NBR Transcripts-January 1, 2009
Thursday, January 01, 20092008/2009 Investment Review & Preview : The Year In Review
SUSIE GHARIB: The financial markets celebrated the start of 2009 by taking the day off. So tonight, we'll take stock of where the markets have gone over the past year and where they may be headed in the coming year. Jeff.
JEFF YASTINE: Susie, 2008 will be remembered as one of the worst years in decades for investors, especially if they happened to be invested in stocks. When trading opened a year ago, the Dow Jones Industrial Average stood at just over 13,000, while the NASDAQ Composite was just over 2,600. But during January, recession fears led investors to dump stocks and prices tumbled. It took two interest rate cuts and passage of an economic stimulus package to get them moving higher. February brought oil closing above $100 a barrel for the first time. That and a slowing economy led stocks to lose another 3 percent. March saw wild price swings, as worries over mortgage securities sent the dollar to new lows and gold's price above $1,000. But another interest rate cut helped stocks regain their footing. They continued to move higher in April, despite more bad economic news. Unemployment rose to a two-and-a half year high and new home sales fell to a 17-year low. May brought $130 oil and big rises in food prices. And as inflation concerns grew, consumers and the Dow cut back. Then, as oil went past the $140 a barrel mark in June, the Fed decided to hold interest rates steady. That didn't help stocks, leading to the worst June in Wall Street since 1930. In July, oil and commodities prices began to plunge, but that good news was offset by worries about the financial sector, as Federal regulators seized California thrift Indymac. The dollar regained much of its strength in August and small cap stocks showed some signs of life. But a sell off in financial stocks kept the Dow from gaining ground. Then a series of surprises sent stocks reeling in September. The collapse of Lehman Brothers and the near-failure of other major financial firms threatened the very stability of the financial system. And when Congress rejected a plan to rescue the financial sector, proposed by Treasury Secretary Paulson, the Dow lost 777 points, its biggest one-day drop ever. Passage of that bailout plan a week later did not quell Wall Street's worries. Signs the economic downturn was spreading worldwide sent the Dow below 9,000 and the NASDAQ below 1,700. Only a big rate cut from the Fed led to a brief comeback. Although November began with an Election Day rally, the Obama victory was soon eclipsed by worries over the future of the U.S. auto makers. Skepticism about Detroit's prospects led the markets to reach their lows for the year on November 20. In early December, word of the worst job losses in 34 years raised hopes for passage of a new economic stimulus plan. That and the Fed's decision to lower short-term rates to near zero helped the markets to end the year on a somewhat hopeful note. And to fill us in on the details of the past year's market action, joining us is Sam Stovall, chief investment strategist for Standard & Poor's equity research. Sam, happy New Year and welcome to, welcome back rather to NBR.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Jeff, happy New Year. Good to talk to you again.
YASTINE: Thanks, let's begin by taking a look at the relative performance of the major indexes. And as we can see, it was a pretty ugly year all around.
STOVALL: Absolutely. You actually have to go back to the 1930s to find a calendar year that was as bad as this one.
YASTINE: Now take a look at some of the individual winners and losers last year. We start with the lone gainers among the Dow Industrials, we have Wal-Mart (WMT) and then McDonald's (MCD).
STOVALL: Well, with Wal-Mart you had consumers who were trading down to a more discount environment. And McDonalds, again the situation where consumers were more willing to focus on getting the best bang for their buck.
YASTINE: And turning to big losers, no surprise General Motors (GM) with a huge drop in its stock price.
STOVALL: Well, it certainly did. The share prices suffered from a negative automobile as well as credit market environment. And I think investors are still a bit skeptical that they would be able to avoid bankruptcy rather than simply delaying it.
YASTINE: And then Citicorp (C), a big loser now for the second year in a row.
STOVALL: That's right. And also realizing that their on and off balance sheet of assets is totaling $3 trillion.
YASTINE: Oh my gosh. Turning to the S&P 500, we have a double digit winner. There were some winners on the S&P 500 this year, beginning with Family Dollar Stores (FDO).
STOVALL: Again, a situation in which consumers traded down. But investors were also happy that this company was able to hang on to strong margins even in a difficult retailing environment.
