NBR Transcripts- December 18, 2008
Thursday, December 18, 2008President-Elect Obama Assembles His Regulatory Team
SUSIE GHARIB: President-Elect Obama named two tough regulators today to police the financial markets and restore trust. He tapped Mary Schapiro, a veteran regulator as the new head of the Securities and Exchange Commission. He also named Gary Gensler, a former Treasury official, to chair the Commodities Futures Trading Commission, which regulates the futures and options markets. In the wake of the Bernie Madoff scandal and the financial crisis, Obama said he's counting on Schapiro and Gensler to overhaul the financial regulatory system. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Usually it's at least a few months into a new administration before a president nominates heads of the SEC and the CFTC. But with the SEC reeling from criticism, Obama made clear today's choices are about more than a change of management.
PRESIDENT-ELECT BARACK OBAMA: The alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets.
DHUE: The Obama team is working on its plan to overhaul the regulatory system. The president-elect hinted at the kind of changes under consideration.
OBAMA: For us to, for example, focus narrowly on bank regulation when huge amounts of money in the financial system are sloshing around outside of banks, that's a problem. Those are systemic risks that have to be dealt with.
DHUE: He tapped Schapiro to help manage those risks because of her unique experience. She was an SEC commissioner for six years and headed the CFTC in the Clinton administration. She also oversaw the merger of the regulatory arm of the New York Stock Exchange and the National Association of Securities Dealers into what is now Finra. Schapiro is committed to reforming the system.
MARY SCHAPIRO, CHAIR-NOMINEE, SECURITIES AND EXCHANGE COMMISSION: The only way to restore the trust that has been lost is through effective, thoughtful reform of our regulatory structure and the consistent and robust enforcement of our financial regulations and this will be my top priority.
DHUE: Schapiro is credited with strengthening enforcement at the NASD. But critics note that the organization she now heads, Finra, is responsible for examining broker dealers. It too, missed the alleged Madoff Ponzi scheme. James Angel is a finance professor at Georgetown University business school. He says the problem is too many agencies with too narrow a mission.
JAMES ANGEL, FINANCE PROF., MCDONOUGH SCHOOL OF BUSINESS , GEORGETOWN UNIV.: So if you look at all the messes that have occurred in the last few years, many of them stem from things that fell between the cracks at these different agencies, so the real challenge at this point is to create a new regulatory structure that is efficient and that doesn't have so many gaps.
DHUE: Obama says regulators have been asleep at the switch and he promises his team will aggressively crack down on fraud to protect investors, consumers and the economy. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The Latest on Required Minimum Distributions
SUSIE GHARIB: No break for seniors this year on rules requiring them to take money out of their IRAs and 401ks. The Treasury and IRS said today they will not change those required distributions for 2008.
The decision is a huge disappointment for many Americans age 70-1/2 and over who've seen their retirement funds torched in the market meltdown.
They must take out money based on the value of their accounts at the beginning not the end of this year. Our tax guru Kevin McCormally of Kiplinger's says now that the decision has been made you need to act quickly!
He suggests contacting your IRA or 401K custodian tomorrow morning. There's a 50 percent penalty if you don't take the Required Minimum Distribution and it has to be done by close of business December 31st.
Cash Stash Options
JEFF YASTINE: Whether or not you are in retirement mode, you are most likely shell-shocked as a result of the bear market. Making new investments is probably not at the top of your agenda. But safeguarding what cash you have probably is. So in times like these, where do you stash your cash? New York bureau chief Scott Gurvey went to find some answers.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: First stop, the mattress store. They wouldn't let us in. We figured there would be a line of people looking for a place to stuff currency but in fact the store was empty. So where is the money? With interest rates near zero, bank accounts are yielding virtually nothing. Money market mutual funds are yielding virtually nothing as well, although they are still the choice for maximum liquidity. If you're looking for yield, experts recommend government insured bank certificates of deposit. You should also consider TIPS, Treasury inflation protected securities. With TIPS, the principal is adjusted up with inflation, down with deflation. But you won't get back less than the original principal if you hold to maturity. TIPS usually yield less than regular Treasuries. But Joe McAlinden of Catalpa Capital says because of fear of deflation, the TIPS yield is currently greater.
