NBR Transcripts-October 1, 2008
Wednesday, October 01, 2008$700B Bailout Bill Passes The Senate...Again
SUSIE GHARIB: All eyes are on Capitol Hill tonight where the U.S. Senate is expected to vote on a revised version of the government financial rescue plan. The vote is scheduled for 7:30 p.m. Eastern time and the bill is expected to pass easily. Optimism over that likely approval helped stabilize stocks today, as the Dow and NASDAQ posted modest losses. Our Washington bureau chief, Darren Gersh, has been tracking developments on Capitol Hill, and he joins us now, Darren?
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Oh, boy, Susie, this is as dramatic a moment as you can imagine in Washington. Now the Senate hopes, say, hopes, its vote on the financial rescue package will help force action in the House by the end of the week. Supporters of the rescue package now say they are hearing from Main Street and the news is not good. Senate Majority Leader Harry Reid says a car dealer in Nevada is telling him he can't get loans to buy cars.
SEN. HARRY REID (D-NV), MAJORITY LEADER: The credit markets are frozen. Major companies are on the verge of going under.
GERSH: Bruce Josten at the U.S. Chamber of Commerce says the message from business is increasingly blunt:
BRUCE JOSTEN, U.S. CHAMBER OF COMMERCE: If you don't do this, you run the risk of tipping this economy into a pretty severe recession.
GERSH: The president once again urged action.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: It's important to get credit flowing again so that small businesses and our communities will be able to finance their operations, so that local municipalities will be able to get the money they need to take care of the needs of local citizens, so that states will be able to meet their needs
GERSH: Opponents of a bailout say they are still getting calls from grateful taxpayers congratulating them on voting no. But the price of opposition is rising. In the Senate, the rescue package has now been paired with popular tax cuts like the temporary fix for the alternative minimum tax, sales tax deductions, research and development tax credits, and a much higher limit of $250,000 on FDIC-insured deposits. Now the big question in all of this is how it will play out in the House. An influential player in that will be Congressman Barney Frank. He's the chairman of House Financial Services Committee. A few minutes ago I talked with Frank, and I began by asking him whether the votes will be there to pass this bill in the House.
REP. BARNEY FRANK (D-MA), CHAIRMAN, FINANCIAL SERVICES COMMITEE: I'm hopeful, I'm not confident. I really still think that the turmoil we are seeing within the Republican Party is extraordinary. And as I said, I'm hoping that it will work out and everything is being done that can get there. I guess the biggest thing that has happened were the effects of our not passing the bill. You know, on Monday, many of my colleagues were saying, well, this is all scare tactics. Sadly, the bill's defeat has produced many of the negative effects we feared, and I think that's having some impact on people's votes.
GERSH: We'll get to the big picture in a minute, but it sounds to me like, you know, with what the Senate has added to this package, tax cuts, things like that, will that make it more difficult for Democrats to come on board? Is that going to put the package at risk on your side?
FRANK: Well, the tax cuts they're doing are widely supported on the Democratic side. These are not across the board tax cuts for very wealthy people that the Republicans have specialized in. These are what we call tax extenders. These are targeted tax incentives for researcher and development for energy that ought to be made permanent, frankly, but for budgetary trick reasons have to be renewed every so often. Now there is a problem in the House, many members of the House, particularly our more moderate group known as the Blue Dogs very much believe that the deficit has got to be under control. And ironically it's their Republican counterparts who don't seem to think that. They say if we're going to extend these tax incentives, which are generally widely supported, they should be offset by revenue increases. And we call that that the pay-go principle. The Senate has not held to that. The House passed many of these same tax extenders before but with revenues to pay for it. So there is some negative feeling on the part of some of the Blue Dog Democrats, who are really hawkish on trying to keep the deficit down, and I sympathize with that approach obviously, but it's not that the incentives themselves are controversial; they are generally very favorably seen. But it's the lack of offset that's the problem.
GERSH: One of the things that I'm hearing when I talk to people in the markets and when I talk to people about whether this package will do what it needs to do, they say, look, this is an issue of trust and confidence. People don't trust the financial markets and they don't have confidence in Washington. So how will this package, assuming it passes, do the job and help the economy?
