NBR Transcripts October 17, 2008
Friday, October 17, 2008The Cash Flow Is Easing The Global Credit Squeeze
SUZANNE PRATT: A volatile end to a whipsaw week on Wall Street. The Dow fell 127 points, after more bleak news on the economy. But the blue chip average still ended its four-week losing streak with a nearly 5 percent gain. Helping underpin stocks today: signs of thawing in the credit markets. Lending rates between banks have finally started to fall. But as Erika Miller reports, experts say it will take time before credit market conditions are back to normal.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: It took a costly bank rescue plan from Congress and massive interest rate cuts from central banks around the globe, but finally, today, fixed income expert Brian Edmonds saw an important sign that the credit squeeze is loosening its grip.
BRIAN EDMONDS, DIR. OF FIXED INCOME, CANTOR FITZGERALD: I think today was a major move forward in credit, in that we finally saw three month lending going on in the euro/dollar deposit market. That's the market where banks internationally lend each other monies based in dollars. That market had basically been frozen up until today.
MILLER: Specifically, the three-month London Interbank offered rate or LIBOR fell to 4.42 percent today, although the rate is still well above normal levels. Credit expert Andy Brenner is expecting the rate to fall even faster next week.
ANDREW BRENNER, CO-HEAD OF CREDIT PRODUCTS, MF GLOBAL: A lot of the Fed auctions that we've seen that are trying to alleviate the stress, it's going to be happening in Europe next week. The Swiss national bank, the European central bank and the British will all be auctioning dollars, so we are hoping, and we are predicting, that that will bring rates down.
MILLER: That's not the only positive development. It has become easier in recent days for corporate borrowers to get short term loans in the commercial paper market.
BRENNER: We're also seeing some activity in the corporate bond markets. Morgan Stanley Jan 09's (ph), which is a bond a lot of people own, it's a good sized bond, has gone from 30 percent last week down to about 12 percent this week.
MILLER: But he and others warn that credit conditions are far from normal. And it will likely take months before banks readily lend to each other, let alone consumers. However, the situation today is a vast improvement from just a few weeks ago, when there were serious concerns about a meltdown in the financial system.
EDMONDS: A month ago, almost nobody could get credit. So, we're at a point now where we're freeing that up, normalizing the market place, which is just key, absolutely key in trying to produce conditions that are favorable for the economy.
MILLER: The big risk of course is that the economy slows sharply and home values continue to erode. If that happens, experts warn banks will clamp down on lending to each other and to consumers. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Housing Starts Still Can't Get Started In These Troubled Times
PAUL KANGAS: Last month was another dismal one for the housing industry. Construction of U.S. homes fell to a 17-year low. Housing starts plunged more than 6 percent from August and 31 percent from the same time a year ago. It's the lowest since January of 1991 according to the Commerce Department. As Stephanie Dhue reports, the worst may not be over.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Consumers continue to shy away from home purchases amid worries about the economy, tighter credit standards and increased down payment requirements. Rising foreclosures are adding more inventory to already glutted markets. National Association of Home Builders economist David Seiders says builders have limited choices.
DAVID SEIDERS, CHIEF ECONOMIST, NATIONAL ASSOCIATION OF HOME BUILDERS: The supply demand imbalance out there is quite serious and the sensible thing to do is to really cut back starts of new units. That's what we're seeing.
DHUE: With mortgage rates heading higher, the outlook for home sales continues to weaken. Economist Dean Baker expects home prices to fall an additional 10 to 15 percent nationwide, before stabilizing.
DEAN BAKER, CO-FOUNDER, CENTER FOR ECONOMIC & POLICY RESEARCH: Ideally, somewhere in the middle of '09, we can expect to see prices start to stabilize. The big question will be whether they overshoot on the downside and that's where it may be important for the government to take a role.
DHUE: The National Association of Home Builders wants Congress to stimulate home buying. The highly touted $7,500 tax break for first time home buyers that kicked in earlier this month has not provided much incentive, since buyers have to pay the money back.
SEIDERS: A good strong incentive for home buying, like a larger tax credit, maybe $10,000, maybe $15,000, not repayable to the Treasury, probably is enough to get a lot of people off the sidelines
DHUE: But Baker says not all markets are good buys. Home prices in cities like Boston, DC and New York as still high relative to rents. He suggests a targeted policy aimed at depressed areas like Detroit, Cleveland or Atlanta.
BAKER: There are markets that we would want to stabilize somewhere near current prices, there are other areas where it just makes no sense. I mean, it would be like trying to keep the NASDAQ at 5,000. It wouldn't have made sense and it would be crazy to try and have a government policy to do that.
