NBR Transcripts- November 25, 2008
Tuesday, November 25, 2008The Fed Buys Debt To Boost Credit
SUSIE GHARIB: American consumers got an early holiday gift today from the Federal Reserve: two new programs designed to give them easier access to credit. The Fed will lend hundreds of billions of dollars to consumer finance companies so they will increase loans to consumers and small businesses. The central bank has committed even more taxpayer money to buy the debt and mortgage-backed securities of government entities such as Fannie Mae and Freddie Mac. In reaction, 30-year mortgages posted a record one-day drop of 1 1/8 percent to a rate of 4 7/8 percent. Washington bureau chief Darren Gersh has more on today's Fed actions.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you were looking for a reason to be thankful, the Federal Reserve offered two today. First the Fed announced it would buy $600 billion in debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac. Fed officials say their goal is to boost credit and reduce the cost of buying a home. Mortgage expert Guy Cecala says the government is putting a huge amount of buying power to work.
GUY CECALA, CEO, INSIDE MORTGAGE FINANCE: They could buy the entire market and basically buy every new security Fannie Mae and Freddie Mac creates, leaving very little for anyone else to purchase, other investors. So the idea is that it would drive down mortgage rates and it should have immediate impact.
GERSH: The second reason to give thanks is a new Federal Reserve program to support consumer and small business lending. The Fed plans to lend $200 billion to help buyers of asset-backed securities like mutual funds and insurance companies. The Treasury now says it will absorb the first $20 billion and any loss the Fed may take. The assets include car loans, student loans and some small business loans. Banks fund those loans by packaging them together and selling them off, that is until last month when the market dried up completely. Treasury Secretary Henry Paulson sees an aggressive effort to revive that market.
HENRY PAULSON, TREASURY SECRETARY: Remember, that $200 billion is the starting point. It's going to take a while to get this program up and going and then it can be expanded and increased over time.
GERSH: Paulson says the program could ultimately be expanded to include commercial mortgages, though all the details of these programs can seem mind numbingly complex. Former Fed Governor Laurence Meyer says the overall goal is clear.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: You have the Fed going around virtually market to market and seeing where credit is clogged and what they can do to get that credit flowing again and so I think it's very significant.
GERSH: If you think that effort has been aggressive so far, Meyer says there's more to come. If necessary, the Fed could begin buying up jumbo mortgages, maybe even corporate loans.
MEYER: It doesn't want to be the total intermediator of credit throughout the economy, but it's moving in that direction.
GERSH: Indeed, the Fed is now approaching $3 trillion in all its various lending facilities. When all is said and done, Meyer wouldn't bet against that rising to $4 trillion. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
When Will The Unofficial Recession Become Official
PAUL KANGAS: Despite all those Fed expenditures, the U.S. economy is still struggling. The Commerce Department said today the economy contracted by half a percent in the third quarter, more than the original estimate of .3 of a percent. As Suzanne Pratt reports, many economists predict this recession could be a long one.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It should come as no surprise to Wall Street, for that matter Main Street that the U.S. is in recession. While there is a panel of experts that officially dates U.S. recessions and it hasn't yet done so, most forecasters say we're already in one. Many believe the recession started early this year, with others saying it began in the summer. The big question, however is how long and how deep. Economist Brian Fabri expects GDP to contract 3 percent in the fourth quarter of this year and 4 percent in the first quarter of next year.
BRIAN FABBRI, CHIEF ECONOMIST, BNP PARIBAS: I think it's going to be longer and deeper than anything we've experienced in the post World War II period. Clearly, we have not had a cycle recession that has been burdened by this kind of a financial crisis in the last 70 years.
PRATT: A recent poll of economists predicted the U.S. economy measured by GDP would shrink 3 percent in Q four and 1 1/2 percent in Q one of next year. That same survey showed economists do not think the U.S. will start to grow again until the third quarter of next year. T. Rowe Price economist Alan Levenson says conditions will start to improve in the second half of '09, although he doesn't expect a rapid recovery.
ALAN LEVENSON, CHIEF ECONOMIST, T. ROWE PRICE: This optimism, such as it is and I'm talking about the worst recession since 1981, '82, is based on the massive policy stimulus that's being thrown at it. The Fed has cut interest rates. It's pumping money into the economy aggressively and it looks like we're go to have fiscal stimulus as well.
