NBR Transcripts-May 29, 2009
Friday, May 29, 2009GM Drives Toward Bankruptcy
SUZANNE PRATT: General Motors is barreling towards bankruptcy tonight. The auto maker has scheduled a news conference for midday on Monday in New York City and is expected to announce it is going into Chapter 11. The company will restructure itself in a move that will cost taxpayers billions of dollars, turning what was once a hugely profitable company into a ward of the government. That process was helped along today when the United Auto Workers union said a majority of its members have agreed to a new contract that slashes GM's labor costs by more than a billion dollars a year. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The new union contract at GM freezes wages, ends bonuses and bans a strike for six years. But the largest savings come from a 25 percent cut in retiree health benefits. UAW President Ron Gettelfinger admits there were tough choices.
RON GETTELFINGER: This was a matter of salvation, salvaging as much as we possibly could for our retirees. I'm regretful that we had to do anything.
DHUE: With four retirees for every one active worker, supporting generous retirement benefits doesn't add up. Labor expert Charles Craver says retiree benefits are what keeps U.S. auto makers at a disadvantage to their foreign competitors.
CHARLES CRAVER, PROFESSOR, GEORGE WASHINGTON LAW SCHOOL: The biggest thing is Toyota and Honda don't have a huge health care issue and pension issue because one, to the extent that they are producing cars in Japan, they have national health care. Even in this country to the extent that they are paying health care, they don't have hundreds of thousands of retirees because they haven't been operating the plants in this country very long and they don't have a 30 and out retirement program like the UAW has because they don't have a union.
DHUE: What the UAW now has is a 17.5 percent stake in the new GM in exchange for part of the company's current $20 billion obligation to the retiree health care trust fund. Whether future obligations will be met depends more on auto sales than the union contract. GM's viability plan is based on industry sales of 10 million vehicles each year in the U.S. Sales now are running closer to nine million. To be healthy, analyst Itay McKelly says the industry needs to sell upwards of 11 million.
ITAY MICHAELI, AUTO ANALYST, CITI, SMITH & BARNEY: I think the labor contracts and all the restructuring are very positive and they do absolutely help, but at the end of the day when you think about how healthy the industry can be two to three years from now, the biggest driver of that or the answer to that question really is what is the level of demand for automobiles in the U.S.
DHUE: The agreements of labor, many bondholders and the backing of the U.S. government should accelerate GM's reorganization. Administration officials say GM could emerge from bankruptcy in 60 to 90 days. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Who Will Replace GM on the Dow
SUZANNE PRATT: As GM heads towards bankruptcy, investors should brace for a change to the Dow Jones Industrial Average. GM is a Dow component and will be removed from the prestigious index once the company files for Chapter 11. The auto maker would be the first company removed from the Dow due to bankruptcy in nearly three decades. And as Erika Miller explains, there's plenty of speculation about which company will be invited to join the Dow 30.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: There are many exclusive clubs in the world where memberships rarely open up. What's true of the elite Metropolitan Club is also true of the Dow Jones Industrial Average. Once General Motors files for bankruptcy protection, it will kicked out of the venerable index. John Prestpo, the head of Dow Jones indexes says there are no official criteria for membership.
VOICE OF JOHN PRESTBO, EDITOR & EXEC. DIR DOW JONES INDEXES: There aren't any quantitative thresholds that we have to meet. But we do look for leading companies in their respective industries, ones that have a long track record in operations and also that are widely followed by investors.
MILLER: There is much speculation about which company will be picked to replace GM. Market strategist Nick Colas has compiled a list he calls the magnificent seven. There are Cisco Systems, Apple, Google, Oracle, Monsanto, Wells Fargo and Goldman Sachs. As for the frontrunner?
NICHOLAS COLAS, CHIEF MARKET STRATEGIST, BNY CONVERGEX GROUP: I'd have to put it even between Goldman and Cisco, as the two most likely names. I think Goldman for having financial exposure and having a big weighting if it's included. And I think Cisco, because it does have a very dominant position in its market.
MILLER: There is also the possibility that more than one Dow component could get booted from the index. Some analysts even speculate Dow Jones could expand the index to say, 50 names.
COLAS: It's really almost an ossified indicator at this point. Having 30 names represent the global economy in the same way 30 names represented the economy in the 1920s to me seems out of step.
MILLER: But even if the number stays at 30, finance Professor Kenneth Froewiss thinks the impact of a change in components will be minimal.