JOSEPH MCALINDEN, CHIEF INVESTMENT OFFICER, CATALPA CAPITAL: I would much rather own TIPS than coupon Treasury bonds. Over the next three to five years I believe there will be inflationary consequences of all of this stimulus, not the deflation that people are worried about. Because people are worried about deflation, the TIPS have become very, very cheap and they are attractive I think for many investors.
GURVEY: If you are still scared of equities, you will not be happy to learn that many of the advisers we talked to say you may regret sitting on the sidelines. Christine Fahlund of T. Rowe Price suggests putting your toe in the water.
CHRISTINE FAHLUND, FINANCIAL ADVISOR, T. ROWE PRICE: We suggest that you consider how you're feeling right now and that one of the best ways to go back in is gradually. So you have the anxiety. The markets are way down now. So theoretically we like to buy things on sale. Now would be a good time to put a little of your cash back in the market.
GURVEY: And McAlinden recommends you have enough cash on hand to cover expenses for three to six months. But that's it.
MCALINDEN: I don't recommend the mattress for a variety of reasons including smoking in bed and burglaries and other things that could go wrong with that. But then all money beyond that that one has for long-term investment purposes should be in long-term assets and this may turn out to be the buying opportunity of a lifetime.
GURVEY: While most experts are confident a turnaround is coming, they are not predicting an exact time or date. So you may take your lumps from the money you are sleeping on or from the market. Your choice. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Jack Bogle, Founder of the Vanguard Group
SUSIE GHARIB: Well, if you are seriously contemplating a mattress as part of your asset allocation, you need some help. That's why we turned to legendary investor John Bogle. As founder of the Vanguard Group, Bogle has seen it all. Washington bureau chief Darren Gersh sat down with Bogle today and began by asking how best to navigate an economy and markets not seen in decades.
BOGLE: First you've got to make a very important distinction between the economy and the market. And we are in a serious recession already. I think that you are going to be facing -- we are going to be facing as a nation a more serious recession than we've had probably since the depression. I don't look for another depression. But it could go on for another year and a half to two years before we finally start to recover, the question with what strength. The stock market, however, is known, correctly known for anticipating what happens. So while the economy, GDP is down maybe 2 percent, 3 percent from its high, the stock market went down 50 percent from its high. Its reaction was huge compared to what happened to the economy. So the trick in the stock market is to try and figure out how much risk you are willing to take and the extent to which that has accurately anticipated that we are going into tough times.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is the thing, OK. And help me with this. Because I've taken your advice and I have been a buy and hold guy and tried to keep my costs down. But I looked at it. And for 10 years I've gone nowhere. Should I be doing something different?
BOGLE: No, you should not be doing something different. Buy and hold is eternal. What you have to understand is and I know you do understand it and that is the market moves in fits and starts. There is essentially nothing from 1960 to 1982, zero, just about the same level at the beginning as the end and then two booming -- two booming decades, 17 percent annual returns and then a decade where the return is, you are right, more or less zero.
GERSH: So maybe I have to get in my mind and everybody has to get in their mind that it could be two decades where we just kind of go sideways and you have to be there and you got to have that kind of time frame.
BOGLE: There is probably a decade of that behind us. So I think we can move toward more normal returns in the stock market now for some very fundamental reasons. First the dividend yield, an important part of long- term stock market returns. In fact, in the long-term the stock market return of 9.5 percent is a 4.5 percent dividend yield and 5 percent earnings growth. I think we're going to get higher than that earnings growth looking ahead here because earnings are down somewhat now. And if you get 7 percent earnings growth, that means the earnings on the Standard & Poor's 500 will double in the next 10 years. We had a 1 percent dividend yield back in 2000. Now that yield is up to 3 percent. So the fundamentals are stronger than they have been in a long time.
GERSH: Be devil's advocate though, right? A lot of companies used to be able to borrow more money than they had any business borrowing and consumers too. So we are de-leveraging. People can borrow less money. I see no reason that that is not going to continue for years. I don't know how long. In an environment where people can borrow less and spend less, companies too, doesn't that mean earnings should be lower for a long time?
BOGLE: Well, the one thing we know and this is really quite a well- known item and that is corporate earnings have grown at about the rate of our economy year after year after year. So if the economy is growing at a lower slower rate, let's say its normal growth has been in the last 100 years about 5 percent in nominal terms, 2 percent after adjusting for the cost-of-living. It may not seem like much, but that is where stock returns get created. So yes, corporate earnings will -- they are down sharply now. I think they will come back faster than the 5 percent growth.
