NBR Transcripts-May 20, 2009
Wednesday, May 20, 2009Former PBGC Executive Director Brad Belt Sees Major Pension Problems Ahead
SUSIE GHARIB: Grim news today affecting the nation's retirement system. The agency that insures private pensions for millions of Americans told Senate lawmakers that it faces a huge deficit: $33 1/2 billion. The Pension Benefit Guaranty Corporation says its deficit has tripled in just the last six months. That means it might not be able to pay pensioners if their company plans fail. Joining us now to explain the implications, Brad Belt. He's former executive director of PBGC. He's currently the chairman of Palisades Capital, an advisory firm dealing with pension issues. Brad, welcome to the program.
BRADLEY BELT, FORMER EXECUTIVE DIRECTOR, PBGC: My pleasure to be with you Susie.
GHARIB: What happens that the deficit got so big so fast?
BELT: Well, I think it's a reflection of the fact that a number of companies that sponsor pension plans are now in bankruptcy and typically when companies enter bankruptcy, PBGC assumes that the plan will terminate and that's what shows up in their reported deficit. It also stems from declining interest rates over the last year, which some people believe have been held artificially low by the Federal Reserve which is how you value pension liabilities.
GHARIB: So let's say that more companies go out of business, that the economy, recession drags on for a while. When will the PBGC runs out of money? I know this is a loaded question but is there some basic math on this?
BELT: The PBGC isn't going to run out of money for quite a period of time. It's a little built perverse here Susie because every time the PBGC takes over a pension plan, it actually gets the assets in that pension plan and it gets those assets right away and has to pay out the benefits over a long period of time. The issue is every day that passes, the hole gets a little bit deeper and unfortunately, we haven't stopped digging. The system is set up so the hole inevitably will get larger over time. It means that somebody's going to have to fill that hole. It just doesn't have to happen tomorrow.
GHARIB: Well that somebody could be us, the taxpayers, right. At some point down the road if they don't have enough money to cover pensioners, we're going to have to pay the bill, is that right?
BELT: That's the real concern. Now taxpayers aren't explicitly on the hook with respect to the PBGC but everybody believes and I think rightly so that if the PBGC can't pay its bills at the end of the day, it's called the guarantee corporation that the pressure will be on taxpayers to step up to the plate and make good on those obligations.
GHARIB: It's frustrating here Brad for a lot of the people who are listening in on the program now. We've been led to believe that we can rely on our company pensions. We can count on Social Security to pay for our retirement. But it sounds like from what we're talking about here that the system is broken.
BELT: I think that's right, or at least you can say that every strand of the social safety net is increasingly frayed, whether it's defined benefit plans, defined contribution plans, whether it's Social Security and Medicare, home values, everything's taking a hit. And it suggests that there's a very dire picture for some Americans that were contemplating retirement in the near term or for future generations.
GHARIB: Now you advised clients on these pension issues. What do you think needs to be done to fix the system?
BELT: A number of steps need to be put in place. One, we've got to stop the hemorrhaging in the system. We've got to stop allowing pension plans to become so under funded in the first place. If pension plans were fully funded at all points in time, even if their company got into -- or their sponsor got into financial difficulty, it wouldn't have an adverse impact on participants or taxpayers. Unfortunately, we are where we are right now and most pension plans are substantially under funded. So we've got to put in place a system that allows those plans to get to better funded status over a period of time.
GHARIB: Let me just jump in here. Until that happens, for people who are in their 40's and are planning for their retirement, any quick advice that you can give them in case this system doesn't get fixed?
BELT: Well you got to take a little ownership of this yourselves. You can't necessarily count on your company sponsored pension plan. You know your 401k plan has taken a hit. You know healthcare costs are going to continue to rise. The real issue is with respect to the long term solvency of Social Security, you've got to start saving more today. And as a nation and individuals we haven't put aside enough resources today to meet our future needs and obligations. That has to start now.
GHARIB: All right. Well thank you so much for giving us your insights. We appreciate your time.
BELT: My pleasure Susie.
GHARIB: My guest tonight, Brad Belt, chairman of Palisades Capital.