YASTINE: On the flip side, the S&P 500, the big loser, American International Group, AIG, until recently, the nation's largest insurer.
STOVALL: No surprise here. Basically we saw a company that has outsized exposure to the mortgage industry and the credit default swap market that recently had to go to the Federal government for an emergency bailout.
YASTINE: Now let's switch over to the NASDAQ 100. The big winner there was Vertex Pharmaceutical (VRTX), just what they did do to get that kind of a gain.
STOVALL: Vertex benefited from the favorable clinical trial data for its hepatitis C protease inhibitors.
YASTINE: And the big losers in the NASDAQ 100, Liberty (LINTA) got clipped. What did it do wrong?
STOVALL: Well, it suffered from challenging economic headwinds and a competitive online retail environment.
YASTINE: We are now going into the first year of a new president's first term. Is that supposed to be a good year historically, traditionally for stocks?
STOVALL: Well, that depends. If it is a Democrat, going back to 1945, the first year has been a gain of more than 14 percent. Of course past performance is no guarantee of future results. But that compares quite favorably with a minus 2 percent for the first year for Republicans.
YASTINE: You know, 2008, it seemed day in and day out marked by huge volatility. Do you see that volatility level coming down, calming in the markets in this coming year. Or do you think we are in for yet another roller coaster ride?
STOVALL: I sure hope we don't get another roller coaster year. In the past 12 months we had more than 40 days in which the S&P declined by more than 2 percent in that single day. In the prior 50 years however, there was an average of only four times per year so we experienced 10 times the volatility that we normally do.
YASTINE: All right. We'll keep the Rolaids handy nonetheless, very interesting. Thanks for the analysis, happy New Year, Sam.
STOVALL: Thanks a lot, Jeff.
YASTINE: Our guest Sam Stovall, chief investment strategist for Standard & Poor's.
2008/2009 Investment Review & Preview : Bailout Fever
SUSIE GHARIB: One legacy of 2008 is the government's unprecedented role in the rescue of failing companies, especially in the financial sector. As Erika Miller reports, Federal bailouts in that industry centered on institutions that were deemed too big to fail, fearing their collapse might have a domino effect.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government's first big move to prop up a financial company came in March. Faced with the impending collapse of Bear Stearns, the Treasury arranged for JPMorgan Chase to buy the investment bank in a fire sale. To sweeten the deal, the Federal Reserve gave JPMorgan a $30 billion line of credit and agreed to pick up most losses on Bear's assets. Vanguard founder Jack Bogle was critical of the government's role.
JACK BOGLE, FOUNDER, THE VANGUARD GROUP: It is to me remarkable that all these capitalists who say just keep the government out of the way and we'll do fine are the first ones in line when they're coming to search for help. You know, go to the government whenever you get in trouble.
MILLER: And that was just the tip of the iceberg. Two months later, financial giants Fannie Mae and Freddie Mac, which together back half the nation's mortgages were on the ropes. After massive sell-offs of their stock, the government decided to take over the two firms. Treasury official Jeremiah Norton said the move would assure foreign investors of the safety of Fannie Mae and Freddie Mac securities.
JEREMIAH NORTON, DEPUTY ASSISTANT SECRETARY, TREASURY DEPT.: This announcement will help show the world that invests in the U.S. mortgage market that the U.S. government stands with the mortgage market with these entities.
MILLER: Nevertheless Treasury Secretary Henry Paulson warned that the government would not prevent the failure of every big financial institution. That policy shift proved fatal for Lehman Brothers, which filed for bankruptcy protection on September 15. But just a day later, Paulson had to change course. Insurance giant American International Group was on the line for billions in credit default swaps on mortgage securities and there was real concern that an AIG failure could threaten the entire financial system. So the government announced an initial $85 billion bailout of the insurer. Then in a bid to replace the stopgap rescues of individual firms, Treasury Secretary Paulson outlined a new approach: buying up billions of dollars of toxic mortgage assets.
HENRY PAULSON, TREASURY SECRETARY: I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.
