NBR Transcripts-April 16, 2009
Thursday, April 16, 2009The Search Engine Google Finds Big Earnings In The First Quarter
SUSIE GHARIB: Google delivered impressive quarterly results after the bell today, signaling that the Internet giant is coping well through the recession. Excluding items, Google earned $5.16 a share in the first quarter. That was $0.23 better than analysts' estimates thanks to continued growth in advertising revenues. Sales rose 6 percent to $5.5 billion, but they were down 3 percent from the fourth quarter, the first decrease in the company's history. CEO Eric Schmidt said the company is feeling the impact of a weak economy. Citigroup Internet analyst Mark Mahaney spoke to us by phone a short while ago and says investors should be impressed at how Google has tightened its belt.
MARK MAHANEY, INTERNET ANALYST, CITI: For the second quarter in a row, the company has shown that it can materially reduced its operating expenses. For years, Google has proven that it can grow. Google has never proven that in a deteriorating revenue environment, they can manage costs. They've done that for two quarters in a row and I think that's what investors have been pretty positively impressed with.
GHARIB: Mahaney's firm has done business with Google in the last 12 months. He says Google still needs to figure out how to maximize the advertising capabilities of its video sharing web site youtube.
SEC Chairman, Mary Schapiro Discusses The Changes Coming From The Agency
PAUL KANGAS: The Securities and Exchange Commission's mission is to be the investors advocate. But in the heat of the financial crisis, it seemed to be anything but. It said Bear Stearns was well capitalized just days before it collapsed and it missed red flags on the Madoff Ponzi scheme. Now the agency is trying to restore its credibility. At the helm is new Chairman Mary Schapiro. NIGHTLY BUSINESS REPORT's Stephanie Dhue spoke with Schapiro earlier today in the chairman's first television interview.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Mary Schapiro is now 10 weeks on the job as SEC chairman. So far she spent much of her time responding to the financial crisis and talking with lawmakers. The agency took up short selling rules last week and yesterday held a roundtable about the shortcomings of credit rating agencies. She says changes are coming.
MARY SCHAPIRO, SEC CHAIRMAN: We got an enormous amount of information from all of these participants and a lot of issues for us to parse and to really think about. So I can't tell you a specific time when I think we'll be done on that issue, but we will be very much informed by what we learned yesterday from all these experts and proceed hopefully sometime this summer to propose some additional enhancements.
DHUE: So you think new regulations will be needed, that the regulation that have been put in place just don't need enough time to work?
SCHAPIRO: Some of the regulations are so new they haven't really had enough time to work, but I think there are some additional things we need to focus on to align the interests of the credit rating agencies with the users of the ratings, investors, as opposed to the issuers of the security.
DHUE: We're just about in the throws of proxy season and shareholder activists are pushing hard to rein in executive pay. Will you help them and give them easier access to get rid of non responsive board members by giving them access to the proxy?
SCHAPIRO: We are very committed to giving long term, serious shareholders access to the proxy and we should propose rules on that probably in about a month or so for the commission to consider and to put out for comment. But it's real important, especially given the crisis that we are going through right now that boards be ever more accountable to the owners of the company, the shareholders.
DHUE: Just before the financial meltdown, banks that owned money market funds were quietly shoring up funds they were concerned would break the buck, or would have broken the buck if they didn't pour money in, largely unbeknownst to investors. What changes are you going to make to money market mutual funds and the way they are regulated?
SCHAPIRO: Money market funds are an enormously important part of the financial system. There are $4 trillion in money market funds and investors rely on them enormously. So from my perspective, it's really critical that the SEC take all the steps it can to bolster confidence in money market funds. So we are going to look at proposing rules very shortly that will enhance the credit quality of money market fund holdings, shorten maturities and therefore increase liquidity and hopefully make them more resilient in an economic crisis than we learned they were in this past fall.
DHUE: The SEC has been involved in investor education on Ponzi schemes, particularly in light of the Madoff scandal. Are you getting more people calling in with tips about potential Ponzi schemes and what are you doing with that information?