FRANK: Well, it's not based solely on trust. It is actually going to provide some real resources to the troubled sectors. Now we have a situation where because of an absence of regulation that the conservatives who are in power really for much of the past couple decades could do, the private sector made a lot of bad mistakes and they clogged up the system. This is an effort to unclog the system. It's step one. Step two has to be next year that we put regulations in place that prevent this from recurring. It would be fruitless to deal with this problem and let it happen again. But what we're talking about is not inspiring confidence by good words, we're talking about the secretary of the treasury using his authority to buy equity in some companies, to buy up some of the troubled assets, to actually instill some money, not some confidence, into the system by unblocking it. So as I said, confidence, no. You would hope there would be some confidence as a part of it, and in fact, the lack of confidence really is one of the rationales for the plan because our assumption is that there are assets out there that are depressed beyond the real value by the psychology that's so negative. And that means that the federal government -- that's why this isn't going to cause anything like $700 billion and could conceivably come close to breaking even. Because this is a chance that the federal government, which is the only one that has the resources to do it, to go in and buy up assets that, as I said, are depressed, in many cases, below what their ultimate value will be, hold them, sell them at a reasonably moderated pace, and so in that sense, we hope the confidence is restored, but after money has been put in.
GERSH: When will it take effect -- Chairman Frank, but if it goes into -- if it is passed, do you think this will be a matter of weeks before we can see some of these sales or months?
FRANK: Oh, I don't think anybody realistically thinks that you can predict that. Nobody knows that. We are talking -- they will be buying these things. I do think within a few weeks, you will see some credit restored. But I think anybody who is realistic about the economy knows you can't make that kind of prediction.
GERSH: Congressman Frank, I'm afraid we're going to have to leave it there for now. We hope to have you back on and thank you for your time.
FRANK: You're welcome.
GHARIB: Darren, what's your sense? I mean, what's holding up House lawmakers from passing this bill?
GERSH: Well, Susie, I mean, it's still $700 billion and there's still a lot of people who have philosophical differences and just don't like that idea of bailing out Wall Street. The push is obviously that the economy looks like it's getting much worse and the vote's going to be on Friday it looks like when the unemployment report comes out in the morning.
GHARIB: All right. And we still don't know it's supposed to be a pretty bad employment report, but putting that aside, if we don't get a bill this week, what happens next?
GERSH: Oh man, that's anybody's guess. I mean, the leaders of Congress, the president, everybody said that Congress can't leave without a bill. But at a certain point, you know, this is a confidence game. You're trying to restore confidence in the markets and in Washington, and if you keep not passing a bill, I don't see how that restores confidence. At a certain place you just cut your losses.
GHARIB: Well, the clock is certainly ticking. We'll have to wait to see what happens. Darren, thank you so much for your report and update. That's our Washington bureau chief, Darren Gersh.
GERSH: Thank you.
The Third Quarter Proves Difficult For Big Business
SUSIE GHARIB: General Electric got a vote of confidence today from legendary investor Warren Buffett. He's buying $3 billion worth of GE's preferred shares, just days after making a $5 billion investment in Goldman Sachs. Buffett's GE investment comes at a time when the giant conglomerate is struggling because of the effects of the credit crisis. The deal guarantees Buffett a 10 percent dividend and the option to buy another $3 billion of GE stock. Buffett says GE is, quote: "The symbol of American business to the world," and he's confident the company will be successful in the future. Well, other investors didn't share that optimism today, GE shares fell a dollar to close at $24.50. Last week GE warned that its third-quarter profits could fall by as much as 12 percent.
PAUL KANGAS: GE is not the only company likely to report a tough quarter. Corporate America begins releasing its third-quarter results next week, starting with Alcoa (AA). Experts say given the worsening economy, it was another rough period for many U.S. companies. Suzanne Pratt has a preview of what to expect.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: At some point in the not too distant future, stock investors might refocus on fundamentals, things like the economy and corporate profits. But, portfolio strategist Steven Wood says watching earnings seems like a luxury as we battle the massive financial crisis.
STEVEN WOOD, SENIOR PORTFOLIO STRATEGIST, RUSSELL INVESTMENTS: I think right now corporate profits is kind of like putting a candle up to the sun. They are being eclipsed by this larger issue. And really estimates right now are going to have to come down and I'm not even convinced that current estimates are very meaningful.
PRATT: Optimists say there will soon be a rescue plan. And then, third- quarter results, which flood Wall Street in a few weeks, may garner some attention. While the earnings news could provide a welcome distraction, the actual results are likely to be disappointing. Market strategist Brian Rauscher says corporate profits are melting away, but they're not collapsing.
BRIAN RAUSCHER, DIRECTOR, PORTFOLIO STRATEGY, BROWN BROTHERS HARRIMAN: Earnings are decelerating. They are having some problems. But they're -- I would still say they are not falling off a cliff.
PRATT: Right now, analysts expect third-quarter earnings for companies in the S&P 500 to drop 2.3 percent. That's down from estimates in July that earnings would rise nearly 13 percent. If current expectations are correct, the third quarter would be the fifth straight quarter in which profits fell, the longest such stretch since the 2001 recession. Some market pros say investors should be prepared for the possibility of lots of earnings misses, with companies putting the blame squarely on credit market turmoil. But others point out that not all firms need credit to do business.