MILLER: But many on Capitol Hill, including Representative John Boehner, were skeptical of the plan and its $700 billion price tag.
REP. JOHN BOEHNER, MINORITY LEADER: We will not agree to a bill that sells taxpayers out to bail out Wall Street.
MILLER: The House rejected the Paulson plan by a vote of 228 to 205. Only after making some serious revisions did Congress pass a new plan, now known as the Troubled Asset Relief Program or TARP. But as volatility in financial markets continued, The Treasury did another about-face. It decided that it would be better to use the TARP money to inject money directly into banks by purchasing bank stock. As TARP Director Neel Kashkari explained.
NEEL KASHKARI, INTERIM ASST. SECRETARY, FINANCIAL STABILITY: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.
MILLER: But even that wasn't enough. On November 23, the government had to shore up Citigroup with a rescue package worth more than $300 billion. And the following day, the Federal Reserve unveiled an $800 billion plan to buy mortgage-related debt and back consumer loans. The big question now is what actions the Obama administration will take. So far, it has indicated it would like to see more moves to help individual homeowners, and just financial institutions. Erika Miller, NIGHTLY BUSINESS REPORT, New York
2008/2009 Investment Review & Preview : Mutual Fund Movements
JEFF YASTINE: As we noted, stocks were in a tailspin for much of the final months of 2008. So how did mutual funds fare? To help us find out, joining us from Chicago is Christine Benz, director of personal finance for Morningstar. Christine, happy New Year. Welcome back to NIGHTLY BUSINESS REPORT.
CHRISTINE BENZ, DIRECTOR, PERSONAL FINANCE, MORNINGSTAR: Hi, Jeff, happy New Year to you, too.
YASTINE: Let's begin by taking a look at which mutual fund categories did best. And as we'll see, the only categories to turn in really good returns for both the quarter and the full year were bond funds invested in long government issues and bear market funds. And is it significant that not a single stock fund category made the list here?
BENZ: Not only did they not make this list, Jeff, they didn't eke out positive returns for the year. So it was a terrible year and a terrible quarter overall for stock funds with nearly every stock fund category posting a double digit loss for the year.
YASTINE: Let's hope that one is not repeated for 2009. Now let's take a look at the top individual funds for the quarter with assets of more than $50 million. And we see a mixture of funds in the two top categories, lead by Vanguard Extended Duration Treasury Index (VEDTX) and Pimco Extended Duration (PEDIX). Isn't it unusual for government bond funds to rack up double digit gains? These are usually done for safety rather than capital gains.
BENZ: It is. Although when the Federal Reserve is in aggressive interest rate cutting mode as it has been for much of this year, this is when long Treasury bonds will really shine. But you're right, the gains typically aren't this large. The last time gains were quite this good was back in 1995 when the category returned something like 25 percent.
YASTINE: All right, we'll bring out the drum roll for this next one. The top performing fund for 2008 according to our preliminary results, the Rydex Dynamic Inverse NASDAQ 1002X Strategy H (RYVNX). That's quite a mouthful. What exactly does that fund invest in?
BENZ: This is a fund that shorts the NASDAQ and then also uses leverage, essentially borrowed money to magnify the NASDAQ's gains or losses. So when technology stocks are dropping like a stone as they were for most of 2008, this is a fund that will really thrive.
YASTINE: So double -- essentially double the loss of whatever the NASDAQ has?
BENZ: Right.
YASTINE: All right, let's look at over the past five years and there is a familiar name in the best performer spots, T. Rowe Price Latin America (PRLAX), an annualized return of about 16.7 percent. That include its results over the past year, when I understand it took a real beating.
BENZ: It did take a beating. It was a fund in a category, Latin America stocks that actually was holding up pretty well through the first half. But in the second half as it became clear that we would see a global recession, demand for commodities, which are really the bread and butter in Latin America, slackened dramatically and hit this fund very hard. So it suffered a steep sell-off.
YASTINE: And Christine, we have about 30 seconds on this. Finally, let's see how the largest funds did over the past year. Again preliminary results it seems that only Pimco Total Returns (PTTAX) managed to come out with a positive result.
