NBR Transcripts -October 22, 2008
Wednesday, October 22, 2008Wall Street's Final Hour Free Fall
SUSIE GHARIB: Another sharp sell off for stocks today, on fresh concerns about a global recession and a mixed batch of earnings reports. The Dow tumbled 514 points closing at the 8,500 level. The NASDAQ lost 81 points and the S&P 500 dropped 58 to its lowest level since 2003. Investors dumped shares of Dow components Boeing and Merck after the companies reported disappointing quarterly numbers. They also punished AT&T and McDonald's which had positive news. As Scott Gurvey explains, the key for investors is what corporate America says about future earnings.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Third quarter earnings reports are giving investors headaches, not so much for what they say about the quarter just ended, but for what they forecast about quarters to come. Earnings growth estimates for the fourth quarter have been falling but are still positive. While that sounds strange given the talk of recession, it's because last year's fourth quarter was unusually weak. Thomson Reuters research director Ashwani Kaul says fourth quarter growth guidance now stands at 37 percent.
ASHWANI KAUL, DIRECTOR OF RESEARCH, THOMSON REUTERS: It's a sharp drop from 80 percent that we were expected three months ago. And we expect that number to continue to fall as companies give more guidance and have more visibility into the fourth quarter.
GURVEY: Earnings growth for the first quarter of next year is expected to be even worse. Those expectations have also been falling. Some improvement is seen for the second quarter and Kaul expects still more improvement in the third quarter of next year.
KAUL: I don't think anybody should be really surprised. I think we're like in the middle of what you would call a sort of a quote/unquote recession. So you know it's only ... we're in the middle of it. We're still going to have a couple more quarters of pain, so I'm not surprised at all to see these numbers really come down.
GURVEY: For investors looking for a market bottom, there is actually good news in lowered guidance. Strategist Gail Dudack says the market decline simply means the market is doing its job.
GAIL DUDACK, CHIEF INVESTMENT STRATEGIST, DUDACK RESEARCH GROUP: If we actually hit $60 earnings and we put an average multiple to that of 15 times, then you come up with an S&P of 900. So we've traded below 900 in this recent low. So I think the market has done a big job of discounting a lot of earnings disappointment as of the middle of October.
GURVEY: In fact, Dudack says for long term investors, the more guidance is reduced, the better.
DUDACK: I think we're actually in the process of discounting a lot of negative earnings that probably we'll get to the point, hopefully, where we might actually see that we might have some positive earnings surprises.
GURVEY: Dudack says if the market continues to test 900 on the S&P 500 and it holds, it will be a good sign a bottom has been found. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Sam Stovall, Chief Investment Strategist at Standard & Poor's
SUSIE GHARIB: Joining us now to talk more about the markets is Sam Stovall, chief investment strategist at Standard & Poor's. Hi Sam.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hi, Susie. GHARIB: You know, you heard in our report, so many stock experts have already said that the markets have priced in a recession. They've priced in that things are going to be tough. Given this big sell-off that we had today, is there some new twist to what is going on that we should know about?
STOVALL: Well, Susie, I think they've priced in the definition of a recession and the definition and expectations of weaker earnings, but they have yet to price in the actual magnitude. Certainly right now we're expecting to see about a 1 percent GDP peak-to-trough decline in this recession, but if it ends up being similar to what we saw in the mid-1970s, that would be a 3 percent decline and expectations of about a 4 percent shortfall in this third quarter could get worse.
GHARIB: Now, we saw the S&P 500 hit its lowest level since 2003. It's below 900. What's your forecast for the S&P for this year and going into early next year?
STOVALL: Our expectation is that we think similar to what Gail Dudack just mentioned, that we are searching for a bottom. When you look primarily to investor sentiment, you look to the fact that more than 88 percent of the companies on the New York Stock Exchange hit 52-week lows and you look at extreme levels of market volatility, et cetera, it indicates to us that we appear to be searching for a bottom. And as a result, our investment policy committee has a year-end target of 1100 on the S&P 500. Now granted that's higher than where we are now, but it implies a 25 percent decline this year which would be the worst since 1937.
