NBR Transcripts-February 25, 2009
Wednesday, February 25, 2009President Obama Reveals Details of the Bank Stress Test
SUSIE GHARIB: The Obama administration unveiled today its stress test guidelines for American banks. They'll be used to test the health of the nation's 19 biggest financial institutions to determine if they need more government loans and how much. It comes as President Obama urges lawmakers to write tough new regulations for the financial industry. Darren Gersh has details.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This afternoon the president laid out financial ground rules for the future, putting forward his broad principles for reform once the credit crisis is over.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Financial institutions that pose serious risks, systemic risks to our market should be subject to serious oversight by the government.
GERSH: That's for tomorrow. For today, regulators are beginning to stress test bank finances and now they have said how it will work. Bank examiners will evaluate the ability of consumers and businesses to repay loans under two scenarios. First, the baseline assumes the economy falls 2 percent this year and rebounds 2 percent next year; unemployment hovers between 8 and 9 percent. Second, in what is delicately called the more adverse case, the economy drops more than 3 percent and is mostly flat next year; unemployment tops 10 percent. Regulators will also examine what happens to banks if home prices keep sliding, under the baseline, down 14 percent this year and 4 percent next, in the worst case, a sobering 22 percent this year and 7 percent next year. Experts consider the assumptions plausible. The question says Vince Reinhart, a former senior official at the Federal Reserve, is with the banks.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: We're not really confident that banks know what their own balance sheet is. So it is not obvious that we should be confident that they would know what their balance sheet would look like in a year.
GERSH: Regulators said they would not make the results public, leaving individual banks to release their test scores. The real goal of this exercise, Reinhart says, is for regulators to force banks to clean up their finances.
REINHART: This is saying, take a look at your balance sheet, report back if you think you have balance sheet problems. This is an opportunity for them to say, well, actually we need a little more capital.
GERSH: But even as the government contemplates pumping more money into banks, Fed Chairman Ben Bernanke repeated assurances to the House Financial Services Committee today that the stress tests won't end with the government owning banks.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Nationalization to my mind, is when the government seizes the bank, zeroes out the shareholders and begins to manage and run the bank. And we don't plan anything like that.
GERSH: Bernanke also took a rare stab at analyzing the stock market. The Fed chairman said the low prices today don't reflect economic fundamentals as much as the fear investors now feel. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
The New Big Three- Energy, Education and Healthcare
PAUL KANGAS: President Obama in his address to Congress called for increased spending for energy, health care and education. While details of the plan are still sketchy, Scott Gurvey looks at which areas of those sectors could benefit and whether investors should consider them.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Energy, education, healthcare. These are the sectors President Obama identified last night as critical areas for government investment in the nation's future. Jim Awad of Zephyr Management says as a result, these sectors should outperform the overall economy in the years ahead.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: If the government is going to be spending a lot of money in these three areas, that relative to the rest of the economy, these are going to be three growth industries and you're going to see investors and money going into them.
GURVEY: In the energy sector, analyst Fadel Gheit says it will pay to be green.
FADEL GHEIT, SR. OIL & GAS ANALYST, OPPENHEIMER & CO.: Obviously natural gas companies. Most of the independent oil and gas companies are basically natural gas companies, so they will benefit definitely from that. But technology, whether it's clean coal, whether green energy, that will open up a very new area if you will and will put the muscle of the U.S. government behind it and I think will (INAUDIBLE) significant growth in this area.
GURVEY: In education, salaries are by far the largest expense and these are for the most part public sector jobs. But analysts also predict growth for textbook publishers, companies which specialize in school construction and those which create web-based instruction and other educational alternatives. Healthcare is much more complicated. As the government gets more involved in providing insurance and managing care, that will increase the volume of services, but decrease profit margins. Robert Gold of Standard & Poor's suggests investors look for companies which provide specific services.
ROBERT GOLD, DIR., HEALTH CARE EQUITY RESEARCH, STANDARD & POOR'S: We're not talking about the product companies as much. We're not talking about the large capital equipment companies, which are struggling right now with reduced hospital spending generally. We're talking more about again the companies that collect patient records, that do inventory management, that just help operating efficiencies for the system. I think you're going to see a lot of companies emerge in those categories and a lot of the current companies are going to face a lot of pricing pressures.