SCHAPIRO: We receive close to a million tips a year at the agency and we need to handle them better and more effectively then we have historically. And we are reviewing from "A" to "Z" our process for handling tips so that we can be more effective with them, but I will tell you that the number of Ponzi schemes that we are uncovering early on and stopping, shutting down immediately has grown dramatically in the time that I've been here and I think to quote Warren Buffett, when the tide goes out we see who's been swimming naked. And that's what's happened with Ponzi schemes. They can't maintain the scheme in more difficult economic times and as a result, they are being exposed earlier on.
DHUE: But even though you've been making all these efforts, the SEC, given its handling of the financial crisis is under fire and some critics say, you know, it's time to scrap it and start over, maybe fold it into the Commodity Futures Trading Commission or just do away with it. They haven't done their job. What do you see for this agency in the next five years?
SCHAPIRO: I don't think that there's any doubt that the agency has had a difficult couple of years, but I think now more than ever, particularly in a crisis, we need a really competent, very aggressive, very activist Securities and Exchange Commission. We are the only Federal agency charged with protecting investors. Those are our constituents. Those are the people we should be serving and I'm highly committed to doing that. I would not have come to the SEC if I didn't feel like I had the freedom to move the agency very much in that direction. The markets are critically important. Restoring investor confidence in the market is important. That's not going to happen unless the SEC is doing a first class job and that's what we're all committed to do.
DHUE: Can the SEC do the job? Can they police the markets? Or does it just give people a false sense of security that their investments are being protected, when they're not.
SCHAPIRO: I think the SEC can do the job. Does that mean we'll never miss a fraud or never miss a scam? Of course not. The markets are enormous. We're an agency of only 3,500 people with close to 30,000 regulated entities, so we're small for the task, but with that said I think with an aggressive enforcement program, with a great program of regulatory response to problems as they begin to emerge, so that the rules are written that protect the public more effectively, I think we can do a very, very good job. That said, investing always has risks and investors need to always have that in the front of their minds.
DHUE: We've been speaking with Mary Schapiro, chairman of the Securities and Exchange Commission, thanks so much for joining us.
SCHAPIRO: Thank you. It's my pleasure.
"Reviving the Economy: Real Estate"-Matthew Anderson of Foresight Analytics on Commercial Real Estate Failures
SUSIE GHARIB: Another sign of weakness in commercial real estate today. General Growth Properties filed for bankruptcy, the largest real estate failure in U.S. history. The Chicago-based developer owns 200 U.S. malls in 44 states. It will continue to operate all of those shopping centers during the bankruptcy process. General Growth is saddled with $27 billion in debt and couldn't rework the terms of those loans with lenders. So what are the implications of the General Growth bankruptcy for the commercial real estate market and the economy? As we continue our series "Reviving the Economy: Real Estate," we are joined now by Matthew Anderson, partner in the real estate research firm, Foresight Analytics. Hi, Matt.
MATTHEW ANDERSON, PARTNER, FORESIGHT ANALYTICS: Hi, Susie.
GHARIB: So do you think that this General Growth bankruptcy is the beginning of bigger problems in the commercial real estate market?
ANDERSON: Well, it wasn't exactly unexpected. It had been widely discussed for awhile, but I do think it sends -- puts a chill on the market and has probably raised anxieties about the whole issue of liquidity within the commercial real estate market where you have a lot of loans coming due from prior, more (INAUDIBLE) evaluations from prior years and easier lending standards. They really wouldn't qualify under those same terms today.
GHARIB: Are developers defaulting on their loans?
ANDERSON: Well, developers are. You have among the different loan types out there in commercial real estate, construction lending - both for -- mainly for residential but also for commercial real estate. The defaults there have risen and as of the fourth quarter, the delinquency rate on construction loans was 11.4 percent. That compares to mortgage -- the commercial mortgage market where delinquency rates were more like 2.7 percent.
GHARIB: Do you see that these problems in commercial real estate could have more of an impact on the economy? Everybody's been kind of worried about the other shoe to drop. Is this the other shoe?
ANDERSON: Well, we think it is. It's not exactly clear whether defaults will rise to the levels that we and other people fear. There's a lot of liquidity trying to be -- or an attempt to pump liquidity into the market, especially from the government's side and some different government programs to enhance liquidity in the market, but certainly, we're worried about that. And you've got commercial real estate lows hitting at a time when banks, for example, are already weakened by the residential problems.
GHARIB: What is the exposure that U.S. banks have to commercial real estate lending?