GHARIB: Oh, that hurts. Ouch! You know, Sam, there was some good news today. We saw oil prices fall sharply. That's good news. We've been seeing evidence that the credit markets are thawing. Everybody was waiting for that. That's good news. But it seems like good news means nothing for investors these days. Why is that?
STOVALL: Well, I think right now investors are allowing their own worst enemies to get the better of them and that is their emotion. That basically they're selling now and asking questions later. And what we are likely to experience is the stretching of a rubber band that soon will be snapping back. If you look to the possibility of another rate cut which we see by the end of this year, another stimulus package early in the new administration's term, also oil prices that are now half of where they were just a little while ago, then all three of those items, I think, could end up stimulating overall consumer spending.
GHARIB: There was a time where investors were told this was the advice. Buy on the dips. So in a market like this when prices would come down, you'd buy. It doesn't seem like that strategy is relevant today. What is your advice to investors? What should they do?
STOVALL: Well, I think certainly at this point, I would advise investors not to be bailing out primarily because while you might look smart in the near term by having sold out your equity positions, unfortunately most investors get back in at prices that are higher than where they get out. Since we don't know exactly where a bottom is and your time horizon should be longer than five years, I would tend to say that these could be representing good buying opportunities, not levels at which you should start a selling program.
GHARIB: All right. got to be patient, I guess, right, Sam?
STOVALL: That's right, Susie. I think in the long run, you'll probably be happy for having done so and not let your emotions get the better of you.
GHARIB: All right. Thanks a lot for coming on the program. My guest tonight Sam Stovall, chief investment strategist at Standard & Poor's.
Credit Rating Agency Execs Get Grilled on the Hill
PAUL KANGAS: The nation's credit ratings agencies were key players in the financial meltdown. So today, Standard & Poor's, Moody's and Fitch were called on the carpet by Congress to explain why they gave good ratings to bad debt. The firms say that they had no way to foresee the financial crisis. But as Stephanie Dhue reports, the committee on government reform and oversight didn't buy that.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: House investigators uncovered a culture inside the credit rating agencies that put profits ahead of quality ratings. Former Standard & Poor's analyst Frank Raiter left the firm in 2005. He told the committee S&P management refused to invest in the staff and technology needed to keep better tabs on mortgage-backed securities.
FRANK RAITER, FORMER MANAGING DIRECTOR, STANDARD & POOR'S: There was a big breakdown between the people that were trying to maximize profits and the people that were trying to maximize the credit ratings methodology and activities and the people with the profit motive won.
DHUE: That's apparent from internal S&P exchanges from structured finance employees. They read quote, that deal is ridiculous. The model does not capture half the risk. It could be structured by cows and we would rate it. Standard & Poor's President Deven Sharma says the company is now restoring professionalism.
DEVEN SHARMA, PRESIDENT, STANDARD AND POOR'S: The unfortunate and inappropriate language that used in some of these e-mails does not reflect the core values of S&P.
DHUE: S&P is not alone. Committee Chairman Henry Waxman highlighted a Moody's board meeting where the CEO described his dilemma: issuers want high ratings, investors don't want downgrades and bankers try to game the rating agencies.
REP. HENRY WAXMAN (D) CALIF.: Unchecked, competition on this basis can place the entire financial system at risk, end quote.
DHUE: But Moody's CEO Ray McDaniel insists its ratings are not influenced by the issuer.
RAY MCDANIEL, CHAIRMAN & CEO, MOODY'S: Our ratings are the basis of our best opinion based on the available information at the time.
UNIDENTIFIED FEMALE: But that's not what you said to your board members. That's not what you said..
McDANIEL: It is not inconsistent with what I said to my board members. What I said to the board is that it creates a problem. That to maintain the appropriate standards creates a conflict potentially with maintaining market share.
