NBR Transcripts-February 20, 2009
Friday, February 20, 2009Nervousness Over Nationalizing U.S. Banks
SUZANNE PRATT: Talk of nationalizing U.S. banks took center stage on Wall Street and in Washington today. That prospect sent bank stocks tumbling and pushed the Dow to its lowest close in seven years. The White House said a government takeover of banks is a bad idea, but the chairman of the Senate Banking Committee warned that banks may have to be nationalized for a short time to help them survive. Nationalization would give banks a clean slate by wiping out all their bad debts, but it would wipe out shareholders, too. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some believe it would be the end of capitalism. Others say it is the only way to save the banking system. Nobel laureate Joseph Stiglitz says a takeover would force banks to stop helping themselves at our expense.
JOSEPH STIGLITZ, ECONOMICS PROFESSOR, COLUMBIA UNIVERSITY: American taxpayers have provided most of the capital but the banks are not maximizing the interest of the owners, i.e. the American taxpayers. They're maximizing their interests of their management, of their own shareholders. And that's why you see this very peculiar behavior, taking our money and pouring it out to dividends, pouring it out to bonuses.
GURVEY: Rumors about a possible nationalization are rocking Wall Street, driving Citigroup and Bank of America almost to penny stock levels. These two are considered the most likely targets if the government decides on a takeover. Taxpayers already have $45 billion invested in Bank of America, which today said quote, we see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization. Citi also has $45 billion in taxpayer funds and today it said quote, Citi's capital base is strong and our tier one capital ratio among the highest in the industry. Investors trying to sort through the rumors have been unsettled by a series of ambiguous comments. Earlier this week, Fed Chairman Ben Bernanke implied a government takeover is possible.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.
GURVEY: And Christopher Dodd, chairman of the Senate Banking Committee agreed, although he said he opposes such an action. Treasury Secretary Timothy Geithner has been silent on the issue and when asked at today's White House news briefing if banks would be nationalized, Treasury (sic) Secretary Robert Gibbs said:
ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government.
GURVEY: Strategist Robert Albertson of Sandler O'Neill is among those raising strong concerns about a government take over of any bank.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: There's no such thing as temporary nationalization. Once you've done it, you have permanently wiped out capital and you have for the long term reduced the opportunity of ever attracting capital again into the banking system. Secondly, you're driving it out of banks that aren't nationalized, because once you do one or two, it's hard to know where you're going to stop and therefore investors shun for a long, long time into the future.
GURVEY: Meanwhile, credit default swaps on Citi and Bank of America rose sharply today. Those are effectively insurance policies against default and is a sign of declining investor confidence. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Standard & Poor's Chief Investment Strategist Sam Stovall Speaks on the Stock Slide
SUZANNE PRATT: Joining me now with a discussion of today's market activity and the outlook for stocks is Sam Stovall. Sam is chief investment strategist at Standard & Poor's equity research. Sam, welcome back to the program.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hello, Suzanne.
PRATT: I have to ask you why is it that people are selling shares of Coca-Cola and Merck if we're worrying about nationalizing banks?
STOVALL: Well, I think certainly that part of the reason why the market declined today was the worry over the nationalization of the banks, but I think also investors remember that the stock market tends to lead fundamentals, by that I mean the economy by about six months. And so what investors are indicating is that possibly this economy is likely to be weaker than we're willing to admit and that possibly the government's efforts are not likely to bear fruit.
PRATT: So what do you think would happen to the market if in fact we did nationalize at least some of the banks?
STOVALL: I think it would probably be additional fall out as the prior guest just mentioned. And I think as a result we'd probably end up breaking below the November lows for the S&P 500 and possibly push the index down between 625 and 675 on the S&P 500 in the next several months.
PRATT: Now, if we don't nationalize, do you still see the S&P 500 going back to those November lows or going even below that as you said, 650, 625?
STOVALL: I still think that that is very good possibility, certainly because again the concern about the U.S. economy. S&P is forecasting that unemployment peak out about 9.5 percent in the beginning of 2010, that the depth and the duration of this recession is likely to be greater than that, that we saw since World War II, so deeper than the '73-74 recession and longer than both the mid '70s and early '80s.
PRATT: So, how do you think investors are going to know when in fact the stock market has hit a bottom?
