NBR Transcripts- January 21, 2009
Wednesday, January 21, 2009President Obama Goes To Work While Treasury Secretary Designate Geithner Takes The Hill
SUSIE GHARIB: Bold changes today from President Obama in his first full day in office. He instituted new restrictions on lobbying, imposed a salary freeze for highly paid White House staffers and is working on a more dramatic approach to rescuing the nation's banks. Obama's nominee for Treasury Secretary Timothy Geithner said the plan should be ready in a few weeks, but declined to say how much it might cost. That revelation came out at Geithner's confirmation hearing on Capitol Hill today. He was grilled by senators about his personal tax problems and also about the policy moves he's made to deal with the financial crisis. As Darren Gersh reports, Geithner not only defended his past decisions, he also talked about his future strategy.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The man Barack Obama wants to run the Treasury told senators at his confirmation hearing today, the lesson of financial meltdowns is to do a lot soon and stay with it. And Timothy Geithner made it clear the Obama administration is prepared to do just that.
TIMOTHY GEITHNER, TREASURY SECRETARY-DESIGNATE: We're at the beginning of this process of repairing the system, not close to the end of that process. And it is going to require much more substantial action on a very -- on a very dramatic scale.
GERSH: Former Federal Reserve Chairman Paul Volcker explained how the Obama team defines dramatic when he introduced Geithner this morning.
PAUL VOLCKER, CHAIRMAN, ECONOMIC RECOVERY ADVISORY BOARD: Over time the hard fact is, several trillions of dollars will be necessary to be committed in a combination of budgetary expenditures and various guarantee and insurance programs and extensions of credit by the Federal Reserve.
GERSH: The Obama administration is considering fulfilling the original mission of the financial bailout Congress approved last fall, but on a far larger scale. That would involve creating what's come to be known as a bad bank.
TOM GALLAGHER, POLITICAL ECONOMIST, INTERNATIONAL STRATEGY AND INVESTMENT: It is basically a government set up entity that would buy the toxic assets from the banks.
GERSH: Political economist Tom Gallagher says the bad bank could help unlock the financial system.
GALLAGHER: The whole problem right now is that banks are perceived to be under capitalized and that's because of the uncertain value of these toxic assets, so then bank management thinks they better horde their capital and not make loans to prepare for further write downs.
GERSH: But the prospect of funding a bad bank is raising concern with lawmakers like New York Senator Chuck Schumer.
SEN. CHARLES SCHUMER (D) NEW YORK: I did a little calling this weekend to people who would know and they said it could be $3 trillion, $4 trillion. If you did the whole good bank, bad bank across the board, which creates great worries for the dollar and for you know, inflation down the road. I mean it just shakes our financial system, something that large.
GERSH: Geithner did not accept or dispute Schumer's price tag. Key to the success of the bad bank is the method used to value the mortgage securities and other toxic assets the government buys. Geithner said the administration is considering using market prices, financial models or letting regulators make the call.
GEITHNER: There's a range of approaches you can do. All of them have risks. All of them are imperfect. They all have limitations. Most people, I believe, I think you need to look at a mix of those type of measures. But it's very hard to do but critically important to get right.
GERSH: Senators also grilled Geithner for failing to pay self- employment taxes for several years. He apologized and said he made a careless mistake. The issue does not look like it will derail the nomination and even Republicans predict Geithner will soon be confirmed. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Oil Supplies Rise But Prices At The Pump Aren't Falling
SUSIE GHARIB: Oil prices surged more than 6 percent today, despite expectations that tomorrow's government inventory report will show another increase in supplies. In New York trading, March crude futures rose $2.71 to $43.55 a barrel. That's still lower than where oil prices began the year. But as Erika Miller reports, lower crude prices haven't meant lower prices at the gas pump in 2009.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Many drivers are doing a double take as they fill up their cars. Prices at the gasoline pump have been rising sharply this year, even as crude futures have fallen. A gallon of regular gasoline is currently averaging $1.85 nationwide, a 14 percent increase since January 1. But crude oil futures have dropped 6 percent in that same period. Experts aren't exactly sure what's behind the disconnect. Many predict the price of gasoline will come down eventually, especially if crude continues to fall. Oil trader Ray Carbone believes oil may be headed to $30 a barrel, due to concerns about the economy.