Treasury Secretary Timothy Geithner Updates Capitol Hill On The TARP
DARREN GERSH: Now that grim pension situation could improve when the economy improves. Treasury Secretary Timothy Geithner told lawmakers today the financial system is starting to heal. Still, Geithner said it could take years for the government to unwind its bailout of banks and insurance firms. As Stephanie Dhue reports, the big question lawmakers want answered is what happens next with those bailout bucks?
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Treasury has taken an unprecedented role supporting banks, insurance giant AIG and the auto industry. Lawmakers want to know when and how it will end. Treasury Secretary Timothy Geithner told them not so fast.
TIMOTHY GEITHNER, TREASURY SECRETARY: There will be a time when we will be able to come to you and say, here's how the unwinding process will work, but it's too early to do that now. This is still a -- you know, the economy is still shrinking. The financial system is still quite damaged and we'll get to that point, but we're not quite there yet.
DHUE: To date, the government has pumped $600 billion into the financial system under what's known as the TARP. $270 billion has gone into banks, $70 for AIG, $40 for auto makers and their suppliers, $50 for a foreclosure prevention plan and $170 billion for various lending programs. There's about $100 billion left in the fund and with several big banks now eager to pay back their loans there will be more. Treasury plans to recycle those funds back into the program. That prompted this exchange between Geithner and Senator Jim Demint.
SEN. JIM DEMINT, (R) SOUTH CAROLINA: Instead of backing out of this whole intervention, you see now, instead of fixing the problem of the banks that were too big to fail, that the Treasury is going to be a permanent player in the financial system.
GEITHNER: No, I would not support that. I would not want that to happen. We're going to do what it takes to fix this system. We're going to do no more than what it takes. We are going to try to get out as quickly as possible because it is not going to be healthy for the system or the economy for the prospect of a sustained government involved in either the automobile industry or the financial sector as a whole.
DHUE: The bailout program is supposed to expire at the end of this year. But the way the law reads, the Treasury secretary can write a note saying he needs it and continue the program for another two years. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The Markets Are All About The Vix
SUSIE GHARIB: The big buzz on Wall Street is about the Vix. This is a closely watched measure of market volatility and sometimes indicates the direction of trading. Today the Vix touched its lowest level since last September, right before Lehman Brother s collapsed. But, as Suzanne Pratt reports, there are mixed opinions on the Vix.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The panic that gripped Wall Street just a few months ago appears to be moving on. At least that's what Wall Street's fear gauge, also known as the Vix, currently suggests. The Vix is a popular measure of expected volatility for the S&P 500 index and it trades on the Chicago Board Options Exchange. Many market pros, both technical and fundamental, watch it closely because of its inverse relationship to stock prices. Last fall, as fear dominated financial markets worldwide, the Vix surged to 80. The spike higher set the stage for the stock market's relief rally in March. As stocks surged, the Vix dropped, recently falling back below 30. On the surface, less fear and volatility in the stock market seems like a good thing. But Oppenheimer's Carter Worth says it may suggest a selloff is coming, particularly because stocks have moved so far so fast.
CARTER WORTH, CHIEF MARKET TECHNICIAN, OPPENHEIMER: We take the complacency in the Vix as a warning that the current nine week uncorrected rally in equity markets is mature and is due for the normal consolidation, pullback, arrest, giveback that is associated with any very steep uncorrected advance.
PRATT: To be sure, Worth does not think stocks are in danger of another collapse, rather a prolonged period of apathy. Others, however, say the Vix could continue to move lower in the coming weeks. After all, a reading below 20 was the norm for much of the decade. It would also mean that investors rediscovered their appetite for stocks. Still others, like Standard & Poor's Alec Young, doubt the Vix can crystal ball the stock market's future at all.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: The Vix is a coincident indicator. So, the market is going up and therefore the Vix is declining. I don't know that it's that predictive. So, just because the Vix is going down, the Vix is going down because the market is going up. But, as to the question of whether the market will keep going up, I don't think it's as simple looking at the Vix. If it were that easy, we'd all be millionaires.
PRATT: Some experts also question the usefulness of the Vix because of its relatively young age. It only began trading in the 1990s, so is somewhat untested in its ability to deliver a message about the market. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York
"Street Critique"-Pat O'Hare, Chief Market Analyst at briefing.com
DARREN GERSH: Tonight's "Street Critique" guest has been bargain hunting in the supermarket aisle. He's Pat O'Hare, chief market analyst at briefing.com. Welcome back to NBR Patrick.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Thanks for having me on the program again.
