NBR Transcripts-October 6, 2008
Monday, October 06, 2008Stocks Take A Super Slide Past 800
SUSIE GHARIB: A massive global sell-off today as a massive loss of confidence had investors dumping stocks worldwide. The credit crisis, the global economic picture, even the falling price of crude all combined to take the Dow and other world markets sharply lower. The blue chips tumbled as much as 800 points. But a powerful rally in the final hour trimmed losses, and the Dow went on to lose only 369 points. That's the first close below the 10,000 level in four years. The NASDAQ lost 84 points. And European stocks suffered their biggest one-day decline ever. As Suzanne Pratt reports, investors everywhere are asking if now is the time to sell.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the opening bell on Wall Street, the selling was steep and relentless. But as severe as the U.S. losses were, they were even worse in overseas markets. Exchanges in Brazil and Russia were forced to halt trading after sharp retreats. Emerging market stocks fell the most in two decades. National benchmark indexes in the U.K., France, and Germany all suffered deep declines, while stock markets in Japan and China also took big hits. Wall Street veteran Jim Awad says panicked investors are worried about liquidity and the global economy.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: In the credit markets, people are hoarding capital, and in the real economy, people are hoarding cash, so earnings estimates have to come down. And we're working our way through the problem, but there's no bottom in sight, hence a weak stock market.
PRATT: The Standard & Poor's 500 has plummeted 28 percent this year alone, and is down 32 percent from its all-time high, reached just one year ago. The abysmal performance of U.S. equities has investors of all ages questioning whether they should stay in stocks. Financial planner Stacey Francis advises her clients to sit tight and resist the urge to time the market.
STACEY FRANCIS, CERTIFIED FINANCIAL PLANNER, SAVVY LADIES: This is a portfolio that's supposed to be there for five, 10, 15, 20 years. The worst thing is, is that, you know what, you're going to possibly miss the upturn in the market when it does happen, and it is going to happen. And you want to make sure that you're invested to benefit from it.
PRATT: Francis says the one exception is those people who need the money in a few years. Retirees or anyone planning on a big purchase like a house should definitely sell now. For everyone else, most stock market pros also say don't sell. They say investors need to be patient and give the stock market time to bottom out.
AWAD: We will end up with a stronger banking system, with a more conservative banking system, with more sound practices on the part of executives and consumers. We will come out of this stronger, but there is pain to be had between now and then. >>
PRATT: While many market pros advise against selling, they also say it's too early to buy. They say it's a good time to sit on cash, that is, if you have it. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Liz Ann Sonders of Charles Schwab & Company and Brian Wesbury of First Trust Advisors Size Up The Markets & The Economy
SUSIE GHARIB: Joining us now to talk more about the markets, the economy, and your investments, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company; and Brian Wesbury, chief economist at First Trust Advisors. Hi, Liz Ann. Hi, Brian. LIZ ANN SONDERS, CHIEF INVESTMENT STRATEGIST, CHARLES SCHWAB & COMPANY: Hi, Susie.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie.
GHARIB: Liz Ann, let me begin with you, so is this a time to sell or a time to buy?
SONDERS: Well, you know what, it may not be either. I think this whole get in, get out idea that often gets bandied around, neither of those are strategies. I think if you do take -- your prior guest talked about long- term strategies, diversification, rebalancing. And if you actually go through that process, you would have been trimming back your equity positions, particularly your emerging market positions a year ago when they had ballooned in your portfolio. Now down 35 percent year-over-year for the market, we have only see seen that happen three times before, 1974 and twice in the '30s, those were not great selling opportunities.
GHARIB: Brian, you made a bold call today, you said that the Federal Reserve should cut interest rates immediately by 1 percent. You know, not too long ago you were saying just the opposite, so what changed in your mind?
WESBURY: Yes, well, what changed is that we've had a hoarding of cash, kind of a panic that has taken place. And banks are having a tough time lending to each other. Consumers are hoarding cash. Credit standards have tightened dramatically because of fear. And what this has done is it has caused a slowdown in the turnover of money. And the only way to combat that is for the Federal Reserve to print more of it and push more into the economy, and that means cutting interesting rates again. So that why I made that call. I thought we had avoided a recession until this panic hit in just the last three weeks. And now I think we are in a recession. So I -- the whole world has changed in just a three-week period of time.
GHARIB: All right. Let me come back to you in a minute about the economy. But I want to ask Liz Ann, do you think a big rate cut will restore investor confidence and take some of the fear and panic out of the markets?
