NBR Transcripts-October 8, 2008
Wednesday, October 08, 2008Interest Rate Reduction Goes Global
SUSIE GHARIB: An unprecedented interest rate cut today, coordinated by the Federal Reserve and five other central banks around the world. Each lowered their key rate by half of a percent in an effort to encourage financial institutions to lend money to businesses and consumers. Here in the U.S., the Federal funds rate now stands at 1.5 percent. The reaction on Wall Street: extreme volatility. Stocks whipsawed all day, with the Dow shifting several times between triple-digit gains and triple- digit losses. By the closing bell, the Dow lost 189 points and the NASDAQ fell 14.50. We have two reports looking at the historic global rate cut and whether that dramatic action will restore investor confidence. We begin with Stephanie Dhue in Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: U.S. Treasury Secretary Henry Paulson welcomed today's coordinated rate cut, and says world leaders must continue to boost liquidity and strengthen financial institutions.
HENRY PAULSON, TREASURY SECRETARY: I think you're going to have different policies. But the key thing is that we continue to work closely together, we continue to communicate, we continue to coordinate.
DHUE: The U.S. Federal Reserve, the European Central Bank, Bank of Canada, Bank of England, Central Bank of Sweden, and the Swiss National Bank, all reduced interest rates. The Bank of Japan supported the policy action, but its rate is already near zero. International Monetary Fund chief economist Olivier Blanchard says the results won't be immediate.
OLIVIER BLANCHARD, CHIEF ECONOMIST, INTERNATIONAL MONETARY FUND: But even once such concerted action is taken, the effects will take time, and it is clear that there will be tough economic times ahead.
DHUE: Already the U.S. has passed $700 billion package to buy troubled assets, guaranteed money market funds, taken over Fannie Mae (FNM) and Freddie Mac (FRE), and driven down mortgage rates, and pumped money into the commercial paper market. European countries have increased deposit insurance for banks and in some cases nationalized them. G-7 finance ministers will be meeting in Washington, D.C., this weekend. Economist Fred Bergsten says they should seize the opportunity to take additional steps to restore confidence.
FRED BERGSTEN, DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: If world's finance ministers came to Washington and went away without having taken further action, it would be almost as if the Congress had gone home without passing a rescue package and would be both a huge missed opportunity and risking a further downward spiral in the confidence crisis.
DHUE: The IMF estimates that an economic recovery could take place in 2009. But others question whether our consumption-based economy can recover that quickly. Investment manager Rob Dugger says a recovery could take a decade.
ROB DUGGER, PARTNERSHIP FOR AMERICA'S ECONOMIC SUCCESS: If the problems are longer term and the roots historically extend over decades, we should expect to see the turmoil in financial markets continue as one after another of the deep dimensions of our problems become evident.
DHUE: Analysts say world leaders working together increases the odds of reaching a solution to the financial crisis that works. But when asked when a recovery might take hold, Treasury Secretary Paulson declined to give a forecast. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Suzanne Pratt. You would think the rare synchronized slashing of rates would soothe Wall Street as well as global stock markets. But the central bank moves did little to stem the selling or build investor confidence. U.S. stocks fell for the sixth straight day, while many overseas markets, including Japan, Hong Kong, France, and the U.K., logged big losses. Wachovia Securities strategist Scott Wren said the U.S. response was muted because investors expected the global rate cuts, and are looking for additional action.
SCOTT WREN, SENIOR EQUITY STRATEGIST, WACHOVIA SECURITIES: We've been very volatile. I think it's all about uncertainty, it's all about confidence. And I think that the Federal Reserve and these other central banks, while they've done a lot to provide liquidity to the system, there are some more things that they probably need to do.
PRATT: So what will it take to put a hardwood floor under equity prices? Further cuts in short-term rates are a given for most market experts. But Wachovia's Wren says at the top of his wish list is the hope that central banks soon act as intermediaries in the LIBOR market, which he says will go a long way in unclogging credit markets.
WREN: I would like to see the central banks -- a combination of central banks, mainly the Federal Reserve, the European Central Bank, and the Bank of England, come in here and guarantee these LIBOR bank-to-bank trades. I think that's very important.
PRATT: Frozen credit remains the primary worry for equity investors. And while some credit market participants see small signs of thawing, the overwhelming consensus is that the process will take time. Fixed income expert Ira Jersey says all investors need to be more patient.