PRATT: In evaluating the severity of recessions, economists also keep close watch on the nation's unemployment rate. It peaked at more than 6 percent following the 2001 recession, nearly 8 percent after the 1991 recession and nearly 11 percent after the one in 1982. While millions of Americans are expected to find themselves out of work in this recession, the unemployment rate will probably only hit about 8 or 9 percent. That's if the government's rescue plan works.
FABBRI: The risk is it comes too little too late and therefore the recovery gets postponed deeper into 2010, for example and then that's when the unemployment rate could easily go back to 10 percent.
PRATT: The past two recessions each lasted only eight months. Some economists believe this one could linger as long as a year and a half, making it the longest recession since the great depression. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Voices from Main Street"-Fashioning Business In Troubled Times
SUSIE GHARIB: American cities and towns are hit by the financial slowdown and so are the businesses that line their streets. We're visiting some of them in the continuing series that we call "Voices from Main Street." Jeff Yastine dropped by a high-end men's clothing store in south Florida where customers are tightening their belts, as well as their purse strings.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Downtown Hollywood, Florida. It's 1200 miles from the canyons of Wall Street, but the nation's economic troubles are just as apparent. Less traffic on the streets, fewer people in the restaurants and fewer customers here at 1919 Hollywood Boulevard. That's the location of the Irving Berlin men's apparel shop, a decades-old landmark business on this particular main street. Ronnie Cohen grew up in these aisles and now co-manages this family-owned shop with her father.
RONNI COHEN, VICE PRESIDENT, IRVING BERLIN FOR MEN: It's a challenge, I must say that I've been in the store 35 years and I have never seen the drop in revenue that we have right now. There's, it's hard put to get people to come in the door.
YASTINE: It hasn't always been hard. Cohen's father Lou bought the store in 1974 from this man and yes his name really was Irving Berlin, the habadasher. He founded the store in 1955. Since then it's changed with the times. You'll find high end Italian clothing and accessories and the store has weathered other economic downturns, but Cohen says this one is different.
COHEN: I think it feels worse, unfortunately. I think people are just a little more hesitant, they are a little more nervous, I don't think people have seen the destruction of their 401k's and just their perception of the lull I think right now is a big, you know, part of their worries to spend money.
YASTINE: So Cohen, like every other small business these days, has been adjusting to the leaner economic times. It's meant carrying less inventory and also adjusting the product mix here in the store to carry fewer suits and more shirts with a lower price point. And she's learned something else, selling through the Internet. She's also focused on keeping existing customers coming back, e-mailing them photos of new inventory, making alterations from measurements on file, then personally delivering the merchandise. Cohen says Irving Berlin has always been about treating customers as family.
COHEN: I'm concerned. Would I say I'm pessimistic, no. We've all been here, done this before, just have to try to, you know, trim whatever costs you can, and, you know, -- oh, I'm sorry. How are you? Good to see you.
YASTINE: The philosophy she believes will keep her store in business long after this economic downturn is history. Jeff Yastine, NIGHTLY BUSINESS REPORT, Hollywood, Florida.
President-Elect Obama Shores Up His Economic Squad
SUSIE GHARIB: President-Elect Barack Obama is making deficit reduction a goal of his administration. But first, he' has to stabilize the economy. Today, Obama announced his budget director and is expected to name more of his cabinet tomorrow. As Stephanie Dhue reports, the president elect is balancing campaign promises with a dose of financial reality.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Facing a shrinking economy and growing deficits, Obama promises to meet the nation's economic crisis in a fiscally responsible way.
PRESIDENT-ELECT BARACK OBAMA: We are going to have to jump start the economy. And there's consensus that that requires a bold plan to make the investments in the future. But we have to make sure that those investments are wise. We have to make sure that we're not wasting money.
DHUE: Obama also renewed his pledge to go line by line through the budget to eliminate ineffective programs. To help get the job done he picked Peter Orszag for budget director and Robert Neighbors as deputy. Orszag now heads the Congressional Budget Office and has made health care reform a priority. Federal budget watcher Stan Collender says Orszag's knowledge is an advantage.
