NBR Transcripts-March 25, 2009
Wednesday, March 25, 2009President Obama Heads to the Hill to Push the $3.5T Plan
SUSIE GHARIB: President Obama today went to Capitol Hill to lobby Democrats in Congress for support of his $3.5 trillion budget. After the closed door meeting, the president would only say quote, it went great. White House budget Director Peter Orszag says the House and Senate budget measures are 98 percent in line with the president's plan. But congressional Republicans criticize the White House for too much spending and large tax increases on the wealthy. They're planning a series of amendments aimed at freezing most domestic spending. As President Obama works to pass his budget, his job will be complicated by a big change in the government's math. Based on numbers from the president's budget and the Congressional Budget Office, it appears that the era of large Social Security surpluses is over. Darren Gersh examined the numbers and found that Social Security's finances are facing the same headwinds hitting the overall economy.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The great recession has brought great changes to Social Security. With unemployment rising, analysts say there are fewer workers paying into the system, pushing Social Security payroll tax revenues down. In tough economic times, disability claims also tend to rise and more workers retire early, driving up benefit costs. And remember those high energy prices of last year? They raised energy and food costs, boosting payments to beneficiaries in a 5.8 percent cost of living increase. That's the largest in 25 years. Chuck Blahous was executive director of President Bush's Social Security reform commission. He says the trend is clear.
CHUCK BLAHOUS, SR. FELLOW, HUDSON INSTITUTE: So you put the higher COLA payments, the higher disability benefit claims, the higher retirement benefit claims, in combination with the lower payroll tax revenue and most of your surplus is gone.
GERSH: Last April, the Social Security surplus was projected to be $83 billion this year and almost $90 billion next year. Using figures from the president's budget and the Social Security actuary, NIGHTLY BUSINESS REPORT calculates this year's surplus is now likely to fall to $30 billion and $27 billion next year. But the Congressional Budget Office is more pessimistic. It expects the surplus will be $16 billion this year, but only $3 billion next year. Altogether, the recession has shaved more than $150 billion off the Social Security surplus over the next three years. Mark Warshawsky, a member of the Social Security advisory board, thinks the news could be even worse. He says the economy is now weaker than the program expected and it's likely benefits will exceed tax revenues this year for the first time in a quarter century.
MARK WARSHAWSKY, MEMBER, SOCIAL SECURITY ADVISORY BOARD: The margins are so small that even small changes in the economy, small changes in the way the program is operated could easily put it into a deficit situation.
GERSH: The Social Security actuary tells NIGHTLY BUSINESS REPORT that is unlikely, putting the odds of a cash deficit this year at well under 50 percent. But the outlook has clearly worsened. Last year, the program's trustees estimated Social Security would go cash flow negative in 2017. Blahous thinks that date will now change.
BLAHOUS: It's clear that is going to come nearer. We don't know how much, maybe 2016, 2015, it's hard to say. But clearly, the surplus is going to be much smaller going forward than it has been in the past.
GERSH: A negative cash flow does not mean Social Security is in crisis. The program has built up an enormous trust fund over two decades. Barbara Kennelly is president of the Committee to Preserve Social Security and Medicare. She says the trust fund is more than enough to cover any short-term financial hit.
BARBARA KENNELLY, PRES., NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY & MEDICARE: The trustees look at it every single year, the report is going to come out at the end of this month. And you're going to still see that we can pay those benefits way out. Say it's not 2041, it's 2040 or 2039. But we have that money. There is $2.5 trillion in the trust fund for Social Security.
GERSH: The bigger problem may be the rest of the budget. A former member of Congress, Kennelly says Social Security's smaller cash surpluses will raise the fiscal pressure on Capitol Hill.
KENNELLY: What that does is guess what members of Congress, your deficit is even bigger than you're wanting anybody to know.
GERSH: Were Social Security's cash flow to turn negative, the impact on the Federal budget would be immediate.
BLAHOUS: If tax revenues fall short of the cost of paying benefits, the Federal government has to find additional money to redeem the bonds in the trust fund. And that has a cost. It would add to the deficit and given where we are in the budget with enormous deficits across the board, that's a great concern.