KENNETH FROEWISS, FINANCE PROFESSOR, NYU STERN SCHOOL OF BUSINESS: If you put in a stock that has more volatility, other things being equal, it would increase volatility of the index. But remember you have 30 stocks in there. And so the movement in any one stock is going to be somewhat muted. I wouldn't think that that is going to have a great impact.
MILLER: If GM files for bankruptcy, Dow Jones says it hopes to announce the auto maker's replacement as quickly as possible. But Dow Jones says the announcement will only be made outside of normal trading hours typically before the market opens. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Reviving the Economy"-Revisiting Mayor Richard Kaplan of Lauderhill
JEFF YASTINE: It's not energy, but economic challenges which face Florida these days. It's one of four states that account for nearly half of the new foreclosures nationwide. Lauderhill is a small south Florida town where the housing has taken a hit. I visited it 18 months ago and introduced you to the mayor, Richard Kaplan, who was fighting to maintain his city. As we continue our series "Reviving the Economy," I went back to Lauderhill, caught up with Kaplan and asked him how it's weathering the real estate bust now.
MAYOR RICHARD KAPLAN, LAUDERHILL, FL: This is a relatively stable community. Many of the people who live in Lauderhill have lived 20, 30 years in this city.
YASTINE: Lauderhill's Mayor Richard Kaplan drives his convertible all over this town. Lauderhill is a community of 60,000 people. Roughly one-third are recent immigrants, many from the Caribbean. When we talked to Kaplan a year and a half ago, he was deeply worried about the impact of the foreclosure crisis.
KAPLAN: I don't think anyone has seen the worst yet.
YASTINE: And now?
KAPLAN: I think our city overall has come through quite well, because we've got some excellent personnel in our city that recognized what the problems were, addressed them, putting plans into place to try and stem off as much as possible to avoid the problems that a lot of other communities have.
YASTINE: There are about 300 foreclosed homes within the town limits. There are also many rental complexes here; as the housing crisis lengthened, some, like this one, became eyesores, although it will soon re-open. Spending on transportation and beautification efforts continues, investments, Kaplan says, to avoid a key problem, spiraling declines in quality of life seen elsewhere.
KAPLAN: From a personal point of view with households where they're having problems with jobs and stuff, yes, there's still a problem, There definitely still is a problem. But from a governmental point of view, we've provided what we can for the community to sustain itself as well as possible.
YASTINE: Kaplan says the city has been applying aggressively for Federal stimulus funds and stepping up efforts to stabilize former high-crime areas.
KAPLAN: I'm going to drive into an area. It's called the renaissance of Lauderhill. This is some of the biggest problem area or challenges we have in the city. Brand new housing, this was sold to people under a lottery system, newly constructed housing. In an area that nobody would ever want to come to except those that could not afford anything other than that.
YASTINE: The city's housing authority also bought some struggling older condos where crime was a problem.
KAPLAN: This is the Windermere area. This is going to become a gated community. This is where crime has dropped tremendously. We own a lot of the units in here that we rent out. We were finally able to secure ownership of it and we have totally rebuilt the center. The center is a very positive community. The police have some presence here. The rec center has some presence in here and -- hey how you doing? This is one of our officers. Maybe you might want to ask a question.
YASTINE: Officer Lerue Sarvis says the city's efforts, in the face of the real-estate crisis here, are now paying off.
OFFICER LERUE SARVIS, LAUDERHILL POLICE DEPARTMENT: I'll put it to you this way. I've been back here now for about seven months. After the first three months, crime decreased 39 percent. After the fourth month, it went down to 43-44 percent.
YASTINE: There's one last stop Kaplan wants to share on our tour of the city.
KAPLAN: We're going to have to walk out here and get our helmets.
YASTINE: The new city hall. The previous one was destroyed by a hurricane in 2005. Local tax dollars are funding the construction, not Federal stimulus money. After a short tour inside, I ask Kaplan if other cities can follow his example.
KAPLAN: You just can't look at what can we do today. You have to look at what we can do today and what we're going to need to do tomorrow and take those steps to tomorrow. You have to follow certain principles and don't violate those principles and if you do, then you start running into problems. You won't be able to do what you need to do. We (INAUDIBLE) very true to the principles that we've instilled in Lauderhill.
YASTINE: And with tax revenues shrinking, Lauderhill has cut its budget and city workers recently switched to a four-day work week.