STOVALL: Unfortunately bear markets end only when stock prices stop falling. As silly as that might sound, the market does tend to anticipate the end of a recession by an average five months over the past 60 years, by an average of nine months for both the troughing of earns as well as the peaking of unemployment. So basically you just have to wait to see when the market has finished selling and then you get a good idea as to how far out it is anticipating that the worst of the economic data will come forward.
PRATT: So give us your best guess, so when do you think that is going to happen? When, I mean, if ever, do you think it makes sense to start buying again?
STOVALL: Well, I think we're actually getting close in both time and price. Certainly if we do head to about 700 or even below that 650 or so, then we're dealing with a 10-15 percent additional decline in the S&P 500, certainly nothing like the 52 percent thrashing that we took from October of 2007 through November of 2008. So I would tend to say, start thinking about longer term investment opportunities in the next several months.
PRATT: All right. We just have a few seconds left. Let's talk about the longer term opportunities. Where's the first place or the second place that you would go?
STOVALL: Right now I'm still sticking with the defensive areas consumer staples, healthcare, telecom, utilities, primarily because the trend is your friend until it ends. But historically I would then say that you might want to start nibbling at technology stocks, they have actually been holding up quite well. Also you might want to take a look at some of the other cyclical stocks, if their fundamental forecasts are beginning to improve as well.
PRATT: OK. I think we have to leave it there. Thank you so much for joining us this evening.
STOVALL: You're welcome, Suzanne.
PRATT: My guest, Sam Stovall of S&P.
"Reviving the Economy: Jobs"-Where The Jobs Are
SUZANNE PRATT: Help wanted. In these tough times, those words are rare but extremely welcome. Even though the economy has lost millions of jobs in the last year, there are a few sectors where new positions can still be found. As we continue our series, "Reviving the Economy: Jobs," I did a little digging to find out where the jobs are now and where they might be in the near future. Like many public colleges, Stony Brook University in Long Island, New York, is coping with a massive fiscal crisis. It has slashed millions of dollars from its budget this year and the belt tightening will undoubtedly continue. But one thing the university is not doing is laying off employees. Stony Brook is hiring; it currently has more than 100 job openings, many at its nearby hospital and medical school. Stony Brook President Shirley Strum Kenny explains that the hospital services more than a million area residents.
SHIRLEY STRUM KENNY, PRESIDENT, STONY BROOK UNIVERSITY: It's enormously important for it to grow and to get new specialties and better ways to treat people. So for example, we have a new ambulatory surgery center. You've got to have personnel there. We've have a new cancer and imaging center. You've got to have personnel there.
PRATT: It makes sense that Stony Brook would be hiring given that education and healthcare are the only industries in the U.S. economy to see significant job growth in the last several months. While those areas will continue to be among the best places to find jobs for years to come, Joanie Ruge of the staffing firm Adecco says right now financial services companies are also hiring.
JOANIE RUGE, SR. VP, ADECCO: We have 1,500 open positions all across the U.S. today in the banking field and most of the positions are mortgage related. So it's all related back to that interest rates have lowered and people are looking at refinancing or maybe trying to take some advantage of the real estate market at this point.
PRATT: That brings us to President Obama's $800 billion stimulus package, which he promises will create or save about 3.5 million jobs. Many experts quibble with the total number and others point out the jobs only replace some of those lost to the recession. Still in the next few years, there will be thousands if not millions of jobs because of the stimulus. According to moody'seconomy.com, the largest number of news jobs will be in construction, thanks to infrastructure spending. But there will be openings in a broad range of industries as well. Beyond stimulus-related jobs, human resource expert Martha Fields recommends looking at the Labor Department web site www.bls.gov. It has an online occupational outlook handbook.
MARTHA FIELDS, PRES. & CEO, FIELDS ASSOCIATES: It's going to tell you where the jobs, what are the types of jobs that are out there. What does it take by way of education and training? What can you make? What is the outlook for that job in the future? So I do believe that people need to do their homework.
PRATT: And what do educators like Strum Kenny tell today's students about where the jobs will be in the next decade?
KENNY: Healthcare will continue to grow. We're an aging nation. We're a nation that can do much better in the health care than we've done in the past. So that I think will happen. I think that you're going to see as I said the green industries are going to become very strong because we've got to do things about energy.
PRATT: There is a definite consensus among employment experts about the U.S. job market. Choose a career in healthcare, education or information technology and you'll probably have your pick of jobs in the future.