STAN COLLENDER, MANAGING DIRECTOR, QORVIS COMMUNICATIONS: Unlike a lot of previous budget directors who either knew nothing about the budget or only knew a little bit about it, Peter comes in and there will be no cabinet department that will be able to run rough-shod over him, at least for the first year or two, because he's going to know more about their numbers than they will.
DHUE: Obama singled out a farm subsidy program as an example of wasteful spending he would cut. The Government Accountability Office found farmers making more than the $2.5 million cut off still received $49 million in subsidies from 2003 to 2006. It's a small slice of a $3 trillion budget, but Kenneth Cook of the Environmental Working Group says reviewing every program sends a message.
KENNETH COOK, PRESIDENT, ENVIRONMENTAL WORKING GROUP: Part of this is psychological. In order for people to believe the government can do things right, you can't have these kinds of examples popping up all the time, without some strong response from the government.
DHUE: Obama also promised to have a long-term plan to reduce the deficit so the next generation isn't left with a mountain of debt. Obama will have more to say tomorrow and there's some speculation he could name New Mexico's Governor Bill Richardson as Commerce Secretary. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Riding Out The Storm"-Personal Debt To Cash Ratio
SUSIE GHARIB: As we continue to follow how you're riding out the storm, tonight we take a look at dealing with debt. One viewer, Marie, admits she hasn't been as savvy with her finances as some other viewers. Marie is 37 years old and single. She earns $52,000 a year and has accumulated $27,000 in credit card debt, but she's cash poor. She contributes the maximum amount to her 401k to receive matching funds from her employer. We asked personal finance journalist Eric Schurenberg for his assessment on carrying this much debt with only a little cash on hand.
ERIC SCHURENBERG, PERSONAL FINANCE JOURNALIST: You just don't have enough of a cash cushion and you're too close to the edge. If anything happens to you, you're bankrupt and that's an incredible burden to bear. Now I know a lot of people think that getting that corporate match is a big deal and it is, but remember that's a one-time hit. The interest you're paying on your credit card debt occurs month after month after month and keeps compounding. So concentrate on paying down that debt and when you're through, you'll feel better. You'll be in a better financial position to go back to saving for retirement.
GHARIB: Schurenberg says that once that credit card debt is paid down, Marie should re-start her 401k contributions.
"Of Mutual Interest"-Buying & Selling Mutual Funds
SUSIE GHARIB: In tonight's "Of Mutual Interest," buying and selling your mutual funds can be tricky this time of year. Here with some help is John Waggoner, mutual fund columnist at "U.S.A. Today" and author of "Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you've watched your stock fund plummet this year, you may be thinking to yourself, gosh, can things possibly get worse? Of course they can. A few months of enormous losses are also doling out big capital gains payments, so in addition to losing your shirt, you'll get a big tax bill as well. When a mutual fund sells a stock at a profit, it must distribute those gains to shareholders. Funds also have to distribute any income they receive at least once a year. Most funds typically distribute their gains between now and the end of the year.
What's wrong with that? Well, you owe taxes on the gains and the income. Long-term gains are taxed at 15 percent, income is taxed at your highest tax rate. So if your fund distributes $1,000 in capital gains, you've just added $150 to your tax bill. You'd expect the distributions when the market is soaring, but many investors have sold their stock funds, forcing funds to sell positions to meet redemptions. Vanguard's precious metals fund for example has plunged 61 percent in the past 12 months, but it's distributing $1.95 per share in capital gains and the American Funds New Perspectives fund down 46 percent, estimates its distribution at 7 to 9 percent of its share price.
Many funds will have no distributions this is year, but if your fund does you'll get the full amount no matter how long you held the fund. If you buy a fund before it makes its distribution, you'll just wind up paying more taxes so, don't make a bad situation worse. If you're thinking about buying a fund now, check to see if it's made its capital gains distribution first. I'm John Waggoner.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened on a mixed note with the blue chips posting an early 115-point gain in the Dow and that was thanks partly to those new government programs to boost consumer lending. But the NASDAQ fell 26 points early on as tech stocks were hit by profit- taking. Continuing losses in the tech sector dragged the Dow to a 122 point loss in mid-afternoon, but then some pretty good late buying helped the market end narrowly mixed. The Dow Industrial Average closed up 36.08 at 8479.47. The NASDAQ fell 7.29 to 1464.73. while the Standard & Poor's 500 Index was up 5.58 at 857.39. Over in the bond market, the 10-year note gained 1 28/32 to 105 14/32, putting the yield all the way down to 3.11 percent.
