NBR Transcripts-April 15, 2009
Wednesday, April 15, 2009The Beige Book Finds Signs of Recovery
SUSIE GHARIB: The Federal Reserve said today it sees some faint signs of progress in the U.S. economy. The central bank released its beige book survey of regional economies around the country it showed the pace of decline in economic activity is slowing, signaling the possible beginning of a recovery. The survey also described grim economic conditions with weakness in the job market, manufacturing sector and housing industry. Still, UBS economist Jim O'Sullivan is encouraged by the Fed's report.
JIM O'SULLIVAN, SR. ECONOMIST, UBS SECURITIES: I think the first step is a fading of the rate of decline and I think that's clearly what we're seeing right now. It's not just the beige book. We've seen that in the consumer spending numbers. We've seen it in consumer confidence. We've seen it in home sales. And none of these numbers are suggesting out right strength yet, but unambiguously they are starting to signal at least a fading of weakness and we think that's the first step toward a recovery in the second half of this year.
Credit Market Repairs
SUSIE GHARIB: Now one key to getting the economy back on track is a healthy credit market. For months now, market pros have been saying, fix the credit markets and the financial crisis will soon be over. So are they fixed yet? As Suzanne Pratt reports, experts say we could be seeing a budding comeback.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Spring has sprung in New York City and just as there are finally signs of life on the trees here, metaphorical green shoots have been showing up in the economy, in financial markets and even in the credit markets. Morgan Stanley's Greg Peters says the credit markets are healing but not yet cured.
GREG PETERS, CREDIT STRATEGIST, MORGAN STANLEY: So for the more levered aspects of the credit markets, there's still problems. And then anything mortgage or housing related there are also problems. So, I would say it's operating much better than the fall for sure, but by no means are we out of the woods.
PRATT: We know lenders are operating better today because high quality companies have been able to borrow money to finance operations and do deals. Another frequently cited measure of improving credit markets is the LIBOR rate also known as the London bank to bank lending rate. It has recently been hovering close to a healthier 1 percent. That's a far cry from last fall's almost 5 percent level when banks were fearful of lending even to each other.
PETERS: If banks can't trust each other, then the extension of credit basically seizes up and the flow of funds and the flow of credit also seizes up.
PRATT: Experts say gone is the threat of systemic risk to the credit markets. But the fragile state of the economy still threatens to unwind gains in credit. Others say even though there are signs of a credit defrost, it's critical that the government continues to prop up many areas of lending. As for when it will be business as normal for the credit markets MF Global's Andy Brenner says it could be sooner than you think.
ANDREW BRENNER, CREDIT STRATEGIST, MF GLOBAL: I think by early this fall, we'll pretty much be saying the credit crisis is over. I think that's what Bernanke's been saying the last couple days. Things are still fragile, but we've moved past the worst of it.
PRATT: How will we know that it's really over and the credit markets are totally unclogged? According to one expert, a true sign will be when more leveraged companies also have access to capital. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
The SEC Considers Taking A Closer Look At Credit Rating Agencies
PAUL KANGAS: The Securities and Exchange Commission is considering greater oversight of the nation's credit rating agencies. Those firms had been blasted for keeping triple "A" ratings on risky securities backed by residential mortgages. Congress has even held hearings on their role in the recent financial meltdown. As Stephanie Dhue reports, today's call for change has a familiar ring.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The collapse of Enron started the clamor for change at the credit rating agencies back in 2002. It took until 2006 for Congress to pass legislation that brought more competition to the ratings business. Then late last year came the credit crunch and the financial meltdown.
JAMES KAITZ, PRES. & CEO, ASSN. OF FINANCIAL PROFESSIONALS: It's like "Groundhog Day," the movie for me. It's like the same day, you keep coming back.
DHUE: Jim Kaitz who heads the Association of Financial Professionals says the ratings business needs more substantial changes.
KAITZ: I think if we really look at fundamentally, the competition, how we look at how the rating agencies are paid and someone's willing, hopefully at the commission level to really take some bold action, then maybe we can make some progress.
DHUE: Former Congressman Richard Baker sponsored the 2006 legislation which grew the number of recognized ratings firms to 11. But that hasn't made much difference. Even the government still relies on the big three for ratings.
RICHARD BAKER, FMR. CHMN. HOUSE FINANCIAL SERVICES COMMITTEE: One of the notable setbacks is in the Fed's issuance of requirements relating to TALF. They required people to have been rated by one of the three principal rating agencies as opposed to any of the approved rating agencies.