DHUE: One witnessed likened meat inspection to the financial crisis. Sean Egan, founder of independent rating agency Egan Jones suggests rating firms do spot checks on structured finance deals.
SEAN EGAN, FOUNDING PRINCIPAL, EGAN-JONES RATINGS: You want to do what is needed to give the assurance to first of all check that it isn't tainted meat OK and then also so that the users of this product have the comfort that the proper checks have been made.
DHUE: Tomorrow the committee probes the government's role calling former Fed Chairman Alan Greenspan and SEC Chairman Chris Cox to testify. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Hilary Kramer, Chief Market Analyst at Greentech Research
PAUL KANGAS: Tonight's "Street Critique" guest says cash is still king, especially on days like these. She's Hilary Kramer, chief market analyst at Greentech Research and author of "Ahead of the Curve" and Hilary, great to see you again.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Nice to see you, Paul.
KANGAS: What an ugly day, down another 500 points on the Dow and it's starting to feel like this selling will never end. Are we nearing a bottom here?
KRAMER: We're close to a bottom. We may have another 10 or 15 percent to go. Remember we're in the middle of earnings season and every CEO is coming out and explaining that guidance for the next year may be lower and to expect some bumps along the road with their own companies.
KANGAS: The Treasury and the Federal Reserve appear to be doing all they possibly can. What will turn this market around?
KRAMER: The market will turn around when trillions of dollars just sitting on the sidelines comes back into the market. Now when it turns around, it will turn around big. It's just that for right now cash really is still king.
KANGAS: Is Ford (ph) selling by hedge funds and mutual funds playing a major role in these dramatic final-hour sell offs?
KRAMER: Yes they are but it's also individual investors in terms of the mutual fund that are fearful, panicking, disappointed, and it doesn't necessarily mean it's wrong to be selling because you have to sell if you're in such pain and distress about what your returns are looking like.
KANGAS: What should our viewers look for before stepping back into this market themselves?
KRAMER: Everyone should know it's OK to miss the first 10 percent in up side. It's OK. Stay on the side lines until you're really sure that it's OK to come out. That's been part of the problem the last few weeks Paul. There's so many investors, institutional big sales (ph) money managers and individual investors that said, OK, we had an 11 percent day in the S&P. Let me jump in because what happens is you have fear and then suddenly greed takes over. Oh, no, I'm going to miss the big jump up. Don't worry about missing it.
KANGAS: Some observers are saying the market is discounting an Obama victory in the White House. What do you say?
KRAMER: I say that whichever candidate wins, it's going to be a very, very tough four years because we are in a very serious recessionary environment. But hopefully we'll have programs in place that will get employment going and people making money so they can spend money again because that is what is bringing the market down today are concerns that the consumer doesn't have any money in their wallets.
KANGAS: Now when investors are putting their shopping list together, what do they need to look at before buying a stock?
KRAMER: Never touch a company that has leverage, that has debt because what's going on is that the banks only want to give money to people that don't need it, that don't need to borrow, that don't need refinancing. You have major big companies out there that have a lot of debt on their books. They have to refinance because they have shorter terms than individuals do with a mortgage, for example and the banks don't want to lend to them. They might have started to lend to each other and the credit markets are thawing but, Paul, it's very, very very treacherous right now.
KANGAS: OK. Hilary, I want to thank you very much for sharing your insights with our viewers once again.
KRAMER: Thank you. It's a pleasure to be here.
KANGAS: My guest, Hilary Kramer, author of "Ahead of the Curve." GHARIB: Tomorrow, tech giant Microsoft reports its latest quarterly results. We'll have the numbers and analysis.