SONDERS: I think it may help on the margin, but I think what would be more important is either a coordinated set of rate cuts by global central banks or at least a string of them. And I think given the crushing of inflation expectations thanks to a slowing global economies as well as commodity prices having imploded here, I think the impetus is there now not to mention what is happening to global markets and economies for there to be other central bank rate cuts. And I think it is the combination of those that would be most helpful.
GHARIB: Brian, back to what you were saying. So you see a recession now, which is also new for you. But a lot of people are talking depression.
WESBURY: Right. And I think that's way overblown. You know, in the second quarter we grew 2.8 percent. And so up until, you know, August or so the data looked reasonably good, not great, but no recession. But now all of a sudden things have slowed down very dramatically. And I think this is more of a temporary slowdown, a pullback by consumers. We are not in the kind of environment that causes a depression. That was a hugely deflationary period where the Federal Reserve had interest rates too high for too long. And we had 20 percent declines in the money supply. There is nothing like that going on today. So I think that's just.
GHARIB: Liz Ann, do you agree with that?
WESBURY: . too much to worry about.
GHARIB: Do you agree with that, a short recession?
SONDERS: Well, I don't know. I think that the -- no, I actually think the -- you know, Susie, I've thought we have been in a recession since late last year and the 2.8 percent GDP was artificially high by virtue of an artificially low deflator. And we won't get into the funny math of that. But all of the other indicators that the bureau that dates recessions looks at, including industrial production, wholesale and retail sales, incomes, employment, have all basically affirmed a recession for quite some time now. So I think it started late last year. And I think it is likely to be longer than the norm, which does take us into 2009.
GHARIB: Real quickly, Brian, do you think that this calls for a coordinated rate cut? France was calling for an emergency meeting of the top eight economies. Is that a positive development?
WESBURY: You know, it possibly could be. I think we've got a slowdown in the turnover of money, this velocity slow down is what economists call it. I think it is important that we counteract that. We haven't had a drop in consumer spending yet. And I think it has just happened here in September. So I don't really believe we've been in a recession until this point. And now what we've done is we've scared everybody into backing off from the economy.
GHARIB: Liz Ann, we have just a few seconds left. How long is this bear market going to last? When can investors feel like they are going to get some relief and things go back to normal?
SONDERS: Look, the shorter answer is, I don't know. But I mention the statistic of the year-over-year decline reaching that down 34, 35 percent, and the last time we saw that was at the low in '74, prior to that was in the '30s on percentage of stocks, deep distance from their 50-day moving average. There is a lot of technical things that are similar to where we have been in bottoms, but those are things that happen over time. They are not moments in time.
GHARIB: OK. We're going have to leave it there. Thank you both for coming on the program, really appreciate your analysis.
WESBURY: Thank you, Susie.
GHARIB: My guests tonight, Liz Ann Sonders, chief investment strategist at Charles Schwab & Company; Brian Wesbury, chief economist at First Trust Advisors.
Lehman Execs Get Griled on the Hill
PAUL KANGAS: Some market watchers say the decision to let Lehman Brothers fail touched off the stock slide we've seen in recent trading sessions. Congress is investigating Lehman's fall and today grilled CEO Richard Fuld. As Darren Gersh reports, Fuld claims he did not mislead investors in the days before the company filed for bankruptcy.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: For Lehman Brothers CEO Richard Fuld, the critical moment came on a conference call on September 10th. That was the day he told investors Lehman's assets were properly valued and the firm would not need money from outside investors. Lawmakers like Ohio's Dennis Kucinich weren't buying it.
REP. DENNIS KUCINICH (D), OHIO: Five days later, you filed for bankruptcy. Did you mislead your investors?
GERSH: To questions like that, Fuld insisted Lehman was on a sound financial footing, with capital levels and risk ratios that compared favorably to other Wall Street firms. At the time, the company was also planning to offload assets into a new firm it dubbed "SpinCo."
RICHARD FULD, CEO, LEHMAN BROTHERS: So there was disclosure about where we were, and I believe understanding, and there certainly was no attempt to mislead anyone.
GERSH: Fuld describes himself as haunted by events at Lehman, replaying critical decisions in his head every night. But he blamed Lehman's collapse on a "storm of fear" that was bigger than any one firm. He also says he does not understand why the Federal Reserve and Treasury decided to let his firm fail when it rescued others.
FULD: Until the day they put me in the ground, I will wonder.
GERSH: Henry Waxman, the chairman of the House Committee on Oversight and Government Reform, wondered about a few things, too: like how Fuld could justify earning $350 million in just eight years, and how he could spend billions on employee bonuses and compensation when the firm was heading into a credit crunch.
