NBR Transcripts- January 7, 2009
Wednesday, January 07, 20092009 May Be The Year of the Trillion Dollar Deficit
SUSIE GHARIB: Get ready for a trillion dollar budget deficit. The U.S. Congressional Budget Office said today that the Federal deficit will balloon to nearly $1.2 trillion in fiscal 2009. And that number is likely to rise sharply once President-Elect Obama announces his much anticipated stimulus package to revive the economy. The Obama recovery plan could cost as much as $800 billion over the next two years. But as Washington bureau chief Darren Gersh reports, many analysts are beginning to think that stimulus figure may be too small.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Economist Mark Zandi says the argument for a bigger stimulus package is pretty simple. The economy is likely to shrink by about a trillion dollars this year and something has to fill that hole.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: So as peoples' forecasts grow darker -- and they are growing consistently darker -- the price tag for this stimulus continues to rise and there are a growing number of voices saying, you know, $750 billion-$800 billion isn't going to cut it. We need something greater than that.
GERSH: Asked whether his stimulus would come close to the $1.3 trillion some economists are recommending, the president-elect said no.
PRESIDENT-ELECT OBAMA: It will be on the high end of our estimates, but will not be as high as some economists have recommended because of the constraints and concerns we have about the existing deficit.
GERSH: And what a deficit it is -- $1.2 trillion is the latest estimate from the Congressional Budget Office and the pressure on the budget is growing as the tough economy forces more people to seek government benefits. Spending on Social Security, Medicare and Medicaid is projected to grow 8 percent this year, hitting roughly $1.4 trillion. Medicare's chief actuary has warned the trust fund used to pay hospital bills could be insolvent in seven years. Obama said he'd have more to say about ways to tame all that entitlement spending when he reports a budget outline in February.
OBAMA: The key is going to be medium term and long term, how do we bend the curve so we start getting these deficits down to a manageable level and entitlements are going to be a part of that.
GERSH: This year the deficit is projected to hit 8 percent of the nation's gross domestic product. That shatters the infamous 6 percent record set in the Reagan years. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with NASDAQ CEO Robert Griefeld
SUSIE GHARIB: Even though it was a rough day for the markets, the head of the NASDAQ is upbeat about the outlook for 2009. Earlier today I sat down with CEO Robert Griefeld at the NASDAQ market site in Times Square and he explained why he's optimistic.
ROBERT GREIFELD, CEO, NASDAQ: There's certainly vast amounts of cash on the sidelines trying to figure out when we've hit bottom. When has the knife actually hit the table? So I think we'll see some turn in the market in 2009.
GHARIB: Bob, investors have lost so much confidence in the markets and in financial institutions. What's it going to take to restore investor confidence?
GREIFELD: First off, there is no magic cure. But you need to see sustained economic progress. So if companies are producing results on a quarter by quarter basis, that will be reflected in the stock price and that movement of stock price will attract more and more investors into the marketplace.
GHARIB: I understand that the NASDAQ has relaxed its listing requirements for companies that have been struggling because of the financial crisis. It's understandable what you're trying to do. But do you think that that leniency reduces investor confidence?
GREIFELD: No, I think one is, we have to protect investors so they have their money invested in these companies and these companies by and large are good, solid companies that have been victimized by the credit crisis and the economic times that we live in. And to the extent we de-list these companies, there will definitely be a diminishment of value of these companies. Investors will be harmed so it's our actions we'll hope -- our hope is that this will protect investors, their investment in these companies and give them time to be properly priced in a more normal economic environment.
GHARIB: Everyone is talking about the Obama administration coming up with new rules, reforms for the financial markets. Does that increased government scrutiny concern you?
GREIFELD: I think we need to go at it with a spirit of re-regulation as opposed to new regulation. And we have to make sure that the regulation that we're focused on is material, that that matters. We have got to make sure we're focusing on the big issues and focusing on certainly situations where there's big problems in the marketplace.
GHARIB: Bob, as a reporter I feel obliged to ask you about Bernie Madoff. What do you say to people about his connection to the NASDAQ? Many investors were surprised to hear that he was once chairman of the NASDAQ and he played a key role in the founding of the exchange.
GREIFELD: It's certainly something we're not proud of right now. But it's important to recognize it was many years ago. NASDAQ was not a free standing enterprise back in 1990. It was an advisory committee. Do we wish he had not been the chairman of that advisory committee? Yes, of course we do.
GHARIB: What do you think should be done to prevent the Bernie Madoff scandals in the future?
GREIFELD: We need certainly an enlightened regulatory effort in the marketplace and a very rigorous, you know, continuing effort.