GERSH: All right, so explain this. I understand you're finding some comfort in jam and jelly. What's that about?
O'HARE: Sure. Well the market has had a great run obviously since early March and some stocks have not quite participated as fully and JM Smucker, the stock symbol SJM, is one of them and partly because it fits into a defensive orientation, consumer staples group. But we think right now that because it's been flying under the radar, that's a real nice investment opportunity for the long term investor, trades at about a 40 percent discount to its 10-year historical P/E multiple. And also the company recently increased its dividend by 9 percent which is in contrast to a lot of companies that have been cutting their dividends lately.
GERSH: Now, do you own this stock. Do you have some disclosure here?
O'HARE: No, I don't own it right now.
GERSH: Explain who should own it and for how long. Is this for somebody like a kid whose got 20, 30 years to own it or for someone who is retired?
O'HARE: I think either could fit that bill. It's really for someone when you think about risk tolerance someone who is a little bit lower risk tolerance and is more conservative in their investment orientation. But, you know, it also derived 75 percent of its sales from products that are number one in their respective categories. It's time tested. It's been around since 1897 and so I think it's just really in a good spot right now.
GERSH: What's it say about the consumers and where the economy is, if you're basically picking a stock where the big splurge is going to be fancy jam?
O'HARE: Well it kind of fits with our premise that the market's getting a little bit carried away now with the recovery train idea because part of that recovery train has been predicated on the belief that the consumer's going to come back in robust fashion and we just don't think that's going to be the case. The consumer is facing rising unemployment still, decelerating income growth, depressed asset prices and high debt burdens that they're still trying to service in a difficult environment.
GERSH: That makes me wonder, banks have been getting a lot of attention lately. So it sounds like you don't think that this bank rally is for real.
O'HARE: Well you know when you're coming back from the worst case scenario, the bank rally is for real. It's been nice to see but again we think we're now getting to the point we're getting carried away here so we wouldn't look for a full extension or a meaningful (INAUDIBLE) on those bank stocks in the near term.
GERSH: That's great, Pat. Thank you very much for being with us. Pat O'Hare, chief market analyst at briefing.com.
"Reviving the Economy"-Congressional Difference of Opinion, Rep. Paul Ryan, R-WI
SUSIE GHARIB: We continue our focus on the government's role in "Reviving the Economy" with a series of commentaries we call a congressional difference of opinion. Tonight, Representative Paul Ryan, Republican of Wisconsin has some thoughts on taxes and American business.
REP. PAUL RYAN, (R) WISCONSIN: Facing serious economic challenges from mounting mass layoffs to increasing global competition, we need to implement innovative solutions to get America back on track and create jobs. Unfortunately, Washington is seeking to take us in the opposite direction, by increasing the tax burden on American manufacturers, small businesses and on families. Washington is looking for any revenue to extract from our economy in an attempt to chase its gusher of new spending. I have proposed a completely different direction with innovative tax reforms and long overdue controls on spending from Washington. For individuals, I propose to give taxpayers a choice: you can choose the current tax code or you can pay your taxes with a simple, flatter system with two low rates and a form that fits on a postcard. We should also eliminate the current tax penalty on investment, savings and risk-taking, activities in short supply these days. For America's job creators, we should level the playing field for American-made products to compete against foreign competitors. I have proposed to scrap our corporate income tax, the second highest in the industrialized world and replace it with a business consumption tax that would be imposed on foreign goods entering the U.S. and repealed on our American-made exports. We must promote the export of U.S. products rather than the export of U.S. jobs. Now, more than ever, we need to strengthen American jobs and put American products and workers in a position to thrive in the 21st century global economy. To learn more about my reforms, I encourage you to visit americanroadmap.org. I'm Congressman Paul Ryan.
GHARIB: Tomorrow, Congressman Jim McDermott, a Democrat of Washington and his take on taxes.