GERSH: For now, members of Congress have been in no hurry to add another reform effort to an overflowing agenda. But some supporters believe the dramatic decline in the Social Security surplus is a clear call to address the future of a vital program. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
The Federal Reserve's Long-Term Treasury Buys Begins
PAUL KANGAS: The Federal Reserve began purchasing long-term Treasuries today, in an effort to bring down borrowing costs. It's the first part of the Fed's plan announced last week to buy $300 billion in Treasuries along with almost $1.5 trillion in housing debt. But as Erika Miller reports, some experts see big risks brewing in the bond market, including the possibility of a bubble.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the 1630's, it was tulip bulbs. In the late 1990's, it was Internet stocks and earlier this decade, housing. Now some investment pros like Warren Buffett worry there's another bubble brewing, this time in U.S. Treasuries. The stock market meltdown has sent investors fleeing to the safety of U.S. government debt even if it means paltry returns. But there are concerns Treasuries could start to lose their luster, if there's a sharp jump in inflation as a result of an economic rebound. Others worry about inflation coming from ballooning government deficits to finance the stimulus and financial relief efforts like today's Treasury bond purchase. But most credit market experts are not worried inflation these days. Many, like Barclay's Ajay Rajadakhysha, think the air will come out of the bond market but in a healthy way.
AJAY RAJADHYAKSHA, US FIXED INCOME STRATEGIST, BARCLAYS CAPITAL: More likely, it deflates slowly over the next several quarters. And it's only by the middle of next year when people start becoming a lot more confident about the fact that the economy has genuinely turned, that you start to see it bursting.
MILLER: The risk however, is that there's a panic-driven flight similar to past bubbles. Experts say one way that could happen is if foreign investors become fearful about owning U.S. government debt. China, the world's largest holder of U.S. Treasury bonds, has already expressed concern about the safety of its investment. But interest rate strategist Suvrat Prakash says currently there's no safer alternative.
SUVRAT PRAKASH, INTEREST RATE STRATEGIST, BNP PARIBAS: People would typically substitute Treasury debt for other investments that yielded slightly more, let's say European government debt, emerging market debt and agencies and triple-A corporates. Now the question is up in the air over all of that. We don't even know if bond rating companies have been placing those ratings correctly.
MILLER: Unlike other manias which were rooted in greed, enthusiasm for Treasuries is being driven by fear. So ironically it's the quest for safety this time that's creating the risk of a bubble. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Reviving the Economy: What Should Business Do?"-Home-Based Business
SUSIE GHARIB: With job cuts on the rise in this recession, many people are looking at starting a business right at home. The average home business nets about $22,000 a year in profits. But with long hours and little pay, start-ups are not for everyone. As we continue our series, "Reviving the Economy: What Should Business Do?" Jeff Yastine gets the basics of starting a home-based business.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Denise Dugan's story is a familiar one.
DENISE DUGAN, HOME-BASED ENTREPRENEUR: I went the corporate route for many years and I was really not happy and satisfied.
YASTINE: So she switched jobs, becoming a health food store manager. Then, she was laid off.
DUGAN: So I just wanted to see how you were doing with your exercise routine.
YASTINE: That's when she got serious about creating a home-based business. She uses her computer, phone and chutzpah to sell nutritional counseling to a growing network of clients. So, how do you start a home- based business? Alan Carsrud, a lecturer on entrepreneurship at Miami's Florida International University, says success starts with a business plan and a budget.
ALAN CARSRUD, GLOBAL ENTREPRENEURSHIP CENTER, FLORIDA INTERNATIONAL UNIV.: One of the things that a lot of these businesses need to do is really sit down, first and foremost, what is it that I'm trying to sell? What is it that I'm really providing?
YASTINE: Libraries and bookstores carry plenty of material on writing an effective business plan. Next you'll need to do some legal paperwork. Does your business have a name? You may need to file it as a DBA or doing business as with local or state authorities and you'll need a business license from city hall depending on what you're selling, also a sales-tax license. Other permits may also be needed. Check with your local and state regulators. The other thing you'll need says Carsrud, is low expectations.
