NBR Transcripts - October 15, 2008
Wednesday, October 15, 2008Recession Fears Spark Major Stock Sell Off
SUZANNE PRATT: New concerns about the U.S. economy sparked a ferocious sell-off on Wall Street. The Dow plummeted nearly 8 percent, or 733 points, its second biggest one-day point drop. The NASDAQ plunged 8.5 percent, and the S&P 500 tumbled 9 percent. Investors dumped stocks following a batch of economic reports that suggest a severe recession. Comments by Federal Reserve Chairman Ben Bernanke did little to alter that pessimistic outlook. As Erika Miller reports, consumer spending has already slowed sharply, and there's great concern that corporate profits will soon follow.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Another devastating day on Wall Street as investors agonized about the weakening economy. Stock strategist Scott Wren says fears are growing of a prolonged recession, which would hurt corporate profits.
SCOTT WREN, SENIOR EQUITY STRATEGIST, WACHOVIA SECURITIES: I think a lot of this is emotion. A lot of it is uncertainty. But there's definitely some economic fundamentals behind it that say, hey, we're going to be in for a period here of a significant slower, significant weaker economic growth.
MILLER: Stocks were rattled by a warning from Fed Chairman Ben Bernanke today that the economy won't rebound quickly, even if the credit crisis is resolved.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE BOARD: Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away.
MILLER: Those concerns were supported by new data showing retail sales have now fallen three months in a row, something that hasn't happened since at least 1992. Economist Michael Moran sees continued weakness in spending as the crucial holiday season approaches.
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES: I think it's a combination of the soft labor market and the difficulties in the financial system that is leading consumers to be quite cautious right now. I suspect as we go through the rest of the year, and even into early 2009, we're going to see consumers spend cautiously.
MILLER: Adding to the grim outlook was word from the Federal Reserve's Beige Book that economic activity weakened across all 12 districts. Economist Jim O'Sullivan thinks the U.S. is in the midst of a deepening recession.
JAMES O'SULLIVAN, SENIOR U.S. ECONOMIST, UBS: Our view has been that the recession actually started a while ago but it was pretty mild by past standards in the first half of the year. But it' pretty clear based on the latest data that it's not as mild as it was, that there is intensification of weakness.
MILLER: Ben Bernanke tried to reassure investors that policymakers will continue to do everything they can to calm financial markets. But he did not promise the interest rate cuts many investors are now expecting.
BERNANKE: We will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity.
MILLER: Strategists are already warning there could be more big losses for stocks this week. Not only are they predicting more depressing economic news, but also an onslaught of weak corporate earnings. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Randy Lert of Russell Investments Analyzes The Dow's Drastic Dive
SUZANNE PRATT: Joining me now for more analysis of today's massive market sell-off is Randy Lert, chief portfolio strategist at Russell Investments. Randy, welcome to NIGHTLY BUSINESS REPORT.
RANDY LERT, CHIEF PORTFOLIO STRATEGIST, RUSSELL INVESTMENTS: Thank you, Suzanne.
PRATT: So tell me, what happened today? What changed so much from Monday and caused this massive sell-off that we saw today?
LERT: Right. Well, I'm not sure that anything really fundamental happened today. We're in the midst of a market that is gripped with really unbelievable levels of fear and uncertainty, and it is really driving investor behavior. It is not normal for stock markets to go up and down by 9 and 10 percent a day, it just doesn't happen.
PRATT: But is it news to investors that we are in a recession or about to go into a recession?
LERT: I think we're almost certainly in a recession at the moment. And I do believe that we're going to have some earnings declines. The question is what level of pricing of stocks is appropriate for that? My own view is that stocks are in the range at 900 on the S&P are pretty attractively priced. That does not mean they won't become more attractively priced. I think that we're going to test the lows from last Friday, and I think we're likely to break through them for short time frames, but fundamentally there are some very good bargains out there. There are some very healthy long- term companies that are selling at attractive prices and high yields right now.
PRATT: So what are you telling your investors, though? What are you recommending that people do? It's too late to sell, but is it really too early to buy as well?
LERT: We have been cautious with respect to our comments to investors about rebalancing back into equities. When we're in periods of this kind of volatility, you can just be caught trading on the wrong day, and that can just create an unfortunate short-term outcome that you have to dig out of. We are basically telling our investors, however, that stocks have been attractive, that you've already suffered a very severe decline in wealth, we're roughly 40-some percent off from last October's peak, and that it's pretty uncommon to lose significant incremental wealth from now on. And so as you have the opportunity and in which we have reasonably what I'll call low-volatility trading days, those are pretty good days to go ahead and start putting some money back to work in the stock market. We are telling people for comfort reasons that they should average in. There's no question investors fear loss more than they like gain, and that's partially what we're dealing with right now.
