NBR Transcripts-May 27, 2009
Wednesday, May 27, 2009Chrysler Bankruptcy Heads To Court
SUSIE GHARIB: They're burning the midnight oil in the Chrysler bankruptcy case tonight. A judge is still hearing arguments at this hour on the critical issue for the company. Can it sell its biggest assets to Italian auto maker Fiat? It's a make-or-break decision for Chrysler and if approved, could speed up its exit from bankruptcy. New York bureau chief Scott Gurvey was in the courtroom for today's hearing.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The lines formed early and at times backed up down the street as lawyers and their documents, reporters and spectators filed in to hear Chrysler make its case. Chrysler lawyer Corrine Ball asked Judge Arthur Gonzales to approve the sale of most of Chrysler's assets to Fiat, the Italian auto maker. The deal would create a new Chrysler with a United Auto Workers union health care trust holding a majority stake. Fiat and the governments of the United States and Canada would also hold shares. Testifying for Chrysler, former CEO Tom Lasorda told the court he spent several years trying to find a partner for Chrysler but that in the end, only Fiat presented a viable alternative. Lasorda was cross examined by Karen Asner, an attorney representing a group of Indiana pension funds. It is among scores of parties, including debt holders, pensioners and Chrysler dealers, who object to this deal. They argue a better buyer could have been found or a liquidation would better serve their interests. Asner tried to get Lasorda to admit Chrysler did not seek another buyer because of pressure from the Treasury Department and President Obama. But Lasorda insisted the Fiat deal was the best option available. Chrysler CEO Robert Nardelli filed a statement in court this morning saying quote, the objectors seek to derail a sale that will save thousands of jobs, avert further economic disaster and provide secured lenders a payout. In the end, the court is expected to approve the plan that transfers Chrysler's assets to Fiat, just as the government wants because in the end, only the government has the will and the money to make the plan happen. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Bond Holders Reject GM's Debt for Equity Swap
SUSIE GHARIB: Meanwhile, General Motors' board of directors will meet to decide the company's next move, now that bondholders have rejected GM's debt for equity swap. But the auto maker says that there are no plans to extend or revise the offer. That means GM will likely be pushed into bankruptcy on Monday. Now worries about that are keeping sales in neutral at many dealers, while the sour economy is plaguing all car companies. Analysts say the possibility of a Chapter 11 filing has made it even harder for GM to offer leases and rebates. But as Diane Eastabrook reports, a government-backed reorganization could get consumers buying again.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In late February we joined Tom and Julie Godar as they shopped for a new or used Chevy sedan to replace their nine-year-old Chevy minivan. But three months later the Godars still have that old minivan and no immediate plans to trade vehicles.
TOM GODAR, CONSUMER: We're just nervous about the economy and about our jobs, even though there isn't anything necessarily foreseeable, an issue with our jobs. But every day you hear of other companies where it didn't appear there was foreseeable layoffs and now they're laying people off.
EASTABROOK: The Godar's fears are helping to fuel one of the worst sales slumps in decades for the auto industry. General Motors is battling those fears on top of the burden of a potential bankruptcy, a battle that is being fought in every dealership. Veteran Chevrolet dealer Bill Stasek says the new Malibu and other Chevy products have been drawing more interested buyers to his showroom in recent weeks. But Stasek speculates a lot of that interest isn't translating into actual sales because of bankruptcy fears.
BILL STASEK, CHEVROLET DEALER: I would hope that people would realize that General Motors isn't going away. There are going to be dealers to service those cars and I don't think that that is a reason that anyone should hesitate buying a car.
EASTABROOK: The poor economy and GM's financial woes are also denting sales at Mike Ettelson's dealership. GM's primary financing arm GMAC, suspended leasing last summer and leases made up almost half of Ettelson's lucrative Cadillac business. He is hopeful improving credit markets will let the auto company go back to leasing.
MIKE ETTELSON, CADILLAC DEALER: Typically someone in the upper echelon that drives a luxury car trades cars every two, three, four years and so they want to get in their car and get out of it before the warranty runs out, before they have any expenses and they just found that leasing makes a lot of sense for them.
EASTABROOK: IHS Global Insight auto analyst John Wolkonowicz thinks bankruptcy is inevitable. But he thinks Chrysler's progress in bankruptcy could renew consumer confidence in GM.
