NBR Transcripts-March 20, 2009
Friday, March 20, 2009Optimism Vs. Reality-One Recession Two Outlooks
SUSIE GHARIB: More upbeat comments today from Ben Bernanke. The Federal Reserve chairman told a gathering of bankers in Phoenix that the economy and quote all segments of the financial system are doing better thanks to bold actions by the central bank. But much of corporate America is delivering a different message and it's not good. Xerox is the latest big company to warn of tumbling profits because of the recession. The tech giant cut its forecast for first quarter profits by as much as 85 percent. So why the disconnect between big business and big Ben? Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: We listen to Fed chief Ben Bernanke and we hear cautious optimism. We listen to America's corporations and we hear doom and gloom. Which should we believe? It depends on your point of view. It is in the government's best interest to accentuate the positive, in part because consumer spending is a big part of the economy and sentiment is a big influence on spending. Many economists do see a flicker of light at the end of the tunnel. S&P's David Wyss says all the government stimulus can't help but have a positive effect.
DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: We think that a combination of calmer financial markets and the stimulus package should bring us out of this recession some time later this year.
GURVEY: But company after company is serving up dire warnings along with their latest quarterly earnings statement. It is in their best interest to tamp down expectations so they don't disappoint. Thomson Reuters says the ratio of negative to positive forecasts for the first quarter is four to one -- twice the normal amount of negativity. But research director Ashwani Kaul sees something positive.
ASHWANI KAUL, DIR. OF RESEARCH, THOMSON REUTERS: Companies are actually able to offer guidance now, whereas three, four, five months ago, they couldn't even look into a crystal ball and tell you what's going on. So I think that kind of message, like, hey we have visibility, it's not going to be as good as we think it's going to be but we at least have some visibility and we can tell you OK, we're going to miss our earnings by X, Y and Z. At least they're able to afford the opportunity to do that, which I think is a positive sign for the markets.
GURVEY: The message for investors is that corporate guidance is one of the last indicators to turn around when a recession ends.
WYSS: That's because corporations are looking at what has happened. In many cases they're cash constrained because their profits are down during the recession because they can't borrow or it's very expensive to borrow. So they're always among the last ones to turn around in a recovery.
GURVEY: If the recovery comes at the end of the year, it would be after seven or eight quarters of declining corporate profits. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Public Private Investment Fund
SUSIE GHARIB: The nation's budget deficit will top $1.8 trillion this year. And if you think that's big, just wait. The Congressional Budget Office says the Obama budget could produce $9.3 trillion worth of red ink over the next decade. That huge number reflects the worsening economy and the government's payout of billions of dollars to fix the financial system. Meanwhile, next week the Obama administration is expected to unveil one of its most important recovery programs yet, offering details on just how it'll clear all those toxic assets off the books of the nation's banks. It's called the public private investment fund. The idea is to bring hedge funds and other big investors in to help the government value and buy up troubled assets. Now while we don't know all the details, Darren Gersh looks at how the program might work.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Let's pretend we have $1 billion to invest. Villanova School of business Professor Mike Pagano says, we're in the cat bird seat.
MICHAEL PAGANO, PROF., VILLANOVA SCHOOL OF BUSINESS: When markets are panicking, people are nervous and everybody wants to sell, it's great to be a buyer.
GERSH: So if Uncle Sam wants to make us a deal, we're going to have some requirements. First, we're looking for favorable financing. Of course, the best borrower around is Uncle Sam. If he can pass along his low borrowing cost to us of around 2 percent, then we're interested.
PAGANO: Then I can make 12 to 18 percent on this investment and that's usually in the ballpark where these kind of distressed investors, some of these hedge funds find it attractive in other words it becomes worthwhile to take the risk.
GERSH: Our second requirement is leverage. In the go-go days, we would have put one dollar down and borrow $30 more to invest. But go-go is now a no-no, so the Fed's likely to offer us a smaller deal.
PAGANO: You would put in a billion and then the government would put in $5 billion.
GERSH: So any investment we make, we can multiply by six. For those of you who really love math, we have more details on our web site -- and keep in mind this is just one possible example. Dtails of the program haven't been released yet. But an educated guess is that if we buy a toxic asset paying 3 percent on our investment, we make six times 3 percent or 18 percent. And if our leverage turns out to be higher, we make even more. So far, so good, but we are talking about toxic assets, after here, which means we may want the financial equivalent of a hazmat suit, some additional financial protection in case things go wrong. How about this deal?
