Founder Offers Advice for Individual Investors
PAUL KANGAS: Joining us now to put today's events into perspective for individual investors is John Bogle, the founder of the Vanguard Group. And, Jack, welcome back to NIGHTLY BUSINESS REPORT.
JOHN "JACK" BOGLE, FOUNDER, VANGUARD GROUP: Good to be with you, Paul.
KANGAS: You were with us just two weeks ago almost to the day, the Dow had tumbled 500 points that day, and you told this crisis was different, that it's going to be tougher than the others we have faced. What is your take on what happened today in the House of Representatives?
BOGLE: Well, it was certainly not much of an act of statesmanship on the part of our elected officials to begin with. And there was a lot of pettiness like blaming Speaker Pelosi's speech on -- for the Republicans to abandon ship. The one thing I did observe, looking at the vote, Paul, is that this must have been the most bipartisan vote of this entire congressional session. It was not so darn far from evenly divided for and against between Republican and Democrats: the Democrats marginally in favor, the Republicans marginally against. So if that is what we get out of bipartisanship, that's not so good. And you know, there is an old saying, there are two things, two things one never wants to watch being made. One is legislation, and the other is sausages. (LAUGHTER)
KANGAS: That's right.
BOGLE: And I think there was a lot of sausage out there today.
KANGAS: But what are investors to do in a situation like this?
BOGLE: Well, first, my assumption is, I hope it's not vain, that Congress will finally pull its wits together and give us a bill. And in particular, I think there are legitimate objections to this bill. I think we should have been much clearer on giving the government options on them -- or equity participation in the banks they are helping. I do believe strongly, it happens to be a Democratic position, but that doesn't matter to me, in doing something about the mortgage bankruptcy laws that would allow a renegotiation under bank supervision of people that are -- you know, are going to be able to pay off their mortgages and can't do it now. And those are two things that should be addressed, I'm quite confident. But it's very difficult to do.
KANGAS: I understand. The market's action itself is just terrible. I mean, do you see a bottom forming here? Is there any hope of that?
BOGLE: Well, I don't know too much about tops and bottoms. The market is now down about 29 percent measured by the Standard & Poor's 500.
KANGAS: Right.
BOGLE: About 29 percent from the high last autumn. And who knows where it goes? I mean, I would certainly not hesitate to venture that we are more than halfway to the bottom. But I think investors should think about, you know, the warnings they've gotten from experienced investors over the years, you know, at the times of maximum pessimism, there is a time to think a little more positively. I was brought up years ago by Walter Morgan, our founder here. And he taught me the lesson: The crowd is always wrong. And what we have now is a crowd of speculators out there. This has, I think, not that much to do with investing at the moment. It's kind of heading to the hills by people who were speculating and maybe we're facing problems with leverage or debt, something like that, margin requirements. So the markets are very, very shaky. I think they overstate the seriousness of a very serious -- I want to don't want to make light of that, a very serious situation.
KANGAS: In your -- if you held a portfolio for a long time, would you hold it, continue to hold it through this crisis?
BOGLE: I do that with my own. I may have mentioned that I happen to be, ever since the beginning of 2000, that market high went back to about 67 or 68 percent bonds, and 32 or 33 percent stocks. And I would hold on. And I would say to older investors, if you have a position like that, with some backstopping, an anchor to windward in the form of bonds, I would hold -- and then very diversified on the stock side, I would hang on through this. And for younger investors, if you have got very little at stake. I would just keep doing your dollar averaging, realize every day this market is low, it is a good time to invest in the long run.
KANGAS: All right. Jack, I want to thank you once again for sharing your insights with us.
BOGLE: Great to be with you, Paul.
KANGAS: My guest, John Bogle, founder of the Vanguard Group.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street got off to a dismal start, reflecting major losses in foreign markets, bank failures in Europe, and uncertainty about the U.S. bailout vote in Congress. After 30 minutes of trading, the Dow plummeted almost 300 points and the NASDAQ fell 75 points. The market remained down around those early levels for the next several hours. But when the House rejected the bailout plan this afternoon, stocks went into free fall, posting some of their worst point one-day losses ever. The Dow Jones Industrial Average plunged 777.68, ending at 10,365.45. The NASDAQ Composite plummeted 199.61 points to 1,983.73. While the Standard & Poor's 500 Index tumbled 106.59 points to 1,106.42. In the bond market, the 10-year note rallied 2 8/32 to 103 14/32 on flight to safety buying, and that cut the yield down to 3.58 percent.
Most active Big Board issue, trading 35.3 million shares, Citigroup (C), losing $2.40, as you heard. It's buying Wachovia's (WB) banking assets for $2.2 billion. Wachovia's stock plummeted $8.16 to close at $1.84 a share.
American International Group (AIG) in there with a $0.65 loss.
Bank of America (BAC) down $6.45.
GE (GE) lost $2.15.
Exxon Mobil (XOM) tumbling $6.59. Oil in New York trading today fell almost $11 a barrel. Exxon Mobil the victim of some heavy selling there.
And Pfizer (PFE) down $1.01.
Finally a gain at Triarc Companies (TRY), rising $0.47. The company completed the $2 billion acquisition of Wendy's International today.
Wells Fargo (WFC) down $4.06.
Triarc B (TRYb) stock up $1.32.
And then JPMorgan Chase (JPM) down $7.24 in an extremely weak banking group.
Morgan Stanley (MS) not bucking the trend, down $3.76. Mitsubishi (MTU) will acquire 21 percent stake in the company for $9 billion. Separately, Credit Suisse cut its 2008 and '09 earnings for Morgan Stanley. And the Fox-Pitt brokerage cut fourth-quarter earnings estimates from $1.03 down to $0.83 a share.
American Express (AXP) losing $6.95. Credit Suisse cut earnings estimates there. And its price target from $0.36 to $0.32 a share. This stock is almost there with today's sell-off. Some other weak Dow stocks: Boeing (BA), and Caterpillar (CAT), Chevron (CVX), IBM (IBM), United Tech (UTX), all victims of this sell-off today.
National City Corp. (NCC) lost 63 percent of its value, plummeting $2.35. The defeat of the bailout plan in Congress could boost the company's credit losses in its mortgage portfolio.
A lot of other, smaller banks were victim to the sell-off. Mellon Bank of New York (BK) down nearly $10. Fifth Third Bancorp (FITB), Keycorp (KEY), and then Northern Trust (NTRS), State Street (STT), all major losers, almost incredible one-day losses.
Walgreen (WAG) down $1.73. Fourth-quarter earnings were up 12 percent, $0.45 versus $0.40 a year ago, and a 9 percent rise in revenues. Separately the company agreed to pay $10 million to resolve Medicaid false billing allegations.
And Thor Industries (THO), a recreational vehicle manufacturer, down $1.64. The Baird brokerage downgraded it from neutral to underperform. Did the same thing with Winnebago (WGO), which fell $1.39 today.
Apple (AAPL) topped the active list on NASDAQ, down nearly $23 a share. Morgan Stanley downgraded it from overweight to equal weight. RBC Capital downgraded it from outperform to just sector perform.
Google (GOOG) losing just over $50 a share today.
Microsoft (MSFT) down $2.39.
Research In Motion (RIMM) off $9.03.
And then Qualcomm (QCOM) with a gain -- a loss of nearly $6. Gains are not in today.
Cisco Systems (CSCO) off $2.03.
Intel (INTC), $1.93 loss.
Oracle (ORCL) fell $1.85.
Comcast (CMCSA) down $2.69. Oppenheimer downgraded it from peer perform to underperform.
And finally shares in Baidu.com (BIDU) slid $29.55 to an eight-month low.