CARSRUD: From some indications several years ago, the average home- based business was making about $28,000, so that's not a - I mean that's revenue, that's not profit, that's revenue. Today it's probably up $40,000 or $50,000, but it's still very, very small.
YASTIINE: Carsrud says there's another important factor in starting a home-based business: marketing. The vast majority of home entrepreneurs are selling a service, not a product. So first and foremost, you'll need to promote yourself.
DUGAN: In all aspects I've turned it around where now I attend more marketing events and attend women's groups, and different lectures. I'm just putting myself out there so people know my name.
YASTINE: Experts say getting out there is key. Because if customers remember you and your home-based business, then, like Denise Dugan, you're already improving your small company's chances for success. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
"Street Critique"-Patrick O'Hare, Chief Market Analyst at briefing.com
PAUL KANGAS: Tonight's "Street Critique" guest has some thoughts on dipping back into this volatile market. He's Patrick O'Hare, chief market analyst at briefing.com and Pat welcome back to NIGHTLY BUSINESS REPORT.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Hi, Paul. Great to be back with you.
KANGAS: We had one of those volatile days today. How do you view these rallies that we're seeing? Are they bear market rallies or the laying of a foundation for a new and lasting bull market?
O'HARE: Well, given what we had all been witnessing, it certainly encouraging to see rallies like this although given the scope of this recent move, it seems likely to see a period of consolidation here. We do think that the pull backs will be relatively short and shallow at this juncture for three reasons in particular. One, we think there will be less attention now to trying to pick the absolute bottom of this bear market and more conviction in adding to or initiating core positions on a cost basis. Two, the velocity of the recent rally exposed that it can be harmful to hold excessive levels of cash earning close to nothing and three, there's a burgeoning sense that it's becoming less easy now to hold short positions and be successful for a lasting period. Whether it's a bull market or a bear market rally, I think that the end of the day here this should not be construed as the start of a new true bull market. Time will ultimately show that this is likely to be just a rally within a secular bear market.
KANGAS: Is a comeback in the economy in the cards here? Is it helping?
O'HARE: Well, it seems to be helping the sentiment here in the near term as the economic data has been less bad than feared. It's still early to declare that we've hit a bottom in the economy but just the fact that it's less bad can help improve sentiment. You've seen that reflected in stock prices of late.
KANGAS: Sounds to me like you might be tiptoeing back into the market. Do you have any particular recommendations to buy?
O'HARE: We do. You know, we think that the Spider S&P 500 exchange- traded fund trades under the symbol SPY is a good way to do it. It's meant to mimic of the performance of the S&P 500 Index. At its low on March 6, it was down about 57 percent from its October 2007 high. It's come back about 23 percent since then. So it's probably going to pull back here a little bit but the history of past bull markets has shown that it has paid handsomely to hold an index fund for a multi-year period coming off bear market bottoms. We have those, the ETF (INAUDIBLE) traditional investment because it trades like a stock and it has a lower expense.
KANGAS: And it yields almost 3 percent. Do you personally own it, Pat?
O'HARE: No, I do not, Paul.
KANGAS: All right. Unfortunately we're already out of time. But I want to thank you for being with us once again.
O'HARE: Thank you, Paul.
KANGAS: My guest Patrick O'Hare of briefing.com
"Money File" -Strategic Alliances
SUSIE GHARIB: In the "Money File" tonight, using strategic alliances to enhance your business and the economy. Here's Jonathan Pond, author of "Safe Money in Tough Times."