GHARIB: What do you think is the most important thing President-Elect Obama needs to do to restore the health of our markets and the economy?
GREIFELD: We believe between the stimulus package that incoming President Obama will recommend and the actions that have been taken between the Fed and the Treasury to really bring liquidity into the system and to unfreeze the financial world, will have a positive outcome from that.
GHARIB: Let's talk a little bit about the future of the NASDAQ. Where do you see growth coming from?
GREIFELD: NASDAQ was formed in 1971 to bring automation to the over- the-counter cash equity marketplace. In 2009, we're going to bring that same level of automation to the over-the-counter interest rate swap marketplace so just as NASDAQ grew tremendously over the intervening 36, 37 years, we think we have great opportunities to grow as we bring some of the formative structures that exist in our marketplace to this derivative as well.
GHARIB: What are your expectations for this new derivatives business?
GREIFELD: When you look at the over-the-counter derivatives marketplace today, it dwarfs -- the listed derivative marketplace, so as big and as powerful as CME, CBOE, NYMEX, ICE are in their chosen fields, recognize beneath the surface the over-the-counter market is five or six times that size, so we're going to bring that level of automation to a market that size. It's kind of inconceivable that we sit here in 2009 to recognize that we have such large markets that are completely unautomated, unformed, without a known rule set and that's going to be a great growth opportunity for us.
GHARIB: There's been almost no activity in initial public offerings. Do you see that changing in 2009?
GREIFELD: We certainly hope. We have a large number of companies in the backlog. They are waiting for the right opportunity. It's impossible for me to predict when that opportunity might happen. But I think as we wax on in 2009, the odds increase that these very qualified companies will have the ability to come to market.
GHARIB: Bob, thank you very much and happy New Year.
GREIFELD: Thank you. It's my pleasure to see you again.
The Fight To Get Fixed Rate Mortgage Loans
PAUL KANGAS: The Federal Reserve began purchasing billions of dollars in mortgage-backed securities this week, as it first promised in November. The action has done exactly what it was designed to do, drive down mortgage rates. Rates on some 30-year fixed mortgages have dipped below 5 percent, their lowest level in nearly four decades. But as Suzanne Pratt reports, those deals aren't available to everyone.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: At Manhattan Mortgage, after a long lull, business is finally picking up. Mortgage broker Bruce Maasbach and his team say it's been four years since they've seen this much activity. Most of the calls are about refinancing, people anxious to move from adjustable rate mortgages to fixed rate loans.
BRUCE MAASBACH, MANAGING DIRECTOR, MANHATTAN MORTGAGE: The onslaught of people were calling, saying hey, this is something terrific. We really want to do something here for what we've got and change out of a product that we're not happy with and we're probably not going to move as quickly as we thought. So let's lock in and grab the bargain of the day."
PRATT: Conforming fixed rate mortgages are currently the sweet spot in the market. Those are loans under $417,000 in most areas of the country. According to bankrate.com, the national average for a conforming 30-year fixed rate mortgage with no points is 5 1/3 percent, although in some areas, you can get a rate below 5 percent. While the rates for adjustable mortgages have dropped a bit, they're not where they used to be. Experts say that's because demand is down and banks are less willing to take on the risk. Still, there's a perception that banks aren't lending. They definitely are for all types of mortgages, provided your credit is good and you have proof of income and a down payment of at least 20 percent will get you a better deal. But for borrowers who need a jumbo mortgage -- which is true of homebuyers in pricier areas of the country -- the rate for a 30- year fixed is closer to 7 percent. Bankrate.com's Greg McBride explains the government is not propping up that end of the market.
GREG MCBRIDE, SR. FINANCIAL ANALYST, BANKRATE.COM: With a lack of demand among investors, any lender that's making a jumbo loan is, by and large, going to hold this in their portfolio. When the chef has to eat his own cooking, he's a lot pickier about the ingredients. And as a result, you're seeing not only tighter underwriting guidelines, but also much higher rates.
PRATT: As for where mortgage rates are headed in 2009 for conforming loans, most experts say they will stay low, at least for the first half of the year.
MAASBACH: I don't think we're going to go down to 4 percent. I think we're going to see mid fours. I'm not thinking much lower than that. Who knows though.
PRATT: The multibillion dollar question is whether lower mortgage rates will build a solid foundation for the housing market. Experts say eventually they will entice new buyers, but lower rates will not turn bad loans into good ones. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Street Critique" -Michael Farr, President, Farr, Miller and Washington
PAUL KANGAS: Tonight's "Street Critique" guest has brought us his shopping list for 2009. He's Michael Farr, president of the money management firm Farr, Miller and Washington and author of "A Million Is Not Enough." Michael, welcome back to NIGHTLY BUSINESS REPORT.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Thanks, Paul, great to be with you.
