NBR Transcripts-February 13, 2009
Friday, February 13, 2009The Stimulus Bill Goes Through The House
SUSIE GHARIB: A big win for the Obama administration today. The $787 billion economic stimulus plan was approved by the House of Representatives. The House passed the revised bill without a single Republican vote. They say the rescue package won't work because it doesn't include enough tax cuts. The Senate is expected to OK the measure tonight, clearing the way for President Obama to sign it into law early next week. Well, as the government prepares to enact that stimulus bill and its plan to rescue banks, there's still one key issue: how to value toxic assets. Some say it's tough to put a price tag on them. But is that really true? Darren Gersh asked the experts for a lesson in toxic assets 101.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The toxic asset we'll examine today is a residential mortgage-backed security. It is part of a pool of 6,524 sub-prime loans, mostly from California, Florida and Texas. As homeowners make their monthly mortgage payments, the cash goes into the pool and is then paid out as interest on bonds that were sold to investors for $1.2 billion in 2006. Now contrary to what you may be hearing, many financial pros like investment banker Robert Albertson say concerns about valuing toxic assets like this are overblown.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: We're pretending these things are intergalactic and foreign to the earth and they're not. They're reasonably analyzable. We're over-reacting.
GERSH: Investors are doing the hard work of valuing toxic assets, beginning Standard & Poor's Mike Thompson says, with cash flow.
MIKE THOMPSON, CREDIT RISK GROUP, STANDARD & POOR'S: If you lend people money and they're going to pay you back, well then you're going to get full value, but the problem is, is that, if folks stop paying you, your cash flow goes down. You start having defaults. The value of your expected stream of cash is going to go down.
GERSH: This is an actual valuation scenario Thompson's team ran for an investor holding a bond in our toxic asset pool. Standard & Poor's figured about 20 percent of the mortgages in our pool will refinance and fall out of the pool every year. Another 20 percent will default and for each default, investors will lose an average of $90,000. Here's the good news. Assuming the economy doesn't get a lot worse, Thompson's valuation team figured there would be enough cash to pay 100 percent of the money owed on the bonds that were initially rated triple AAA or close. But here's the problem. The bonds in our pool are not all the same. The bonds at the bottom, the 'Bs' get a higher interest rate, but are riskier, because they absorb all the early losses in the pool. The bonds in the middle a little less interest, but a little safer. The bonds at the top are triple- A lower interest but the very safest. If a lot of people stop paying their mortgages, the bonds at the bottom get nothing. If even more people stop paying their mortgages, bond holders higher up lose everything. Eventually, all that's left are the bonds at the top. The investors who hired Thompson to value their assets held a middle-tier bond class called M4. Thompson's conclusion, they will lose $0.98.6 for every dollar they invested.
THOMPSON: It's not a pleasant sensation. It's not a gentle water flow cascading down. You just go right over the edge.
GERSH: And our pool of toxic assets is quickly growing more poisonous. People with good credit refinance and drop out of the pool. People with bad credit stop paying their mortgages. The cash flow dries up. As that happens, even the top-tier bond holders, those expecting to get all their money back are unable to sell their toxic assets to other investors.
THOMPSON: People are just downright scared of anything that they don't understand and these are hard to understand.
GERSH: So the problem with many of these toxic assets is not that people don't know how to value them. It's that they really don't like the answers they get when they do. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
The Impact of Stimulus Plan on the Bond Market
SUSIE GHARIB: Now that the economic stimulus plan is close to becoming a reality, the next big challenge is how to pay for it. The Federal government will have to issue large amounts of new Treasuries, which makes some in the bond market uneasy. Scott Gurvey takes a look at the outlook for bonds.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Until recently, Treasuries were the bond of choice, safe haven in a time of turmoil. But lately traders have been dumping Treasuries in fear the government will be increasing supply to pay for the stimulus package. Zane Brown of Lord Abbott thinks the traders are wrong.
ZANE BROWN, CHIEF FIXED INCOME STRATEGIST, LORD ABBOTT: We certainly got a good test of that this week. We had a three-year auction, a 10-year auction and a 30-year auction. All of them were well placed. The three year in particular was well over subscribed. And I think that gave us a good indication and some comfort that indeed there will be buyers out there.