PRATT: So if you are telling people to average in, what types of things are you recommending that people buy at this time?
LERT: Well, we're pretty much believers here at Russell of very broadly diversified portfolios, and we don't focus on sort of heavy-duty sector bets and very narrow plays. However, it would be conventional wisdom in a market like this that we are going to have a slower economy, we are in a slower economy, I think it will get slower yet before it gets better. We want to be in some large cap companies that have strong names. You want to be in staples. It would be appropriate to look at firms that have sustainable dividend yields that will help cushion some of the inevitable blows. But I want to emphasize, we basically believe in broadly diversified portfolios and not trying to make really clever sector bets. That's actually how you can get very badly hurt.
PRATT: We have to wrap things up shortly here, Randy. But bottom line for investors, should they expect more days like today, would you expect?
LERT: I would expect some more days like today, unfortunately, and I know that's not very comforting news to leave people with, but we are in a market right now where volatility is extremely high. Visibility into next year's earnings is a bit foggy. And that's part of the problem. The stock market is searching for the correct value. Nobody knows exactly yet how this financial crisis is going to impact the real economy and what the actual damage to the economy and corporate earnings are going to be. So unfortunately, we're in for an uncomfortable time frame in the context of most of the damage has been done, and I really believe that investors that on balance are stepping in right now over a three- to five-year time frame are likely to be reasonably well-rewarded.
PRATT: I hope you're right. I think we have to leave it there. Thank you so much for joining us this evening.
LERT: I hope I'm right, too. Thanks very much.
PRATT: My guest, Randy Lert of Russell Investments.
"Economic Choices 2008"-The Candidate's Economic Rescue Plans
SUZANNE PRATT: The faltering economy is the top issue for the nation, as the presidential candidates prepare for their final debate tonight. Both men unveiled new economic proposals this week to address the financial crisis. As we continue our "Economic Choices '08" coverage, Stephanie Dhue looks at how the plans are similar and different.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Senator McCain's latest economic plan draws from the Republican playbook, focusing on stimulating investment. He is proposing a lower capital gains tax rate, bigger write-offs for tax losses, and a business tax cut from 35 to 25 percent.
SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: Reducing business tax rates has the potential to stop and reverse the rise of unemployment, and could create millions of new jobs.
DHUE: Senator Obama's plan highlights Democratic priorities, focusing on job creation. He's proposing tax credits for businesses that create jobs, tax cuts for middle-income and low-wage workers, and spending on infrastructure projects.
SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: I'm proposing a number of steps that we should take immediately to stabilize our financial system, provide relief to families and communities, and help struggling homeowners. It's a plan that begins with one word that's on everybody's mind, and it's easy to spell: J-O-B-S, jobs.
DHUE: There are places where McCain and Obama agree, including suspending the rule requiring people at age 70.5 to take withdrawals from 401(k) and individual retirement accounts. McCain also wants a lower tax rate for older Americans who withdraw retirement money. Obama would go further and waive the 10 percent tax penalty for workers who make early withdrawals from those accounts. Economists say both plans would discourage savings at a time when Americans should be doing just that. Tax analyst Clint Stretch says people should think twice before making early withdrawals.
CLINT STRETCH, MANAGING PRINCIPAL, DELOITTE TAX: You can only put so much money in each year. When you take money out, it's out and you can't have that in these tax-favored accounts anymore. These are accounts that, in essence, grow tax-free, and so they are like having a tax exemption on your bond portfolio or your stock portfolio, very favorable treatment.
DHUE: Rudy Penner is a former Congressional Budget Office director. He doesn't like either plan, saying they would both add to the deficit.
RUDY PENNER, FORMER DIRECTOR, CONGRESSIONAL BUDGET OFFICE: We are looking at gargantuan deficits in 2009 and 2010, probably well over $700 billion. I really think we have to be very careful about adding even more to the national debt with stimulus plans at this point.
DHUE: The candidates will have a chance to explain their latest economic ideas at tonight's debate. But analysts say those proposals are likely to change when the campaign promises of today meet the economic realities of tomorrow. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique" -Kevin Depew, Executive Editor for Minyanville.com
PAUL KANGAS:While stocks are becoming attractive to some, tonight's "Street Critique" guest says with days like today, he's sticking to the sidelines a while longer. He's Kevin Depew, executive editor at the financial information Web site minyanville.com. And, Kevin, great to see you again.
KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: Always great to be here, Paul.
KANGAS: From steep market sell-offs to the government's latest rescue plans, we've been through a lot since your last visit last month, so what are your thoughts on all of this action?