Paul Kangas' Stocks in the News
DARREN GERSH: Stocks started off strong following Bank of America's successful efforts to raise private money to bolster its capital levels. Then the market went sideways through midday, but stocks headed decidedly lower after the afternoon release of the minutes from the Fed's April 29th policy meeting. The Fed thinks housing may be nearing the bottom, but central bank governors lowered their forecast for the economy this year and see a weaker recovery in 2010. So stocks ended the day with a modest selloff. The Dow fell 52 to 8422. The NASDAQ lost six to 1727 and the S&P 500 lost almost five points to close at 903. Those Fed minutes also showed Ben Bernanke and company are discussing buying more bonds, including government bonds and that helped drive down interest rates. The yield on the 10-year note falling to 3.19 percent which sounds like what the Fed is hoping for.
Now let's take a look at our stocks in the news tonight. No surprise here, Bank of America (BAC) topping the big board actives, once again closing up $0.24. The bank is raising more private capital, but analysts tell me it's important to keep in mind that this is the additional money the government thinks the banks need to withstand a deeper recession, not necessarily money the bank can use to lend and make more money.
Citigroup (C) down $0.08.
Ford Motor (F) revs up $0.22. A fair amount of volume on some optimism Ford sales are stabilizing.
General Electric (GE) up $0.07.
Wells Fargo (WFC) slid $0.94.
JPMorgan (JPM) down $1.26.
And Amer Intl Group (AIG) loses $0.03.
Regions Financial (RF) down $0.35. It's raising $1.25 billion in new capital, but still not as much as the government wants it to.
Invesco (IVZ) added $0.63. It's also trying to raise capital through a $400 million stock offering at $14 each.
And General Motors (GM) rounding out the actives, closing up $0.18 and frankly, I don't understand this, because many bankruptcy lawyers and analysts tell me the stock is going to be wiped out soon. GM has plans to sell up to 60 billion shares to pay off its government loans and if that happens, the current shares would be worth about a penny. GM says a bankruptcy filing is probable. Standard & Poor's Brian Levy calls the trading here irrational and says people are buying the stock like a lottery ticket.
Target (TGT) up $1, several stocks fitting the theme of not as bad as people thought. Same store sales down at Target almost 4 percent. Target says its fastest growing business is in basic needs. Those are low market products people have to buy.
Deere (DE) added $0.51. Again, fiscal second quarter sales not as bad as expected, but the company still thinks sales will be down 19 percent on the year.
Analog Devices (ADI) up $3.22 or almost 16 percent, again, not as bad as feared, earnings of $0.21 a share. Analysts were looking for $0.09, but revenues were flat and the outlook for the current quarter is flat, but that's better than earlier hints the business would be down.
Visa (V) rose $0.16. Interesting given the legislation Congress just passed curbing credit card abuses. In a new report, Wachovia expects the credit card market to be stagnant for a while but says Visa will do well because of increased use of debit cards.
And we told you about the coffee wars yesterday. Today Deutsche Bank upgraded McDonalds (MCD) based in part on its McCafe (ph) coffee drinks, now Hitting (ph) 10,000 locations, the market loving it. McDonald's up $2.38.
And Hertz (HTZ), the big loser on the day, down $1.38 or almost 17 percent. The company is issuing up to 46 million common shares to shore up its finances and pay off debt. The car rental industry has been under a lot of pressure. Consumers just aren't traveling.
NASDAQ, Apple (AAPL) loses $1.58. Mark your calendar. On June 8th, the company is coming out with a new operating system, Snow Leopard and people are speculating we'll see a new iPhone too.
First Solar (FSLR) up $12.70.
Research in Motion (RIMM) rose $0.56.
Microsoft (MSFT) up $0.07.
Intel (INTC) slid $0.07.
Cisco Systems (CSCO) down $0.28.
Google (GOOG) down $1.70.
Qualcomm (QCOM) a $0.23 gain.
Amazon (AMZN) up $0.10.
And Oracle (ORCL) losing $0.03.
And finally, there you see Palm (PALM). It's off $1.03 today. There are very high hopes for the new pre smart phone which launches June 6th, but so far, we've seen few independent stress tests of that phone which is why Needham Brokerage analyst Charlie Wolfe (ph) has my favorite quote of the day. He says Palm shares are priced as if quote, the company could walk on water but Wolfe doesn't think it can.