RAUSCHER: There are a lot of large health care companies, the large consumer staples companies, this does not impact them that much, companies that generate a lot of free cash flow and don't have a lot of debt and don't need to go to the credit markets. While that may impact their customers, it's not impacting the financing of their businesses.
PRATT: At the moment, analysts profit growth of 47 percent for S&P 500 firms in the fourth quarter. Much of that is due to easy year-over-year comparisons. Still, experts say those expectations will undoubtedly be reset. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Street Critique" Hilary Kramer, Chief Market Analyst at GreenTech Research
PAUL KANGAS: Tonight "Street Critique" guest says bailout or not, these are treacherous times. She's Hilary Kramer, chief market analyst at GreenTech Research. And, Hilary, good to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Nice to see you, Paul. Thank you for having me on today.
KANGAS: In early July, you told us a major capitulation was coming in the fall and that cash is king. So was Monday's massive sell-off that capitulation or is there another shoe to drop?
KRAMER: That was the major crash that we've experienced, but we may see other very bumpy days, rocky days, days where we start to pull ahead and then suddenly we pull back. So it's not yet the time to get too aggressive in the market.
KANGAS: So you're on the sidelines for the moment.
KRAMER: Absolutely. And waiting.
KANGAS: Are you seeing any good news here coming down the pike, so to speak?
KRAMER: Absolutely. We're going to see a bull market before long because so many institutional funds have raised huge amounts of cash because they've been expecting redemptions. They've been nervous and all at once, all that money is going to return into the market especially in November and December.
KANGAS: Now you recommended a handful of stocks during the third quarter and like the market's, in general, performance has been dismal. On August 6th, you liked dividend-paying stocks like FPL (FPL) and Pinnacle West (PNW). And FPL down, Pinnacle West up. Do you still like them?
KRAMER: FPL especially, what a great opportunity at $50. What has happened is the utilities have fallen off, they've done terribly because people have shied away from any kind of company that needs a lot of financing and depends on the banks. So at FPL you're getting a great opportunity and Pinnacle West, P-N-W, has always been a stock I like as a portfolio keeper.
KANGAS: Then there was Constellation Energy (CEG) and Southern Company (SO). Constellation down sharply, but it was picked up by Warren Buffett's MidAmerican Energy on September 19th at $26.50 a share, but the rest were, well, kind of a mixed bag there in Southern Company.
KRAMER: Right. Well, anything that Warren Buffett buys, we all know, we like to watch Warren, and follow what he does. And Southern Company as well, a good company to have an investment in.
KANGAS: OK. We talked commodity stocks in August 20th. And you liked metal firms like Metalico (MEA) and Sims Group (SMS), they've been hit hard. What happened there?
KRAMER: The commodity prices came down hard, but what happened is commodity funds sold off. Now talk about absolute capitulation, Metalico is still my favorite stock, it's still one of my largest positions, M-E-A, and I still believe it will go back up to $20. It's amazing what has happened and how that stock has come off. And in terms of Sims, S-M-S, Sims Metal Management, again there, the same. Everyone is worried about scrap metal pricing because of global weakness. As you know, the world is still moving forward.
KANGAS: All right. And the last 20 seconds here, you like Petrobras (PZE) and you said avoid Whole Foods (WFMI), are you sticking with those calls?
KRAMER: Absolutely.
KANGAS: OK.
KRAMER: Petrobras, the portfolio stuffer to always just have in there, I have that. It's very, very long term. And Whole Foods, I don't see where it's sustainable (ph).
KANGAS: All right. Hilary, do you own these stocks or have any disclosure to make?
KRAMER: Yes, I own FPL, I own Metalico, Sims and Petrobras.
KANGAS: OK. Thanks for sharing your insights with us once again. My guest, Hilary Kramer, chief market strategist at GreenTech Research.
"Money File"-South Floridians' Finances & The Financial Crisis
SUSIE GHARIB: In the "Money File" tonight, we asked people in South Florida what they wanted to know about their money and the bailout plan. Eric Schurenberg, managing editor at Money magazine, has the answers.
CAMILA ZAMORA, SOUTH FLORIDA RESIDENT: First, if they don't do anything, what's your perspective on what's going to happen? Which is the worst case scenario, I think? And the second is, if finally the government decides to do something, which is what they should do, in my opinion, how long is it going to take before the markets get better?