RAYMOND CARBONE, OIL TRADER, PARAMOUNT OPTIONS: I think the market is focused on global demand and recessionary fears and that is the reason behind the drop of over $100 from the highs of July to late December of 2008.
MILLER: But others think crude prices are being kept artificially low, due to what's called hyper contango. Contango is when the price of a short-term futures contract is worth less than a longer term one. Although the condition is not uncommon, energy analyst John Kilduff, says the current gap is the biggest on record.
JOHN KILDUFF, SR. VP, ENERGY, MF GLOBAL: There's so much crude oil being produced that there's a hyper glut of crude oil on the marketplace right now. Storage is pretty much full here in the U.S., if not around the world. They are not cutting back on production to a degree sufficient to relieve that situation.
MILLER: However, Kilduff and others do not think that situation will last. Over the next few months, he expects a sizeable rebound in energy prices.
KILDUFF: I think any hope, any restoration of faith in the global economy, will push those prices back up quickly. Certainly easily above $50 a barrel, because that is really the uh, I think, the fair price, considering growth in population, growth in demand and diminished output now that we're seeing now as a result of these low prices.
MILLER: Traders say those low prices could go even lower tomorrow. The government will report weekly data on oil inventories and it is expected to show a big increase in crude supplies. Erika Miller, NIGHTLY BUSINESS REPORT, New York
Housing Rescue By Bankruptcy
JEFF YASTINE: Confidence among U.S. home builders fell to a record low this month. It's another sign that with the recession and rising unemployment, it may be a while before the housing market turns around. The National Association of Home Builders, Wells Fargo housing market index now stands at a record low of eight. Index readings below 50 show negative sentiment about the housing market.
SUSIE GHARIB: One possible plan of action to help the housing market is being hammered out in Washington and could be rolled into the new stimulus bill. The idea is to force banks to bring down mortgage rates with bankruptcy judges as the court of last resort. Stephanie Dhue explains.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It sounds like a smack down and to some creditors it may feel like one. But the term is cramdown and it means modifying a loan whether a creditor wants to or not. Democratic lawmakers want to change the bankruptcy code to add cramdown so judges can re- write the terms of a home mortgage. Michael Calhoun of the Center for Responsible Lending says without cramdowns, homeowners are not on equal footing with lenders.
MICHAEL CALHOUN, PRES., CENTER FOR RESPONSIBLE LENDING: For example, Lehman Brothers is in bankruptcy court right now. Its debts are being adjusted, but the sub-prime borrowers who got loans from Lehman Brothers cannot go into bankruptcy court today and get any relief on their loans.
DHUE: To get relief, a borrower would have to be in foreclosure and file for bankruptcy. If that borrower owes more than the home is worth, the judge could cram down the loan amount to the current market value and change the terms of the loan to create an affordable payment based on the lower amount.
CALHOUN: It's meant as the last resort to help people who aren't assisted through the voluntary modification programs.
DHUE: Recently, Citigroup dropped its long-standing opposition to letting bankruptcy judges modify first home mortgages, but most banks and servicers remain opposed. Scott Talbott chairs the bankruptcy coalition, a financial services industry group opposed to cramdowns. He says the proposed change will lead to higher mortgage rates for all borrowers.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: The lowest interest rate is for mortgages which cannot be changed in bankruptcy. The entire system, the tax code, the bankruptcy code is designed to make it possible, to make it affordable for Americans to buy a home and this broad bill would undermine that entire mindset and allow for abuse by anyone who has a mortgage.
DHUE: Georgetown University law professor Adam Levitin says that's wrong. He says bankruptcy cram-downs would have only a small impact on mortgages rates.
ADAM LEVITIN, GEORGETOWN LAW: Historically, when there are major type of modification was possible in most parts of the country, it seems that in districts where you could modify that mortgage, interest rates were only on average 12 basis points higher. That's a very small change, but it's statistically significant, but small.
DHUE: The Obama administration supports changing the bankruptcy code to include cramdowns. The question is whether it will be included in the stimulus package Congress is trying to pass in the next month or in a housing package that would come later. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Street Critique"-Paul Larson, Equities Strategist at Morningstar
JEFF YASTINE: Tonight's "Street Critique" guest says there's an exceptionally large number of high quality stocks on sale. He's Paul Larson, equities strategist at Morningstar and editor of the "Morningstar Stock Investor" newsletter. Paul, welcome to NIGHTLY BUSINESS REPORT.