"Economic Choices 2008"- Battleground New Mexico
SUSIE GHARIB: When it comes to presidential elections, New Mexico is supposed to be a swing state. George Bush won there in 2004. So this year, John McCain had high hopes for it. But new polls show Barack Obama is opening up a lead both in New Mexico and nationwide. Tonight, we continue our "Economic Choices '08" look at battleground states. As Washington bureau chief Darren Gersh explains, the financial crisis is a key reason for those gains.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Barelas coffee house is not the kind of place where people usually talk about high finance. The focus here is on friends and food, so the banking crisis has been an unwelcome topic of conversation. Geri Lucero is Barelas' manager and an undecided voter.
GERI LUCERO, MANAGER, BARELAS COFFEE HOUSE: I think that all these powerful minds should have realized what could have happened with all of that. I don't know it, because I'm just a working person. But people that claim to know finances, they should have seen some of this stuff coming, I believe.
GERSH: Outside the coffee house, small business owner Kara Summers is ready to vote for Barack Obama. But like many voters we spoke with, she is not expecting a quick solution for our current economic problems.
KARA SUMMERS, OBAMA SUPPORTER: I don't know that either one of them has great answers, but this is such a mess, I just don't know how we get out.
GERSH: The economics of the financial meltdown and the details of plans to inject capital into banks baffle many of the voters we talked to here in New Mexico. But the political impact is fairly clear. John McCain is being hurt by the financial crisis with western fiscal conservatives and key swing voters. In a western swing state like New Mexico, pollster Brian Sanderoff says many fiscal conservatives are puzzled by McCain's support for a rescue plan, in part, because the financial crisis seems like a Wall Street problem.
BRIAN SANDEROFF, PRESIDENT, RESEARCH AND POLLING INC.: Most westerners think that these are problems that were caused by people on the east coast, quite frankly and they wonder why they, as taxpayers should have to foot the bill.
GERSH: You can hear the frustration in avid stock trader Larren Glover's voice. He'd been a Republican for 30 years, up until a few months ago.
LARREN GLOVER, OBAMA SUPPORTER: I guess in a way it's kind of in defiance. You know, like, come on, the Republican Party has just made a mess of things.
GERSH: But fiscal conservative Paul Sowards, a banker and reluctant supporter of the rescue plan, believes an orderly wind down is better than a fire sale. While John McCain is not his first choice, Sowards thinks McCain is the only choice to rein in the Federal budget.
PAUL SOWARDS, MCCAIN SUPPORTER: There is another way to do this. When my household budget is constrained, we stop spending as much. The Federal government doesn't seem to use that as an option.
GERSH: When we visited New Mexico, early voting was in full swing and Obama's supporters clearly outnumbered McCain's. And of those who are for McCain, like Fred Perez, many are voting pro-life.
FRED PEREZ, MCCAIN SUPPORTER: If we can't get simple things like morality straight, I think the economy won't get well either. So I think that it goes hand in hand.
GERSH: Recent polls confirm this swing state heading strongly towards Obama. Mary Naranjo is a good example. She's angry with what she calls the greed on Wall Street and Main Street.
MARY NARANJO, OBAMA SUPPORTER: I think that this experience that we had might have been for a good reason. People are going to learn to be a little bit more wiser in their selections. They're going to probably not be as materialistic.
GERSH: Many New Mexicans we talked to seemed to feel the same way. It appears the financial crisis is not only shaping the election, but our economic expectations as well. Darren Gersh, NIGHTLY BUSINESS REPORT, Albuquerque.
GHARIB: Our economic choices coverage continues tomorrow as we head to the battleground state of Virginia.
Paul Kangas' Stocks in the News
PAUL KANGAS: Sharp declines overseas brought out the bears on Wall Street early today. The blue chips plunged 400 points at the outset of trading while the NASDAQ off 40 points. A huge third quarter loss at Wachovia and lower earnings from Boeing and Merck added to the selling. The losses were trimmed a bit over the mid-session, but all bets were off in the final hour of trading as stocks plunged to fresh lows. The Dow Industrial Average off almost 700 points ended the day down 514.45 at 8519.21. The NASDAQ Composite ended with a loss of 80.93 at 1615.75. Standard & Poor's 500 fell 58.27 to 896.78. Over in the bond market, the 10-year note rose 1 5/32 to 103 9/32, putting the yield at 3.60 percent.