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Wouldn't we all like to know when it will get better, Camila. Let me take the first part of your question. The worst case scenario is ugly. It's a kind of vicious cycle of default leading to tighter credit, leading to recession, leading to more defaults, which just starts the spiral all over again. Now if the government does fund a rescue plan and even if the plan works as hoped, you can't expect a rebound in stocks right away. Remember, the plan is about averting disaster in the credit markets, not about jump-starting the stock market. A mild recession could end next spring, in which case you might see stocks start climbing again this winter. A bad recession could last through next year, with no relief of stocks until 2010. But remember, Camila, these are just guesses. You have an investment plan, stick to it, and don't try to time the market.
HUGO ORTIZ, SOUTH FLORIDA RESIDENT: Well, one thing that I do want to know for sure is if the politicians are actually looking at the younger people and the middle class people, you know? A lot of people are going to be affected, especially the unprivileged people who could not pay their mortgage and that they were getting like adjustable rates. So I want to know if something is going to be taken -- like something is going to be done for them and if they're going to be taken care of.
SCHURENBERG: Hugo, as I said, the rescue plan the House voted on was all about averting a credit meltdown, not about helping people facing foreclosure, even though foreclosures are at the root of the credit crisis. The bill does require the Treasury encourage mortgage servicers to renegotiate loans with homeowners who need help, but that's about it. Now there are other plans out there designed to do more. The main thing is, if you're running into trouble on your mortgage, let the lender know right away or contact Hope Now at hopenow.com while there's still time to work out a plan that will let you stay in your home.
GHARIB: All right. Thanks a lot, Eric.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened lower as wary investors took some money off the table on concern the rescue plan still had some strong headwinds to overcome. By 11 a.m., the Dow was off 177 points and the NASDAQ down 39 points. Selling pressures eased over the next few hours as the Senate appeared poised to pass a rescue plan. A sharp drop in oil prices also helped the market trim its closing losses. The Dow Industrial Average ended off 19.59 at 10,831.07. The NASDAQ Composite was down 22.48 at 2,069.40. Standard & Poor's 500 fell only 5.30, ending at 1,161.06. In the bond market, the 10-year note rose 20/32, to 102 2/32, putting the yield at 3.75 percent.
Big Board volume leader on 14.8 million shares, National City (NCC), a nice move up, $1.14, good percentage. Approval of the $700 billion rescue plan would ease the pressures on the company's mortgage portfolio.
Wachovia (WB) in there with a $0.05 gain.
And then GE (GE) closing down a dollar, despite Warren Buffett's buying $3 billion in preferred stock. But the company also plans to offer $12 billion in common stock. Deutsche Bank cut 2008 earnings estimates by 9 percent, down to $2 a share, and cut 2009 earnings down $1.95.
Citigroup (C) up $2.49. Good performance there.
Pfizer (PFE), a $0.50 gain.
And moving along on the active list, American International Group (AIG) gained $0.62. Former CEO Hank Greenberg asked the present CEO of AIG for a chance to bid on any assets the company plans to sell.
Bank of America (BAC) up $3.13.
JPMorgan Chase (JPM) did well, up $2.93.
Sprint Nextel (S), a $0.44 gain.
And Exxon Mobil (XOM) was up $0.92, even though oil was down $2.11 in the November contract in New York to $98.52 a barrel. Looking at some of the other oil stocks, they were weak: Conoco (COP), Hess (HES), Marathon (MRO), Occidental (OXY); and Valero Energy (VLO), the refining company, down $1.02.
But Northwest Airlines (NWA) moved up $1.47 after the company said it can be profitable with crude oil around the $100 a barrel level, which it's below now. That helped the airlines in general.
Federal Agricultural Mortgage (AGM) up $2.69. The company received a $65 million investment from a group of banks in the form of non-voting preferred stock.
Actuant Corporation (ATU) down $3.27. Fourth-quarter earnings $0.54 versus $0.50 a year ago, but the company first-quarter dropping to $0.48 to $0.52. The Street estimate is at $0.56.
NASDAQ's most active, Apple (AAPL), down $4.54.
Google (GOOG) was up $7.74. The company unveiled a $4.4 trillion plan to cut U.S. dependence on fossil fuels for electricity generation and go instead to nuclear, wind, and geothermal sources.
Microsoft (MSFT) down $0.21.
Research In Motion (RIMM) fell $1.37.
Intel (INTC) down $0.21.
Cisco (CSCO), a $0.61 loss there.
Qualcomm (QCOM) fell $1.45.
But First Solar (FSLR) moving up $8.35.
Amazon.com (AMZN), a $3.18 loss.
And then 10th in volume was Oracle (ORCL), down $0.45.
And finally, ImClone Systems (IMCL) rose $2.95 on a Wall Street Journal report that Eli Lilly (LLY) is in talks to acquire the company for about $70 a share.
