NBR Transcripts- November 5, 2008
Wednesday, November 05, 2008New President...Old Problems
SUSIE GHARIB: Post-election blues on Wall Street today, despite optimism that President-Elect Barack Obama will usher in a new era for the nation. The Dow tumbled 486 points and the NASDAQ lost 98, as investors remained concerned on how the new president will fix the ailing U.S. economy. Where will Obama start and how soon will he have a plan in place? We have two reports tonight, looking at what's first on his agenda and what will he do to reassure investors. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This was the only on-camera glimpse of the president-elect today, Barack Obama heading for a workout at the gym. Good thing, because there is much heavy lifting ahead, beginning with the economy. If the Bush administration agrees, congressional Democrats want to pass a new stimulus package worth up to $100 billion later this month. The president-elect would clearly help shape that package. There would likely be more to come after Obama is sworn in. But House Speaker Nancy Pelosi seemed to be lowering expectations for the new Congress and the new administration.
REP. NANCY PELOSI, HOUSE SPEAKER: I think it's important for the American people to know that many of our options have been diminished because of the downturn in the economy in the last couple of months.
GERSH: Even so, many Democrats are hoping for quick action on major items like health care reform and alternative energy. Economist Lawrence Mishel argues the election should be read as a mandate for aggressive government action.
LAWRENCE MISHEL, PRESIDENT, ECONOMIC POLICY INSTITUTE: We no longer are in a situation where those who are invoking that markets always work -- what I would call market fundamentalism -- have a veto. So that gives an opening to use government to pursue national needs.
GERSH: Even before he is sworn in, Obama will have to make quick decisions on the direction of the Treasury's financial rescue program. To make his mark there, it's expected the president-elect will soon name an economic team. New York Federal Reserve President Tim Geithner and former Treasury Secretary Lawrence Summers are leading contenders to replace Henry Paulson. But the National Association of Manufacturers John Engler worries too much tinkering with the Treasury's rescue plan would be counterproductive.
JOHN ENGLER, PRESIDENT, NATIONAL ASSOCIATION OF MANUFACTURERS: We need some certainty in this process. Every time one move is made, there's an impact somewhere else that's requiring almost a second move.
GERSH: Other immediate action items for the Obama administration include financial regulatory reform and passage of a children's health program. Many other items have been promised, but Pelosi cautioned major change takes time.
PELOSI: So we have to choose our priorities very carefully about what is achievable, what can be done in the best possible way.
GERSH: Much of the new president's agenda will be focused on jobs, an issue that will become even more important on Friday. That's when the October employment report is released. The worst-case scenario is expected to show a loss of 300,000 jobs. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Recession Worries Still Weigh Heavy on Wall Street
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York, where it was a rough day on Wall Street. The Obama victory may have settled the biggest question on the nation's collective mind, but it marks the beginning of a new period of uncertainty for the financial markets. Art Cashin of UBS says the markets can't wait for the inauguration to learn the new president's plans.
ARTHUR CASHIN, DIR., NYSE FLOOR OPERATIONS, UBS: We're in a very difficult and strained transition period now. And it's not January 20. It is the next week or so. What the president-elect decides to do and his advisors begin talking about can either soothe the markets greatly or potentially disrupt them and that's why there's some nervousness about in the market.
GURVEY: Rarely has a president taken office in the midst of such financial turmoil with credit markets still frozen. Millions of Americans worried about making mortgage payments and consumer sentiment running at record low levels. Historian Richard Sylla points to the end of the great depression as an example.
RICHARD SYLLA, HISTORIAN & ECONOMIST, NEW YORK UNIVERSITY: When President Roosevelt came in in 1933, somewhat analogous to an unpopular Republican president giving way to a probably more popular Democratic president, the market did very well in 1933 and it went up every year in President Roosevelt's term.
GURVEY: Wall Street knows there will be change. The nation demanded it in voting Democrats into office coast to coast. But market strategist James Awad says the markets are afraid Washington will read the call for change as a demand for retribution.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: If you do it irresponsibly and if we overcompensated for the fact that some on Wall Street were given to excess, if we overcompensate and penalize the whole capital sector because of that, that would be negative change.
GURVEY: Still, Awad says it is possible for change to be good for the system, even if it shifts the balance somewhat from the financial sector to the consumer and labor sectors.
AWAD: If it's positive, forward-thinking change within the construct of a capitalist system and balanced budgets and responsible regulation and reasonable taxation and incentives, all of that I think could be a positive for the economy short, intermediate and long term.