REP. HENRY WAXMAN (D-CA), CHAIRMAN, OVERSIGHT AND GOVERNMENT REFORM COMMITTEE: In retrospect, you think you should have done some things different, but you don't seem to acknowledge that you did anything wrong.
GERSH: Tomorrow it is AIG's (AIG) turn in the hot seat, when three former CEOs testify about the $85 billion taxpayer bailout of the nation's largest insurance company. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Roger Ferguson, Former Fed Vice Chairman Analyzes the Credit Crunch
SUSIE GHARIB: More analysis now on the worldwide credit crisis from a former high-ranking Federal Reserve official. Earlier today I talked to Roger Ferguson, former Fed vice chairman and current chief executive of TIAA-CREF, the financial giant that specializes in retirement funds for teachers. I began by asking him what needs to be done now to get the financial system back to normal.
ROGER FERGUSON, FORMER VICE CHAIRMAN, FEDERAL RESERVE BOARD: Well, the challenge to the financial system today is that there is an absence of credit and credit availability, and there`s also an absence of confidence. And clearly the package that was passed by Congress and signed into law, plus a number of other actions that the Fed has taken are all aimed at trying to increase the amount of credit available in the system, and by doing that, increase the amount of confidence available in the system.
GHARIB: Mr. Ferguson, some economists, I`m sure you have heard this, are saying that the federal reserve should take immediate action and cut short- term interest rates in a big way, something like half a percent. What are your thoughts on that, would that help get the credit going again?
FERGUSON: I`m not in a position to really speculate on what the Fed might do. I will say they`ve proven themselves quite adept and flexible at using a full range of tools, including those that deal directly liquidity as well as those that deal with the price of money, the interest rate.
GHARIB: What about the suggestion that the world`s major central banks should work together and coordinate interest rate cuts worldwide, given that the credit crisis is now a global problem?
FERGUSON: Many economies are confronting the same sorts of challenges. And so the range of policy solutions in all of these central banks will probably move in the same direction. Whether or not that is the result of coordination or decision-making country by country, is in some sense irrelevant. The goal is to get to the right outcome for each jurisdiction.
GHARIB: Now the central problem here is still falling house prices. I mean, what measures need to be taken to turn around the housing sector and home prices, is there anything that can be done there?
FERGUSON: I do not think there is a magic bullet. I don`t think there is a single action that the government could take that will do that. I think what the government is doing is attempting to restore confidence by providing liquidity that will allow the credit markets to function. And as the credit markets start to function more smoothly, individuals will find that it is easier to get mortgages again, for example, and that may be part of the solution.
GHARIB: Mr. Ferguson, you worked many years at the Federal Reserve. If you were still working at the central bank, what would you do to stabilize the economy and the banking sector?
FERGUSON: Actually, I give my former colleagues quite high marks. I think they have proven themselves to be very flexible. They have used a number of tools that existed when I was at the Fed. And they have used a number of new tools that we had only thought about at the Fed.
GHARIB: The central question that everyone wants an answer to is, when is this economic slump going to be over? What do you think?
FERGUSON: It would be nice to say that we have turned the corner and we are starting to come out of it. I am afraid that I cannot subscribe to that, for the point that you have raised, this is very much a slump that started in the housing sector. We see some early glimmers of hope in some specific house markets, for sure. But I`m afraid that for my standpoint, I think we may have several months to go before we really can start to blow the all clear whistle.
GHARIB: Mr. Ferguson, your firm invests the pensions of millions of Americans. What is your sense of investor sentiment and what advice would you give to people out there who are so worried right now?
FERGUSON: The sentiment is one of great uncertainty, that`s what we are picking up. The advice that we tend to give people is keep the long view. Do not panic. Seek objective advice. And remember, the fundamentals mainly deal with diversification of a portfolio.
GHARIB: Mr. Ferguson, thank you so much for your time, we really appreciate it.
FERGUSON: Susie, thank you for inviting me on.
Economic Choices- 2008: Leadership Strategies
SUSIE GHARIB: With the presidential election weeks away, we continue our series of special commentaries, looking at the candidates' economic choices and voters' choice: Who will be our next president? Tonight, John Quelch, Harvard Business School professor and author of "Greater Good: How Good Marketing Makes for Better Democracy," gives us his take on the candidates' leadership styles.