PAGANO: I'm willing to take some of the risk down, I'm willing to lose half of my money, but after that all losses go to the government.
GERSH: Which means we actually don't have $1 billion at risk. We have only $500 million at risk. In effect, we are doubling our return. Now we might make 25 to 30 percent and that's on the interest. If the value of the toxic assets themselves rise because there are more buyers, we can easily make 40 percent or more. Of course, we'll have to split some of this with our partners in the government, but remember, they put in a lot more money. So what is the government's return?
PAGANO: It looks like between 1 1/2, 2 1/2 percent return on their investment.
GERSH: That doesn't sound very good, but consider that if this works, we've helped the government clean up the pool of toxic assets that's poisoning the economy and that's huge. But if it doesn't work, you know who will be left holding the bag. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Reviving the Economy: What Should Businesses Do?" -The Newspaper Fight For Survival
SUSIE GHARIB: The recession has hurt virtually every industry, but for newspapers it's a fight for survival. Many papers are folding; others are filing for bankruptcy because of a big drop in advertising. The "New York Daily News," the nation's fifth largest paper, is attacking the problem in a unique way. Erika Miller explains as we continue our series "Reviving the Economy: What Should Businesses Do?"
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's the middle of the night and printing presses at the "New York Daily News" plant are rolling out newspapers at dizzying speeds. But there's big change coming here in the fall. These older presses will be replaced by state-of-the art new ones that can print every page in close to magazine color quality. Daily news publisher Mort Zuckerman predicts the upgrade will pay off on the bottom line.
MORT ZUCKERMAN, PUBLISHER, NEW YORK DAILY NEWS: On the revenue side, it's beneficial because, "A," we will attract more advertisers if we have more color. Advertisers want to advertise in color. They don't want to advertise in black and white nearly as much as they were willing to do before. "B" we get a higher rate from advertisers for the color. So we think it will enhance our advertising revenues.
MILLER: He also thinks it will enhance newsstand and subscription revenues. And because three older presses can be swapped for one new one, Zuckerman sees cost savings as well. The "Daily News'" focus on enhancing its printed product comes at a time when newspapers nationwide are facing increasing competition from the Internet. More and more Americans are opting to get their news free online rather than paying for a printed edition. That trend has led to predictions that printed newspapers could eventually become obsolete, especially now that there are Amazon's Kindle and similar devices. But analyst Alexia Quadrani isn't writing an obituary for printed papers.
ALEXIA QUADRANI, AD & PUBLISHING ANALYST, J.P. MORGAN: I don't think everything disappears. I don't believe the print product will disappear in aggregate. I think you will definitely have papers that will survive. You know, there's still a demand for papers. It's just unfortunately the business model is not attuned for what really is the reality right now and the reality is that most people are not picking up the paper anymore to gain their news.
MILLER: She predicts big name papers, like the "Wall Street Journal" and the "New York Times," will survive because they offer unique content. She also expects most small town papers will survive for the same reason. It's the mid-sized metropolitan papers that analysts believe are most vulnerable. Denver's "Rocky Mountain News" recently folded and the "Seattle Post Intelligencer" is leaving paper behind altogether becoming a smaller online news source. The "San Francisco Chronicle" has warned it might close, which would mean no daily paper in that city. The owners of the "LA Times," the "Chicago Tribune," the "Philadelphia Inquirer" and the "Minneapolis Star Tribune" have all filed for bankruptcy protection. Media analyst Ed Atorino of the Benchmark Company says many newspaper publishers made the mistake of taking on heavy debt loads when times were good.
EDWARD ATORINO, MEDIA ANALYST, THE BENCHMARK COMPANY: This is a brand new phenomenon. I've followed the industry for, you know, 30 years. You never really thought about balance sheets for this industry, a cash flow business, not a big problem. But now, it is a crisis.
MILLER: Most analysts don't see much hope for the industry until there is a pickup in advertising, because it typically accounts for 80 percent of a paper's revenues. Mort Zuckerman warns the trouble in the newspaper business has serious social consequences, including the loss of important investigative journalism.
ZUCKERMAN: The newspapers can no longer afford that kind of original reporting and longer pieces. And that is the real loss to the community, because that gives them an insight into what's going on and a check, I might add, on public officials that is just not going to be there in the future. So I think that's a huge loss.
MILLER: If he's right, that's bad news no matter how it's delivered. Erika Miller, NIGHTLY BUSINESS REPORT, Jersey City, New Jersey.