DEPEW: Well, there continues to be a misunderstanding, I think, about what this crisis entails. This is a debt crisis, and it's being treated as a liquidity crisis. And just to clear that up very quickly, if there's a rumor about a bank making a bad loan and everybody goes to get their money out of the bank, because banks lend out more than what they have in deposits, that could be a temporary liquidity crisis if those rumors proved to be false. But what we have now is a situation where there are a lot of bad loans out there, and that's a debt crisis. The Federal Reserve and the Treasury Department, no matter how much liquidity they inject into the economy, don't have the power to make those bad loans suddenly good.
KANGAS: So what should they do about it, this magnitude of debt that exists?
DEPEW: Well, the only thing that they can do, really, is to try to extend the runway to prolong the events that are unfolding as long as they can, to give these bad debts the time to be destroyed. That's one of the reasons we are seeing the dollar going up, because when debt is destroyed, that debt is either repaid in dollars, and it causes the dollar to go up.
KANGAS: Well, some of these stocks have been destroyed, or all but. Are you tempted at all to step in and do some buying here?
DEPEW: Well, not at all. If your time frame is longer than 10 years, Paul, then I think that certainly these are the times when you want to be committing as much capital as you can. But if your time frame is shorter than that, then I think that you have a much more serious problem and you should be focused on capital preservation at this point.
KANGAS: What signals would you look for to know that the market is getting better and healthy for investment?
DEPEW: Well, that's a great question. We need to see credit improve, and by that I mean we need to see corporate bond issuance improve where the credit spreads, the difference between what it costs a corporation to borrow and what it costs the U.S. government to borrow, we need to see the spread between those two come in from their high levels right now. And we have not seen that yet.
KANGAS: Well, so what do you do with your money? You are getting practically no yield by buying the safe Treasury route, what do you do?
DEPEW: Well, that's -- you know, sometimes there's that old saying, a market cliche that cash is king. This is one of those times. You know, if you noticed that even though those Treasury yields are so low, your dollars are increasing in value. So people who are being paid to hold government debt, they're seeing the dollar go up in value as well, so that gives a little bit of boost to those low yields.
KANGAS: We have just a few seconds for any final thoughts, Kevin.
DEPEW: Well, I think the most important thing for Main Street and the consumer out there is to try to pay down your revolving debt and increase your savings level so that you can commit capital once that credit market begins to improve.
KANGAS: You're being very conservative here and probably wisely so. I want to thank you for sharing your thoughts with our viewers once again.
DEPEW: My pleasure.
KANGAS: My guest, Kevin Depew, of minyanville.com.
"Commentary"-What Labor Wants From The Next President
SUZANNE PRATT: With the presidential election just 20 days away, we continue our special series of election commentaries, looking at the candidates' economic choices. Tonight, John Sweeney, president of the AFL-CIO weights in on what labor wants from the next president.
JOHN SWEENEY, PRESIDENT, AFL-CIO: There couldn't be more at stake for working families in this year's election. Today's financial crisis is rocking Wall Street and Main Street. The stock market's tumble has wiped out $2 trillion in Americans' retirement savings. More than 760,000 Americans have lost their jobs this year. But this crisis didn't develop overnight. In fact, the roots are decades deep, reflecting an elitism that was built into our economic rules. These rules favor corporate profits and Wall Street over working people. Over the last several decades, America's workers set records for productivity, yet wages have stayed low. In part this is because big business has brutalized workers who have tried to win better wages and benefits by forming unions. And without strong unions, there is no real counterweight to corporate greed. America's workers can't afford another day of the Bush economic policies. And there's no question that this is the most important election in our lifetimes. Our very future and our children's futures are at stake. That's why I believe Americans will make history this November and turn our nation around. I'm John Sweeney.
"Riding Out the Storm"-"Cash Only Day"
SUZANNE PRATT: Finally tonight, thanks to everyone who responded to our requests for "Riding Out the Storm," and what you're doing to weather the financial crisis. We heard from Steve in Carson, California, who suggested Americans have a "Cash-Only Day." It's a day when we don't use any credit cards and only spend cash. Steve says, quote: "It will re-educate us all into buying only what we can afford. As a nation, we need to remember to live within our means." He proposed the first "Cash-Only Day" on Black Friday, the day after Thanksgiving. We asked Harriet Johnson Brackey, personal finance columnist at The South Florida Sun-Sentinel for her opinion.
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SOUTH FLORIDA SUN- SENTINEL: I think it's an interesting idea. I am not sure exactly who would be the most impacted other than the credit card companies on a day when you only use cash. The question, I think, really goes to how much money are you spending that you can afford to spend? And I think what this person is saying is, why don't we have a day when we only spend what we can afford, or my idea, even less than you can afford. And maybe have this day be a regular occurrence or a monthly thing in order to convince people to get their budgets down below their income instead of above by using credit. There is nothing wrong with that idea. I don't think the retailers will really like it, but I think it would be a sound strategy for most families to put themselves back on a good footing.