PAUL LARSON, EQUITIES STRATEGIST, MORNINGSTAR: Thanks for having me.
YASTINE: The first question here, what's your take on this current market environment?
LARSON: I think this market is exceptionally volatile. It's seeming like 2009 is looking a whole lot like 2008 was with very high volatility and a focus on the financial sector. When is this credit crisis going to end? Right now it's an open-ended question. We had a good day today, but I don't think we're out of the woods by any stretch of the imagination.
YASTINE: You haven't been a "Street Critique" guest before. Give us a sense of your market and investment philosophy.
LARSON: Well, my focus at Morningstar is on the high quality companies or as we call it here, the wide mode companies or as what other people might say the blue chips. The good thing about focusing on high equality companies is that these are companies that tend to have stronger balance sheets, very good competitive positioning and all else equal, these companies are going to be the survivors of a tough environment. And I think that focusing on the survivors is a very prudent thing to do, given how bad this recession is turning out to be.
YASTINE: You brought some suggestions along for us. The first one is Berkshire Hathaway (BRK.B), Warren Buffett's holding company and these are the class B shares.
LARSON: That's exactly right. We think that the class B shares are worth $4,800 apiece. And the stock is a little bit under $3,000 so you have a nice, potential return there and this is a company that is incredibly well positioned to take share as some of the weaker competitors fall by the wayside, companies like AIG and Ambac and Warren Buffett is still at the helm, still creating a copious amount for the company and it's sold off quite a bit and it's cheap today.
YASTINE: Paul, we have about 45 seconds left. Give us your second one, General Dynamics (GD)?
LARSON: Yes. This is a defense company. And as a defense company, it should be relatively insulated from the economic environment and it's also trading on the cheap. We think that there's a potential 50 percent upside from here today.
YASTINE: And then you have a health care stock as your final pick.
LARSON: That's exactly right, Novartis (NVS) and this is sort of like the Swiss J&J. They cover the waterfront regarding what sort of products they sell, everything from branded pharmaceuticals to generic pharma, to consumer products. And this is a stock that we think should be relatively safe. Health care is not really affected by the economic environment and this is a very high quality company that is trading at an inexpensive price.
YASTINE: Paul, any quick disclosures for us in the stocks you've talked about here.
LARSON: Absolutely. The cook is eating the cooking here. At Morningstar, I own all three of them, both in the model portfolio I run for Morningstar as well as personally.
YASTINE: Paul, thank you for your time on our program. Our guest, Paul Larson, equity strategist at Morningstar.
"Money File"-Bonding With Muni's
SUSIE GHARIB: In the "Money File" tonight, investing in bonds, municipal bonds. Here's Jason Zweig, personal finance columnist at the "Wall Street Journal."
JASON ZWEIG, PERSONAL FINANCE COLUMNIST, WALL STREET JOURNAL: Thinking big certainly got a lot of investors into trouble in recent years. How about thinking small? Instead of buying overpriced Treasury bonds from the U.S. government, why not invest in dirt-cheap bonds issued closer to home? No matter where you live, municipal bonds offered by your state, county and local governments are probably selling at bargain prices and the interest is tax-free. Municipal bonds or munis, are now yielding up to twice as much as Treasury securities, the widest gap in at least half a century. You would have to earn 6 to 9 percent on taxable bonds to match what you can get on munis. You can buy muni bonds from a broker or sometimes even directly from the local issuer, but most investors are better off with a tax-free mutual fund or exchange-traded fund. Steer clear of anything with high yield or high income or yield plus or ultra in the name. You want a muni fund, not a loony fund that can expose you to unnecessary excess risk. Try to get a medium-term or intermediate offering that will not over-invest in riskier long-term bonds. A national fund is fine unless you live in a high-tax state like California or New York, where you should choose one that makes a specialty of in-state bonds. Finally, look for funds with annual expenses of half a percentage point or less. You want to lower your taxes without raising your fees. I'm Jason Zweig.