GERSH: Here is the other thing about the market right now which is this whole Bernie Madoff thing and you can keep going down the sorry litany that we have had so far. Personally I'm having a crisis of confidence. I don't know who to believe or whether I should believe. And if I don't believe, my instinct is pull back, don't trust people. How do you operate in an environment? Should you trust people? Who should you trust?
BOGLE: Well, one of my early books said investing is an act of faith, including faith that our investment stewards will handle your money with the same care at which they handle their own and that faith has been hurt. And faith in our corporate enterprises has been hurt. And people should be mad as heck and not going to take it anymore. On the other hand, we have seen victims, companies that have done this going out of business. Individuals have led these companies have lost their jobs. So if you don't trust, ultimately you do nothing so whom should you trust? Trust people that are trying to serve you before they serve themselves. Beware of marketers. They're spreading the Madoff mystique all over the world we now know. And make sure are you investing rather than speculating. Know exactly what your costs are. It is a big part of the equation and make sure you are tremendously diversified in stocks and bonds and have an intelligent asset allocation. That's it.
GERSH: Jack Bogle, Vanguard founder, thank you for coming by. It's good to see you.
BOGLE: My pleasure Darren, always.
Two Ways to Play - Fed Rate Cut
SUSIE GHARIB: It's said there are two sides to every story, two ways to play every trade. So tonight, we're looking at the Fed's latest rate cut from both sides of the issue. In tonight's "Two Ways to Play" here's Minyanville's Kevin Depew and Kevin Depew of Minyanville.
KEVIN DEPEW, MINYANVILLE: This week the Federal Reserve cut its overnight lending rate, the Fed funds rate 75 basis points to a range of 0 percent to a quarter of a percent. This is an historic step, marking the first time ever the Fed funds rate has been reduced to as low as zero. In doing so, the Fed has finally acknowledged the tough economic conditions we've been experiencing on Main Street for quite some time. But more importantly, this move marks the beginning of the end for this bear market. With stocks down nearly 40 percent year-to-date and incredible as this may seem, down 5 percent over the past 10 years, now is not the time to be turning bearish. That time has long passed.
Your optimism is relentless, but if there is one thing we've learned this year it's that not even the bears have been bearish enough. The hope among the bulls is that the Fed's zero interest rate policy will mark the end of this deflationary debt unwind, effectively punishing savers. But hope is not a viable investment strategy. Instead, what the Fed has done is push all their chips into the pot, gambling everything on one final card. Stocks are no longer being priced according to fundamentals, because they are now simply pawns in the Fed's giant credit market gamble. Unfortunately, this reckless gesture sets the stage for a more likely negative outcome and that's full-blown crisis of confidence in the dollar and the central bank itself.
"Commentary"-Holiday Reality Check
SUSIE GHARIB: In tonight's commentary, a reality check for Christmas. Here's Alfred Edmond Junior. He's senior vice president and editor in chief at blackenterprise.com.
ALFRED EDMOND JR., SR. VP, EDITOR-IN-CHIEF, BLACK ENTERPRISE.COM: Most of us know the principles of responsible money management: habitual saving and controlled spending. Never borrow money without a plan to pay it back. Don't live beyond your means. We read about it in the "Black Enterprise," heard about it on NIGHTLY BUSINESS REPORT, accumulated best sellers ranging from "Rich Dad, Poor Dad" to "The Millionaire Next Door." Yes, we know what to do. We just didn't do it. Now, the inevitable winter of the economic cycle has arrived and we're all paying the price for not putting aside resources for tough times. I find it encouraging to remember an American generation that didn't just talk about fiscal responsibility, but lived it: the survivors of the oft- referenced great depression of 1929. They learned the hard way to save diligently, borrow sparingly and appreciate everything, taking nothing for granted. I remain hopeful that we will not experience a depression on the scale of the one from 80 years ago. However, the silver lining in the cloud swamping our economy could be a resetting of our values, turning us away from the addiction to credit, disdain for saving and immature obsession with satisfying our every whim now, even if we can't afford it. There is a conversation that many parents, including me, have been forced to have with our children this Christmas: the presents under the tree will neither be as large, nor as plentiful this year. But it's not about the stuff we can buy. It's about valuing life and the people in it. I'm hoping this reality check will be the gift that keeps on giving long after the economy recovers. I'm Alfred Edmond Jr.
