NBR Transcripts- October 29, 2008
Wednesday, October 29, 2008The Fed Reserve Cuts Rates Again
SUSIE GHARIB: A big interest rate cut by the Federal Reserve today, but stocks on Wall Street were mixed. The central bank lowered its key Federal funds rate by half a percentage point. It now stands at just 1 percent and as a result, the prime rate which many car and home equity loans are based on, also dropped. Today's action follows a similar rate cut just three weeks ago by the Fed and other central banks around the world. As Suzanne Pratt reports, interest rates could fall even further.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Short-term interest rates have only been this low twice in the last 50 years, once as the housing bubble was beginning to inflate in 2003, the other when Dwight Eisenhower was in the White House. In just over a year, the Federal Reserve has cut its benchmark rate from 5 1/4 to 1 percent. The U.S. central bank has slashed rates and used other tools in its arsenal, all in an effort to keep the country from plunging into a deep recession and to prop up fragile financial markets. Experts say investors were expecting a cut today and there was little chance policymakers would disappoint. Economist Ethan Harris says it was also important that the Fed's vote was unanimous.
ETHAN HARRIS, CO-CHIEF U.S. ECONOMIST, BARCLAYS CAPITAL: I think this was a lot about signaling to the markets, about confidence building, be decisive, be united in the way you implement the policy.
PRATT: In the statement that accompanied today's decision, policymakers noted weakness in the economy on many fronts including consumer and business spending. They also changed their assessment of inflation risks, saying quote, the committee expects inflation to moderate in coming quarters to levels consistent with price stability.
HARRIS: That's a big admission for the Fed. It's saying that they're really fighting only one war and that's the war against recession. They are not worried about inflation.
PRATT: Most economists expect the Fed will keep trimming rates, if we see continued distress in the credit markets. Economist Josh Feinman says the Fed will go as low as it has to go.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: I think that the Fed is going to possibly lower rates further and almost certainly keep rates low through well into 2009, until they are very, very confident that the credit crisis has eased and the downside risks to the economy have receded.
PRATT: The next Fed meeting is scheduled for December 16th. Right now, some economists believe a 0.25 point cut in rates is likely at that meeting, while a 0.5 point slice is possible. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York
Michelle Girard Senior Economist at RBS Greenwich Capital & Mike Holland of Holland & Company Analyze The Interest Rate Reduction
SUSIE GHARIB: Joining us now with more analysis, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company. Hi, guys.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
GHARIB: Michelle, let me begin with you. You told clients today that cutting interest rates -- I'm going to quote you -- is a side show to fixing the economy. Are you saying that Fed rate cuts just aren't as important as they used to be?
GIRARD: Well, that's true. I think in terms of the economy, their impact is more marginal. It has an effect, but it's much smaller than the effect that all of the other action the Fed is taking is having. I mean, Suzanne noted it in her report. We have the Fed just flooding the markets with liquidity to help out the banking system and sectors of the credit markets that are struggling. And ultimately helping to stabilize the financial markets is the best thing that can be done to get the economy on a more stable footing.
GHARIB: Mike, do you agree with Michelle?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Yeah, Michelle's point is very well taken if you just look at the Fed's own balance sheet, if you will, Susie. During the past 12 months, that balance sheet has actually doubled. All of these things they've been doing, they have made their balance sheet twice as large as it was one year ago. That balance sheet, our Federal Reserve balance sheet, which is essentially what we own as taxpayers, is 13 percent of the GDP of the United States. So we have done massive things through the Federal Reserve. I think as Michelle says, this is a side show. All these other things they have been doing have been far more important and 1 percent. Who cares? But these other things have been extremely important, very imaginative and they've started to work. Michelle, I would be interested in your saying in the last several days here that the credit markets have become to come unclogged.
GIRARD: We actually, Michael are, starting to see some of that. You know, we talk about some of these rates that banks charge each other starting to come down. The really important thing here is that there has been a shift in what the Fed is doing. They can either target the price of money, which is the Fed funds rate or the quantity of money and very quietly, I think, unbeknownst to a lot of people, that's what they've started to do is focus on how much money they're supplying and less on a target. They may say they're selling money one at 1 percent, but in truth, in the marketplace, banks are able to buy it much more cheaply.
HOLLAND: Susie, if I could just add to what Michelle just said. In Japan, where we had a little bit of a preview of coming events during their crisis a decade ago, they did a lot of targeting of interest rates, not until they did just what Michelle talked about, which is use the money supply, a quantitative liquefying measure, did they get out of their morass. Our guys have moved more quickly and they're doing it right now.