DHUE: The big three, Standard & Poor's, Moody's and Fitch, say they are managing conflicts of interest in their businesses, re-evaluating their ratings models and making changes. And the SEC has required changes in disclosure and record keeping. Daniel Curry of DBRS, a new rating agency in the U.S., says the current financial crisis has the companies on their best behavior.
DANIEL CURRY, PRESIDENT, DBRS: There's a lot of work that's been done at all agencies to improve the quality of those decisions and managing conflicts. I wonder how permanent that will be.
DHUE: The focus now is on transparency and accountability. Robert Dobilas heads the credit rating agency Realpoint. He says investors need an easy guide to the ratings.
ROBERT DOBILAS, FOUNDER, REALPOINT: When you pick up "Consumer Reports" and you look at, you know, toaster ovens, you're able to read the reviews on the toaster ovens. You're able to see the different comparisons of toaster ovens to each other, same type of thing. You don't have that in the bond markets.
DHUE: SEC Chairman Mary Schapiro says her agency has a lot of work to do to restore investor confidence in credit rating agencies. But any major changes are likely to be evolutionary, not revolutionary. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Reviving the Economy: Real Estate,"-Corruption Cases
SUSIE GHARIB: Another twist to the crisis in the housing sector: mortgage fraud. There's been an explosion of foreclosure scams and mortgage fraud that are costing homeowners as much as $6 billion annually. As we continue our series "Reviving the Economy: Real Estate," we focus tonight on what the FBI is doing to crack down on these corruption cases. Joining us now, Sharon Ormsby, supervisory special agent with the FBI and welcome to NIGHTLY BUSINESS REPORT.
SHARON ORMSBY, FBI SUPERVISORY SPECIAL AGENT: Thank you, Susie.
GHARIB: Let me begin by asking you, what is mortgage fraud? What is a foreclosure fraud? Can you give us a simple explanation of how these scams work?
ORMSBY: Yes. A foreclosure fraud is actually what we call foreclosure rescue scam. There's three types, phantom help. There's a bust-out scheme and a bait-and-switch. Basically the phantom help is an advanced fee scheme where somebody in foreclosure is approached by another individual for the purpose of paying a fee in exchange for helping them get out of foreclosure. The problem remains that the person in foreclosure pays the fee but doesn't get foreclosure help. The other two schemes are similar in design in that the victim of the foreclosure ends up signing documents that they either don't understand or they haven't read and they end up signing their house over to the subject. The house is then sold unbeknownst to them.
GHARIB: Now, I know that the FBI has been ramping up in terms of staff and resources to catch these thieves. How successful has the agency been?
ORMSBY: I think we've been successful in the sense that since 2007, we have doubled our numbers in agents working this violation.
GHARIB: And you've been successful in cracking down on capturing these thieves and punishing them?
ORMSBY: We have. Our indictments and information have also doubled from 2007-2008.
GHARIB: All right. Now, does the law protect victims? Like you mentioned there are some people who might not be so financially sophisticated. They sign over papers. They hand over their deed. Does the law protect these victims because they just didn't understand what they were signing?
ORMSBY: Well, there's two types of frauds that we look at. One is fraud for housing and one is fraud for profit. If it's a situation fraud for housing it's an individual who is seeking to purchase a house but is providing fraudulent information regarding their income, debt, employment, assets, valuation of the property. So when somebody provides fraudulent information to a financial institution for the purpose of influencing them to provide the loan, then that is a criminal offense.
GHARIB: So what should consumers do if they are victimized?
ORMSBY: I think if a consumer is in a position of having a foreclosed home or a situation where they're trying to refinance, they should not sign a document that they haven't read, sign a document they don't understand or sign a document that is blank. I think individuals should seek a third party to help them through the process, whether they get referrals to a real estate agent or a real estate attorney. Again, the old tried-and-true statement. If it sounds too good to be true, then it is.
GHARIB: Let me ask you on that, too. I mean, any good tips on how someone can spot a scam artist because they're very clever and very reliable sounding. How do you stop them?
ORMSBY: Well, first of all, if somebody is approaching an individual unsolicited, that's a red flag. If somebody does a cold call to your house and contacts you regarding refinancing a loan or obtaining a loan, that's a red flag. The important thing to know is that you have to be vigilant about people making contact to you about your private business because usually you as a victim should be seeking out the institution to help you.