BENZ: Right. And this is the sole bond fund on the list. Not only was it a bond fund, but it also was positioned very well. Bill Gross and the team anticipated that rates would be on the decline. And so they got the fund into more rate sensitive bonds. That was a good place to be in the second half of 2008 in particular.
YASTINE: Christine, thanks for your insights and happy New Year once again.
BENZ: Jeff, thank you and happy New Year to you too.
YASTINE: Our guest Christine Benz of Morningstar.
2008/2009 Investment Review & Preview : A Roundtable Look Ahead
SUSIE GHARIB: So what's ahead for the stock market and the economy in 2009? I got some answers from three experts: Joe Battipaglia, chief investment officer at Stifel Nicolaus, James Awad, investment strategist at Zephyr Management and Josh Feinman, chief economist for Deutsche Asset Management. I began by asking Josh, will the U.S. economy get worse before it gets better?
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: I'm afraid it is likely that it will. The effects of the housing slump, the credit crunch, the loss of confidence will continue to depress economic activity into 2009. I don't think it's going to get better right away. I do see sort of a bottom forming, maybe by the middle of the year into the second half and the economy gradually pulling out with the aid of a loss of fiscal stimulus and monetary stimulus. But I fear that it is going to be a long, tough slog.
GHARIB: Joe, what a horrible year this was for the stock market. In 2009 are we going to go from a bear market to a bull market?
JOE BATTIPAGLIA: CHIEF INVESTMENT OFFICER, STIFEL NICOLAUS: Well, certainly in 2009 risk is being priced appropriately regardless of what asset class you look at, whether it equities, bonds, domestic or foreign stocks. So that's the good news. The issue is how much of a recovery do you get in '09 and how vibrant can it be in 2010. And may own view is that it is going to be a very slow recovery process. So the consumer still needs to retrench, which means a reduced profile for spending. Businesses are over invested so they have got to under invest for a period of time. Consequently market activity is going to be sluggish at best. So it may be a better year than the year before, but it's not going to be a gangbuster kind of recovery.
GHARIB: Jim, what do you think, will stocks recover in 2009?
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: Well, it depend on on what happens with the economy and right now you have to say the momentum on the economy is on the downside. One would expect that ultimately all this stimulus will take effect. But right now people are continuing to rebuild balance sheets, conserve capital. So what I'm afraid of is that the recovery may be is in '010 instead of '09. But make no mistake about it. The minute the market senses that things are not getting any worse, they will then anticipate that it is going to get better and it will start to do better. But I'm afraid that '010 is the recovery and therefore the stock market may not see an appreciation until the back half of '09.
GHARIB: Do you agree with that? That it is going to be 2010. Can you give us a quick update on what we can expect on home prices, oil & gasoline prices and how this is all going to impact consumer spending?
FEIMAN: Sure. I think house prices are going to continue to go down for a while but then I see the foundations for a bottom forming. Housing affordability is starting to improve, lower prices, lower interest rates. They will help to form the bottom. I don't think we are there yet. But when housing does bottom, maybe by the middle of 2009, then maybe the credit markets start to improve further and that forms the foundation for a more meaningful economic recovery later in '09 and into 2010.
BATTIPAGLIA: I want to take the other side of that if I can for a minute. Because the demand side of that equation is what troubles me the most. The public's portfolio has been badly damaged, houses and stocks. They don't have the capital to step into the housing market as in previous cycles. Businesses are in a similar condition in terms of how much supply is already out there, the market can't accommodate more. So what I'm concerned about is that the demand won't be there despite low rates, despite the stimulus. That could be the real challenge in 2009.
AWAD: What that means, Susie, is that -- and I don't disagree with what Joe was saying, but the major delta in the economy, the stimulus is going to come from government. And that means that -- that is the sole source of recovery. That is what we are counting on and hoping that it spreads to the consumer and to business eventually. But it also means that a government recovery is not necessarily to a capitalist the most efficient recovery, so it might be a slower recovery than one that was instituted by the free market.
GHARIB: All right so while investors are waiting for this recovery, what are they supposed to do with their money? Are they supposed to keep it in cash? Are they supposed to take advantage of these bargain prices in the stock market? Where do you put your money, Jim?