JOHN QUELCH, PROFESSOR, HARVARD BUSINESS SCHOOL: At first blush, senators McCain and Obama look like chalk and cheese. McCain is the not so slightly old-fashioned hero leader, a product of military hierarchy, more commander- in-chief than president. Obama is the energetic yet measured ingenue, an assured yet quiet leader who takes counsel and drives towards consensus. It is a leadership style born not on the battlefield, but in the neighborhood streets. But to conclude that McCain is all about hard power and Obama is all about soft power, to borrow Joe Nye's terminology, would be to do a disservice to both men. Both have proven they can be agents of change. McCain has often bucked his own party leadership and reached across the aisle. Obama, to secure his party's nomination, challenged the heir apparent. So what separates the two men? McCain is a maverick. Obama is a manager. Mavericks are loners who break ranks, who love to be different and irreverent. Obama is a better manager than McCain. His campaign has been a model of teamwork. He has selected good people who have worked well together. But a good manager does not necessarily make a good leader any more than a good maverick does. A leader must articulate a vision for the nation and motivate citizens to follow his or her lead. Both McCain and Obama look like leaders. The choice on Election Day will be between the maverick and the manager. For Harvard Business School, I'm John Quelch.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street wasted no time in joining the steep sell-off seen on world markets overnight. The selling was sharp and swift throughout the session. By midafternoon, margin calls and a major loss of investor confidence had the Dow off 800 points and the NASDAQ down 170 points. That freefall attracted some aggressive buyers in the final hour, though, and cut the market's losses considerably. The Dow Industrial Average closed down 369.88 points at 9,955.50. The NASFAQ down 84.43, ending at 1,862.96. Standard & Poor's 500 down 42.34 at 1,056.89. Over in the bond market, the Treasuries were strong across the board. The 10-year note jumped 1 6/32 to 104 16/32, putting the yield down to 3.46 percent.
The most active Big Board issue on 40 million was General Electric (GE), down $0.19 at the close. But it traded as low as $19.70 during the day.
Then Citigroup (C) with a $0.94 loss. As you heard, Citigroup, Wells Fargo (WFC), and Wachovia (WB) are -- have agreed to a standstill until Wednesday.
Pfizer (PFE) in there with a $0.06 loss.
Companhia Vale do Rio (RIO) down $1.19.
And Dr. Pepper Snapple (DPS) in there, very active, down $0.25. The stock, of course, replacing Wrigley in the Standard & Poor's 500. So a lot of index fund activity today.
Bank of America (BAC) down $2.26. As you heard, big shortfall on earnings, and cutting the dividend in half. Also it plans a $10 billion stock offering.
Alcoa (AA) down $1.13, among other Dow losers. Alcoa's third-quarter earnings due out tomorrow. The Street estimate about $0.53 to $0.56 a share. The low today was $16.70.
Boeing (BA) in there with a $2.83 loss.
And we had Chevron (CVX) down $2.54.
IBM (IBM) off $2.82.
And Wal-Mart (WMT) even fell $1.83 to $57.90 today.
Deere & Company (DE) off $1.95. JPMorgan sees the company's lending business being hurt by lower interest rates.
Then Hartford Financial (HIG) up $3.50, a gainer. Germany insurance company Allianz (AZ) will make a $2.5 billion capital investment in Hartford, hence the nice gain.
Genentech (DNA) losing $6.02, it traded as low as $78.20 during the day on news the company's lung cancer drug, Avastin, and OSI's (OSIP) drug, Tarceva, in combination did not improve the patient's survival rate, quite a disappointment there. Southwestern Energy (SWN) losing $1.11. The story here, Standard & Poor's downgraded it from buy to sell on a valuation basis. And Goodrich Petroleum (GDP) down $5.32. Standard & Poor's downgraded that stock from hold to strong sell on valuation.
And then GAMCO Investors (GBL) up $4.22. Bill Gates' Cascade investment firm boosted the stake in this Mario Gabelli firm from 10.4 to 18.9 percent.
And then finally Avery Dennison (AVY), the office products company, got a downgrade from Credit Suisse from outperform to just neutral.
Apple (AAPL) closed up $1.07. It traded as low as $87.54 during the day.
Google (GOOG) down $15.70.
Microsoft (MSFT), $1.41 loss there.
Research In Motion (RIMM) off $1.30.
And then Cisco (CSCO) lost $0.79 a share.
eBay (EBAY) down $1.05. The company sees third-quarter revenues at the low end of its guidance. It is cutting 10 percent of its global workforce and it's acquiring several online payment companies for $1.3 billion.
And finally, ImClone (IMCL) up $1.93. It will be acquired by Eli Lilly (LLY) for $70 a share in cash. Lilly's stock dropped $2.89.
Those are the "Stocks in the News" tonight.