IRA JERSEY, FIXED INCOME STRATEGIST, CREDIT SUISSE: Time is the only thing that winds up healing these wounds and unfortunately that time -- the time frame that it's going to take is unpalatable to a lot of people because it can take many quarters, if not years, in order to alleviate the backlog and the risk aversion that is currently built up in the financial system.
PRATT: In the last eight trading sessions, the Dow has lost nearly 2,000 points, or 17 percent of its value. While it may take time to regain investor confidence, it may also take time to regain that lost ground. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
One on One with Robert McTeer, Former President Dallas Federal Reserve Bank
SUSIE GHARIB: More analysis now on that global interest rate cut from a former high-ranking Federal Reserve official. Joining us, Robert McTeer, former president of the Dallas Federal Reserve Bank, and currently distinguished fellow at the National Center for Policy Analysis, that's the Dallas-based think tank. Mr. McTeer, welcome back to NIGHTLY BUSINESS REPORT.
ROBERT MCTEER, FORMER PRESIDENT, DALLAS FEDERAL RESERVE BANK: Thank you, Susie.
GHARIB: I know you endorsed this coordinated rate cut. Tell us why you think it was the right move.
MCTEER: Well, for a while now, I've been saying that we don't need to cut rates further, that we've gone as far as we need to. But interestingly, yesterday I wrote in my blog that if we could use a rate cut here to lure other central banks into doing the same, it would be worth it. In particular, I think the European Central Bank has -- they actually tightened rates not long ago. And they needed the political cover, I think, that we gave them. So, it should have given a lot more bang for the buck to have a coordinated cut. So it was a good idea. And I don't know why the markets didn't applaud it.
GHARIB: Do you think that the Fed will have to cut rates again when policy makers meet on October 28th?
MCTEER: Well, I think the market is going to be demanding it and there probably wouldn't be much to lose by doing it. And not doing it might just aggravate the market turmoil. So.
GHARIB: How much of a rate cut?
MCTEER: So while I don't think there's a real need -- they probably would go a quarter so that they could have two more and get to 1. You can't take very large bites if you only have one-and-a-half left.
GHARIB: That's right. All right. So we got this big rate cut move today internationally. The big question though is, will this spur banks and other financial institutions to start lending money again? What do you think?
MCTEER: Well, I don't think their fear has much to do with the rates, unfortunately. I think there are going to have to be other solutions to that. And I wish the program of Mr. Paulson could get under way a little bit earlier than apparently it's going to. Frankly, I think there is some low-hanging fruit left. And that would be a suspension of mark-to-market accounting. I think that's long overdue and Mr. Cox ought to direct the accountants to do that forthwith. Then it wouldn't be so urgent.
GHARIB: Don't leave that yet, because there has been a big debate about mark-to-market accounting and there are a lot of people in Washington and on Wall Street who have different views on whether it's a good idea or not or is it more phony business, playing with numbers? Why are you in favor of it, of suspending the rule?
MCTEER: Because a lot of banks are holding mortgage-backed securities that because they're not trading right now, because they're illiquid, they're having to write them down to fire sale prices. And when they have to write them down, it reduces that much from their capital. Most of these banks would be in a position to hold these securities, either to maturity or until they rose substantially in value. So to me it's sort of an artificial loss. And you have to be a real accounting purist to put your banking system through that wrenching adjustment unnecessarily.
GHARIB: OK. All right. Let me ask you, we just have a few minutes left, and I want to ask you an important question. We saw the Fed take some unprecedented moves recently besides what happened today, also intervening to directly lend money to American businesses through the corporate -- commercial paper market. Do you think that the Fed's next step is going to be to intervene and directly help out distressed homeowners through some kind of mortgage renegotiations?
MCTEER: Well, I think it would be logistically cumbersome to do that. Perhaps there's some way it could do it on a wholesale level by making more funds available to Freddie and Fannie and the housing administration and so forth. I doubt that it would do it piecemeal or at the micro level.
GHARIB: In just a word, do you think that this crisis is of such a magnitude that the Federal Reserve system cannot handle it?
MCTEER: I think eventually it will handle it. I'm amazed that the flexibility and the innovations that they have undertaken. You know, people started out saying they're operating by the seat of their pants, they're making it up as they go along. That's true, thankfully, because I think they've done a magnificent job of moving onto other ways of doing things when the old ways weren't working very well.
GHARIB: All right. Some very fresh ideas. Thank you very much, Mr. McTeer, for coming on the program.
MCTEER: My pleasure.
GHARIB: My guest tonight, Robert McTeer, former president of the Dallas Federal Reserve Bank.