"Market Monitor"-Eric Takaha, Portfolio Manager at Franklin Templeton
PAUL KANGAS: My "Market Monitor" guest this week is Eric Takaha, portfolio manager and director of the credit group at Franklin Templeton. Eric welcome to the program.
ERIC TAKAHA, PORTFOLIO MGR. & DIR. CREDIT GROUP, FRANKLIN TEMPLETON: Thanks, Paul.
KANGAS: This is your first visit with us, so share with our viewers your investing philosophy if you would, briefly?
TAKAHA: Sure, I focus on the corporate bond market primarily and so we're very much a bottom-up driven shop. We look at the fundamentals of the corporate issuers. We think about the long-term prospects really from a credit standpoint in terms of the outlook for these companies. And we look at the relative value of the securities that we're investing in, but we're very much focused on individual security selection and we have a very long timeframe in terms of our investment. That's really been our philosophy since I joined the firm about 20 years ago in the late 1980s.
KANGAS: With the stock market in such sad shape, it makes the bond market look a little better, does it not?
TAKAHA: You know, it has and frankly 2008 was a good example of the benefits of diversification into bonds, at least for part of a portfolio. If you look at the performance of the stock market versus the broad bond market, certainly having some bonds in your portfolio gave you diversification, helped to dampen some of the downside that you saw in the stock market. And frankly as we sit today and look at the bond market, we see a lot of opportunities for pretty attractive investments and yields in the bond market globally.
KANGAS: What are the chances of appreciation of bonds with interest rates already practically zero in the Fed funds rate, for example?
TAKAHA: The good news is, if you look at interest rates as you mentioned they're close to zero on the short side. Even Treasury bonds are at historical lows. However, if you move outside of the government bond market, you look at the investment grade market, you look at some of the mortgage markets, the asset-backed market, certainly the high yield market, many of those prices are actually at a discount to par. So in addition to getting yields above government yields, you actually have some price appreciation potential when you look at some of these areas.
KANGAS: What are your favorite segments of the bond market -- Treasuries, munis, corporates? Where do you find the best deals?
TAKAHA: Right now not Treasuries, actually investment-grade corporates is one of the areas that we've been putting a fair amount of money to work over the past several months. The yields for investment-grade corporates is around 7 percent which obviously compares fairly attractively to Treasuries. And although we think the fundamentals are going to be pretty difficult for the next few quarters given the economy and given the outlook for earnings we think many of these investment in corporates will weather the storm and you're picking up a pretty nice relative yield and some price appreciation potential by investing in investment-grade corporates.
KANGAS: What quality ratings would be the lowest that you would go on the purchase of a bond?
TAKAHA: Well, for investment-grade corporates, the lowest is triple B. It ranges everywhere from triple B to all the way to triple A. We have dipped in to non-investment grade, so those would be rated double B and below in the scale. And there's even some distress names that we've looked at from an individual basis. Although you have to understand that if you're investing in non-investment grade, there will be more volatility. There's more price risk. In some ways, high yield bonds are almost more equity like than they are bond like. So you have to understand the risks, but at the same time the upside in terms of appreciation is much greater than the typical bond. So we have some non-investment grade portfolios as well, but we have focused on investment grade as of the current cycle.
KANGAS: What about maturity lengths? Is there a minimum or maximum there?
TAKAHA: We really don't have any minimums or maximums in terms of maturity. Certainly if you do have a longer maturity bond, you have to understand that interest rates are relatively low, so if you look out several years and there's some chance of longer term inflation which we don't see today, but longer term, there could be some pressure on some of the prices for longer maturity bonds. But in general we play across the spectrum anywhere from short term maturities all the way to very long 20, 30 year maturity bonds.
KANGAS: You're the manager, portfolio manager of a fund that has a lot of diversification. What is the name of that fund?
TAKAHA: That fund is the Franklin Strategic Income Fund. It is a very broad, multi-sector global fixed income fund.
KANGAS: What's the trading symbol just out of curiosity? FRSTX.
TAKAHA: That's right, FRSTX.
KANGAS: OK, very good, interesting things that you told us, Eric and I want to thank you very much for being with us.
TAKAHA: Thanks again for having me. It's my pleasure.
KANGAS: My guest, Eric Takaha, portfolio manager and director of the credit group at Franklin Templeton.