DHUE: More ideas to stimulate the housing market are sure to be considered in the next few weeks as lawmakers put together a second stimulus package. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Michigan Governor Jennifer Granholm Describes How Her State Is Weathering The Rough Economy
SUZANNE PRATT: The housing recession has put tremendous pressure on the state of Michigan, which has already lost thousands of manufacturing jobs as the auto industry continues to struggle. Earlier today, I spoke with Michigan Governor Jennifer Granholm about the state's economy. I began by asking her how Michigan's economy compares to the rest of the U.S.
GOV. JENNIFER GRANHOLM, (D) MICHIGAN: We're sort of a leading indicator, I would say, Suzanne, because we've been experienced seeing contraction in our economy since frankly, about the year 2000, because of the disproportionate manufacturing sector that has an impact on our economy. In fact, since the year 2000, we've lost about 400,000 jobs, which has been extremely devastating to our -- to our entire state. That's housing, that's consumer confidence, obviously. That means a lot to every day citizens. So we're certainly watching and I know are going to participate in great numbers with this presidential race because it means a lot to people on the ground here.
PRATT: Uh-huh. What about the effects of the credit markets? Have you seen that conditions in the economy in Michigan have gotten worse, significantly worse in the last few weeks?
GRANHOLM: Well, it clearly, because one of the biggest purchases that citizens can make is a vehicle and we're the automotive capital of the world. When citizens across the country or in Michigan can't purchase because they don't have access to credit, that hurts us, frankly, disproportionately. Obviously loosening up credit across-the-board, whether it's consumer goods or mortgage industry will be beneficial to the economy as a whole. But we sure as heck have seen it. The foreclosure rate here is unbelievably high. You know, this -- this current economy, both short term and long term, we are the poster child of why we need change, frankly.
PRATT: Clearly, as you mentioned, much of Michigan's economic woes are tied to the fate of the auto industry. What about a merger, what would a merger do to the state, do you think?
GRANHOLM: Well, as you know, mergers usually represent job loss. And since both of these headquarters of these two storied, proud companies are in Michigan, we are fearful that a merger would mean more job loss. And that is the last thing we need. Now a merger could mean opportunity too, if it means consolidations, especially if consolidations occur from somewhere else in to Michigan. But the reality is, a merger does not necessarily bode well for the level of employment in Michigan. And that's really what most of us here are most concerned about.
PRATT: Do you think a bankruptcy of GM or Chrysler would be a better option, actually?
GRANHOLM: No, no, no, absolutely not and clearly we don't want to see bankruptcies either. And I don't -- that's not going to happen. I feel very confident that the leadership, both Bob Nardelli and Rick Wagoner, the head of Chrysler and GM are both taking the steps that they need to take to make sure that they have liquidity, to make sure that they have access to capital. Clearly the effect of the loan guarantee for the first tranche of that $25 billion that was approved by Congress two weeks ago is very important for these auto makers to be able to convert to make the vehicles that will be much more fuel efficient in the future. That's all very important. But we need a big injection of consumer confidence. And frankly, I encourage people to buy stock right now for GM and Chrysler and other American made products so that we can get this economy back on track. That's obviously not the only thing that needs to what. But I think we do need some significant increase in consumer confidence.
PRATT: Governor, I know that you have launched a number of initiatives to attract new businesses to Michigan and to generate jobs because you have the highest jobless rate in the country. How are those initiatives going?
GRANHOLM: Our whole focus has been on creating jobs and our motto is I'm going to go anywhere and do anything to bring jobs to Michigan, but really about diversification of our economy given our disproportionate focus on manufacturing which we love. But we have securitized our tobacco settlement money to create a $2 billion tenure initiative to invest in companies who are willing to come and grow jobs in Michigan. We have focused on an energy sector. I just signed a big energy bill into law. We've added the most robust film credits in the nation to add a film sector. We've invested more than we ever have before in marketing Michigan for tourism because we have this phenomenal story to tell, these great natural resources. We especially are focused though at the moment on energy because of the synergy between fuel efficient vehicles, materials, the battery technology, renewable energy and what we've got here in Michigan as a natural asset which is our wind, our water, the forests that we have in Michigan.
PRATT: I think we have to leave it there. Thank you so much for joining us.
GRANHOLM: You bet, thank you.
PRATT: My guest, Michigan Governor Jennifer Granholm.
"Market Monitor"-Michael O'Higgins, President of O'Higgins Asset Management
PAUL KANGAS: My guest "Market Monitor" this week is Michael O'Higgins, president of O'Higgins Asset Management based in Miami Beach, Florida. Mike, welcome back to NIGHTLY BUSINESS REPORT.
MICHAEL O'HIGGINS, PRES., O'HIGGINS ASSET MANAGEMENT: Nice to be here.