JOHN WOLKONOWICZ, SR. AUTO ANALYST, IHS GLOBAL INSIGHT: Chrysler was taken into bankruptcy a month ago. The president suggested to the American public that Chrysler would be coming out very soon and now the news is indicating that in fact that is exactly what is happening.
EASTABROOK: Analysts say more certainty about GM's future could encourage some consumers to start buying the auto company's products again. But they also concede it might not encourage buying from consumers like Tom Godar who are more concerned about the overall economy and job market. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Hogdkins, Illinois.
One on One with John Garvey, Head of U.S. Banking & Capital Markets at PricewaterhouseCoopers
SUSIE GHARIB: Some good news, for a change for the nation's banks. The FDIC says overall bank earnings turned positive in the first quarter of this year, after massive losses at the end of last year. Still, 21 banks failed between January and March. Three hundred and five banks are now on the agency's problem list and it admits there will be more failures. The Feds are working on a plan to help banks sell troubled assets. But FDIC Chairman Sheila Bair says the companies may not need as much help now.
SHEILA BAIR, CHAIRMAN, FDIC: The good news is that banks have been able to raise a lot of new capital, even before taking more aggressive steps to cleanse their balance sheets. So the incentives are sell maybe less, but that's for good reasons because they've been able to raise new capital. So there are still some issues that they're working through.
GHARIB: Joining us now with more analysis of the health of the banking sector, John Garvey, the head of U.S. banking and capital markets at PricewaterhouseCoopers. Hi John.
JOHN GARVEY, HEAD OF U.S. BANKING & CAPITAL MARKETS, PRICEWATERHOUSECOOPERS: Hi.
GHARIB: Let me begin just by asking your opinion, your description of the health of the banking sector.
GARVEY: Well we definitely see some improvement in terms of the underlying profitability, some stabilization in the economy which is obviously good and then the loan losses and the like are starting to, while still high historically, starting to stabilize. So this is all very good news for the banking sector.
GHARIB: But the head of the FDIC Sheila Bair also admitted that troubled loans continue to pile up on bank books. How serious is that?
GARVEY: I think the concentration has been on the largest banks, the top 19 or so and now they're moving into the community banks and the like. And there's still a lot of work to do there from a clean up perspective and stabilization.
GHARIB: Now you and your firm have proposed a solution to get out of this banking mess using sovereign bad banks to use your words. How would that work and why is that needed?
GARVEY: Well, I think there are two points to the research and our paper. We basically show that conclusively a government run bad bank which takes the assets from the other banks, the bad assets, toxic assets and works them out and leaves good banks to encouraging lending and resume normal operations is the policy choice that has worked time and time again. In the current structure, we also see the opportunity for the government to guarantee some of these toxic assets and encourage investors to buy those assets directly from the banks, thereby cleaning the balance sheet and avoiding some of the bad bank scenarios that others have had to engage in in the past.
GHARIB: What about the Treasury's plan for these public/private partnerships that would also buy these toxic assets and get them off of banks' books? Do you think that that would work? How is that different from what you're proposing?
GARVEY: Well, it could be incorporated within the Treasury's plan. Right now, there are no, you have to get a willing buyer and a willing seller. So I think they're working on getting investors interested in buying the troubled assets. They now have to focus on getting the banks to sell those troubled assets and without incentives like creating tradable guarantees for those assets, it's going to be tough for the banks to want to sell those assets because they feel that they're undervalued today.
GHARIB: Now, I know that you have a lot of your clients are large banks and you also advise the government. What do they think of your proposal?
GARVEY: Well I think everyone is very, very encouraging of bringing these ideas to the forefront. These ideas have been discussed with our clients, with the various government agencies and I think they've contributed to the policy debate to date and will continue to contribute to the policy debate going forward. And I think that's the intention of our paper, really, to do that.
GHARIB: Now banks have been through the stress test. They're now raising new capital. What else do they need to do? Do they need to do more?
GARVEY: Well, I think ultimately the paper shows that until the banks are cleansed of these toxic assets, normal lending and banking functions cannot proceed at the level that's necessary to support the economy. So we think there still needs to be more done to remove those troubled assets from bank balance sheets.
GHARIB: What is the status of lending right now whether you're talking about directed to consumers or to businesses?
GARVEY: Well, everyone is in, you know, capital conservation mode and they're very careful about their lending. I think there's been a tightening of standards across the board. So lending is still proceeding - - lending is still declining and credit is still declining, credit availability and the like and will continue to decline until this troubled asset, you know, issue is resolved.