GURVEY: Most analysts say the sooner the president-elect announces his economic team the better. Until his plans are known, investors' nerves are expected to remain on edge. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Tom Gallagher, Political Economist at International Strategy and Investment
SUSIE GHARIB: Back now to our top story, the economic and market impact of the new administration of President-Elect Barack Obama. Joining us with more analysis, Tom Gallagher. He's political economist at International Strategy and Investment. Hi, Tom.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: Hi.
GHARIB: Tom, as you heard from all of our reports, everyone wants to know who is going to be on Barack Obama's economic team. So how soon do you think he's going to name his Treasury secretary? And who will it be?
GALLAGHER: I think there are a lot of indications that that will possibly be his first cabinet appointment. The first thing he wants to do is get a chief of staff in place. I expect within the week, we'll probably know who the Treasury secretary designate is going to be. All I can tell you is what the names are that are out there. Larry Summers, the Treasury secretary at the end of the Clinton administration, Tim Geitner, the New York Fed president are the top two candidates. And beyond that, I'd be surprised if it's somebody else. I think a lot of the other names that have surrounded Obama during the campaign like Volcker, Rubin, Buffett, I think they're all unlikely to have formal positions in the administration.
GHARIB: So Larry Summers and Tim Geitner possibilities, are they good choices to fix the economy and restore investor confidence?
GALLAGHER: Well, I think so. I think both will be great choices. Larry Summers was very early on the GSEs. If you look at what he was writing back in the summer about what the next policy steps should be, he really had it all nailed as far as a TARP-like proposal. Tim Geitner has hones his crisis management skills in a couple of different crises now. So I think they would both be strong.
GHARIB: As you know, Congress has been considering all sorts of different stimulus packages. Do you think that President-Elect Obama will be able to put his mark on any stimulus action?
GALLAGHER: Yes, definitely. One of the errors I think so many of the comments on your show so far underscore that markets and voters really aren't going to have a lot of patience for the technicalities of a two-and- a-half month transition. They'll want to see the -- President Bush and President-Elect Obama working together. I think one of the areas where that will be important and will be a challenge is on a fiscal stimulus measure that Congress is likely to take up in a lame duck session. My guess is that we'll see something like Darren described in his reports earlier, a down payment on a bigger stimulus bill that's likely to pass sometime next year. So I think in November there will probably be in agreement on a package, maybe around $100 billion, that will serve as a transition until the bigger economic measures that President-Elect Obama will propose early next year can take effect.
GHARIB: The other big issue that everybody has a question mark about is Obama's tax policies. Realistically what can we expect? Will he raise taxes in his first term or in his first year?
GALLAGHER: I think taxes are going up in the first term. I think they'll probably legislate the tax increases in the first year. That will probably be seen as a way to reassure markets that the jump in borrowing, the huge increase in borrowing is just going to be temporary. It will be a message to markets that they'll try to bring deficits down. As to when those tax increases will take effect, I think that's harder to say, 2010, probably 2011 but not next year. I think it's quite unlikely that the tax increases will take effect in 2009.
GHARIB: Looking at the Federal Reserve there are a couple of vacancies currently. What kind of people do you think President-Elect Obama will appoint and will he reappoint Fed Chairman Bernanke for another term?
GALLAGHER: Those are big questions. I think some of the most important questions because so many items on the Democratic agenda look to have inflationary effect so what Obama does with the Fed will be really important. I think there's been a clear trend over the last couple of presidencies to take politics out of the Fed. So I don't expect Obama to try to steer the Fed in a more populist direction. I think he'll appoint kind of the macro economic heavyweight banker probably to the Fed. And if I had to guess right now-- and it is really just a guess-- I would bet that he would reappoint Bernanke. A lot depends on how the Fed does over the next several months in handling the financial crisis, but I think in particular Bernanke's crisis management skills have been recognized by Democrats and would be rewarded. But there's no question Obama will have an ability to put his imprint on the Fed in the first year.
GHARIB: All right, real quickly. For investors who want to rearrange their portfolio based on this election victory, what is the top stock sector that they should put money into in an Obama presidency and what's a sector they should avoid? GALLAGHER: I think infrastructure and alternative energy combined are the big winners. The losers are big pharma and managed care companies and traditional or conventional energy producers.
GHARIB: Thank you for that quick answer. We'll have to get back to you for more details. Thank you so much, Tom, for coming on the program.
GALLAGHER: Thank you, Susie. Thank you.
GHARIB: My guest tonight, Tom Gallagher, political economist at International Strategy and Investment.