PRATT: To share your ideas on getting back on good financial footing, visit the "Riding Out the Storm" section of our Web site.
Paul Kangas' Stocks in the News
PAUL KANGAS: From the opening bell, the word was "sell" on Wall Street, and that's exactly what traders did on those growing fears of recession. By midday, the Dow was already down 378 points with the NASDAQ off 68 points. Fed Chairman Bernanke's midday comments put the market into a tailspin this afternoon, 5 percent slide in oil prices at just below $75 a barrel added to the selling pressure. So stocks went on to close at the day's lowest levels. The Dow Industrial Average tumbled 733.08 points to 8,577.91. The NASDAQ Composite nose-dived 150.68 points, ending at 1,628.33. While the Standard & Poor's 500 Index plunged 90.17 to end at 907.84. Over in the bond market, the 10-year note surged 1 2/32 to par and 13/32, putting the yield down to 3.95 percent.
Big Board volume leader, General Electric (GE), down $1.60 on 25.25 million shares.
Followed by Citigroup (C), down $2.39.
Bank of America (BAC), just like Citigroup, giving back recent gains, off $2.71.
Then Pfizer (PFE) with a $0.86 loss.
Exxon Mobil (XOM) tumbling $10.11 a share. November oil in New York traded down $4.09 to $74.54 a barrel.
Let's have a look at some other hard-hit Dow stocks today: Alcoa (AA) off $1.66. Fitch cut a number of the company's ratings, and the stock down $1.66.
American Express (AXP), Caterpillar (CAT), Chevron (CVX), and DuPont (DD) all multiple point losers.
Getting back to the active list, JPMorgan Chase (JPM) off $2.22. The company in with an 84 percent drop in third-quarter earnings, $0.11 versus $0.97. But the Street was looking for a loss of $0.21. At one point, Morgan's stock was as high as $41.79 today.
Then Wells Fargo (WFC) down only $0.17. Its third-quarter earnings came in at $0.49, well down from $0.64 a year ago. But that was $0.08 better than expected. Wells also said its Wachovia (WB) merger is on-track to close at the end of the year. And Standard & Poor's upgraded the stock of Wells Fargo from hold to a buy.
AT&T (T) in there with a $2.06 loss.
American International Group (AIG) down $0.37.
And Companhia Vale (RIO) down $3.48.
There was one gainer in the Dow 30, and it was Coca-Cola (KO), up $0.48 on the close. It traded as high as $47.33 after reporting third-quarter earnings of $0.81, up from $0.71 a year ago. Revenues rose 9.1 percent. And today's Standard & Poor's repeated a strong buy on Coke stock.
CSX (CSX), the big rail, down $5.29, $0.94 in third-quarter earnings, up from $0.67 last year. But due to the slowing economy, the company is now targeting the low end of its 2008 earnings guidance of $3.65 to $3.75 a share.
Genentech (DNA) moved up $2.38. After the close yesterday, third-quarter earnings came in at $0.81, up from $0.73 a year ago. Revenues jumped 17 percent. And today the Cowen brokerage upgraded the stock from neutral to outperform.
Visa (V) down $7.86. Standard & Poor's downgraded it from buy to hold in reaction to the drop in September retail sales and the slowing economy in general.
Jones Apparel Group (JNY) losing $4.01, almost 30 percent of its value. The company cut its 2008 earnings guidance from a high of $1.35 a share down to $0.98 a share at best.
And then the golf company, Callaway (ELY), down $2.39. The company sees third-quarter sales of $213 million well below last year's $236 million. And it is forecasting a third-quarter loss of $0.12 to $0.14 a share.
Then the brokerage Piper Jaffray (PJC) off $6.83. Third-quarter loss reported $1.68 a share versus earnings of $0.28 last year. Revenues tumbled 25 percent.
Apple (AAPL) topped the NASDAQ actives, down $6.13.
Followed by Microsoft (MSFT), with a $1.44 loss.
Google (GOOG) down $23.54.
Intel (INTC), a $0.94 drop there.
Research In Motion (RIMM) off $4.37.
Cisco (CSCO) dropped $1.97.
Qualcomm (QCOM) off $4.01.
And Oracle (ORCL) losing $1.74.
Amazon.com (AMZN) in this blizzard of minus signs, down $7.14.
And then Baidu.com (BIDU) lost just over $23.
And finally, eBay (EBAY) was down $2.41 a share on the day. Merrill Lynch downgraded it from neutral to underperform. Then after the bell, eBay reported third-quarter profits of $0.46 per share, a nickel better than estimates. But the company warned fourth-quarter and full-year earnings will miss Street estimates. The shares fell $1 in after-hours trading.