"Street Critique"- Michael Farr, President of Farr Miller & Washington
PAUL KANGAS: Tonight's "Street Critique" guest says now is the time to bring current earnings guidance for the Standard & Poor's 500 Index companies down to realistic levels. He's Michael Farr, president of the money management firm Farr Miller & Washington. Michael, welcome back to NBR.
MICHAEL FARR, PRESIDENT, FARR MILLER & WASHINGTON: Thank you, Paul. Thank you very much for having me back.
KANGAS: Well, we certainly have had a gut-wrenching couple of weeks in the stock market, and the global economy appears to be melting down. What is an investor to do here?
FARR: You know, it has been really tough. And if you are worried and if you are a little scared, it just says to me that you're paying attention. This has been a remarkable time. I would tell investors now to think about your original investment strategy. You thought about enduring down times when you began investing. You probably didn't anticipate anything quite this bad, but what was your original plan? Were you going to see it through? Were you going to raise a little cash? Whatever that plan was, I encourage you to stick with it. And I would also encourage you not to panic now that we're down some 37 percent. If you're going to buy low and sell high, this certainly isn't high.
KANGAS: Well, somebody is still selling in a state of panic. How long do you think it's going to last from here?
FARR: I remember John Maynard Keynes said that the markets can remain irrational longer than you can stay liquid. So I think that this could probably continue for some time, but it feels like we're near the bottom. Certainly hedge funds that we're seeing a lot of quarter-end redemptions would be liquidating large blocks of shares which would explain some of this weakness.
KANGAS: Right, right. Now let's get back to your call for more realistic earnings guidance. How will that help the market, if at all?
FARR: Anything that adds clarity and transparency to markets, I think, really does help. Some of these earnings forecasts are still well too high, looking for somewhere around $99 for the S&P 500 in earnings. I think that number going to be a good deal lower. As soon as we get a more realistic view, investors have a more stable ground on which they can stand and upon which they can base more rational decisions.
KANGAS: Are there any stocks or sectors that you're looking at buying here?
FARR: I continue to like the consumer staples and medical health care stocks because they're defensive. Though, Paul, I've started to nibble at a couple of financials on this weakness. JPMorgan (JPM) is one that I've started to nibble at. It has got better.
KANGAS: What a bumpy ride that has had, according to the chart. It has been all over the place.
FARR: It has been all over the place. It's 1.1 times book, 4 percent dividend. It might take me a while before I really make money. I think that's a survivor. Also I like Goldman Sachs (GS). I think it's still -- although they're becoming a commercial bank. they still have the finest investment banking operation, in my opinion, on the Street. And again, 1.1 times book. Sooner or later these values will prove that. And we'll have more money I think in these names in years to come.
KANGAS: Michael, do you own JPMorgan or Goldman Sachs shares or have other disclosures to make?
FARR: I do. I own them both personally and I own them in accounts under my discretion, my family owns them as well.
KANGAS: Michael, I want to thank you very much for sharing your insights with our viewers.
FARR: Thank you, Paul. I appreciate their e-mails too. That has really been great since the last time I was on. You're very kind to have me.
KANGAS: Great, I'm glad. My guest, Michael Farr, of Farr Miller & Washington.
"Money File"-Finding Balance In Volatile Times
SUSIE GHARIB: In the "Money File" tonight, the benefits of a balanced fund in a down market. Here's Gail Marks Jarvis, personal finance columnist at The Chicago Tribune.
GAIL MARKS JARVIS, PERSONAL FINANCE COLUMNIST, CHICAGO TRIBUNE: If you are saving for retirement and you've been asking yourself each day, should I stay in the market or get out? You might like a simple solution, a compromise. It should take some of the sting out of the stock market. Consider a balanced fund. It allows you to have about half of your money in the stock market and half in bonds. If you had put money into the average balanced fund at the beginning of this year, you would have lost money, but only about half as much as you would have in the stock market alone. And what about the future? There are no guarantees, but the last bear market offers a clue about how balanced funds can hold up. You'll recall that between 2000 and 2002, investors in the stock market or the Standard & Poor's 500 lost about half their money at the worst point. So $10,000 would have turned into about $5,000. It was one of the worst losses since the Depression. Still, consider the contrast with a balanced fund. If in 2000, you had put $10,000 into a balanced fund you would have lost only about $2,000, and recently you would have had about $12,000. Not great, but a lot better than an all-stock market investment. With that, you'd be roughly where you started more than eight years ago with about $10,000. I'm Gail Marks Jarvis.