KANGAS: It's been one of the nastiest and most volatile bear markets in recent memory. Do you see any signs that we've reached a bottom or are near one?
O'HIGGINS: I think we've already hit the bottom. I think the bottom was last Friday. But at the very least we're very close if that wasn't it.
KANGAS: What convinced you?
O'HIGGINS: Just the level of panic that's been reached. I don't know if you are familiar with the volatility index, the VIX. But it hit the highest level since the '87 crash.
KANGAS: Are we going to have to live with this forever, this kind of volatility?
O'HIGGINS: I doubt it. At some point things will settle down and we'll start going back up again. But there is still -- it's going to take time for these measures that have been taken to take effect.
KANGAS: Well, today was unusually volatile because of the expiring options and futures, correct.
O'HIGGINS: Right.
KANGAS: We're not going to see that every day.
O'HIGGINS: No, you have them periodically where you have these options expirations. But its --
KANGAS: So if we have seen a bottom, one thing that I was wondering, you have long favored gold and gold stocks. But they don't seem to be participating at this time when fear was at its maximum. What's going on there?
O'HIGGINS: Well, gold has really -- well, because it a deflationary environment right now. And the fear is not of inflation now, it's of deflation. Gold has actually held up OK. Unfortunately the stocks have gone down while gold has gone kind of sideways. The stocks are down 50 percent.
KANGAS: And are they bottoming out with the market, do you think?
O'HIGGINS: Well, I would hope. Certainly usually when gold goes up, the stocks go up quite a bit faster, three to five times faster. And they also go down faster when gold goes down.
KANGAS: When you were last with us in March you recommended six securities to buy. Let's see how they have done since then. I think they were victimized by the fair market.
O'HIGGINS: Do we have to?
KANGAS: I'm afraid so. Let's have a look. Citigroup (C) was one of your favorites and who would have believed it would be down 25 percent from there. And Pfizer (PFE) down 18 percent, you still like Pfizer?
O'HIGGINS: No, it's -- I like it but it's not one of the ones I'm going to recommend tonight.
KANGAS: OK, let's have the next board of previous recommendations. The Belgium I shares down a massive 57 percent. This a global sell-off, obviously.
O'HIGGINS: It was the cheapest at the time. It was the cheapest stock in Europe. Now it is the second cheapest.
KANGAS: OK. And the Thai fund (TTF) down 48 percent or nearly so.
O'HIGGINS: It was the cheapest market in Asia. It still is the cheapest market in Asia.
KANGAS: All right and you had two other recommendations, XTO Energy (XTO) which is strangely enough, well, of course oil is down now.
O'HIGGINS: Yeah, oil is down. And gas is down more than oil. Even though oil was cheap to gas, it's even cheaper now than it was.
KANGAS: And then the precious metal Profunds (PMPIX) down 74 percent, gold hasn't kept up.
O'HIGGINS: As I mentioned, the gold stocks are down 50 percent. This moves one and a half times the price of gold. So or the price of the gold stocks, so it's down 75.
KANGAS: How about some new recommendations, if this is the time to buy, what are we buying?
O'HIGGINS: Right now, I would -- I'm concentrating, I would recommend that people concentrate, keep it simple, four stocks. Citigroup which I think is the poster child for the banking problem.
KANGAS: Is this one of the dogs of the Dow? You are famous for that, you know.
O'HIGGINS: Yes, I wrote the book, literally. It is extremely cheap. They have a global franchise. They're too big to fail. The government has already come out and said they're going to bail out everybody.
KANGAS: We just have a minute left. How about another choice.
O'HIGGINS: Well, we have the cheapest market in Europe is Italy. It's dirt cheap. It's way down also.
KANGAS: The I shares (EWI).
O'HIGGINS: We have -- then we have the energy service group (XES) is extremely cheap. This is the ETF has 20 some odd different -- the average energy service stock is about five times earnings and then we have, I'm staying with the precious metals fund (PMPIX) because I still think gold is going higher and these stocks should go up a lot faster. This a mutual fund that moves one and a half times the Dow Jones precious metal index.
KANGAS: Mike, do you personally own any of these securities mentioned or have other disclosures to make?
O'HIGGINS: I own them all.
KANGAS: You believe in your own cooking in other words.
O'HIGGINS: I like to eat my own cooking. Yes.
KANGAS: We got 15 seconds for any last minute thoughts.
O'HIGGINS: I will also throw in an emerging markets fund, the EEM. Emerging markets have gotten absolutely crucified. And I think, that is where the fastest growth in the emerging markets.
KANGAS: Very good, Mike, thanks once again for being with us.
O'HIGGINS: My pleasure.