GHARIB: So we still have a ways to go. Thank you so much for coming on the program.
GARVEY: Thank you.
GHARIB: My guest tonight, John Garvey of PricewaterhouseCoopers.
"Street Critique"-David Garrity, Principal at GVA Research
JEFF YASTINE: Tonight's "Street Critique" guest says if history teaches us anything, technology could very well lead this market recovery. He's David Garrity, principal at GVA Research. David, welcome to the program.
DAVID GARRITY, PRINCIPAL, GVA RESEARCH: Thank you.
YASTINE: The S&P 500 is up about 32 percent from the March lows, but the NASDAQ is up about 36 percent from the March lows to today's close. What does that say about the market?
GARRITY: Certainly what it says about technology is on a relative basis the companies are more reasonably valued and are in better financial condition in the broader market. And what investors should consider here is that going into this downturn, about 75 percent of the technology companies in the S&P 500 Index are actually net cash positive. Their balance sheets work much stronger. The S&P 500 on the other hand only about 25 percent of the companies actually had a net cash position, so far more exposed. Also we would note here technology companies basically pulled a trigger pretty quickly in terms of rating back both their expenses as well as also their production. So the companies really have been a very lean position now as we start to see the recovery in new orders coming from such things as the Institute for Supply Chain Management or ISM index and that argues that we should start to see probably revenue growth resume in the second half of 2009 and along with that, probably fairly meaningful profit margin expansion and as a result, tech stocks do have a leadership position in terms of the market.
YASTINE: David, tell us about the stocks you're watching. One of those is Apple (AAPL).
GARRITY: Certainly. In terms of Apple, obviously a name very well- known to investors at large and certainly a product or a company that has a wide range of products benefiting both in terms of the consumer as well as also the enterprise segments. If we look at what Apple has done with the iPod , while they didn't necessarily invent the smart phone category, certainly they have served very significantly to popularize it. And at the same time, while Apple has been putting in place innovations such as being able to run off Intel software, Intel hardware, chips and also at the same time being able to operate with Microsoft software, they started to address a larger end market to include business as well as personal users.
YASTINE: And the other stock you like is Google (GOOG). Why?
GARRITY: Certainly for Google, company at the vanguard of the shift of advertising away from old media channels over towards the Internet. Certainly they maintain that position very strongly U.S. and overseas. At the same time, Google can use their dominant position in that high margin, high growth business to move into other areas that potentially displace companies such as Microsoft.
YASTINE: And the third stock, amazon.com (AMZX).
GARRITY: Amazon, consumers obviously aren't rebounding rapidly but at the same time you can find better value in Amazon in some priced categories than you might be able to find at Wal-Mart. And as a result of that, you start to see consumers gravitating towards where the value is best. And Amazon, surprisingly, offers this in a wider range of categories and also in a wider range of geographic markets.
YASTINE: David, do you own any of the stocks we have talked about?
GARRITY: Yes, I have an ownership position in Apple both personally and professionally, no positions in Google or Amazon.
YASTINE: David, thanks for your time on the program, appreciate it.
GARRITY: Thank you.
YASTINE: Our guest David Garrity of GVA Research.
"Money File"-Regulation & Recovery
SUSIE GHARIB: In the "Money File" tonight, the role of regulation in reviving the economy. Here's Eric Schurenberg, editorial director at Bnet Moneywatch.
ERIC SCHURENBERG, EDITOR IN CHIEF, BNET MONEYWATCH: After the great depression, Washington and Wall Street sat down and fashioned a new regulatory system to restore confidence in banks and capital markets. It worked. In fact, it kept going 60 years until it finally broke down in this crisis. We need something like that again. It seems to me that a few principles ought to be followed. First, accountability. If you take the risk, you take the hit. Wall Street firms used to be partnerships, in which partners risked their own capital. Financial enterprises today are run by managers. If they gamble and win big, they get rich. If they lose, the shareholders get wiped out. If Lehman and Bear and Merrill CEOs stood to lose their own money, would they have gambled on toxic loans at 30:1 leverage? Second, acceptance of uncertainty. The problem with sub-prime loans wasn't so much that they were made. It was that investors believed they were safe. They believed it because credit rating agencies said so. Washington blamed the credit rating agencies last year, but Washington created the situation by making them official arbiters of credit risk. In effect, Uncle Sam decreed such firms could see the future. They couldn't. Finally, balance. Markets exist because regulations can't possibly keep up with change. Regulations exist because markets inevitably give in to emotional folly. You need both markets and rules because circumstances always change and human nature never does. I'm Eric Schurenberg.