GHARIB: Actually what I was going to say was picking up on the same Japanese model and I want to toss this out there for discussion, is there any risk of the interest rates getting down below 1 percent or to 0 percent. Any risk to them dropping that low, Michelle?
GIRARD: I think they could and really effectively, that's what they're doing now. They've got something in place. They're paying interest on reserves to banks, which is helping to keep what appears to be the level of rates in the marketplace at 1 percent, but effectively, if they weren't doing that, we'd be at zero. So really, going to zero would not change what they're doing behind the scenes, which is basically flooding the system with reserves, with the quantity of reserves, just like was done in Japan.
GHARIB: Let me switch gears a little bit --
HOLLAND: I'm sorry, go ahead.
GHARIB: I was going to switch gears just one moment because we're running out of time. I want to ask you about the markets. Investors wanted a rate cut. They got a rate cut. The Dow sold off. So what's all that about?
HOLLAND: You're talking about the stock market, obviously. And the stock market is-- we're still in a bear market. We had an 11-point -- 11 percentage point move to the upside yesterday. We gave back just a tiny bit of that today. But there's no question, with the slowing economy, we're in a bear market. We can come out of it at any time, but it isn't yet as we saw, in the last half hour today, the last 15 minutes today.
GHARIB: So Michelle, do you think that the GDP number that comes out tomorrow will change market sentiment at all?
GIRARD: Well, it might. One of the things that I think is that we could get a positive number but I think you cannot be fooled. If you strip out inventories and trades the number is going to look weak, and I think that's going to spook the markets and I think near term, the economic numbers are going to look very weak, particularly next week's employment report.
GHARIB: All right, guys, thank you so much, always a pleasure to have you on the program. We're going to have to leave it there. My guests tonight Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland & Company.
"Anatomy of a Financial Crisis"-The Government
SUSIE GHARIB: How did American government leaders allow the financial crisis to occur? It's a question many people are asking. Tonight as we continue our series "Anatomy of a Financial Crisis," we shift our focus to the nation's capital for some answers. As Stephanie Dhue explains, lax lending standards and a hands-off regulatory approach laid the groundwork for the meltdown.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The problems began when lenders started bundling their mortgage loans into securities and stopped worrying about whether those loans could be paid back. The government let that happen in pursuit of the American dream of home ownership. Ira Peppercorn was at the Federal Housing Administration from 1998 until 2002.
IRA PEPPERCORN, FORMER DEPUTY FEDERAL HOUSING COMMISSIONER: What went wrong is simply the system failed and the system failed in so many different ways and part of that is the regulation of the system is completely fragmented.
DHUE: During the housing boom, sub-prime loans were barely regulated. And it wasn't until last year that the Feds made a serious attempt to crack down.
PEPPERCORN: We have no system as a nation that looks at mortgage products and mortgage foreclosures and defaults holistically. And the challenge is you say, well the government should have. Well, the problem is when the government did step in, it pushes people over into the non- regulated sector.
DHUE: Ironically, Fannie Mae and Freddie Mac were regulated all along and could have been a stabilizing factor in the market, but even they got into the sub-prime game. Their mission to support affordable housing conflicted with the mission to increase shareholder profitability. Both collided in August when the government took over the firms. Analyst Karen Petrou says the quest for profits drove the firms to buy billions of dollars in sub-prime mortgage backed securities.
KAREN PETROU, MANAGING PARTNER, FEDERAL FINANCIAL ANALYTICS: Freddie's CFO said this, we did it because the competition was and we thought we needed to too, to give our shareholders a profit.
DHUE: At the same time home loans were getting riskier, Wall Street was increasing the complexity of packaging and traded mortgage backed securities, selling them around the world. Petrou says regulators had faith the markets were spreading the risk.
PETROU: The regulators had bought into what I call the gee, isn't it cool approach to financial product innovation. They believed that the market had an insight into them. They believed all of these quote innovative products were in fact distributing risk and they did not respect how dependent the entire global financial market had gotten on untested models.
DHUE: Last week former Fed Chairman Alan Greenspan confessed as much to a House committee investigating the financial crisis.
ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: Those of us who have looked to the self interest of lending institutions to protect shareholders' equity, myself especially, are in a state of shocked disbelief.
DHUE: Banks were counting on an innovation called credit default swaps to protect themselves from bad mortgage investments. These instruments are essentially insurance against the potential failure of a company or investment. In this case, Greenspan and other regulators were hands off. Michael Greenberger disagreed with that approach. He headed the trading and markets division at the Commodity Futures Trading Commission in the late 1990s. At that time, he worried credit default swaps were kind of a shell game.