ANDERSON: Well in total, commercial real estate loans on banks' books amount to about $1.8 trillion. That's a big figure, um, but -- and that's a little over half of the entire commercial mortgage market or commercial real estate debt market of $3.5 trillion. To put it in some relative terms the entire U.S. residential mortgage market is $11 trillion. We're at about 1/3 the size, but we're experiencing a lot of the same issues that hit the residential market where, again, easy money from prior years at higher evaluations really is coming back to bite us now.
GHARIB: I'm sure you heard that today the Federal Reserve said that it would -- it could make changes to its TALP program, its Term Asset Lending Program to provide loans to investors to buy commercial mortgage-backed securities. Would this help the industry?
ANDERSON: It helps out. It provides sort of, in our view a marginal boost. Obviously, the direct impact is that it'll help boost the prices for the highest-rated CMBS securities or the AAA-rated CMBS securities. It doesn't really have a great impact necessarily on the lower-rated -- even the other investment-grade tranches like BBB on AA. It doesn't necessarily help out there. And it's hard to see what the direct impact is on lending. I think ultimately, the goal is to revitalize the CMBS market which at its peak was providing about 40 percent of the net --
GHARIB: Matt, I hate to jump in. I hate to interrupt you. I'm so sorry but we're just run short on time. Interesting question that we'll have to pursue with you at another time.
ANDERSON: Great, thank you Susie.
GHARIB: Thank you. My guest tonight, Matthew Anderson of Foresight Analytics.
Rosetta Stone Speaks Wall Street's Language
PAUL KANGAS: For the first time in nearly a year, a company has priced an initial public offering above its original estimate and seen its stock rise sharply on the first day of trading. But does today's debut of Rosetta Stone signal a thaw in the frozen IPO market? Scott Gurvey gets some answers.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Rosetta Stone shares popped right out of the starting gate, trading more than 40 percent above their opening price an hour after CEO Tom Adams rang the opening bell.
TOM ADAMS, CEO, ROSETTA STONE: We just believe so much in our own story and what we are trying to do that, you know, it's a pleasant surprise how strong the response has been in the market but of course, it's just the first day.
GURVEY: This was only the fourth IPO of the year and the only one to price above its estimated range. William Smith of Renaissance Capital says there is plenty of supply waiting in the wings.
WILLIAM SMITH, CEO, RENAISSANCE CAPITAL: The backlog is huge. And when we talk about huge, that means companies that are filed and would love to go public right now, but they're not able to get out. We have the left side of the equation with the supply is there with a lot of companies.
GURVEY: But demand is another story. Institutional investors, burned by IPOs issued before the market collapse, have been sitting on the sidelines. They poked their heads up today for Rosetta Stone, a maker of language-training software which has heavily marketed its brand in recent years. But Rich Peterson of Standard & Poor's says that makes Rosetta Stone the exception.
RICH PETERSON, M&A ANALYST, STANDARD & POOR'S: We can enjoy the spectacular gains by Rosetta Stone given its wide, I guess, visibility to the investing public as a plus, but over the near term I think you're not going to see an improvement in the IPO market until you probably see an improvement in credit activity.
GURVEY: That improvement is being seen, but it is arriving ever so slowly. For the time being, the IPOs most likely to succeed will be companies with strong brands and spin-offs of successful units from companies trying to de-leverage their balance sheets.
SMITH: It won't be until maybe early part of 2010 will we see some of the more traditional, what I would call venture capital, active type companies and entrepreneurial companies just coming public, because we're not going to be in that standard market at least for another half year.
GURVEY: One spin-off the experts expect will do well is Skype, the Internet phone company, which eBay plans to divest in the first half of next year. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Two Ways to Play"-Kevin Depew of "Minyanville."
SUSIE GHARIB: Will changes to mark-to-market accounting rules help get us out of this recession? There are two ways to answer that in tonight's "Two Ways to Play." Here's "Minyanville's" Kevin Depew and Kevin Depew of "Minyanville."
KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: The Financial Accounting Standards Board, known as FASB recently agreed to relax so- called mark-to-market rules, giving banks far more leeway in valuing distressed securities on their balance sheets. With all the toxic loans on the books of financial institutions, the requirement to value these assets at current market prices has been nothing short of disastrous. Why? Because there hasn't been a market. It's as if an 800 pound gorilla has been standing on the chests of banks, not allowing them to breathe. Relaxing mark-to-market rules has removed that gorilla. OK I agree, there's an 800 pound gorilla in the room, but it's not mark-to-market accounting. It's the absolute refusal by banks and policymakers to accept responsibility for bad decisions, choosing instead to privatize gains and socialize losses. Let's be honest, the intent of the FASB change is to delay loss recognition with the hope that a future economic recovery will somehow save the day. This shouldn't be surprising. Since this debt crisis began, decision making by policymakers has been characterized by one thing: a mindless disregard for the costs that must one day be borne by our children and grandchildren.
Paul Kangas' Stocks in the News
PAUL KANGAS: A mixed start for Wall Street today as a worse than expected 10.8 percent drop in March housing starts dampened interest in the blue chips. At mid-morning, the Dow posted a 55 point loss but the NASDAQ was up 15 points on a strong tech sector. An unexpected decline in new jobless benefit claims helped get the blue chips back on the bullish track, as did optimism about Google's after the bell earnings report. So stocks ended broadly higher. The Dow Industrial Average closed up 95.81 points at 8125.43. The NASDAQ Composite was up 43.64 ending at 1670.44. Standard & Poor's 500 gained 13.24 to 865.30. In the bond market, the 10-year note fell 21/32 to 99 6/32, putting the yield at 2.85 percent.
Most active big board issue on 99 million shares, Citigroup (C) edging up $0.04.
Followed by Bank of America (BAC) down a dime.
Chimera Investment (CIM) was up a dime. The company's offering 235 million shares at a price of $3 each and it'll raise $705 million for the company.
Then moving along, American International Group (AIG) a $0.09 gain. The company is selling its 21st century auto insurance unit to rival Zurich Financial Services. The price, nearly $2 billion.
General Electric (GE) a $0.44 gain there. Bernstein Research is boosting its 2009 earnings estimate from $0.81 to $0.94 and still has a target of $13 a share on GE.
JPMorgan Chase (JPM) $0.68 gain. First quarter earnings out this morning at $0.40, down from $0.67 last year, but $0.08 better than expected and the chief executive officer said the company is right now capable of paying back its TARP funds.
Duke Realty (DRE) $0.87 gain.
Wells Fargo (WFC) a dime loss.
Pfizer (PFE) $0.04 advance.
And Regions Financial (RF) had a big gain, $1.70. The chairman and president said the company will post a first quarter profit. Wall Street was thinking it would have a $0.42 per share loss.
Hewlett-Packard (HPQ) doing well, up $1.75. Next Monday the company's expected to introduce a new server system and today, Citigroup said that the company - this quarter's tracking ahead of schedule, ahead of its guidance and it kept its price target of $51 a share.
Nokia (NOK) moving up $1.52. The first quarter earnings were only .10 on the euro, down from .39 euro last year. Revenues dropped 27 percent, but Nokia says that second quarter mobile device market share is rising as the market stabilizes.
Sherwin-Williams (SHW) big gain, $5.85, $0.32 in first quarter earnings, half of what it earned last year, but $0.11 above the Street consensus.
Genuine Parts Co (GPC) $3.05 gain there. First quarter, $0.56, down from $0.75 but $0.07 above the Wall Street estimate.
And Krispy Kreme Doughnuts (KKD) up $1.18 or almost 52 percent rise. Fourth quarter was break even versus a loss of $0.50 last year and the company's in a pact with its lenders to keep it in compliance with its loan covenance.
NASDAQ's most active, Google (GOOG) up $9.24 on those great earnings.
Apple (AAPL) up $3.81 after Nokia's comment that the mobile device market is stabilizing.
That also helped Research in Motion (RIMM) rise $3.61.
Microsoft (MSFT) $0.93 advance.
Intel (INTC) a $0.27 rise there.
$0.52 gain in Cisco Systems (CSCO).
Qualcomm (QCOM) $0.74 advance.
Intuitive Surgical (ISRG) $0.59 gain.
Amazon.com (AMZN) was up $2.54.
And then Oracle (ORCL) moved up $0.59.
And those are the stocks in the news tonight.