Big board volume leader was Citigroup (C) trading 54.6 million shares, stock moving up $0.13. The Sandler O'Neill brokerage upgraded Citigroup's stock from "hold" to "buy."
Bank of America (BAC) edged up $0.21.
General Electric (GE) a $0.51 gain. GE will provide service agreements worth over $1 billion in the next 18 years to Algeria's state-owned power company.
JPMorgan Chase (JPM) up $2.19.
ExxonMobil (XOM) down $0.69 as oil dropped a bit today.
Pfizer (PFE) $0.10 loss there.
Wells Fargo (WFC) edged up $0.93.
AT&T (T) a $0.35 gain.
And then ITT Corp (ITT) down $0.73.
Petrobras (PBR), the Brazilian oil up $0.19, tenth in volume.
Goldman Sachs (GS) up $4.36. The company launched a $5 billion offering of debt backed by the FDIC. Demand was good and other major banks are expected to follow suit with their own offerings.
Hewlett-Packard (HPQ) was a drag on the market today, down $2.10. Its fourth quarter earnings came out $1.03, versus $0.86. That was right in line with the company's recent pre-announcement of those earnings, but now it sees unfavorable currency impact on its first quarter results. That hurt the stock.
Rio Tinto (RTP) plunging almost $40 a share, traded as low as $93.79 on news that BHP Billiton has backed out of its all-stock buyout offer saying that that offer is no longer in the best interests of its shareholders.
BHP Billiton (BHP) was up $4.85 to $38.27.
Lennar (LEN) up $1.45, big percentage move there. UBS financial upgraded it from "neutral" to "buy" and other home builders' stocks were up on the Federal Reserve programs (INAUDIBLE) credit markets by supporters holders of asset-backed securities.
Let's look at a board of those other home builder stocks, DR Horton (DHI), despite reporting a big fourth quarter loss, was up $1.90.
MDC Holdings (MDC) did well.
And NVR (NVR), high-priced issue, even higher.
And Ryland Group (RYL) up $1.65, nice percentage gain there.
Analog Devices (ADI) on the other hand, down $1.22, despite higher fourth quarter earnings, $0.49, up from $0.30 a year ago, but the company says its first quarter revenues could drop as much as 20 percent. Obviously that hurt the stock.
Treehouse Foods (THS) losing $4.10. Credit Suisse brokerage downgraded it from "out perform" to just a "neutral" rating.
And Universal Tech Inst (UTI) rising $2.05, a turnaround, fourth quarter earnings of $0.02 versus a loss of a nickel a share last year and BMO Capital brokerage upgraded it from "market perform" to "out perform."
The big jewelry chain, Zale (ZLC) tumbling $3.73, a 41 percent loss. First quarter loss of $1.43. The Street was expecting a loss of just $0.95 and same store sales were down 3.7 percent.
NASDAQ's most active, Apple (AAPL) $2.15 loss there.
But Google (GOOG) did pretty well today, up $24.61.
Microsoft (MSFT) rising $0.70. There's a rumor making the rounds Microsoft will launch a smart phone based on its Zune music player technology.
Research in Motion (RIMM) down $3.76.
Cisco (CSCO) off $0.98. Cisco's going to shut down its U.S. and Canadian offices from December 29th to January 2nd because of flagging demand for its products.
Oracle (ORCL) $0.66 loss.
Intel (INTC) dropped $0.43.
Qualcomm (QCOM) $0.13 drop there.
Amgen (AMGN) fell $1.06.
And Gilead Sciences (GILD) up $1.41.
Daktronics (DAKT) up $1.34, almost a 20 percent rise. Second quarter earnings nearly tripled from last year, $0.30. They did triple, versus only $0.10 then and that was $0.11 better than the Street consensus.
Those are the stocks in the news tonight.