GURVEY: The president releases his budget tomorrow, but there are reports tonight that it will call for spending $634 billion over the next 10 years as a down payment on the overhaul of the health care system. That money to come from reductions in Medicare payments and limits on the tax deductions taken for upper income taxpayers. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Anne Mulcahy, Chairman & CEO of Xerox
SUSIE GHARIB: My guest tonight says this is a fasten-your-seatbelt economy. She's Anne Mulcahy, chairman and CEO of Xerox and one of the nation's business leaders advising President Obama. Earlier today, I talked to her about the president's plans to revive the economy and if he's on the right track.
ANNE MULCAHY, CHAIRMAN & CEO, XEROX: I think he's put the right priorities in order. I think the balance between both spending and stimulus and tax is appropriate. It's addressing the right issues. So, yeah, I am supportive of you know, what he's put forward. And I think the biggest challenge is going to be executing it.
GHARIB: As you know, the president gets a lot of criticism from business people that his stimulus plan won't work. I know you're an advisor to President Obama. What are you telling him that he really needs to do?
MULCAHY: I think from a business perspective, our single biggest worry is unemployment, that you know, certainly job creation, you know, doing everything we can to stem the tide in terms of job loss is hugely important.
GHARIB: What about the employment picture? When do you see it getting better?
MULCAHY: I think most of us know that this year is going to be a tough year and that you know, we're hopeful that by the end of the year, we'll start to see some of the flow-through from the stimulus package. We'll by the way from a corporate perspective see the results of restructuring and getting fit from an economic perspective so that we'll begin to see some light at the end of the tunnel. But I think realistically, we're all looking for a tough 2009.
GHARIB: Fed Chairman Bernanke says that the recession will be over by the end of this year. From what you're seeing, does that sound right?
MULCAHY: I think it can in this country. Actually, I think the U.S. is better positioned to come through this quicker than perhaps some of the rest of the world. There are signals. We do see that credit is beginning to ease up. One of the things that I think the corporate environment has done is acted appropriately and aggressively to get fit and take care of our own businesses which will have positive flow-through by the end of the year as well and that gives us some time to see the results of the stimulus and other private actions that are being taken. So I think it is possible and I think it's the right message in terms of expectation-setting.
GHARIB: Is there anything in this economic stimulus package that will help tech spending and will help Xerox sell products like these?
MULCAHY: I do. I think that probably the most direct impact for us is the fact that our customers and suppliers will be helped by the stimulus package and therefore, a healthy supplier and customer environment is probably the most important thing we can ask for from the stimulus package. But also the focus on energy, IT, health IT, certainly educational spending in the area of technology, math and engineering. All I think, are important areas of investment and focus from this administration.
GHARIB: Anne, you've been cutting jobs. You've been cutting costs. What other steps are you taking to get through the recession?
MULCAHY: Well, I actually think that the most important step you can take getting through the recession is customer focus. This is a time where you have to be listening to your customers, understanding how you help them through this recession and that's the big differentiator in terms of how successful you'll be. We all know how to manage the cost and expense side of the business. I think that's a core competency in most corporate environments, but it's the ability to deliver value, to make investments that continue the kinds of returns that you want for the future that really will be the differentiator coming out of this kind of weaker economy and that's a major part of our focus.
GHARIB: But let's say that the economy doesn't recover for three years, four years, maybe even five years, what can you do to protect Xerox?
MULCAHY: Optimization of resources. Before you hire a person, you have somebody internally that can do that job, so making sure that you're not -- that you're protecting as much of your resource base as possible. Travel, remote technology, really making sure that we're optimizing the ability to communicate without necessarily getting on planes. So there's nothing that goes untouched at times like this including the quality of the investment spend as well. You have to make tough choices. You have to pick your priorities and make sure that you don't spread yourself too thin.
GHARIB: As you're making choices, Xerox has a tradition for innovation. How do you balance between introducing new products and also preserving cash?
MULCAHY: Right. Well, it's a trade-off that I don't think you can actually let happen. You have to be tough-minded, really ruthless in terms of, you know, current decisions, but not trade off the future. Don't mortgage the future for the present. You know, we're a company that is going to come through this stronger versus weaker and therefore, making sure that we are preserving investments particularly in research and development that will provide that pipeline of innovation in the future. It's absolutely what we have done in the past and what we'll continue to do in the future.
GHARIB: Anne, thank you so much for your time. Great seeing you.
MULCAHY: Always a pleasure. Thanks, Susie.