"Street Critique"-Hilary Kramer, Chief Market Strategist at Greentech Research
JEFF YASTINE: Tonight's "Street Critique" guest says while stocks have been beaten up and may look tempting, there are some issues that just aren't worth it. She's Hilary Kramer, author of "Ahead of the Curve" and chief market strategist at Greentech Research. Hilary, welcome back to NIGHTLY BUSINESS REPORT.
HILARY KRAMER, CHIEF MARKET STRATEGIST, GREENTECH RESEARCH: Thank you, Jeff.
YASTINE: First, let's talk about this market today. What happened? It got -- the markets got completely pounded.
KRAMER: Well, institutions, foundations are net sellers. There are a numbers of states, counties that have to raise money and no one wanted to sell before the election. So today was the day that everyone sold, this dead cat bounce and also the day where money needed to be raised.
YASTINE: Normally, when we have you on the show, we talk about what stocks and what sectors to buy. In this case we're talking about sectors and stocks to avoid. What do you have for us?
KRAMER: Well, the first area sector that you want to be careful of would be casual dining because the consumer has less money, 40 percent less money in their 401(k) and unemployment rising. So what's happened is that Burger King and McDonald's have replaced many of the casual dining restaurants and eating at home. So I'd be careful of companies like Ruby Tuesday or a company like Dine Equity, DIN, which has taken on a lot of debt in order to grow and acquire companies like Applebee's.
YASTINE: What's another sector for us to avoid?
KRAMER: High-end retail. A number of very large investors have been really hiding in this space. This isn't just Tiffany's. Be careful of companies like Talbots. Companies like Talbots, the problem is that again the consumer has switched over and is buying at Target and at Kohl's and also there's just less money out there. The big one that I believe in avoiding is Lululemon, LULU. That's organic clothing with very high-priced expensive real estate store front and a lot of growth that analysts have built in that just can't sustain.
YASTINE: And Hilary, give us a third sector then.
KRAMER: OK, now this is very interesting. This is for-profit education. The for-profit education arena seems like a place that would do well when there's growing unemployment, you know, jobs are scarce and those that want to make a transition, want to go back to school and have a degree or a technical degree. The problem is that we could have another sub-prime crisis in for-profit education, just like we did with mortgage lenders because they're taking a lot of debt onto their own balance sheets, these companies, because companies like Sallie Mae aren't available anymore to give them loans so we may see some real trouble brewing. It could take a full year or two. And hopefully, any kind of predatory lending practices will also be handled during the process that these become in focus.
YASTINE: Hilary, do you own any of the stocks that you've mentioned? You know, for disclosure purposes?
KRAMER: Yes. I'm short DIN, Talbots (TLB) and also short lululemon, LULU.
YASTINE: Hilary, thanks for your time on the program.
YASTINE: Our guest Hilary Kramer, author of "Ahead of the Curve."
KRAMER: Thank you, Jeff.
"Money File"-International Investing
SUSIE GHARIB: In the Money File tonight, the latest thinking on international investing. Here's Eric Schurenberg, managing editor at "Money Magazine."
ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: Until recently, you couldn't help but see the wisdom in investing a good chunk of your money outside the U.S. The economic future looked incredibly bright beyond our shores, especially in developing nations like China, India and Brazil. The stock markets there had been on a tear. Besides, shifting money overseas was supposed to be good defense. If a bear market were to strike Wall Street, international stocks would offer some protection. Well, we had our bear market and those foreign funds didn't help, did they? The past 10 years was one of the worst such stretches for U.S. stocks ever. And the good old S&P 500 still did slightly better than Chinese stocks. So what went wrong? Partly it was the strengthening dollar. When the buck gets stronger, stocks denominated in other currencies lose value for American investors. But the worst headwind was the performance of foreign markets themselves. They got clobbered by the same credit crunch as we did here. Many were clobbered worse. Now that doesn't mean foreign investing was all a big mistake. The world economy is still expected to grow 15 to 20 percent faster than the U.S. But you need to be judicious. History suggests that 25 percent in foreign stocks is a good allocation. It's safer than betting entirely on U.S. stocks, but still gives you most of the boost you get out of those risky, . Now history isn't a perfect guide as we all know these days. But as the world grows closer, not farther apart, maybe we should expect a little less magic from those exotic foreign markets. I'm Eric Schurenberg.