Paul Kangas' Stocks in the News
PAUL KANGAS: Unprecedented volatility: That was the day on Wall Street. Stocks opened sharply higher on that coordinated rate cut, but then sold off sharply as investors realized the credit markets still appear to be frozen. By midday, the Dow had turned its early 200-point gain into a 240-point loss with the NASDAQ Index down 39 points. Afternoon trading brought a nice rally, which had the Dow up 130 points, but a late selling spree pushed stocks broadly lower on the close. The Dow Industrial Average ended down 189.01 points, at 9,258.10. The NASDAQ Composite fell 14.55, ending at 1,740.33. While the Standard & Poor's 500 Index was down 11.29 at 984.94. Over in the bond market, the 10-year note fell 1 5/32 to 102 29/32, putting the yield at 3.65 percent.
Big Board volume leader on a very active 65 million shares, Bank of America (BAC) down $1.67. It traded as low as $20.01. As we reported, yesterday it sold 455 million common shares at $22 each. And that was well below what the company was hoping for.
Citigroup (C) down $0.75. The company, Wells Fargo (WFC), and Wachovia (WB), have agreed to extend their litigation standstill until early Friday.
General Electric (GE) in there with a gain of $0.35. And then Pfizer (PFE) down $0.52.
JPMorgan Chase (JPM) dropped $0.02 a share.
Exxon Mobil (XOM) up $0.93, even though oil dropped about a dollar a barrel.
Ford Motor (F) down $0.26. Citigroup downgraded it from hold to sell and did the same downgrade for GM (GM), which fell $0.65 to $6.91.
Merrill Lynch (MER), a $0.02 drop there.
Companhia Vale (RIO) up $0.25.
And PetroBras (PBRa) a $0.35 loss, 10th in volume.
Here's a surprise, IBM (IBM), the tech giant, just released preliminary third-quarter results, earnings rose 22 percent to $2.05 a share. That's $0.04 better than estimates. IBM also reaffirmed its full-year guidance of at least $8.75 a share. The stock was above $94 a share in after-hours trading. What a move.
Then Alcoa (AA), another Dow stock, down $2. Yesterday, as we reported, third-quarter earnings tumbled 52 percent on a 5.3 percent drop in sales. And the company suspended its stock buyback program as well.
Bank of New York Mellon (BK) up $1.79. It's in a pact with JPMorgan to buy all outstanding shares of JPMorgan Trust Bank Limited in Japan. Positive reaction to that.
Monsanto (MON) up $7.26. The company had a fourth-quarter loss of $0.03. Fourth quarter is seasonally its poorest quarter, but that was nowhere near as bad as last year's $0.18 per share loss. A better bet at $0.01 better than expected this year. Sales were up 35 percent at a record high.
And gold was the star today, rising $24.50 to $906.50 an ounce. And look at these gold stocks doing well: Harmony (HMY), Gold Fields (GFI), Barrick (ABX), Kinross (KGC), and Goldcorp (GG) all substantial gainers.
Downside was MetLife (MET), down -- losing $9.87. The company sees third- quarter earnings of $0.83 to $0.93 a share, well below the Wall Street estimate of $1.44. It also plans a 75 million share offering of common stock. And it has pulled the 2008 earnings guidance. The whole insurance sector very weak today. Let's have a look at some other stocks in that group: XL Capital (XL), Protective Life (PL), Principal Financial (PFG), and Allstate (ALL), substantial losses there.
Hasbro (HAS) moved up $1.29. The Needham brokerage upgraded it from hold to buy on optimism its "G.I. Joe" and "Transformers 2" lines will be big sellers.
And another stock on the upside, LDK Solar (LDK), rose $2.16 after the company boosted its third-quarter revenue guidance from a high of $496 million to as much as $540 million.
Apple (AAPL) topped the NASDAQ active list, up $0.63.
And Google (GOOG) losing $7.90.
Microsoft (MSFT), a $0.22 loss there.
Research In Motion (RIMM) gained $2.55. The Cannacord brokerage upgraded its recommendation on RIMM from hold to a buy.
Cisco Systems (CSCO) lost a half a dollar.
Intel (INTC), a $0.23 gain.
Qualcomm (QCOM) did well, up a $1.89.
Oracle (ORCL), a $0.10 gainer.
First Solar (FSLR) down $0.57.
And Amazon.com (AMZN) was up $2.50.
And finally, shares in YRC Worldwide (YRCW) jumped $1.34 after its CEO affirmed the trucking giant's financial stability and expressed confidence in meeting loan covenants.