"Market Monitor"-John Dorfman, Dorfman Value Fund Manager and Chairman of Thunderstorm Capital
PAUL KANGAS: This week my guest "Market Monitor" is John Dorfman, manager of the Dorfman Value Fund and chairman of Thunderstorm Capital, an investment advisory firm based in Boston, Massachusetts. Welcome back to NBR John. Good to see you.
JOHN DORFMAN, CHAIRMAN, THUNDERSTORM CAPITAL: Thank you, so good to see you again.
KANGAS: I'd like to get your opinion as to how the market and Wall Street in general is responding to the massive capital infusion the government is giving the economy.
DORFMAN: I think people were a little shaken and taken aback that the rescue plan seemed a bit hastily cobbled together, but when you stop to think about it, it's natural because we had a financial crisis right at the time of the change of administration. I think things will get a bit more organized as we move forward and I think Wall Street will take some heart from that.
KANGAS: Are you optimistic on the stimulus. Will it work?
DORFMAN: I think it will work over the long term. I don't think government alone can ever save the economy. Business has to come out of the recession itself, but I think the government aid on balance will help.
KANGAS: Wall Street's bulls are coming out of hiding in the last few weeks, showing a little life. Do you think the resent upturn is a bull trap or an uptrend that will last for a while?
DORFMAN: I think things will be scary and choppy but my guess is that you'll see some further improvement over the next nine months and that we'll end the year higher than we are now.
KANGAS: Your brief thoughts toward oil prices. Are they down for a while or are they going to move back up?
DORFMAN: They may be down I think for another three, four or five months but I think the next three to five year trend is likely to be up. I think over the next five years the price will usually finds itself between $70 and $100. We need oil in this country. We're not ready with nuclear. We're not ready with solar. There are problems with natural gas. So I think oil perhaps with have an upward trend.
KANGAS: On your last visit with us September 19th, you had five recommendations. They're all down dramatically. Let's have a look at them. It's been a rough market and Oshkosh (OSK.N) way down, Apache (APA) the same story. Are you still with them or would you buy them more here?
DORFMAN: I'm still with Apache and Oshkosh. I think it's a good company. I'm being very strict about debt right now and it has more debt than I feel comfortable with.
KANGAS: OK, let's have the other picks. AstraZeneca (AZN) down 27 percent and Gannett (GCI) -- newspapers are in major straits, down 88 percent. Still with those?
DORFMAN: I sold my Gannett. There is a lot more to it than newspapers, which people don't realize. However again, the balance sheet deteriorated to the point where I cut it off (INAUDIBLE) AstraZeneca.
KANGAS: OK. There was one last one, Illumina (ILMN) which you said short that stock. It had a two for one split since then but, based on that it was $42. It's down to $35 and it's been as low as $18 which gave you a big profit. How about now?
DORFMAN: I remain short Illumina. They are a supplier to the biotech industry and I think the biotech industry may be in for some tougher times over the next few months.
KANGAS: We have one minute for any new picks. Let's have a list of them if you do.
DORFMAN: Well, I'll start with Berkshire Hathaway (BRK.B), the redoubtable Warren Buffett and I like Merck (MRK). I think its pipeline (INAUDIBLE).
KANGAS: Let's get the Merck chart up there. There it is, Merck, OK, it's down. All right, number three?
DORFMAN: Number three I would recommend General Dynamics (GD). I think that while Democrats talk dovish and Republicans talk hawkish, there's not that much difference in what they actually do. I think defense stocks will do well. And my fourth long recommendation would be Overseas Shipholding Group (OSG) which is an oil tanker company. This is trading for less than two times earnings; it's very cheap.
KANGAS: It is really down. And the last one?
DORFMAN: Last I'll give you another short-sale recommendation, Star Scientific (STSI). They have a lozenge that they think will be a substitute for tobacco and I'm a little dubious whether it will be proved and if so, gain acceptance.
KANGAS: STSI on the NASDAQ right and you say short the stock, short it.
DORFMAN: That is my view.
KANGAS: OK John, do you own any of these stocks personally we mentioned?
DORFMAN: Yes, I own all of the stocks that we mentioned long and I own them for clients as well and for some clients and myself I'm short Star Scientific.
KANGAS: John, thanks again for sharing your insights with us.
DORFMAN: A pleasure
KANGAS: My guest, John Dorfman, president of Thunderstorm Capital.