AWAD: Right now, you are in that twilight zone where it's too late to sell, too early to buy. So you should keep some cash, preserve capital but I would say what you should be looking to buy are dividend-paying stocks where the dividends are sustainable, since dividends count in a low return environment. And I think the best bounce back in the world economies will be in the emerging economies. So not quite yet because they have a tough time to go, but I think the greater secular growth is over there so you want to own emerging market funds and stocks and also big multinational U.S. companies that are leveraged to that growth.
GHARIB: Joe what advice would you give because in 2008 a lot of people put their money - they felt comfortable putting in Treasuries with no return or gold. Is that strategy going to work in 2009?
BATTIPAGLIA: Broadly speaking, what you've got to do now is find those companies, those municipalities that have the financial wherewithal for the next three years that they don't need to come to the market for capital should this thing prolong itself. Secondly, they need to be able to pay the dividends and pay the interest. I couldn't agree with Jim more on that process. But lastly, I would say the bond market offers the most unique opportunities here. Because you are seeing 15 and 20 percent rates of return on corporate instruments, even if the market is going to recover, in which case these yields will come way down to where the Treasuries are, in which case, your rate of return is the greatest. And in a sequence, I think the bonds recover before the stocks get there. And that means the bond market probably is the better opportunity away from Treasuries in 2009.
GHARIB: Let's talk about the Obama administration. A lot of people are pinning their hopes on President-Elect Obama to revive confidence and to fix the economy. Josh, what do you think is the most important thing that he needs to do?
FEINMAN: I think substantively get a lot of fiscal stimulus out there immediately, tax cuts and spending increases. On the sort of psychological side if he can do it, anything to try and revive hope.
GHARIB: Jim?
AWAD: Well, there is money in the system. And he's going to put more money in the system. He was elected as a man of hope. The key here is to get the money turning over and that is a matter of confidence. So I would say keep giving us hope. Keep going to the American people saying we can get out of this starting with the inauguration speech.
BATTIPAGLIA: I go another way with this. You don't get out of debt by taking on more debt. And you should cut all marginal tax rates permanently to truly stimulate for the long term. That's not part of the current plan. So I discount the value of this plan that is on the table.
GHARIB: We'll see what happens in the year ahead. Meanwhile happy New Year to all of you. Thank you very much, Joe Battipaglia, Jim Awad and Josh Feinman.
2008/2009 Investment Review & Preview : Market Monitor Scores
JEFF YASTINE: For another take on where stocks are going, let's turn to our team of market monitors, which is still smarting from its call of last New Year's day. Then, except for a lone bear, Jim Stack, its consensus was that stock prices were headed higher in 2008. But hope springs eternal and for 2009, the bulls again dominate with three of our four panelists expecting the market to end the year higher than it is now. Leading the bulls is Abby Joseph Cohen of Goldman Sachs. She's calling for a big jump in the S&P 500 index, to end the year at 1,150. Cohen expects the market leaders to be energy and technology and she thinks U.S. stocks and high-quality corporate bonds will pay off when the economy stabilizes, around midyear.
Last year's top bull, Eugene Peroni of Advisor's Asset Management, remains optimistic. He expects the Dow to climb above 11,000 before it closes out the year a little lower. He also sees big gains for energy stocks as well as the telecom and water infrastructure sectors and growth funds. Peroni thinks the market is well-positioned to rally, thanks to some unspecified upside surprises. And in what could be a hopeful sign, Jim Stack of Investech has left the bearish camp. He now sees the Dow closing the year just under its high of 10,000. Stack expects good gains in telecommunication services, info- tech and certain health care issues and mid-cap value funds. Like Abby Cohen, Stack expects the recession to end by mid-year, benefiting investors who take advantage of today's bargains in stocks. This year's lone bear is Mark Leibovit of vrtrader.com. While he sees the Dow rising above 11,000, he thinks it will fall back to close at just 6,500. For the second year, his top picks are gold stocks and mutual funds. Leibovit expects an early market rally orchestrated by the U.S. government, but he's concerned that it will only be a bear market bounce, setting the stage for a multi-year decline.