"Street Critique" -Dave Meger of Alaron
PAUL KANGAS: My "Street Critique" guest says when it comes to metals, gold is still the shining star. He's Dave Meger, director of metals trading at Alaron futures and options. Dave, welcome to NIGHTLY BUSINESS REPORT.
DAVE MEGER, DIRECTOR OF METALS TRADING, ALARON: Good evening, Paul.
KANGAS: Why do you like gold?
MEGER: Obviously there's a lot of benefits to being in the gold market for the individual investor. Those benefits obviously range from the safe haven aspect of the metal right now to capital preservation to portfolio diversification. So certainly the individual investor should be focused on the gold market at this time.
KANGAS: How much of the buying would you attribute to safe haven versus industrial demand?
MEGER: Obviously right now in the market, the safe haven demand element going on in the market is a significant portion of that buying. Traditionally jewelry demand can run as high as 70 percent of the market's demand source. However in the near term, we believe that investment demand component that's driving market prices at this time.
KANGAS: How much gold should be in a normal person's portfolio?
MEGER: We traditionally recommend between the 5 and 10 percent. However, in this environment certainly I have many clients that are looking at higher percentages based on the fear that we have in the economy right now. Everything from the equity markets to the bond markets. Certainly a lot of people looking for alternative investments at this time.
KANGAS: Dave, what are the pluses and minuses of buying physical gold versus gold futures, gold exchange traded funds or just the stocks outright?
MEGER: Paul, it's really kind of an individual's choice. But certainly you touched on the three ways to invest in gold. There's ETFs such as the GLD. There's holding physical gold in one's account and then there's obviously futures trading. All of these products are essentially tied to the price of gold which is the essential product of how you want to invest in gold as opposed to investing in such things as mining stocks where you're dealing with a lot of things other than the price of gold.
KANGAS: But at least you get dividends from them, some of them.
MEGER: You certainly do, but you're also subject to the management and the accounting and the hedging practices of those individual firms, so certainly I don't consider that to be a true gold investment.
KANGAS: OK. Good point. We just have 30 seconds left but what is your target price over the next year for the price of gold?
MEGER: We actually see gold going through a bit of a correction right now. We would look to be a buyer if you were to get anywhere in the upper 800s to low 900 at this point. We have price targets as high as 1200 to 1500 by the end of the year.
KANGAS: Very interesting indeed. Dave I want to thank you for sharing your insights with us.
MEGER: My pleasure, Paul.
KANGAS: My guest, Dave Meger, director of metals trading at Alaron futures and options.
"Reviving the Economy: Jobs," -Taking Charge of Your Finances
SUSIE GHARIB: With job losses on the rise, more Americans are focusing on their personal finances. So tonight's "Money File" has some advice on preparing your bank account if you're worried about getting laid off. As we continue our month-long series, "Reviving the Economy: Jobs," here's Gail Marks Jarvis, personal finance columnist at the "Chicago Tribune."
GAIL MARKS JARVIS, PERSONAL FINANCE COLUMNIST, CHICAGO TRIBUNE: In these unprecedented times, even rules of thumb about planning for a potential job loss have changed. In the old days, when it was more likely you could find a job quickly if you lost yours, the rule of thumb was to keep at least three months of living expenses in an emergency fund. Now many advisers are suggesting a full year. In the old days, advisers always said to pay off credit card debt, making that a priority even over amassing an emergency fund. Now with banks and credit card companies yanking away credit, people could find themselves unemployed and without credit cards as a source of a back up. So advisers are saying to build up an emergency fund first while making minimal payments on credit cards. Of course, the best way to build up an emergency fund is to cut out the extras, things you don't really need -- maybe extra phone service or extra cable, maybe dinners out or sell the car that you already can't afford and buy a clunker instead. If you are putting money into a child's college fund or into a 401(k), you could stop doing that temporarily. Instead, put the money into an emergency fund. For flexibility, try putting it into a Roth IRA. These accounts can be used for college without a penalty and if you lose your job, just remove your contributions. There's no penalty. This is Gail Marks Jarvis.
"Last Word"=The Tardiness Trend
SUSIE GHARIB: And finally tonight, this month we've been focusing on jobs -- how to get them, keep them and deal with losing them. Now it seems, more and more American workers are arriving late to them. A new survey shows one in five U.S. workers is late to the job at least once a week. That's up from a similar survey done a year ago. Now the most common reasons: traffic; lack of sleep; and getting kids to school or day care. Careerbuilder.com did the study. And Paul, it also showed being constantly tardy can be grounds for termination. So if you want to keep your job, it helps to keep showing up on time, right? KANGAS: Timely advice indeed especially with the unemployment rate over 7 percent and growing. GHARIB: That is so true.