"Market Monitor"- Bernie Schaeffer, Chairman of Schaeffer's Investment Research
JEFF YASTINE: Our guest "Market Monitor" tonight says there's still some gas left to fuel the market's rally, but don't get too comfortable in the driver's seat. He's Bernie Schaeffer, chairman of Schaeffer's Investment Research and publisher of the "Option Advisor Market Letter." Bernie, welcome back to NIGHTLY BUSINESS REPORT.
BERNIE SCHAEFFER, CHAIRMAN, SCHAEFFER'S INVESTMENT RESEARCH: Pleasure Jeff.
YASTINE: What's your thought on this rally? We started in early March, kind of bottomed there and we've been building ever since.
SCHAEFFER: I think it's more than your -- your typical bear market bounce. We've got a very powerful oversold buy signal in the first quarter market, got more oversold than it ever had been in modern times. And what that indicates is that you had capitulative (ph) selling. You had investors basically throwing in the towel and very often the rally that ensues from that is much more sustainable and goes much further than bear market rallies do.
YASTINE: On a technical basis, the S&P 500 poked up above its 200-day moving average at the very end of today's session. Is there some technical rationale, some technical basis?
SCHAEFFER: It's been unable to take that level out for a few weeks. We've been watching it very closely. We've been writing about it on our web site. In the last five minutes of trading today, we took out the 200-day moving average on the S&P. I think that's very encouraging. I also feel like the hedge funds are moving away from de-leveraging and starting to get involved here.
YASTINE: When you are last on the program in late November, at the time you recall you had three picks that you gave us. Two of them you advised call options on, were the XHB S&P home builders ETF (XHB) and Wells Fargo (WFC). What would do you with those?
SCHAEFFER: I would look for other opportunities. I'm interested in the home builders, but I think there's other opportunities that we can talk about as we move on here.
YASTINE: At the time you were also advising put options on Microsoft (MSFT). Are you still as negative, again because a lot of people own Microsoft still?
SCHAEFFER: Right and that's one of the reasons as a contrarian I really don't see a compelling case. I think the Microsoft trade is quite crowded trade and I would want to avoid that.
YASTINE: All right, so if you were looking at still some near-term upside here, what would be buying these days (INAUDIBLE)?
SCHAEFFER: I would be looking at ETFs, sector ETFs. I would be looking at options on the sector ETFs, which are quite reasonably priced. I'm looking at the retailing S&P, the spider S&P retailing ETF,
YASTINE: Symbol XRT.
SCHAEFFER: XRT. I'm looking at the Ishares MSCI, emerging market ETF. That's symbol EEM, both of those very strong price action, a lot of skepticism. Analysts have not jumped aboard, a lot of short interest. We saw J Crew this morning in the retailing sector just take off four points on a positive earnings report. This is what happens when expectations are low. So I'd be looking at seven-month call options, January call options on both EMM and XRT at about 11 percent premium relative to the underlying price.
YASTINE: I noticed on the emerging markets one it had nearly doubled from the bottom in March to now. So you still think there's upside on that.
SCHAEFFER: I think it's a leveraged play on improving economy and I think -- I think there's room. I think there's sideline money that could come in there.
YASTINE: With the idea of ETFs still, what would do you if you were trying to hedge against this more rosy scenario that you're--
SCHAEFFER: Looking at the Ishares, Barclay's 20-year Treasury bond fund, symbol TLT. I think it's an excellent way to play with options. You have the retailing sector. You have the emerging market sector. You construct a little blended stock and bond portfolio by buying options on TLT and very reasonably priced as well, only 5 percent of the price of the underlying there. And bonds are very oversold in our opinion.
YASTINE: Do you own any of the three ETFs you talked about?
SCHAEFFER: Yes, I have positions in EEM and the emerging markets as well as the TLT bond fund.
YASTINE: Why not own all three of these?
SCHAEFFER: Interesting, because you can essentially for a fraction of the cost of owning the underlying shares, build yourself a little portfolio of the three different ETFs, have a nice blended stock and bond portfolio and still have about 70 percent of your money left over, either to put in cash or invest otherwise.
YASTINE: Options, use a little bit of leverage there.
SCHAEFFER: Correct.
YASTINE: Our guest, Bernie Schaeffer of Schaeffers Investment research.
"Last Word"-Inmates Go Green
SUZANNE PRATT: Finally tonight, a story from the "every little bit helps save money in this recession" department. The sheriff of Sandusky County in Ohio has come up with a way to save $75,000 in jail costs. He's making the inmates grow their own food! The prisoners planted an acre and a half of fruits and vegetables earlier this month. The harvest will end up in the jail's kitchens. And it sounds like they could use it, Jeff. This same sheriff already banned pancakes from breakfast to save money.