Paul Kangas' Stocks in the News
JEFF YASTINE: So questions about General Electric's financial health kept Wall Street's gloom meter (INAUDIBLE) today. The Dow struggled to maintain break even levels in the first half of the session. Stocks faded sharply around 2:30 after Standard & Poor's raised concerns about the future of GE's AAA credit rating and fellow Dow component ExxonMobil sold off on that tumble in oil prices. The Dow went on to close off 219.35 at 8604.99. The NASDAQ fell 26.94 to 1552.37 and the S&P 500 ending off 19.14 to 885.28. And more safe haven buying in Treasuries, the 10-year note gaining 1 7/32 to 114 29/32 and the yield now down to 2.08 percent.
And Transocean (RIG) leads our list today, down a little over $7. The sharp drop in oil prices not helping, but Transocean is going to move its home base to Switzerland for tax reasons. As a result, Standard & Poor's is dropping them from the S&P 500 Index after the close.
And there's General Electric (GE) losing $1.43. S&P cut GE's outlook to negative due to GE capital's problems and since he warned, warned that GE could lose its AAA credit rating if its corporate fundamentals don't improve.
Bank of America (BAC) losing $0.66.
Citigroup (C) losing $0.40.
ExxonMobil (XOM) down a little over $4 as oil prices plunged to that $36 a barrel.
And a look at some of the other oil majors today, BP PLC (BP), Chevron (CVX), ConocoPhillips (COP), Hess (HES), Marathon Oil (MRO), all posting sizeable losses.
Ford Motor Co (F) fell $0.30. More dithering in Washington. The talk of an orderly bankruptcy something the auto makers still reject.
JPMorgan Chase (JPM) losing $1.65.
Pfizer (PFE) dropping $0.13.
And then we have Wells Fargo (WFC) losing $0.33.
Wal-Mart Stores (WMT) gaining $0.22.
Freeport-McMoran Copper & Gold (FCX) losing nearly $3. Gold futures fell about $8 to about $8.60 an ounce. Mining stocks in general under pressure today amid worries about a renewed fall in commodity prices.
Texas Instruments (TXN) sliding $1.19. Analysts at Jefferies see more weakness heading into the first quarter of the year. They're urging clients to hold off buying this stock and others of the chip category.
Another casualty in that space, MEMC Electronic (WFR) down $2.14. Management cut fourth quarter revenue targets again with orders plunging and profit margins shrinking.
Shares in Nike (NKE) rising over $2. The company said last night it sees a drop off in orders around the globe, but analysts at S&P see margin expansion and lower tax rates in some markets that should drive future gains.
Callaway Golf (ELY) clubbed for a loss of $1.31. The company postponing an investor conference where Callaway normally gives revenue and forecasts, profit forecasts. Now investors will have to wait until the second quarter.
And there's Avalonbay Communities (AVB) sinking almost $6. The builder canceling a number of apartment community projects until next year because of the soaring unemployment rate. It's hurting occupancy rates.
Tennant Co (TNC) losing more than $4. Managers there forecasting a loss as the drop in European sales mirrors the weakness in this country.
And then insurance stocks among the pockets of strength today, an agent survey showing some increase in property and casualty rates. Assurant (AIZ), Lincoln National (LNC), Metlife (MET), Prudential Financial (PRU) all doing pretty well.
Apple (AAPL) on the NASDAQ rising $0.27.
Microsoft (MSFT) losing $0.36.
Google (GOOG) dropping nearly $5.
Intel (INTC) losing $1 even.
Research in Motion (RIMM) down more than $2. After the close, they had third quarter earnings which rose nicely. They also raised their forecast.
Cisco Systems (CSCO) rose a - excuse me, following a fraction.
First Solar (FSLR) down more than $4.
Oracle (ORCL) also with earnings, they missed estimates by a penny, losing $0.13 today.
Amgen (AMGN) dropping $0.40.
Qualcomm (QCOM) losing nearly $1.
And finally, Take Two Interactive (TTWO) sliding $3. The game maker warning that its profits in this quarter, which includes the holiday shopping period would be sharply below earlier forecasts.
And those are our stocks in the news tonight.