GHARIB: All right. Good advice. Thank you so much Ms. Ormsby for coming on the program.
ORMSBY: You're welcome, Susie.
GHARIB: My guest tonight, Sharon Ormsby, supervisory special agent with the FBI.
"Street Critique"-Paul Larson of "Morningstar Stock Investor"
PAUL KANGAS: Tonight's "Street Critique" guest says the recent powerful market rally is helping turn both consumer and investor sentiment. He's Paul Larson, equities strategist at Morningstar and editor of the "Morningstar Stock Investor" newsletter. Welcome Paul.
PAUL LARSON, EQUITIES STRATEGIST, MORNINGSTAR: Thanks for having me.
KANGAS: How do you view the condition of the current market?
LARSON: Well, the market is definitely a lot more calm than it was just a couple of months ago where we saw the extreme volatility. Now volatility is still above the long-term trend, but it is much better than the extreme days that we saw in late 2008 where the market was moving 2-3 percent day in and day out.
KANGAS: How much of a negative factor do you believe General Motors' woes are overhanging the market?
LARSON: If you have to pick overhangs, General Motors definitely has to be your number one potential overhang on the market right now. It's not the potential bankruptcy I think people are worried about. It's the reverberations that a bankruptcy could have. It's like Lehman Brothers. When they went under, the pain at Lehman Brothers itself was fairly isolated, but it was the reverberations in the credit markets and the money markets that really caused a lot of the problems in the credit freeze that we experienced.
KANGAS: Now your strategy is to invest in only really high quality companies with what you call a strong economic moat. Explain please.
LARSON: What we call an economic moat is what other people outside of Morningstar might call a strong competitive advantage. And we like these companies because we think that they are protected from competition. They should be able to retain their profits in times of stress like we're experiencing now and they tend to generate a lot of free cash that they can use for things like dividends and stock buy-backs.
KANGAS: Paul, in late January you gave our viewers three long-term buys. Let's see how they're doing these days. Berkshire Hathaway (BRK.B) is up 1.5 percent. General Dynamics (GD) down about 18 percent and there was one other that, Novartis (NVS) down 19 percent. Are you still with all three? These are long-term, correct?
LARSON: Yes. These are all long-term recommendations. If I liked them three months ago, I like them that much better now. These are all wide moat companies trading at very inexpensive valuations.
KANGAS: We just have a few seconds left. Any new picks?
LARSON: Sure. One wide moat stock that we think is undervalued is Johnson & Johnson (JNJ), very high quality stock and it's trading at the lowest multiple of earnings in a very long time. We think that Johnson and Johnson is worth $80.
KANGAS: That would be a nice gain. OK. Incidentally, do you own any of these stocks personally or have other disclosure?
LARSON: Yes. In fact, the cook is eating the cooking with all of these stocks I own all of them personally as well as in the portfolios that I run for Morningstar.
KANGAS: Paul, thanks for being with us again.
LARSON: Thank you.
KANGAS: My guest, Paul Larson, equities strategist and editor of "Morningstar Stock Investor."
"Kevin McCormally's Tax Tips"-How To Pay This Tax Day
SUSIE GHARIB: And finally, it's tax day. And with a midnight deadline looming for Americans to file their Federal return, President Obama is promising to re- write what he's calling the monstrous U.S. tax code. Meanwhile, if you're afraid to file because you can't afford to pay all that you owe, the final installment of our series "Tax Tips" has some suggestions. Here's our tax guru, Kevin McCormally, editorial director at "Kiplinger's Personal Finance."
KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE": I want to close this series by addressing two serious tax matters. First, for those of you out there who owe more than you can afford to pay, you ask me, what do I do? I say, don't try to hide. File your return on time, even if you can't send a check for what you owe. That will protect you from the government's stiff failure to file penalty. In a few weeks, you'll get a bill from the IRS and at that time you can call the number on the form and start the process of working things out. You might, for example, set up an installment payment plan to pay off your debt. The IRS is stressing how reasonable it's being in these tough economic times. And, on the bright side, IRS interest rates are at rock bottom levels. Second, for all of you getting big, fat refunds, please, visit your company's payroll office tomorrow morning to file a new W4 form. The W4 controls how much tax is withheld from your checks. And this year's refund is proof positive that you had too much withheld last year. Claiming more allowances on your W4 will cut withholding and increase your pay. Think of it as getting next year's refund in installments, starting next pay day. Need added incentive? Think of cutting withholding as your patriotic duty. After all, the first thing President Obama did to get the economy moving was to convince Congress to cut withholding to hike paychecks for workers. And the fact is, most Americans can boost their own paychecks by far more than that act of Congress did. All you need to do is file a new W4 so you get more of your money when you earn it rather than as a tax refund next spring. I'm Kevin McCormally.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street started the day to the downside but it didn't stay there very long. The Dow fell 45 points at the outset of trading as March consumer prices dipped, raising deflation fears. But the blue chips bounced back with a 46 point gain by noontime. The momentum was muted by weakness however in the tech sector on Intel's hazy guidance. The market got a breath of fresh air this afternoon from that encouraging beige book report, sparking a late rally and a positive close. The Dow Industrial Average ended up 109 and settled in at 8029.62. The NASDAQ Composite managed to gain 1.08 to 1626.80. Standard & Poor's 500 rose 10.56 ending at 852.06. In the bond market, the 10-year note rose 5/32 to 99 27/32, putting the yield at 2.77 percent. New York exchange volume leader on 122 million shares, Citigroup (C) moving down $0.04 in a mixed banking sector.
Bank of America (BAC) was up $0.35.
American International Group (AIG) $0.08 gain there.
General Electric (GE) $0.32 advance.
And then JPMorgan Chase (JPM) up $1.86.
And Wells Fargo (WFC) was up $1.28.
Pfizer (PFE) $0.52 gain.
Ford Motor Co (F) $0.26 loss.
American Express (AXP) up $2.19. The company says its card holders' ability to pay their bills is stabilizing.
Prologis (PLD) tenth in volume was up $1.11.
Wal-Mart Stores (WMT) closed up $0.17, although the CEO said there remains a lot of stress in the economy and he does not see a quick end to the recession.
International Paper (IP) doing very well today, up almost 22 percent with a rise of $1.58. Deutsche Bank upgraded it from "hold" to a "buy," said the outlook is good for the company.
Burger King Holdings (BKC) however, down $4.01. The company says that it sees not much better than $0.33 to $0.35 in third quarter earnings due to declines in March traffic.
AMR (AMR), parent of American Airlines, up $0.79. The company did report a first quarter loss of $1.30 a share, but not as bad as the Street was expecting, which was minus $1.62. Revenues fell 15 percent in the period.
CSX (CSX), that's the big coal hauling railway, first quarter earnings, $0.62, down from $0.85 last year, but $0.11 better than expected. Standard & Poor's, UBS Financial and Stiefel Financial all repeated "buys" on CSX.
The big coal producer, Peabody Energy (BTU) down $3.38. First quarter earnings $0.63, triple last year's $0.21 but the Street was looking for $0.94 and the company cut its 2009 production estimate.
Brokerage Raymond James Financial (RJF) down $2.57. After the close yesterday, the company said second quarter earnings will fall below the $0.37 per share Street consensus.
Another brokerage did well, Piper Jaffray Cos (PJC) up $5.07, even though it reported a first quarter loss of $0.17, worse than last year's $0.09 loss, but the Street was looking for a loss of $0.23 so it did better than expected.
Abbott Labs (ABT) losing $2.05. First quarter earnings jumped 53 percent but revenues were disappointing and the outlook for the company's experimental anti-inflammatory drug outlook is cautious apparently.
NASDAQ's most active Intel (INTC) down $0.39 after a disappointing outlook out of the close last night.
Google (GOOG) up $10.59, earnings due out tomorrow.
Apple (AAPL) $0.67 loss.
Microsoft (MSFT) $0.52 loss.
And then Research in Motion (RIMM) dropping $0.32 a share.
Cisco Systems (CSCO) down $0.37.
Amazon.com (AMZN) fell $2.51.
Gilead Sciences (GILD) $2.11 drop.
Qualcomm (QCOM) gained a dime.
And then Oracle (ORCL) with a $0.28 loss.
Then Charles Schwab (SCHW) $1.69 gain. Company out with first quarter earnings excluding one-time items, $0.21, $0.05 better than the Wall Street core expected.
And then, Infinity Pharmaceuticals (INFI) plunged $2.51 after halting late stage trials of its gastrointestinal cancer drug due to a higher than expected death rate.