YASTINE: Every dollar counts. I guess waffles are next.
PRATT: Well, if I could get my kids to eat their vegetables, I'd be happy.
Paul Kangas' Stocks in the News
JEFF YASTINE: On Wall Street a so-so start to trading ends with a firm finish to the upside. This morning, investors appeared to be biding their time ahead of GM's announcement. News the nation's economy shrank nearly 6 percent in the first quarter kept early gains to a minimum, but later investors focused on a University of Michigan survey showing Americans are becoming more optimistic about the economy. And that helped stocks rocket higher ahead of the closing bell. The Dow ended up 96.53 to 8500 and a fraction and for the holiday shortened week, it rose three times and fell once for a net overall gain of 223 or 2.7 percent. The NASDAQ gained 22.54 to 1774.33 and it rose three times and fell once for a weekly gain of 82.3 or almost 5 percent. And the S&P 500 up a little over 12 points to 919.14 and for the week, the S&P 500 rising 32.14 or 3.6 percent. Buyers also returned to the bond market on the belief the sell off in Treasuries might be overdone. The yield on the 10-year note falling to 3.46 percent.
Bank of America (BAC) topping our list again here, losing $0.03. An Oppenheimer analyst thinks B of A earnings will suffer for some time as the bank continues to build its post stress test reserves. Senior executives say the industry will remain weak for several quarters to come.
There's General Motors (GM) falling below $1, hitting $0.75 a share. The iconic auto maker steers toward bankruptcy. S&P maintaining a "strong sell."
Citigroup (C) gaining a nickel. It's watching a $4 billion credit card backed TALF deal with the Treasury.
Ford Motor (F) added $0.19. The company says Chrysler dealers are dumping inventory and their going out of business sales hurting the whole industry. Ford sees yearly industry sales dipping to the 10 million unit level.
Wells Fargo & Co (WFC) gaining $0.73.
Then Regions Financial (RF) adding $0.17. Regions CEO bailed on a scheduled appearance at an annual conference, excuse me an analyst conference this morning. Some analysts think that could mean something is up, although the company says the CEO's cancellation was due to what they called an unavoidable conflict.
Chimera Investments (CIM) up $0.17.
GE (GE) gaining $0.29.
Pfizer (PFE) up a half a dollar.
ExxonMobil (XOM) rising $0.12.
And Morgan Stanley (MS) up $0.89. Keefe Bruyette Woods upgraded the stock. They see Morgan benefiting from the pending merger of its wealth management business with Smith Barney.
And J Crew Group (JCG) up more than $5 to 26 percent. The upscale apparel retailer's latest profits beat expectations so it will see a profit in the second quarter instead of a loss and Standard & Poor's upgraded J Crew from "hold" to "buy."
A host of other retailers making news as well, Tiffany & Co (TIF) ends with an earnings disappointment.
But JPMorgan upgrading Office Depot (ODP) shares -- sorry I did that one a little bit in anticipation. Wet Seal (WTSLA) had better than expected first quarter numbers, but sees second quarter results below analyst expectations.
Excuse me, Rostelecom (ROS) down $4.33. Russia's government cleared the way for a massive telecom reorganization there. The government playing a big role, a bigger role in the telecom arena in their country.
(INAUDIBLE) Lexmark International (LXK) rising more than $1. Barclays upgrading the shares from "under weight" to "equal weight."
On the NASDAQ, Apple (AAPL) up $0.74. The stock down despite speculation as you heard a moment ago, Apple might replace GM in the Dow.
Research in Motion (RIMM) off $1.66.
Intel (INTC) unchanged at $15.72.
Cisco Systems (CSCO) losing a nickel, another one mentioned as a possible replacement for GM.
Google (GOOG) adding $6.83. Industry analysts say Microsoft's new Bing search engine not a Google killer.
There's Microsoft (MSFT) up $0.44.
Oracle (ORCL) gaining $0.38.
And Qualcomm (QCOM) rising $0.64.
And then we have Dryships (DRYS) which rose $0.89.
And Dell (DELL), which had earnings yesterday, gaining $0.09.
Finally, Smartheat (HEAT) up $0.44 or 6 percent. This is a Chinese firm registered in the U.S. They make heat exchange systems for China's industrial sector. The chart a bit weird because the company went public in February. The Rodman & Renshaw brokerage boosted the price target from $8 to $10 with a market "out perform" rating.
And those are our stocks in the news tonight.