Paul Kangas' Stocks in the News
PAUL KANGAS: A steep opening sell-off greeted Wall Street this morning, triggered by a 5.3 percent drop in January existing home sales. At 11:00 a.m., the Dow posted a 175 point loss with the NASDAQ Composite off 32 points. Then after some details of the bank stress test came out this afternoon, the market moved briefly into positive ground only to pull back by the closing bell. The Dow Industrial Average ended down 80.05 points at 7270.89. The NASDAQ Composite lost 16.40 at 1425.43, while the Standard & Poor's 500 Index fell 8.24 at 764.90. Over in the bond market, the 10-year note fell 1 2/32 to 98 15/32, putting the yield up to 2.93 percent.
Most active big board issue trading 103 million shares, Weatherford Intl (WFT) up a penny. Shareholders today approved the company's re- domesticating to Switzerland.
Bank of America (BAC) up $0.43.
Citigroup (C) dropped $0.08.
General Electric (GE) $0.07 loss there.
But JPMorgan Chase (JPM) was up $0.71.
Wells Fargo (WFC) gained $0.39.
Pfizer (PFE) lost $0.51.
Co Vale do Rio (RIO) down $0.08.
And then ExxonMobil (XOM) dropped $0.04 a share.
Sprint Nextel (S) edged a penny higher.
Freeport McMoran Copper & Gold (FCX) up $1.33. Today the Credit Suisse brokerage boosted its price target for the stock to $50 a share.
Lincoln National (LNC) down $1.83. The company's cutting its quarterly dividend from $0.21 all the way down to just $0.01 per share.
And another dividend cut by Allstate (ALL), cutting its quarterly dividend from $0.41 down to $0.20, more than half.
CF Industries (CF), which is in the fertilizer business, up $6.19. Agrium Corporation is bidding $31.70 a share in cash plus one Agrium share for each CF share. Today that's a value of $68.27 a share for CF holders. Agrium stock fell $3.73 to $36.57 and the deal depends on CF's dropping its buyout bid for Terra Industries.
Chicago Bridge & Iron (CBI) down $2.29. Fourth quarter earnings, $0.72, up from $0.46 last year, but it suspends its $0.16 quarterly dividend and sees 2009 earnings at $2 a share at the high end and that's $0.15 below the Street estimate.
JM Smucker (SJM) down $2.45, higher earnings third quarter, $0.88, up from $0.79 last year, but it reduced its 2009 sales estimate from $4 billion to $3.7 billion due to the weak outlook for the peanut butter market.
Herbalife Ltd (HLF) down $3.81, $0.53 in fourth quarter earnings, down from $0.77 last year, 11 percent drop in sales and the company cut its 2009 earnings guidance by $0.10 a share.
Dreamworks Animation (DWA) down $2.14, $0.58 in fourth quarter earnings, well down from $0.98 last year, a 31 percent drop in revenues.
And finally the big gas distribution company Nicor (GAS) down, up $3.08. Fourth quarter earnings of $1.05, down from last year's $1.22, but $0.38 better than expected. Standard & Poor's came out with a "buy" on the stock.
NASDAQ's most active, Apple (AAPL) up $0.91.
Google (GOOG) $3.81 drop.
Microsoft (MSFT) fell $0.21.
First Solar (FSLR) plunging $30.03. Fourth quarter earnings $1.61, way up from $0.77 last year, but the company said the short-term outlook for solar stocks and the industry in general has never looked more difficult. Standard & Poor's downgraded this stock from "buy" to "hold."
Intel (INTC) $0.30 gain there. That was fifth in volume.
Research in Motion (RIMM) up $0.75.
Cisco Systems (CSCO) a $0.22 loss.
Qualcomm (QCOM) $0.40 drop.
Amazon.com (AMZN) fell $1.89.
And Oracle (ORCL) a $0.20 loss there. Applied Signal (APSG) up $1.73. Stiffel financial issued a "buy" recommendation with a $25 a share target.
And finally, Wynn Resorts (WYNN) tumbled $4.05 after reporting sharply lower fourth quarter earnings of $0.07 per share down from $0.72 a year ago on a 14 percent drop in revenues. The company cited lower gaming volume.