GURVEY: For all the talk of the credit crunch, Jerry Webman of Oppenheimer Funds says investors looking for yield will find the corporate bond market is reviving and good returns can be found.
JERRY WEBMAN, DIR. OF FIXED INCOME, OPPENHEIMER FUNDS: Issuance is up over 30 percent from where it was last year. Spreads have narrow considerably, especially in the investment grade realm. So money is actually being lent in the capital markets and the best quality companies are able to access the debt markets and raise money. So it's different from what we're thinking about most parts of the financial world right now.
GURVEY: The outlook is not so rosy for companies without an excellent credit ratings and the high yield market remains dormant. But another area where investors can find good yields with relative safety is muni bonds. Interest on municipals is often exempt from taxation.
BROWN: Municipal bonds offer phenomenal opportunity, especially longer term municipal bonds. It's rare and in fact prior to this past year, we never saw municipal bonds exceed the yield of Treasuries. Typically they were only 80 percent or 85 percent of the yield of Treasuries. Now long municipal bonds are 130 percent of the yield of Treasuries.
GURVEY: The highest rated municipals are usually tax anticipation bonds which have first claim on tax revenue and get paid before other obligations. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Reviving the Economy: Jobs"-Search & Interview Techniques
SUSIE GHARIB: 40 percent of Americans now say employment is the nation's biggest economic issue, up from 10 percent back in October. That's according to a report released today by the Pew Research Center. For many people, looking for work can be a daunting experience. As we continue our series "Reviving the Economy: Jobs," Erika Miller has some strategies for landing that coveted interview.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Now that he is unemployed, Carl Sartori's full time job is looking for a job. So how many hours a day would you say you devote to your job search?
CARL SARTORI, JOB SEEKER: It's 40 hours. I mean it's eight hours a day with an hour for lunch. What I try to do is I try to get up and get to work quote to work just as I did when I had a job.
MILLER: The former sales and marketing manager currently monitors over 150 websites for job leads.
SARTORI: With the computer technology and e-mail, it's not like you got to lick envelopes and stamps all the time. You basically hit a button. It can send up to 300 at a time.
MILLER: But everyone else is doing that too.
SARTORI: Exactly.
MILLER: Anonymity is a frustration felt by many online job seekers. Monster.com's Eric Winegardner says the best way to get noticed is to have a snappy cover letter and a carefully crafted resume.
ERIC WINEGARDNER, VP OF CLIENT ADOPTION, MONSTER.COM: You absolutely want to tailor your resume to the job or the organization that you are looking at. Now that doesn't require completely rehauling it. What it really has to do with is making sure that the experience that you have that is real, don't stretch any truths here, the experience that you have is aligned to the top skills that the employer is looking for. Very important to use their language and also get that into the first few paragraphs of your resume.
MILLER: And before you add your resume to an online database like monster's, try to incorporate a variety of different job titles and relevant key words into the document. The goal is to maximize your odds of coming up in an employer search of potential candidates. One way to bring back the personal interaction of a job search is by going to a job fair, like this one in Newark, New Jersey. At least you'll be guaranteed a few seconds of face time with a company that is hiring. If you do decide to go to a career fair, be prepared for crowds and long lines. But experts say there are a few ways you can differentiate yourself from the competition. Just ask Bob Tillman, who organizes career fairs for a living. How much of it is credentials that will help you get the job? How much of it is personality and the way you sell yourself?
BOB TILLMAN, EVENT PLANNER, NATIONAL CAREER FAIRS: A lot of it is personality. And that's why I tell people when they come, be positive. These companies are looking for people who have self-assurance who are confident in themselves.
MILLER: That means no mumbling or grumbling. Dress professionally and research the companies ahead of time so you can ask intelligent questions. Of course you don't have to go to a career fair to network. Carl Sartori recommends telling everyone and anyone, that you are looking for a new position.
SARTORI: It has been quite effective. I've gotten quite a few interviews and opportunities from people like my neighbor who walks past the house to catch the bus up the street.
MILLER: Interviews he hopes will ultimately lead to a great job offer. Erika Miller, NIGHTLY BUSINESS REPORT, Newark, New Jersey.