"Last Word"-Historic Headlines
SUSIE GHARIB: And finally tonight, Barack Obama's election victory is big news around the world and at the Newseum in Washington, DC nearly 700 front pages from newspapers around the world were on display today and "history" seemed to be the buzzword for many. Among them: "Historic Victory"; "Obama Seizes Historic Win"; and of course, "Obama Makes History." Others read "A New Dawn" and simply "Obama." And Jeff, Obama's victory was good for newspapers sales. Across the country newsstands sold out. And the "New York Times" printed 50,000 extra copies after its initial run ran out. Other people did what I did. I saved my copy.
YASTINE: Same here. I saved the local paper myself.
Paul Kangas' Stocks in the News
JEFF YASTINE: And so much for Wall Street's recent rallies. Today's sharp decline erased all of the gains of the past three trading sessions. The Dow opened 200 points lower, with financial stocks like Citigroup leading the way down on worries about tighter regulation under an Obama administration. Adding to the selling, a new report showing further contraction in the nation's services sector. The selling accelerated into the close, so the Dow went on to close off 486 and a fraction to 9139.27. The NASDAQ fell 98.48 to 1681.64 and the S&P 500 down 52.98, ending at 952.77. In the bond market, the 10-year note climbing 6/32 to 102 14/32 and the yield to 3.7 percent.
And General Electric (GE) tops our list, losing $0.84.
Citigroup (C) dropping $2.05. Financials were in broad retreat today. An Oppenheimer analyst expects the new Obama administration to make banks restructure their troubled mortgage loans. That will keep people in their houses, but also mean a contraction in the market for new mortgages.
Bank of America (BAC) down $2.78.
Pfizer (PFE) off $1.09.
Procter & Gamble (PG) down a little over $2.25.
JPMorgan Chase (JPM) again another financial here, dropping nearly $3.
ExxonMobil (XOM) off $3.80. Oil fell over $5 a barrel today and a new government report showed fuel inventories swelling last month as consumers put off unnecessary road trips.
American Intl Group (AIG) down $0.35.
National City (NCC) off $0.17.
Wells Fargo & Co (WFC) losing $3.09. The company announcing plans for a smaller $10 billion stock offering to fund its purchase of Wachovia.
Then we have AT&T (T) pulling back $2 and change. The new Obama administration supports Internet network neutrality rules which are opposed by phone companies like AT&T and the new administration may do more antitrust scrutiny as noted earlier. It makes it harder to do acquisitions.
Then we have the steel giant, Arcelormittal (MT) plunging almost $7. Auto makers aren't selling cars. China's also weakening. That translated to a plunge in sales at the steel maker.
And some of the others in that group not doing well either. AK Steel (AKS), Nucor (NUE), Reliance Steel (RS), U.S. Steel (X) all doing poorly today.
Ambac Financial (ABK) plunged $1.39. Ambac having more liquidity issues after taking a $2.7 billion charge on credit default swaps and now the pressure's on to get the government to use its bailout cash to buy a piece of Ambac. MBIA was also down 20 percent today.
General Growth Properties (GGP) leveled (ph) for a loss of $2.24. The mall owner scrambling to sell properties and raise about $900 million in debt payments which are due at year end.
Notable gainers among today's losers a few (ph), Chesapeake Energy (CHK) climbing $1.88. That's on takeover speculation. The nat gas producer had no comment there.
And Greatbatch (GB) having a great day, jumping $3.38 on an earnings, beat third quarter earnings about $0.12 above analyst estimes.
Over at the NASDAQ, Apple (AAPL) falling more than $7. UBS is now expecting lower iPhone production levels because of concerns about weakening end (ph) demand.
Then Google (GOOG) dropping more than $24. As you heard, Google calling off its advertising alliance with Yahoo!
Microsoft (MSFT) dropping $1.45.
Research in Motion (RIMM) down more than $2.50.
Cisco Systems (CSCO) losing $0.94. It fell about 5 percent after hours, reported flat third quarter profits. The company says the economic challenges here have spread abroad.
First Solar (FSLR) dropping more than $25. The whole solar power group hurt from a profit warning by SunPower. More on that in a moment.
Intel (INTC) losing $1.06.
Qualcomm (QCOM) down more than $2.50.
Yahoo! (YHOO) the only gainer there, gaining $0.57 after the Google deal was called off.
Oracle (ORCL) down more than $1.
Here's SunPower (SPWRA) which sank $17.50. The rally in the dollar over recent weeks will mean reduced earnings growth for the quarter and the year.
I2 Technologies (ITWO) dropping more than $4. It's being pursued by JDA Software as an acquisition. JDA wants a lower offering price on that deal.
And finally, Kendle International (KNDL) climbing $3.97. The drug- testing firm reported record profits that were nearly triple year-ago levels.