Paul Kangas' Stocks in the News
PAUL KANGAS: The sellers were in command on Wall Street this morning, as rumors about bank nationalization grew. By noon, the Dow posted a 136 point loss, with the NASDAQ Composite off 10 points. As the selling heated up, the gold bugs came on strong, pushing the precious metal back above $1,000 an ounce on safe haven buying. The Dow tumbled to a 200-point loss by mid-afternoon as the nationalization rhetoric heated up some more. But stocks made a partial, late recovery after the White House said it favors a privately held banking system. So the Dow Industrial Average cut its closing loss to 100.28 points at 7365.67. In this shortened four-day trading week, it rose only once and it fell a total of 484.74 points overall. The NASDAQ fell only 1.59 points today ending at 1441.23. It declined in all four days this week, losing 93.13 points overall. Standard & Poor's 500 dropped 8.89 to 770.05 today and it fell 56.79 for the week overall. Over in the bond market, the 10-year note gained 17/32 to 99 20/32, putting the yield at 2.79 percent.
Most active big board issue tonight, 138 million shares traded was Citigroup (C) losing $0.56, traded as low as $1.61.
That was followed by Bank of America (BAC) down $0.14. As you heard, the rumors and fears are rampant about the U.S. banks being nationalized.
General Electric (GE) in there because of its GE Capital subsidiary, down $0.68.
And Wells Fargo (WFC) lost $1.10.
JPMorgan Chase (JPM) off $0.70 a share.
A $0.03 drop in Sprint Nextel (S).
Co Vale do Rio (RIO) down $1.12. The story here, the Brazilian iron ore producer reported sharply lower fourth quarter products on flagging demand.
Pfizer (PFE) $0.32 loss.
ExxonMobil (XOM) down $0.93.
And then AT&T (T), finally a gainer, tenth in activity, up $0.39.
Lowes Companies (LOW) down $1.12. Fourth quarter earnings fell to only $0.11 from $0.28 a year ago. Sales on a same store basis down 9.9 percent and Lowes sees first quarter same store sales dropping 6 to 10 percent.
Chiquita Brands Intl (CQB) losing about 43 percent of its value today. Fourth quarter loss of $0.74. That's $0.54 worse than expected and that's versus earnings of $0.02 last year. The BB&T brokerage downgraded it from "buy" to just a "hold."
Then Kindred Healthcare (KND) moving up $3.23. Fourth quarter earnings higher, $0.56 versus $0.51 a year ago. Revenues up 5 percent. Standard & Poor's upgraded it from "hold" to "buy" and has a $20 a share target.
Wellcare Health Plans (WCG) losing $3 a share. The center for Medicare and Medicaid services imposed sanctions on the company's Medicare advantage plans and the company will stop marketing those plans as a result.
Actuant (ATU) off $1.94. The company says its tool sales for the two months ending January are down 23 percent from the same period a year ago.
Cabelas (CAB), this is the outdoor sporting goods company, down or up $2.10. Fourth quarter earnings, $0.74, down from $0.84 a year ago, but $0.07 better than the Street was expecting.
Group 1 Automotive (GPI) up $2.22. Wachovia upgraded it from "market perform" to "out perform," a lot of automotive replacement parts in demand these days.
And Tim Hortons (THI), the Canadian restaurant chain, up $2.02. Fourth quarter earnings came in at $0.38 Canadian, down from $0.40 a year ago, but it sees 2009 operating income growth of 11 to 13 percent. It's also boosting its quarterly dividend to $0.10, up just an 11 percent gain.
Apple (AAPL) topped the active list, up $0.56.
Google (GOOG) up $3.81.
And then came Research in Motion (RIMM) down $2.94. Cleveland Research cut fourth quarter earnings estimates for RIMM from $0.83 to $0.69 on concern about flagging sales at its - of its Blackberry product.
Microsoft (MSFT) $0.09 gain.
Intel (INTC) was up a dime a share.
And then Cisco Systems (CSCO) $0.04 rise there.
Qualcomm (QCOM) up $0.23.
Oracle (ORCL) down $0.27.
First Solar (FSLR) managed to gain $2.71.
And Amazon.com (AMZN) up $1.91.
Career Education (CECO) had a good day, up nearly $4 a share. Fourth quarter earnings, $0.38, way up from $0.21 last year and $0.18 better than the Street expected. The company cited improving profit margins.
And finally, Morningstar (MORN), the mutual fund tracking company, down $4.53. Its fourth quarter earnings, $0.39 versus $0.41 last year. That was $0.04 below the Wall Street consensus.
Those are the stocks in the news tonight.