"Market Monitor" -Elaine Garzarelli, President of Garzarelli Capital
PAUL KANGAS: My guest "Market Monitor" this week is Elaine Garzarelli, president of Garzarelli Capital and welcome back to NIGHTLY BUSINESS REPORT, Elaine.
ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL: Nice to be here.
KANGAS: Because you have a Ph.D. in economics, Elaine, who could be better to ask as to whether these massive Obama rescue plans for the economy and the banks are going to work out.
GARZARELLI: Well, I think it's a little late. I think it's more of a 2010 deal than it is 2009. In both years it will be about 2 to 3 percent of GDP. But 38 percent of it is a tax cut and consumers right now, with the unemployment rate probably getting up to 10 percent, are more likely to save than to spend that money. And the other spending has to do with infrastructure projects. A lot of it goes to state and local governments and their budgets are so bad, they're likely to keep it rather than spend it.
KANGAS: But you're saying it's better than nothing, is that about it?
GARZARELLI: It's better than nothing. And we forecast that by the end of this year, we'll probably see some flattening out in GDP because of it.
KANGAS: On your last visit with us in early August, you were correctly bearish on the stock market mainly because you thought corporate earnings estimates from Wall Street analysts were far too high, about 42 percent too high. How about now?
GARZARELLI: Now they're 44 percent too high.
KANGAS: Oh, boy.
GARZARELLI: Because we had to lower our estimates again from 55 to 46 for the S&P 500 operating earnings. And that's because we see a peak to trough decline in real GDP of about 4 to 4 1/2 percent, which is the worst post-World War II recession that we have ever had.
KANGAS: Your 14 market indicators back in August were at the 50 mark. Thirty is the sell signal, 65 a buy and so they were kind of bearish. Where do they stand now?
GARZARELLI: They're at 38 percent now and they need to go to 65 percent for a new cyclical bull market to begin. So they're still on a sell signal, still in a bear market. We might be getting near the end of it. It all depends really on credit spreads and how fast the BAA bond will come down.
KANGAS: You gave our viewers back then four buy recommendations in August. Let's see how they've done since that time. We see PowerShares (UUP) up 13.6 percent. That's because you were bullish on the U.S. dollar and it worked out.
GARZARELLI: Right.
KANGAS: Bank of America (BAC) did not work out. Did you get out?
GARZARELLI: Well, the first two months after the show, it went up about 15 percent and then Lehman went bankrupt.
KANGAS: Oh, yeah.
GARZARELLI: And then we said--
KANGAS: Time to leave.
GARZARELLI: Sell everything, right.
KANGAS: Then you had two more. Let's see how they fared. Altria (MO), the big tobacco down 23.8 percent and ProShares Short (SH), the S&P worked out to a 11.6 profit from then to now.
GARZARELLI: That's a 30 percent profit on the shorts. And that's because you have to add in the dividends.
KANGAS: The dividend, you're right. Do you have some new recommendations, Elaine?
GARZARELLI: Yes, I do. I have some good ones. Now, I think we might be in a trading range from 750 to maybe 950 on the S&P 500, so in that range you want to un-hedge at the bottom of the range and then you want to hedge at the top end of the range or you could keep hedges on all the time, which is what I do.
KANGAS: OK. We have one minute left. Let's get right to them.
GARZARELLI: OK. The first one is (HNW) and that's 19 percent yield. And that is the--
KANGAS: Unbelievable.
GARZARELLI: That is the Pioneer high-yield income trust. Another one, municipal bonds I think are a great bargain right here. We're getting a 7.4 percent yield and that's MUA, Blackrock muni asset fund.
KANGAS: Very good.
GARZARELLI: And I also like the dividend fund which is (RYU), that's the Ryder, the equal weighted utilities index where most of it is in utilities and then telecom about 20 percent. And then the last one is the same thing I did before but it's a double weight and that's (SDS), which is a short, which gets you 75 percent hedged, 25 percent exposure to the market. That should give you a dividend of about 12 percent.
KANGAS: OK, do you personally own any of these securities or have other disclosures.
GARZARELLI: I own them all.
KANGAS: You own them all. You like your own cooking, don't you? OK, Elaine, thanks for being with us once again.
GARZARELLI: My pleasure, thanks, Paul.