"Last Word"-The White House Goes Green
SUSIE GHARIB: And finally, how's this for the seeds of change? First lady Michelle Obama today began preparing the soil for the future White House vegetable garden. She had some help from students from a local Washington elementary school. The garden will provide food for the first family's meals and formal dinners. With 55 varieties of vegetables, it will be also used to promote healthy eating. And Paul, 1600 Pennsylvania Avenue is following a huge trend. Burpee Seeds, that's the largest U.S. mail order seed company, says demand is now at an all-time high.
KANGAS: My green thumb is at an all-time low. I bought an artificial plant and it died.
GHARIB: Sad to hear. Well, it's never too late to learn, Paul.
KANGAS: I guess not.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street staged an opening bounce from yesterday's sell- off taking its cue from a recovery in the dollar, which has been hammered in recent days. An hour into trading the Dow posted a 41 point gain and the NASDAQ was up 10 points. Stocks then went into a choppy downward spiral over the next several hours. Selling linked to the quarterly expiration of stock futures and options helped send the market to its lows at the closing bell. The Dow Jones Industrial Average ended down 122.42 points at 7278.38. This week it rose twice and then fell three times but still had a net gain of 54.40 points. The NASDAQ Composite fell 26.21 to 1457.27 today. It also rose twice and fell three times this week but it gained 25.77 points overall. Standard & Poor's 500 lost 15 1/2 points exactly to 768.54 today. For the week it was up 11.99 points. Over in the bond market, the 10-year note fell 6/32 to 101 1/32, putting the yield at 2.63 percent.
Once again the big board volume leader today on 125 1/2 million shares, Citigroup (C) edging $0.02 higher.
Bank of America (BAC) however, down $0.74.
American Intl Group (AIG) $0.36 loss.
General Electric (GE) down $0.59.
Alcoa (AA) managed to gain $0.14.
And then ExxonMobil (XOM) down $2.24. Oil down a bit today.
Wells Fargo (WFC) off $1.43, some profit taking in that recently strong banking sector.
Pfizer (PFE) $0.07 loss there.
JPMorgan (JPM) on the downside by $1.80.
And then tenth in volume was AT&T (T) losing $0.27.
American Express (AXP) down $0.81. FBR Capital is cutting its price target from $12 to $10 a share in the belief American Express will see more credit card defaults. And FBR also said it probably will see a quarterly cut in the dividend from $0.18 down to $0.05 per share.
Johnson & Johnson (JNJ), another Dow stock, but this one on the upside by $1.61. UBS Financial upgraded it from "neutral" to "buy" in the belief the various drugs in the company's pipeline will restart growth for the company.
And there you see Xerox (XRX) down one full dollar, almost 19 percent drop. The company cut its first quarter earnings guidance from $0.16 to $0.20, all the way down to only $0.03 to $0.05 a share and Standard & Poor's downgraded the stock from "hold" to a "sell."
Cabot (CBT) which is in the business of carbon black, down $0.96. JPMorgan Chase downgraded the stock from "over weight" to "neutral."
And then Consolidated Graphics (CGX) tumbling $3.38, almost a 22 1/2 percent drop there. The company cut its fourth quarter earnings guidance from $0.35 to $0.55, all the way down to $0.05 to $0.15 a share and says business is the worst in its 24-year history.
Autonation (AN) losing $1.03, $1.63. UBS financial downgraded it from "neutral" to "sell" on concerns about the company's liquidity.
And Simon Property Group (SPG) down $1.58. The company has priced a public offering of its common shares, 15 million of them, at $31.50. It said it will use the proceeds to pay down some debt. Standard & Poor's repeated a "strong buy" on Simon stock.
J. Crew Group (JCG) off $1.32. Brean Murray brokerage downgraded it from "hold" to "sell."
NASDAQ's most active, Apple (AAPL) down $0.03.
Followed by Google (GOOG) up $0.22.
Microsoft (MSFT) an $0.08 drop.
Oracle (ORCL) lost $0.27.
Intel (INTC) a $0.50 drop, not much movement in this active list.
$0.32 drop in Cisco Systems (CSCO).
Qualcomm (QCOM) fell $0.58.
Research in Motion (RIMM) down $0.66.
Aamazon.com (AMZN) $0.14 drop.
And then Gilead Sciences (GILD) managed to gain a penny, tenth in NASDAQ volume.
Finally, Neurogesx (NGSX) up $1.17, 60 percent gain on news a European Union panel is recommending the company's pain patch called Quitensa be approved in Europe.
And those are the stocks in the news tonight.