KANGAS: My guest, Michael O'Higgins of O'Higgins Asset Management.
Paul Kangas' Stocks in the News
PAUL KANGAS: Profit taking from yesterday's rally got Wall Street off to a rather weak start with the Dow losing 250 points at the outset of trading, but by mid-session the blue chips were in the black and the rebound attracted more buying this afternoon. At 2:00 p.m., the Dow was up 250 points, but then it ran into aggressive selling linked to expiring futures and options. So the Dow Industrial Average closed down 127.04 points at 8852.22. This week, it rose twice and fell three times but still had a net gain of 401.03 points overall. NASDAQ today down 6.42 ending at 1711.28. It also rose twice and fell three times for a weekly net gain of 61.78. Standard & Poor's 500 Index fell 5.88, closing at 940.55 today, but for the week, the index jumped 41.33 points. In the bond market, the 10-year note gained 9/32 to par and 17/32, putting the yield at 3.94 percent.
Most active big board issue trading 29 million shares today, General Electric (GE) down $0.26.
Followed by Bank of America (BAC) up $1.02.
Citigroup (C) was down $1.02.
And then American Intl Group (AIG) losing $0.33.
Pfizer (PFE) was down $0.06. The company did settle lawsuits regarding its Bextra (ph) and Celebrex drugs, price, $894 million with claims coming in 33 different states.
ExxonMobil (XOM) fell $1.41.
AT&T (T) $0.17 drop.
Wells Fargo & Co (WFC) fell $1.84.
Then Sprint Nextel (S) $0.27 loss.
Tenth in volume, Co Vale do Rio (RIO) down or I should say up $0.64.
Honeywell International (HON) lost $1.56 despite higher third quarter earnings of $0.97 versus $0.81 a year ago. Revenues up 6.2 percent, but Standard & Poor's said it sees slowing growth for the company ahead. That hurt the stock a bit.
Schlumberger ltd (SLB), the oil service company, down $3.21. Third quarter earnings jumped to $1.25 from $1.09 last year. Revenues jumped 22 percent, but Schlumberger CEO said North American, the North American (INAUDIBLE) account will drop quite a lot as he put it in 2009.
Capital One Financial (COF) up $1.22. Third quarter earnings $1.03, down from $2.09 last year, but $0.10 better than expected. Revenues did drop 7.2 percent, but the company said its credit performance is in line with expectations.
A major loss in Ing Group ADR (ING), losing $4.05. Merrill Lynch cut its price target from $18 a share to $13.50 despite what it said is an attractive valuation, but the company is bracing for its first quarterly loss ever and there is concern that the infusion of cash by the Dutch government could dilute the company's earnings.
Comstock Resources (CRK) gained $3.02. That stock is going to be added to the Standard & Poor's 500, let's make it 400 mid cap index next Tuesday, so there was some index fund buying today on Comstock.
Libbey (LBY) down $1.85. The glass tableware manufacturer got a downgrade from the CO King brokerage from "accumulate" down to "neutral."
And Leggett & Platt (LEG), which does residential furnishings had earnings that were lower third quarter, $0.34 down from $0.36 and the company sees 2008 earnings of $1 to $1.15 and sales dropping 3 percent.
Intercontinental Exchange (ICE) moved up $6.26. The Fox Pitt brokerage upgraded it from "in line" to "out perform" on a valuation basis.
And Badger Meter (BMI) rebounding $1.08 after tumbling over $9 yesterday on flat third quarter earnings, but today, the Baird brokerage upgraded it from "under perform" to "out perform."
NASDAQ's most active Apple (AAPL) down $4.49.
But Google (GOOG) jumped $19.52 and traded as high as $386 a share. Standard & Poor's issued a "strong buy" on Google after yesterday's better than expected third quarter earnings of $4.92 a share.
Microsoft (MSFT) down $0.26.
Research in Motion (RIMM) fell $0.23.
Cisco Systems (CSCO) bucking the trend with a $0.16 gain.
Intel (INTC) $0.38 loss.
Qualcomm (QCOM) $0.86 gain.
Baidu.com (BIDU) $13.22 advance.
Gilead Sciences (GILD) up $1.64.
And then Oracle (ORCL) with a $0.03 gain, tenth in volume.
The Nasdaq OMX Group (NDAQ) stock was up $2.90. It's going to be added to the Standard & Poor's 500 Index after the close next Tuesday. It'll replace Dillard department stores.
And Intuitive Surgical (ISRG) plunging $25.67 despite third quarter earnings of $1.44, way up from $1.04 last year and $0.23 above the Street estimate, but the stock apparently weak on growing concern that hospitals will have a hard time borrowing in this credit climate. Those are the stocks in the news tonight.
