NBR Transcripts-November 12, 2008
Wednesday, November 12, 2008Intel Computes Concern for the 4th Quarter
SUSIE GHARIB: A big surprise warning tonight from Intel. After the bell, the technology bellwether sharply cut its revenue forecast for the fourth quarter. It now expects fourth quarter sales to be about $9 billion. That's about $2 billion less than the high end of previous estimates. The world's largest computer chip maker says all of its business lines are being hurt by poor demand around the globe. In after hours trading Intel shares fell as much as 7 percent.
Treasury Secretary Henry Paulson's New Plan for the Bailout
PAUL KANGAS: That Intel warning capped off another dismal day for stocks which plummeted after the government announced big changes to its financial rescue plan. The Dow tumbled 411 points and the NASDAQ fell 81 as investors worried that the rescue plan's shakeup is a sign the U.S. economy is heading to a deep recession. Treasury Secretary Henry Paulson today announced an expansion of the government's bailout beyond banks to include consumer loan companies and insurers. Paulson also said the government no longer plans to buy toxic assets held by financial institutions. We have two reports tonight, looking at the government's new direction and what companies could be next in line for a bailout. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson says when the facts change, he'll change. And that's why the Treasury is changing course on the so-called troubled assets relief program or TARP for short. Paulson said the $700 billion financial rescue package that was originally designed to buy up troubled mortgage securities, won't.
HENRY PAULSON, TREASURY SECRETARY: Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role.
GERSH: Paulson concluded buying troubled assets would take too long and would not do enough to repair bank balance sheets. Critics like Dean Baker say Paulson has finally seen the light.
DEAN BAKER, CO-DIR.,CENTER FOR ECONOMIC & POLICY RESEARCH: He consistently underestimated the severity of the problem and then when it came to a solution, to my mind he went entirely down the wrong track and he now agrees with what I and most economists in the country were saying.
GERSH: Going forward, Paulson intends to find other uses for the TARP. The Treasury is considering using government money as matching investments to convince private investors to inject their cash into key players in the financial system. Also on the table: working with the Federal Reserve to finance the market for securitized or bundled consumer assets like student loans, car loans and credit card bills. Forty percent of consumer credit is provided through this market and Paulson says it's been all but shut down by the credit crunch.
PAULSON: The illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy.
GERSH: Treasury also wants to help what Paulson called non-bank financial institutions. That might include life insurance companies, credit unions, even brokers. Financial services industry lobbyist Scott Talbot calls it a good idea.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: I think what they are trying to do is signal that they are willing to talk about injecting TARP money into an institution that has a direct lending relationship with the consumer. The consumer is the one that drives the economy, so we want to put the government dollars into the hands of the institutions that lend to the consumers.
GERSH: Paulson also suggested any remaining funds from the financial rescue package be held as a contingency fund to deal with new financial shocks. Some speculated that might open the window to help for GM and Ford, since their failure cold throw millions out of work. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York. Today Treasury Secretary Hank Paulson called an audible. That's what the quarterback does when he figures the play he originally set up isn't going to work. Wall Street's reaction was both swift and negative. Economist Bob Brusca says it is difficult for the markets to have confidence when the game plan keeps changing.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT & OPINION ECONOMICS: They want you to just take it on faith that they are going to hold things together, however bad it looks. Like the wizard of Oz, you know, ignore that man behind the curtain because everything is going to be fine.
GURVEY: The Treasury secretary says new government capital injections will be made only to financial sector companies. Joe Andrew, a former chairman of the Democratic National Committee who advises companies on government regulation, says that is not popular on Main Street.
JOSEPH ANDREW, PARTNER, SONNENSCHEIN NATH & ROSENTHAL: People walk up to me and say, where were these guys when Katrina happened? If you can bail out Wall Street so quickly, where were you when the city of New Orleans and millions of people needed help. It's a legitimate criticism.
GURVEY: What is being asked on Main Street is where does the bailout end? From mortgage lenders to investment banks, from commercial banks to hedge funds, will taxpayers now bail out American Express? How about the auto companies? And how much reform will the government demand from companies in which it invests?
BRUSCA: A lot of us wonder, if you prop things up and if you get back, quote to normal, how do you get back to doing those things again? How do you take these government - the monies from the government that have gone to the private sector and pull them back. Is this healing penicillin or is this crack cocaine?