Paul Kangas' Stocks in the News
JEFF YASTINE: There was certainly no retreat for stock prices today, with the market shaking off yesterday's 332-point drubbing. The financials led the way higher. Stocks like Citigroup and Bank of America rose as Treasury nominee Tim Geithner told Congress about that new bank rescue deal. That helped pull along the entire market through the remainder of the session. The Dow rising 279.01 to end at 8228.10. The NASDAQ Composite jumping 66.21 to end at 1507.07 and the S&P 500 index climbing 35.02 to 840.24. And bonds were all sellers today, the 10-year note sliding 1 18/32 to 110 12/32 and the yield at 2.55 percent.
The financials leading the way higher today, Bank of America (BAC) gaining $1.58. Their Treasury nominee Tim Geithner telling Congress of the Obama administration's new bank rescue package to be unveiled in a few weeks.
And then Citigroup (C) climbed $0.87. Citi naming former Time Warner CEO Richard Parsons to be its new chairman. He'll replace Win Bischoff after criticism about the board's leadership and Citigroup's troubles over the past year.
General Electric (GE) rising $0.10. An analyst at Goldman Sachs expect GE to announce a major dividend cut of at least 50 percent when it reports quarterly results on Friday. The current stock dividend yield is 9 1/2 percent.
JPMorgan Chase (JPM) rising more than $4.50. Their Washington Mutual unit wants a three-month extension to file their Chapter 11 bankruptcy plan. The FDIC seizure made their bankruptcy reorganization a lot more complicated they say.
And then finally Wells Fargo (WFC) rising nearly $2.50.
US Bancorp (USB), another financial, picking up $0.75 and that despite the bank today reporting a 65 percent drop in quarterly profits as they increased their credit reserves and wrote down bad loans.
There's Ford Motor Co (F), excuse me, declining a fraction.
Then Pfizer (PFE) gaining $0.28.
AT&T (T) up $0.77.
ExxonMobil (XOM) rising nearly $3 on a big jump in oil prices, $2.50 to nearly $44 a barrel. Exxon reports results at the end of this month.
Then we have IBM (IBM) which delivered big gains today. The stock rising more than 11 percent. CEO Sam Palmisano raising its profit forecast for the coming year to as much as $11 a share thanks to solid demand for software products and services and a lower tax rate.
Wal-Mart Stores (WMT) falling $1.42. The analyst at Credit Suisse believes the retailer will have a harder time competing with its arch rival Target in the coming year. Wal-Mart shares are down about 20 percent since their September highs.
Then SPX Corp (SPW) jumping more than $3. This conglomerate says customers are deferring orders, but are not canceling them. But you can expect more layoffs as the company cuts costs.
PNC Financial Services Group (PNC) rebounding more than $8, making up nearly half of yesterday's decline. Today, PNC said its losses would be less than its earlier $1.8 billion forecast. That stock tanked yesterday because of orders at National City recently acquired, would need more capital after writing down the usual truck load of bad loans.
Then Cash America Financial (CSH) sliding over $4. The company cut its fourth quarter full year forecast. The Obama administration may look to place more regulations on these kinds of companies, the payday lenders.
On the NASDAQ, Apple (AAPL) rising more than $4.50. During regular trading, it soared to above $90. After hours, quarterly profits rose strongly with robust holiday sales of iPhones and Macbook laptops. Separately, the "Wall Street Journal" says the SEC is now looking into how Apple disclosed the news on Steve Jobs' health status.
Google (GOOG) jumped over $20.
And then Microsoft (MSFT) picked up $0.90. Both of these companies report quarterly results tomorrow.
Research in Motion (RIMM) gaining almost $3. The company withdrew its offer to acquire Certicom, a Canadian company for about $1.50 Canadian.
Oracle (ORCL) tacking on $0.79.
Then Cisco Systems (CSCO) edged up $0.69.
And then Intel (INTC) rising $0.40 in regular trading. The chip maker after hours saying it will close plants in the U.S., Malaysia and the Philippines, cutting 6,000 jobs.
Qualcomm (QCOM) gaining $1.73.
Northern Trust (NTRS) up more than $13.50. What do you know, a financial firm making money. Northern Trust said its quarterly net income more than doubled to $1.47 a share. Revenues up 18 percent. Income from foreign exchange trading helping those results.
Amgen (AMGN) rising $0.53.
And then Cree Inc (CREE) rising over $2. There was a decent jump in second quarter profits for that company.
And finally, Omnicell (OMCL) down $2.30. Investors did not like the company's profit forecast yesterday, when it said 2009 earnings will be more than 50 percent below earlier forecasts.