Paul Kangas' Stocks in the News
JEFF YASTINE: Concerns about the economy kick the legs out from underneath today's stock market. The Dow moved sideways in early trading but as the day wore on, investors turned their focus to the economy and a six month high in inventories of existing home sales adding to the selling, a six month high on the 10-year Treasury note yield, neither of which bodes well for a rapid recovery in real estate. So the selling intensified into the close. The Dow dropped 173.47 to 8300.02. The NASDAQ tumbling 19.35 to 1731.08 and the S&P 500 falling 17.27 to 893.06. And in the bond market, the 10-year note falling 1 28/32 and the yield rising to 3.74 percent, again a six month high. And Bank of America (BAC) falling $0.07. The CFO says it won't be long before the bank can get the entire $34 billion needed to satisfy the government's stress test requirements. But analyst Dick Bove cut his earnings targets because raising all that dough will cost current shareholders and the bank plenty of bread.
Citigroup (C) had a similar loss.
And then there's General Motors (GM) sliding $0.29. As you heard, GM's board will meet to decide what to do if anything as their bankruptcy watch goes into high gear.
General Electric (GE) losing $0.40.
Wells Fargo (WFC) dropping $1.57.
And then Regions Financial (RF) moved up $0.13. Deutsche Bank issued a "buy" on the shares.
JPMorgan Chase (JPM) dropped $1.88. CEO Jamie Dimon telling analysts he wants to repay TARP ASAP and will consider boosting the dividend, but he said shareholders would be lucky if that could be done by the end of the year.
Ford Motor (F) slipping a fraction.
And then Pfizer (PFE) slipping $0.36.
Vale (VALE) falling $0.50.
Then we have Exxon Mobil (XOM) which fell $1.51. CEO Rex Tillerson says shareholders rejected a proposal to split the chairman and CEO positions and he says oil fundamentals have not changed much in the last five months. There's still a large inventory of oil out there despite the recent $10 jump in oil prices.
Monsanto (MON) dropped more than $5. They're seeing more competition against their weed killer product Roundup and they may weed out or that may weed out some profits. Monsanto sees earnings at the low end of previous estimates.
Cascade Corp (CAE) off nearly $3. Rodman & Renshaw does not see a fast recovery in farm equipment spending. Management will give its own status report on the quarter next week.
Autozone (AZO), the parts retailer, falling almost $8. Third quarter profits rose a decent 9 1/2 percent, but some analysts expected better, given that people are putting the brakes on new car purchases.
And another retailer to tell you about, Big Lots (BIG) sliding $1.63. JPMorgan downgraded the stock. Analysts expect slower sales in the summer months and expect a cautious outlook when Big Lots reports earnings tomorrow.
On the NASDAQ, Apple (AAPL) gained $2.27. Some follow through on yesterday's sharp rebound in consumer confidence.
And bucking the broader market today, Research in Motion (RIMM) advanced $0.54. The "Barron's" blog says an analyst upgrade for the shares and a new product called Niagara to debut in July.
Google (GOOG) climbing $1.20. Google has a developers' conference going on right now with more Internet and browser-based applications expected to chip away Microsoft dominance on the desktop.
Intel (INTC) slipped a fraction.
Qualcomm (QCOM) dropped $0.69.
Microsoft (MSFT) shedding $0.21.
Cisco Systems (CSCO) falling a similar amount.
First Solar (FSLR) climbing $1.18.
Oracle (ORCL) losing a fraction.
And Cephalon (CEPH) dropping $1.54.
Sandisk (SNDK) rose nearly $2. Goldman Sachs thinks the royalties from Sandisk technologies are extremely profitable and make the company worth more than $20 a share and they expect the stock to rise as more people value that information.
Oculus Innovative Sciences (OCLS) more than tripled to $4.10. That's a nice move. The FDA giving approval to market its Microcyn gel to heal damaged skin and flesh wounds.
And finally, Cree (CREE) gained $2.58. The chip maker raised its fiscal fourth quarter outlook and sees stronger order bookings and margins.