GURVEY: Whatever the ultimate outcome, it is clear that this crisis has set a precedent which will have a long-lasting impact on the relationship between the private and public sectors.
ANDREW: You've just seen the most dramatic expansion of government activity in the private sector in the history of the United States under a Republican administration. The real question here is, will it work or not work?
GURVEY: On January 20, a new administration takes over in Washington and may change the game plan again. Of course, at any time between now and then, the current government can call another audible. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Fixing the Financial Crisis"-Regulating the Financial Regulatory System
SUSIE GHARIB: The financial crisis has revealed massive gaps in the regulatory system. So as policymakers focus on the short-term fix, they also have to look at what changes need to be made to ensure this doesn't happen again. As we continue our series "Fixing the Financial Crisis," Stephanie Dhue looks at the longer term regulatory issues facing American business.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 111th Congress and the incoming Obama administration face a massive undertaking overhauling the financial regulatory system. Senate Banking Committee Chairman Chris Dodd says he will proceed carefully.
SEN. CHRISTOPHER DODD, BANKING COMMITTEE CHAIRMAN: I want to make sure that we are, we are, we have a regulatory system that has the transparency, the proper supervisory role that we ought to be playing, but at the same time, does not strangle creativity and imagination that has been a hallmark of our success as well.
DHUE: Some of that overhaul is already under consideration. Back in March, Treasury Secretary Henry Paulson unveiled a blueprint for reform. He wants the Federal Reserve to be a kind of super-regulator, overseeing market stability and risk. Currently, the Fed shares those responsibilities with other agencies, including the Securities and Exchange Commission which has come under fire for not doing more to regulate investment banks. Barry Barbash worked at the SEC in the 90s. He says making the Fed a super regulator could work, but he still expects a now-wounded SEC to flex its muscle.
BARRY BARBASH, PARTNER, WILLKIE FARR & GALLAGHER: Whenever the SEC wants to show its strength what it does is it brings enforcement cases, so from that standpoint, the securities business, the hedge fund business will be under pressure from the regulators in the form of enforcement cases and really hard examinations as well.
DHUE: A mortgage regulator may also be part of a fix. Former FHA official Ira Peppercorn says any overseer should be able to sound an early trouble warning.
IRA PEPPERCORN, FORMER DEPUTY, FEDERAL HOUSING COMMISSIONER: What we need is an early detection system that can say, this community is experiencing a high level of foreclosures or not just by the community level, but by a lender or by a broker, that can say, look at the default rate on the portfolio that this lender is originating. Someone needs to step in.
DHUE: Mortgage lending will also need to be addressed. A bill to crack down on predatory lending and create a national licensing system for mortgage originators passed the House of Representatives last year. The Senate may ramp that up and take a more aggressive approach, including letting bankruptcy judges work out troubled mortgages in court. Congress will also have to address Fannie Mae and Freddie Mac. The Treasury's authority to lend money to the mortgage giants expires in a year. But analyst Andy Laperriere says it may take longer to get Fan and Fred back on track.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The companies are going to be bleeding money a year from now and that's just a very tough environment in order to spin them off and have them go back to the private sector and do what they were doing.
DHUE: Lawmakers and regulators also want to address the role of credit rating agencies. Enron's collapse seven years ago unearthed serious conflicts that compromised the rating system. But regulators and lawmakers didn't fix the problems back then. Laperriere says it's still thorny.
LAPERRIERE: They recognize that there's a conflict of interest there, but how do you properly align their incentives and there really aren't very many good ideas out there on how to do it.
DHUE: Also on the to-do list, addressing the largely unregulated derivatives market, which nearly brought down insurance giant AIG. Michael Greenberger headed the CFTC in the '90s and at the time pushed for national derivatives regulation. It didn't happen then. He expects it will happen now.
MICHAEL GREENBERGER, FORMER DIRECTOR, TRADING & MARKETS, CFTC: At the very least, I think it is going to go under a sophisticated regulatory system, maybe onto regulated exchanges, but at the very least a system where a Federal regulatory agency will have reporting, will ensure adequate capital reserves, proper marking the market and anti-fraud and anti- manipulation authority.
DHUE: But there are local efforts. Beginning in January, New York insurance regulators plan to regulate some credit default swaps as insurance. President-Elect Obama has made fixing the economy his top priority. But he has offered few details on what regulatory changes he would make to the regulatory system. Clearly, any overhaul will be a complex and lengthy process. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Michael Farr of Farr, Miller and Washington
PAUL KANGAS: Tonight's "Street Critique" guest says uncertainty surrounding the Treasury's financial rescue plan is driving the markets lower. He's Michael Farr, president of the money management firm Farr, Miller and Washington. Michael, good to see you again.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Thank you, Paul. Nice to be here.