JONATHAN POND, AUTHOR, "SAFE MONEY IN TOUGH TIMES": Whether your business has one employee or 100,000 or somewhere in between, forming strategic alliances can mean the difference between thriving during the great recession or merely surviving. Strategic alliances are nothing new, but when times are tough, they can be particularly beneficial. For smaller businesses, strategic alliances are a lower cost way to work together to reap the benefits of a team effort. A strategic alliance is essentially a partnership in which you combine efforts with others to generate more revenues. The goal is to minimize risk while maximizing leverage and profit. These alliances are more important in today's economy than they have been in decades. Businesses typically use strategic alliances to increase market penetration, to diversify product or service offerings, to create new businesses or to reduce costs. And while outsourcing is not as formal as a strategic alliance, purchasing a functional service for your business rather than building it yourself is a very sensible thing to do in this challenging environment. Now in robust economies, business owners and executives are often inclined to expand their revenues through internal efforts. But in difficult times, forming strategic alliances and outsourcing becomes a smart way to take advantage of expertise that would be very costly to build in house. The result is increased revenues, retention of jobs and efficiencies that help both the business itself and the overall economy. I'm Jonathan Pond.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those two reports gave Wall Street's recent rally a new lease on life this morning. The Dow jumped 160 points by 11:00 a.m. and the NASDAQ gained 29 points. But then the market stumbled a bit after a disappointing auction of five-year Treasury notes. That sent the Dow to 100 point loss by 3:00 p.m. However, financials and tech stocks led a sharp come-back in the final hour, resulting in the positive market close. The Dow Industrial Average ended with a gain of 89.84 at 7749.81. The NASDAQ Composite was up 2.43 points at 1528.95 while the Standard & Poor's 500 Index rose 7.76, ending at 813.88. In the bond market, the 10-year note fell 24/32 to 99 21/32, putting the yield at 2.79 percent.
Big board volume leader on 122 million shares traded on the big board, Citigroup (C) down $0.07.
Bank of America (BAC) a $0.55 gain. The "LA Times" reports CEO Ken Lewis wants to start repaying the company's $45 billion in Federal bailout funds next month. Separately, the "New York Post" reports Bank America and Citigroup are aggressively buying triple-A mortgage-based securities in the secondary market.
American International Group (AIG) $0.17 loss.
General Electric (GE) $0.12 gain.
And then Wells Fargo (WFC) in there fifth in volume with a $0.92 advance.
JPMorgan Chase (JPM) one of the better gainers in the financial sector, up $2.34.
Pfizer (PFE) up $0.39.
Morgan Stanley (MS) an $0.86 gain.
And then Alcoa (AA) a $0.40 advance.
AT&T (T), tenth in volume, was down $0.06 a share.
IBM (IBM) closed down $0.35 and after the close, the company reportedly is expected to tell up to 5,000 North American employees their jobs will be eliminated with many of them being transferred to IBM employees in India.
Verizon Communications (VZ) down $0.38, traded as low as $29.40 after ITT filed suit against the partnership involving Verizon, alleging that it infringed on its global positioning system's patent.
Morgan Stanley (MS) was up $0.86. The company will pay $7 1/4 million to settle charges that its brokers induced dozens of Eastman Kodak and Xerox workers to retire early and open accounts that cost them much of their wealth due to risky investments.
Autoliv (ALV) down $1.90. The company makes those air bags and it's going to sell 13.4 million shares of its common stock to the public at $16 each, a little earnings dilution there. Also the IRS said it may boost the company's taxable income by $294 million.
Hearst Argyle TV (HTV) up $1.94, how that's for percentage gain, 93 percent. Hearst Corporation plans to make a cash tender of $4 a share for the 33 percent it doesn't already own.
And then commercial real estate services firm CB Richard Ellis (CBG) up $1.99. The company and its lenders agreed on amending its credit pact to give the firm increased financial flexibility to help it get through the weak market environment.
And then Robbins & Myers (RBN) down $1.97. Second quarter earnings, $0.46, a nickel above the Street, but the company cut its full year earnings estimate from $2 down to $1.65 a share.
Most active NASDAQ issue, Apple (APPL) losing a penny.
Followed by Google (GOOG) down $3.10.
Intel (INTC) a $0.06 loss there. "Wall Street Journal" reports the company will formerly unveil its next server systems chip next Monday.
Microsoft (MSFT) a nickel drop.
And then Cisco Systems (CSCO) down $0.11.
Qualcomm (QCOM) gained $0.47.
Research in Motion (RIMM) losing $1.31. JPMorgan started coverage on RIMM with an "under weight" rating and a $40 a share price target.
baidu.com (BIIDU) down $4.50.
Oracle (ORCL) $0.18 gain.
And finally, rounding out the NASDAQ most active was amazon.com (AMZN) falling $0.41 to $72.40.