MICHAEL GREENBERGER, FORMER DIR., TRADING & MARKETS, CFTC: The people who held the guarantees were saying, look the worst that can happen to us is we'll collect our insurance, so financial statements seemed very much in order. What nobody understood is that the money guaranteeing the so-called insurance was not there.
DHUE: But against Greenberger's advice, swaps were deregulated further and trading took off. Now there are an estimated $55 trillion in credit default swaps.
GREENBERGER: Had at any point between December 2000 and the onset of this crisis, which really was pretty clear to anybody who was paying attention in the summer of 2007, someone made the judgment to check on the capital reserves of the guarantors on the credit default swap side, this fiasco could have been prevented.
DHUE: Lawmakers are still figuring out what went wrong. What they decide will set the stage for a new regulatory structure aimed at keeping it from happening again. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique" -Michael Farr, President, Farr, Miller and Washington
SUSIE GHARIB: Tonight's "Street Critique" guest expects this bear market to be with us for a while, just like some of its predecessors. He's Michael Farr, president of the money management firm Farr, Miller and Washington. Michael, welcome back to NBR.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Thank you, Paul. Nice to be here.
KANGAS: We saw another rate cut today and the Feds have now pumped billions of dollars in liquidity into the financial system. How long until these moves start helping?
FARR: I think they already have, Paul. We've seen the credit markets trade much better overnight. We're beginning to see bond prices come back up, as spreads between corporate bonds and Treasury bonds tighten a little bit. I think they're beginning to work, but it sort of shows you how broken it really was that it's taking this long to get moving again.
KANGAS: Michael, whether the bear markets of the early 1970s and the one earlier this decade tell you with about our current bear market?
FARR: Paul, you can see from the two charts that they tell you that bear markets take a while. Real heavy bear markets, these drops of 40 percent, close to 48 percent in the previous two bear markets took around 20 months and 36 months really to work their way through. They make bottoms a bunch of different times. So I don't think investors should get too anxious or eager about throwing money too quickly at this one.
KANGAS: When you were last with us on October 8, you said that the selling was not over, correctly so, but that the market was nearing a bottom. How about yesterday's huge run-up? Was that a confirmation of the bottom being processed?
FARR: I don't think so. I think yesterday looked like a great bear market rally. I think that we will see more of those and if you look back to 2000-2003, the first bottom was in July before we ultimately made a final bottom in March of the following year. I expect that given a backdrop of a weakening economy that is continuing to contract and housing prices still dropping, unemployment still going higher, that this could take several months and we'll have more buying opportunities ahead so keep your powder dry.
KANGAS: That's what you're telling your clients now, basically, I guess.
FARR: That is. We have a shopping list together. We have some stocks we would like to buy. We're waiting on better entry points. I think we're going to find cheaper prices. I also will tell them that I'm not inclined at all to sell, that I'm still inclined to be a buyer but I'm a very careful buyer.
KANGAS: In early October you said you were nibbling on some weak financial stocks. Are you still nibbling?
FARR: I nibbled a little bit. Those stocks have come a little bit more my way. I will nibble a little bit more going forward. Yes, but, again, this is still a very uncertain period, so I think the opportunities are still there and they're going to get better.
KANGAS: All right, thank you, once again, Michael for sharing your insights with our viewers. I appreciate it.
FARR: Thank you, Paul, very much for having me.
KANGAS: My guest Michael Farr of Farr, Miller and Washington.
"Money File"-Jason Zweig, Personal Finance Columnist at the "Wall Street Journal"
SUSIE GHARIB: In the "Money File" tonight, why gold doesn't always glitter. Here's Jason Zweig, personal finance columnist at the "Wall Street Journal."