KANGAS: Michael, what can Treasury do to allay Wall Street's fears?
FARR: Be consistent. Stick with the program here. We got news today from Secretary Paulson that they were going to change the way they were going to apply this troubled asset relief program. I've heard people calling it the terrible asset relief program as well. They now want to actually make investments directly into financial institutions, whereas before they wanted to swap some of this toxic debt, some of these really bad investments for cash or for Treasuries. They're now going to change it. It's going to be fine. I think it's a fine approach but, folks, we've got to be consistent here. There's plenty of uncertainty and Wall Street doesn't like uncertainty.
KANGAS: You think in the new form it has a better chance of succeeding?
FARR: I think it has probably a better chance of succeeding because by investing into those financial institutions directly, they're going to be able to gain some leverage and perhaps heal more problems. That's the intention anyway and I think it stands a shot.
KANGAS: Understood. Worries about the health of the consumer have also been weighing on Wall Street. In light of today's news on Intel, are these fears overblown?
FARR: I don't think that you could possibly say that they're overblown given today's news on Intel. That was kind of a shocking number after the close that they may miss fourth quarter revenues by a $1 billion to $2 billion. That's really significant and it shows significant pressure where there's just the demand is drying up around the world. Intel is a big, of course, international company. So that's worldwide demand that's going to be affecting those numbers by as much as 20 percent.
KANGAS: With all this on our plate, the markets appear to be retesting their October lows. Where do stocks go from here?
FARR: Well, I think clearly, Paul, we're going to retest those lows. The hue and cry, the great chorus is calling for a retest of those lows. The expectation is out there. And so therefore, we've seen a buyers' strike today. Buyers who would otherwise come in are saying I'm going to hold off. I'm going to wait until we see those lows again. So, I think we're going to go ahead and test them. Will they hold? We need to see this double bottom. We've seen it historically since 1900, about 86 percent of the time in bear markets. It will happen so I hope from those lows we'll be able to build, but I still expect this recovery to take a good deal of time. I think we could be doing this through the spring.
KANGAS: What are you telling your clients in this ugly environment?
FARR: I'm really telling them that we need to stay the course. If you're going to buy low and sell high, we're down some 6,000 points in the past 13 months. So down 6,000 doesn't mean that we're high. Buying it in here is going to take some patience, I think, but I think that that's probably the right move. I don't think you have to be too fast to buy and you really need to do your homework. You have to be very careful and buy balance sheets that are very strong and for companies that don't need access to the capital markets.
KANGAS: No specific recommendations yet, Michael?
FARR: No specific recommendations yet, Paul. I've got a couple of buy lists in my pocket, a couple of tickets written in the tech area and the prices are coming my way.
KANGAS: Thanks for sharing your insights with our viewers, Michael.
FARR: Thank you, Paul very much. It's great to be with you.
KANGAS: My guest, Michael Farr of Farr, Miller and Washington.
"Money File"-Ending "RMD's"
SUSIE GHARIB: In the "Money File" tonight, required minimum distributions and your 401(k) account. Here's Harriet Johnson Brackey, personal finance columnist at South Florida's "Sun Sentinel."