KANGAS: My guest, Elaine Garzarelli, president of Garzarelli Capital.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street started the day in a narrow trading range as investors showed little reaction to another decline in consumer confidence or that moratorium on foreclosures. They were also hesitant to take positions ahead of the holiday weekend. After the House passed the stimulus plan however, stocks moved to the sell side, ending near their lows of the day. The Dow Industrial Average closed off 82.35 points at 7850.41. This week, it rose only once and it lost 430.18 points overall. The NASDAQ Composite fell 7.35 to 1534.36 today. It rose twice and fell three time this week, had a net loss of 57.35 points. Standard & Poor's 500 Index fell 8.35, ending at 826.84 today and it dropped 41.76 points for the week. In the bond market, the 10-year note fell 30/32 to 98 24/32, putting the yield at 2.90 percent.
Once again topping the active list today on 42.3 million shares, Bank of America (BAC) down $0.30. It's halting those foreclosures as you heard.
So is Citigroup (C) which lost $0.12.
General Electric (GE) $0.24 loss there.
Pfizer (PFE) $0.07 drop.
And JPMorgan Chase (JPM) fell $1.50.
Sprint Nextel (S) bucked the trend, up $0.32.
And Co Vale do Rio (RIO) up $0.35.
Wells Fargo (WFC) down $1.04. After the close yesterday, Wells said it will take a $328 million charge on certain preferred securities and that'll cut its previously reported 2008 earnings of $0.75 a share down to $0.70 a share.
Petrobras (PBR) in there with a half dollar gain.
Then came ExxonMobil (XOM) down $0.63.
Wal-Mart Stores (WMT) fell $1.60 today. Fourth quarter earnings are due out next Tuesday. The Street estimate is about $0.99, but today Citigroup anticipates a guarded outlook from Wal-Mart next Tuesday.
Texas Instruments (TXN) moved up $0.56 after UBS Financial upgraded it from "neutral" to a "buy" recommendation.
And then Pepsico (PEP) up $0.57. Fourth quarter earnings $0.46, down from last year's $0.77, but excluding restructuring charges, its earnings were $0.88, up from $0.79 a year ago. That was about in line with Street estimates.
Mastercard (MA) closed up only $0.10, but it traded as high as $168.81 today after Cowan and Company brokerage upgraded it from "under perform" to "out perform."
The big British bank, Lloyds Banking Group (LYG) down $1.53, huge percentage drop. The company expects to report a 2008 loss of $14.4 billion.
MEMC Electronic (WFR) up $1.27. The story here, UBS Financial upgraded it from "neutral" to "buy" and did the same for a host of other chip stocks.
McAfee (MFE) $0.15 gain, but it traded as high as $33.25 today after reporting first quarter earnings of $0.53, up from last year's $0.46. Revenues were up 19 percent.
Abercrombie & Fitch (ANF) $2.08 gain there, nice move. Fourth quarter earnings excluding items, $1.10 a share, $0.09 above the Street estimate and the company is upbeat on its plans for expansion overseas.
Wyndham Worldwide (WYN) down $1.76, huge percentage drop there. Fourth quarter results excluding items, $0.47, up a penny from last year, but the company sees first quarter earnings falling to only $0.35 to $0.40 a share.
And then Treehouse Foods (THS) up $2.72. Fourth quarter operating earnings, $0.55, up a dime from last year. Sales up 7.3 percent. The company sees 2009 earnings rising 11 to 14 percent.
NASDAQ's most active, Apple (AAPL) down $0.11.
And then Google (GOOG) a $5.37 drop.
Research in Motion (RIMM) off $1.91. Credit Suisse downgraded it from "neutral" to "under perform."
Microsoft (MSFT) down $0.17. It plans to open retail stores to better compete with Apple.
Intel (INTC) $0.12 loss there.
And Cisco Systems (CSCO) a dime loss.
Finally some gains, Qualcomm (QCOM) up $0.14.
Oracle (ORCL) a $0.17 advance.
First Solar (FSLR) down $1.15.
And Amgen (AMGN), tenth in volume, lost $0.51.
Electro-Optical Sciences (MELA), look at that percentage gain, up $2.83. The company's non-invasive device for melanoma detection is looking promising in late trials.
And those are the stocks in the news tonight.