JASON ZWEIG, PERSONAL FINANCE COLUMNIST, WALL STREET JOURNAL: With stock markets being blown to bits worldwide, should you move your money into the safe haven of gold? Many investors are doing just that, but there are a few things you should know first. Gold is supposed to go up when stocks and the U.S. dollar go down. It's also supposed to glow more brightly when the economy goes dim. But just look at what has happened lately. Let's say you bought gold in March, when you were worried about the exploding U.S. budget deficit, the erosion of the dollar and the collapse of the global financial system. Many pundits were predicting that gold would go to $2,000 per ounce. You paid just $1,000 an ounce. Since March, two of America's top five investment banks have gone under. The Dow has lost roughly a third of its value. Housing prices have continued to plummet and the government has committed roughly $1 trillion to bail out the financial system. Every one of your fears has come true, and then some. So is gold at $2,000 an ounce yet? Far from it. Gold is now trading well below where it did in March. The lesson here is that you can be 100 percent right and still lose money if you pay too much for an investment in the first place. The best time to buy gold is not when everyone is going ga-ga over it, but when nobody wants it. Nothing can be trendy and a safe haven at the same time. I'm Jason Zweig.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street's blue chips started and ended the day with modest losses after yesterday's huge rally. The Dow was down 70 points at the outset of trading while the NASDAQ lost 20 points. That mild sell off inspired a rebound with the Dow up 85 points just ahead of the Fed's mid- afternoon rate cut. The Dow then fell to a 120 point loss, only to make a strong 250 point comeback, which believe it or not vanished in the last moments of today's volatile trading session. So the Dow Industrial Average closed down 74.16 and that puts it at 8990.96. The NASDAQ Composite held on to a closing gain of 7.74 at 1657.21, while the Standard & Poor's 500 Index lost 10.42 at 930.09. Over in the bond market, the 10-year note fell 3/32 to 101 4/32 putting the yield at 3.86 percent.
Most active New York exchange issue on 20 million shares, General Electric (GE) losing $0.29.
Then Citigroup (C) with a $0.56 drop.
National City (NCC) fell $0.07.
Wachovia (WB) losing a half dollar.
ExxonMobil (XOM) down $0.21.
Most of these stocks were in the plus column earlier in the day. Bank of America (BAC) down $0.70.
Pfizer (PFE) lost $0.63.
Wells Fargo (WFC) dropping $2.35.
JPMorgan chase (JPM) $1.89 loss.
And then Ford Motor Co (F), the only gainer in the 10 most active, edged up just $0.01.
Las Vegas Sands (LVS), now there's a gain, 80 percent, up nearly $4 and it traded as high as $10.96 today. The Singapore tourist board is working closely with the company to ensure successful completion of the firm's casino resort in Singapore. The casino group generally was strong on that news and also news from MGM Mirage (MGM) which had a good gain of $3.42. MGM plans to issue debt secured by its casino assets in New York in order to bolster its balance sheet.
Procter & Gamble (PG) down $1.90, traded as - that's about the low of the day, actually. First quarter, $1.03, up from $0.92 last year. That was just in line with Street estimates and the company did cut its full year guidance a bit.
Corning (GLW) down $0.91, traded as low as $9.88 after reporting third quarter earnings up 24 percent, $0.49 versus $0.38 a year ago, but the company did warn the fourth quarter results will fall far short of expectations.
Big insurance company Aetna (AET) losing $2.25. Third quarter earnings, $0.58, well down from $0.95 a year ago and it cut its 2008 earnings guidance.
Agco (AG), the farm equipment company, down or up $1.12. Third quarter earnings, $1.04, up from $0.80 last year. Revenues jumped 22 percent.
Atlas Pipeline (APL) losing almost $3 a share after Citigroup downgraded it from "buy" to a "sell."
Sealed Air (SEE) losing $4.65. Third quarter earnings, $0.28 versus $0.40 last year and the company cut its 2008 guidance from a high of $1.51 down to $1.07 per share at best.
William Sonoma (WSM), this is a home products retailer, down $2.49. The company sees a third quarter loss of $0.10 to $0.12 a share versus its prior guidance of break even too earnings of $0.04.
BorgWarner (BWA) down $1.63. Third quarter earnings fell to $0.44 from $0.56 last year on flat sales.
And then FMC Corp (FMC), the chemical company, up $6.65 on higher third quarter earnings of $1.13 versus $0.69 last year, $0.11 above the Street estimate.
Topping the NASDAQ actives, Apple (AAPL) up $4.64. Rumors making the rounds today, the company's going to soon announce a large stock buyback.
Google (GOOG) down $10.75.
Microsoft (MSFT) dropped a dime.
Research in Motion (RIMM) managed to gain $0.83.
Intel (INTC) a $0.92 loss there.
Cisco Systems (CSCO) down $0.44.
Oracle (ORCL) fell $0.33.
Qualcomm (QCOM) off nearly $1.
Amazon.com (AMZN) edged up $0.85.
And Apollo Group (APOL) up $6.14. This is the company that owns University of Phoenix and fourth quarter earnings jumped to $1.43 from $0.60 last year. Enrollments are up 19 percent.
And finally, Dell (DELL) fell $1.02 after BMO Capital markets cut the computer maker's full fiscal year earnings target from $1.56 down to $1.36 per share.