KANGAS: The last time you were with us in early December, you were telling our viewers to be patient with this market because there was little else you could do, too late to panic. What's your view of the market now?
FARR: Be patient. Little else you can do, too late to panic. But valuations are still reasonable. And as you think about investing over the next four or five years, I think valuations are good. Remember that everything kind of old is new again. You can start nodding along with me. Remember that balance sheets matter. Earnings matter. Strong management matters. If it seems too good to be true, it probably is. Play it down the middle.
KANGAS: All right. Now you were also crafting a shopping list the last time you spoke to us. I understand you brought your top 10 picks for 2009 for our viewers. Let's get started. What's your first pick and why.
FARR: Here we go. Stryker (SYK). I told you last time I really liked health care. Stryker makes replacement hips and knees, joints, that sort of thing in the medical area, 12 times earnings with double digit earnings growth, 1 percent dividend. I think it's a good, solid place to be.
KANGAS: OK, SYK is the symbol on the big board. Number one, number two.
FARR: Number two and not necessarily in the order of preference. CVS (CVS), the drugstore chain, very well managed, doing very well. Ten times earnings. I think that's pretty cheap, double digit earnings growth over the next five years, 1 percent dividend. Though as people get older, they go through the drugstore to get their prescriptions and they buy the chips and the bubble gum in front and it's good for CVS.
KANGAS: OK, symbol CVS on the big board. Next one.
FARR: Colgate Palmolive (CL), again a consumer staple was one of the other areas I recommended when I was on last time, 16 times earnings, strong earnings growth, solid balance sheet, 2.3 percent dividend.
KANGAS: OK. CL, Charlie Lima as we say in the phonetic alphabet. Go ahead, next one.
FARR: Mr. Softy, Microsoft (MSFT), $19 a share it closed today. I think the stock is still cheap relatively, 10 times earnings. I think those earnings will grow in the next five years probably 10 percent a year, 2.5 percent dividend. And look, we've done a medical stock. We've done a retailer. We're getting into different industries all the way through. Consumer staples, technology. We're going to do another medical.
KANGAS: OK, another one, we have less than a minute.
FARR: Johnson & Johnson (JNJ) I think is a terrific company, 13 times earnings growing those earnings around 10 percent. Again next five years I don't know about the next six months, 3.1 percent dividend. Another tech name, Cisco (CSCO), 12.9 times earnings, 15 percent earnings growth, don't have a dividend there. I like Medtronic (MDT) again in health care, Medtronic 10 times earnings, 13 percent earnings growth, 2.3 percent dividend. Going to diversify back to the retailers. Staples (SPLS) really best in class, strong management. I like it 13 times earnings. I think again double digit earnings growth over the five years. Tough this year. Danaher (DHR) at 15 times with again double digits earnings growth, no dividend. Here's my one, JPMorgan (JPM) in the financial space. Cross your fingers. I think it's best of breed, 12 times with a 5.2 percent dividend.
KANGAS: We've run out of time but our viewers can find the rest of your top 10 picks on our web site. And before we go, Michael, do you own any of the stocks we've talked about or have other disclosures to make?
FARR: I do, Paul. I own all of them. My family owns them and we own them in firm accounts. I have skin in this game.
KANGAS: All right, good, Michael, thanks for joining us again.
FARR: Thank you, Paul, very much.
KANGAS: My guest, Michael Farr of Farr, Miller and Washington and author of "A Million Is Not Enough."
"Money File"-401k Lose Corporate Support
SUSIE GHARIB: In the "Money File" tonight, 401(k)'s and the disappearing corporate match. Here's Eric Schurenberg, editorial director at Bnet Moneywatch.