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SO. FLORIDA SUN- SENTINEL: There's a movement afoot to suspend the required minimum distributions from qualified retirement plans this year and this idea makes zero sense to me. RMDs, as they're called, are what people age 70 and a half must withdraw from their individual retirement accounts and 401(k)s every year. The reason for them is the government won't let you defer taxes on that money indefinitely. You have to take it out and pay tax or you'll face a heavy IRS penalty. The RMD amount depends on your age and what your portfolio was worth at the end of last year. And I'm sure that account value was higher for almost everyone than what their portfolio is worth today. Proponents of the no- distribution idea argue that retirees shouldn't have to take losses or sell stocks at this low point to make those required withdrawals and this doesn't make sense, because, if you depend on your retirement account for everyday expenses, you've probably already withdrawn enough to meet the required minimum. Keeping the money in the account isn't an option if you need it to eat or pay the bills. Only those who don't need the money can afford to leave it there. Look at it this way. This idea would help some well-off people to lower their tax bill, while the poor fellow living off his savings has to pay up. It's a bad idea. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: Oil prices continued their decline today, falling another 5 percent as the Energy Information Agency said it now sees global demand staying virtually flat next year. In New York trading, December crude futures tumbled $3.17 to $56.16 a barrel. The EIA projected a negligible increase in world oil demand today and pointed to sharp declines in economies around the globe as the reason. Meanwhile, some analysts don't see a material rebound in oil prices until next year. Well that drop in oil prices couldn't lift Wall Street. Stocks opened broadly lower under the cloud of growing recessionary fears and an earnings warning from Best Buy. In a steady sell-off, the Dow fell 255 points by noontime with the NASDAQ off 43 points. Stocks extended their losses through the afternoon amid growing criticism of the government's revised rescue plan and the market went on to end at the day's lowest levels. The Dow Jones Industrial Average closed off 411.30 points at 8282.66. The NASDAQ Composite tumbled 81.69 points, ending at 1499.21, while the Standard & Poor's 500 was down 46.65 at 852.30. In the bond market, the 10- year note rose 28/32 to 102 26/32, pushing the yield down to 3.65 percent.
Big board volume leader on 31.8 million shares, General Electric (GE) down $1.52. That's the lowest close since December of 1996.
Then Citigroup (C) down $1.16. That's its lowest close since May of 1996.
Bank of America (BAC) fell $1.69.
JPMorgan Chase (JPM) down $1.78.
ExxonMobil (XOM) fell $3.72, very active.
General Motors (GM), the only gainer in the Dow 30 index, up $0.16, of course on hopes it'll get government assistance.
Pfizer (PFE) $0.94 drop there.
Procter & Gamble (PG) down $1.97. The consumer-related stocks very weak.
Let's have a look at some other Dow consumer-related stocks. Disney (DIS), Home Depot (HD), Kraft Foods (KFT) and Wal-Mart (WMT) all on the downside.
Then we move along to American International Group (AIG) in the active list, down $0.23.
And National City (NCC) a $0.20 loss there, tenth in volume.
American Express (AXP) was down $2.35. The "Wall Street Journal" reports the company is seeking $3.5 billion in taxpayer funds from the Federal government.
Macy's (M) down $1.04. Third quarter loss of $0.08 a share, not as bad as the $0.19 per share loss that the Street was expecting, but same store sales were down 6 percent.
Scotts Miracle Gro (SMG), a good gainer, up $3.07. The company's in talks with several of its large retailer partners to provide private label lawn fertilizers next year and this occurred after a major rival, namely Spectrum Brands, decided to exit that business, so up went that one.
AK Steel Holding (AKS) down $2.58. The company will idle steel plants in Ohio and Kentucky until mid-January because of the major downturn in product demand.
That hurt some of the other steels such as Arcelormittal SA (MT) down $3.10. It's also cutting production a bit.
Nucor (NUE) down $3.61.
And a $5 loss in U.S. Steel (X).
Prologis (PLD), this is a real estate investment trust that owns warehouses, down $2.40. Its chairman and CEO Jeffrey Schwartz has resigned. The company's cutting its proposed $2.28 annual dividend all the way down to $1 even.
Hutchison Telecommunications (HTX) up $2.60. The Hong Kong communications company says total user base grew to $11.2 million in the third quarter and it declared a special dividend of $7 Hong Kong dollars per share.
And then another retail stock on the downside, Whirlpool (WHR) losing $3.53 a share.
Apple (AAPL) topped the NASDAQ active list, down $4.65.
And Google (GOOG) tumbled $20.46. That's the first time Google's closed below $300 since late 2005. Citigroup cut its fourth quarter earnings due to dwindling fourth quarter online advertising revenue growth.
Microsoft (MSFT) $0.90 drop there.
$0.41 loss in Intel (INTC). In after hours, after that bad news on revenues, the stock I saw as low as $12.51.
Then Qualcomm (QCOM) down $2.50 a share, fifth in NASDAQ volume.
Research in Motion (RIMM) down $2.69.
$0.63 loss in Cisco Systems (CSCO).
Peoples United Financial (PBCT) dropped a nickel.
Oracle (ORCL) losing $0.82.
And First Solar (FSLR) off $20.84.
And finally, UAL Corp. (UAUA), parent of United Airlines, plunged $3.50. Calyon Securities noted that the airlines have detached themselves from lower oil prices and are focusing instead on declining passenger demand.