New York exchange volume leader on 24 3/4 million shares, General Electric (GE) losing $1.39.
Followed by Citigroup (C) $0.86 drop there.
Wachovia (WB) off $0.38. The company reported a whopping third quarter loss this morning of $24 billion. That's $11.18 a share in the red versus earnings of $0.85 a year ago.
Bank of America (BAC) down $1.31.
Then came Pfizer (PFE) with a $0.60.
Then moving along in the actives, Wells Fargo (WFC), which is buying of course Wachovia, down $1.34.
JPMorgan Chase (JPM) fell $2.57.
ExxonMobil (XOM) off $6.93. Oil in New York was down about $5.50 a barrel to $66.75 per barrel.
American International Group (AIG) dropped a dime.
And then AT&T (T) off $1.95. AT&T out with third quarter earnings, $0.55 versus $0.50 a year ago, but on an adjusted basis, they were $0.67 and that was $0.04 below the Street estimate. Revenues were up 4 percent.
Merck (MRK) down $1.96. Third quarter earnings out, $0.80, up from $0.75 a year ago, a penny above the Street estimate. But the company is cutting 7,200 jobs and sees a lower outlook and that's why they're job cutting.
Boeing co (BA) off $3.49 on lower third quarter earnings, $0.94 versus $1.43, $0.04 below the Street estimate. Revenues fell 7.4 percent and of course the ongoing strike is hurting the company's outlook.
McDonald's (MCD) $0.95 loss even though third quarter earnings jumped to $1.05 versus $0.89 a year ago, $0.07 better than the Street was expecting and the CEO said the company continues to be recession proof.
General Dynamics (GD) up $1.01, one of the few gainers in the big blue chip list. Third quarter earnings rose 16 to $1.59 versus $1.34 a year ago, $0.08 better than the Street was expecting. Standard & Poor's repeated a "buy" recommendation.
Major loser, Coventry Healthcare (CVH) losing 51 percent of its value with that loss of over $14. Third quarter earnings dropped to only $0.58 from $1.08 a year ago and the company cut its 2008 earnings guidance. JPMorgan downgraded it from "neutral" to "under weight."
And Kindred Healthcare (KND) plunging $7.34. The company cut its third quarter earnings guidance from $0.20 to $0.25 a share in earnings to only $0.01 to $0.03 per share in earnings.
And finally we see Tupperware brands (TUP), would you believe it sealed up a gain of $2.18? Third quarter earnings, $0.44, up from $0.31 a year ago. Revenues up 13 percent.
Now let's have a look at the NASDAQ most active. Apple (AAPL) up $5.38. After the close yesterday, fourth quarter earnings came in at $1.26 versus $1.01. Today the Needham brokerage repeated a "strong buy" with a $240 a share price target on Apple stock.
Microsoft (MSFT) off $1.83.
Similar loss in Research in Motion (RIMM).
Google (GOOG) down $7.08.
And then Cisco Systems (CSCO) fell $0.45.
Intel (INTC) $0.67 loss there.
Qualcomm (QCOM) lost nearly $1.
And then finally a gainer, Baidu.com (BIDU) up $0.42.
First Solar (FSLR) down $3.92.
Amazon.com (AMZN) closed down $0.24. After the close, third quarter earnings $0.27, up from $0.19 last year, $0.02 above the Street estimate, but the fourth quarter (ph) sales were rather mediocre. The stock plunged to $43 in after hours trading.
Amgen (AMGN) down $2.63. After hours, it reported third quarter earnings of $1.23 versus last year's $1.08, $0.15 better than the Street estimate. In after hours trading, the stock got as high as $52.25, nice gain from there.
And finally, Sandisk (SNDK) fell $4.67 after Samsung withdrew its $26 per share cash buyout bid.