ERIC SCHURENBERG, EDITORIAL DIRECTOR, BNET MONEYWATCH: It's bad enough that every equity fund in your 401(k) lost money last year or that you can't stand to look at your statements anymore. Well, it might get worse for us 401(k) holders. Some companies have stopped making matching contributions. That's right, the feature that really makes 401(k)'s must- have is now in jeopardy. All right, a little perspective: because a few companies made this decision -- Fedex and Starbucks among them -- doesn't mean yours will. So keep saving and getting that match unless and until your company says no more. After all, you still need to save for retirement and a matched 401(k) remains the best way to do that. But what if your company does pull the plug on matches? The best thing to do: keep contributing anyway. You still get taxes deferred on the money you put in and any returns you get. Plus your contribution comes out of your paycheck automatically, which eliminates the biggest risk to your future apart from the bear market, which is failing to save. But here's one wrinkle. If your company stops matching and you'll make less this year than the $166,000 limit for full contributions, consider putting up to $5,000 of your planned 401(k) savings in a Roth IRA. Once money's in a Roth, it's totally tax free, not just tax deferred. As long as you put the same amount in the Roth as you were going to save in the 401(k), you'll come out ahead, especially if taxes rise in the future. Yes it's better to get free money from your employer. But if you can't, keep saving and think about adding that tax free Roth. I'm Eric Schurenberg.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened with a sharp sell-off amid a host of reminders as to just how deep the recession is. For example, payroll firm ADP's private estimate that over 690,000 jobs were lost last month. There was a revenue warning from Intel and last night's Alcoa job cuts all weighing on investors. An hour into trading, the Dow was off 191 points, NASDAQ down 43. Weak oil stocks and the specter of that trillion dollar Federal budget deficit kept the sellers coming all afternoon and the market ended near the day's worst level. The Dow Industrial Average closed down 245.40 points at 8769.70. The NASDAQ Composite tumbled 53.32 to 1599.06. Standard & Poor's 500 Index lost 28.05 at 906.65. Over in the bond market, the 10-year note fell 14/32 to 110 27/32, putting the yield at 2.50 percent exactly.
Big board volume leader its second day running, today on 24 million shares, Bank of America (BAC) down $0.57, but the company did sell $2.8 billion, part of its stake in China Construction bank and that cut its ownership from 19.6 percent down to 16 percent.
Citigroup (C) in there with a $0.31 loss.
General Electric (GE) lost $0.75.
Wells Fargo (WFC) a drop of $1.67.
Pfizer (PFE) $0.31 down.
JPMorgan Chase (JPM) down $1.79.
Time Warner (TWX) fell $0.69. The company noted that the economic environment is a lot more challenging than it expected and it will take a fourth quarter non-cash impairment charge of $25 billion, resulting in a 2008 operating loss. Time Warner cable, incidentally, fell $1.09 to $21.56 on that news.
Compania Vale (RIO) down $1.43 on the lower oil prices.
ExxonMobil (XOM) down for the same reason, $2.05.
And Sprint Nextel (S) edged up $0.06. The company will close 20 of its call centers this year.
Alcoa (AA) down $1.23. After the close yesterday as we reported, the company said it's cutting 13,500 jobs or 13 percent of its workforce and also cutting aluminum production.
Monsanto Co (MON), the star of the day, up $12.70. Big earnings, first quarter, $0.98, up from $0.45 last year and $0.39 above the Street estimate. Sales jumped 29 percent due to strong Latin American demand. The company boosted its 2009 earnings guidance by $0.10 to a high of $4.50 a share.
Aetna (AET) down $1.18. Goldman Sachs issued a "sell" recommendation on the stock.
Harley Davidson (HOG) losing $2.45. Raymond James financial brokerage downgraded it from "market perform" to "under perform" and reportedly, two thirds of the Harley dealers are having fourth quarter sales declines. Fourth quarter earnings are due on the 23rd of this month and Street estimate, $0.58 a share.
Cash America International (CSH) down $3.49. President-Elect Obama plans to put a 36 percent national cap on interest charged by pay day loan companies like this one.
Constellation Brands (STZ), this is the world's largest wine merchant, third quarter earnings fell to $0.38 from $0.55 a year. The company cut its 2009 earnings guidance by $0.04 a share.
Steinway Music (LVB) down $1.74. The story here, company sees fourth quarter sales down 25 percent and the outlook for 2009 piano sales challenging. We see that word a lot these days.
Family Dollar Stores (FDO) however, up $3.48. Higher first quarter earnings, $0.42, up from $0.37 a year ago. Same store sales up 21 or 2.1 percent is should say.
Supervalu (SVU) up $1.24. Third quarter earnings lower, $0.62 versus $0.69 last year, but $0.02 better than the Street expected.
Apple (AAPL) topped NASDAQ's most active, down $2.01.
Intel (INTC) off $0.93. As you heard, the company forecasting lower revenues -- fourth quarter, let's see, for the fourth quarter.
Google (GOOG) was down $12.05.
Microsoft (MSFT) $1.25 loss.
Research in Motion (RIMM) edged $0.08 higher.
Cisco Systems (CSCO) down $0.47.
And Oracle (ORCL) dropped $0.74.
Qualcomm (QCOM) losing $1.60.
First Solar (FSLR) down $5.21.
And Amazon.com (AMZN) down $1.16.
And finally, Netscout Systems (NTCT) climbed $3.05 to $13.29. The company gave an upbeat third quarter forecast, with a preliminary earnings estimate of $0.24 to $0.26 per share, double the Street consensus.
