NBR Transcripts-June 19, 2009
Friday, June 19, 2009Billionaire International Banker Allen Stanford Is Behind Bars
SUSIE GHARIB: Another alleged Ponzi schemer is behind bars tonight. Billionaire Allen Stanford has been charged in a massive, $7 billion fraud. The Texas financier is facing a laundry list of criminal and civil charges. Stanford and others in his once booming financial firm are accused of conspiring with a regulator on the Caribbean island of Antigua to bilk investors. Federal prosecutors say more than a billion dollars from that firm's funds are completely unaccounted for and another $5 billion has been, as the Feds put it, lost. Stanford's attorney says the accusations are false and a jury will acquit his client.
The Outlook for Commodities
PAUL KANGAS: The talk on Wall Street this week has been all about commodities. We've seen rallies in oil, gold, copper, and wheat, raising questions about what's next for these natural resources. Investors see them as a gauge of the health of the economy and as a way to diversify their portfolios. Scott Gurvey checked in with the experts on the outlook for commodities.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it comes to commodities, gold usually gets the headlines. But investment analyst Doug Groh says in the recent rally, everything is moving.
DOUG GROH, SR. ANALYST, TOCQUEVILLE ASSET MANAGEMENT: You are seeing not just gold move in this rally, but you're seeing interestingly lead, zinc, aluminum. Copper's been a strong player in this rally. So you're seeing it across the board.
GURVEY: Commodities are more than metals. They can be any hard asset. That means they have a value and use by themselves. They include livestock, grains and other agricultural products, raw industrial materials and oil, gas and other energy sources. With signs the recession is coming to an end, the closely watched CRB commodity index, which does not include energy, has been rising and most experts expect that trend to continue. Individual investors often use mutual funds and exchange traded funds to invest in commodities. But the experts warn there are vast differences from one fund to the next and investors must do their homework. Strategist Rebecca Patterson says investors must also consider their time frame when choosing commodity funds.
REBECCA PATTERSON, GLOBAL CURRENCY STRATEGIST, JP MORGAN PRIVATE BANK: In the short term with the global economy recovering, improving expectations for global demand is likely to lift all commodity prices at least to a degree. So a broad commodity basket probably will perform relatively well. But if you are an investor with any sort of longer term time horizon, you're probably better off getting a bit more specific.
GURVEY: Commodities are also used as an inflation hedge. Craig Peckham of Jefferies says he thinks that investor worries about inflation will continue to push commodity prices up.
CRAIG PECKHAM, EQUITY STRATEGIST, JEFFERIES & CO.: The rally is not so much predicated on a view that aggregate demand is going to be per se robust, but rather a phenomenon that's dictated by pressure on the value of currencies globally as an unfortunate consequence of all the money printing that's going on and a way to protect value is to sort of hide in hard asset plays.
GURVEY: Commodity prices are highly volatile. So while most financial analysts recommend we have some in our portfolios, they suggest we keep it to 5 to 10 percent. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Congressman Barney Frank Wants to Knock Banks Down to Size
SUSIE GHARIB: A key architect of financial regulatory reform tells NIGHTLY BUSINESS REPORT he plans to make it very tough for a bank to get too big to fail. House Financial Services Committee Chairman Barney Frank wants to raise capital requirements for the largest banks to limit their growth. He says those standards may go up on a sliding scale rising faster as banks get bigger. That could mean dramatic changes for the banking industry and the U.S. economy. Washington bureau chief Darren Gersh talked with Frank. They began by discussing how reform will reduce risks from outside the traditional banking system.
FRANK: With this current situation now, with the technology and the great pools of money that are available outside the banking system, that's the deal. Until fairly recently, if you wanted to lend a lot of money, you had to get it from bank deposits. We have whole new sources of liquidity from the Middle East or from China or from various other places. We have a lending system now, securitization whereby years ago if I lent you money, I waited for to you pay me back, I was very careful about who I lent it to. If I'm going to lend money to a lot of people and sell that loan to a lot of other people, surprise, surprise, I'm less careful.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of the people we had on our program recently said this proposal didn't do enough on that, didn't do enough on the securitization pools and the things that are outside the banking system. Do you agree with that?
FRANK: No. In fact, one thing we are doing that we hadn't done before, we are requiring for the first time legally in American economics history -- if it goes through and it's an idea we pushed here in the House -- that you can no longer securitize 100 percent of everything, that you have to hold back some part of it.
GERSH: So as long as they sell out, they'll keep --
FRANK: They'll have to keep. Now we, in the sub-prime legislation, we put 5 percent in that. That may be too low, but it may be enough -- securitization is a good thing. If I lend money and I can then sell the right to be repaid, I can re-lend the money. I can lend more money if the loans are good. The problem is, when I don't have any penalty if the loans were bad, I'm not going to be as careful. So we are requiring risk retention. The metaphor is skin in the game and this bill does do that. In some cases, by the way, we will say it's only a 5 percent holdback, but it's the first 5 percent. In other words, if those loans lose 5 percent, you're the one who loses all of it and because we know this, once we set up a set of rules that say everybody is now regulated, some very smart people will come up with something that doesn't fit these rules and the regulatory body will then have the power to say, welcome to the world. That was very creative. You're now regulated by this one or that one.
GERSH: Where else do you want to go further than the administration went?
FRANK: I did want to go further than they did. By the way we're not going further now because they accepted our initiative on securtization. This was not in the original plan, but there will be a risk-retention requirement. Secondly, executive compensation -- there are two aspects of this. One, some of these people get way more money than is rationale. But if it's not my money, I'm not going to have a say in it. We do want to give the shareholders the say. In turns out that boards of directors and CEOs who work very closely together, you can't have this kind of an intimate working relationship where they picked each other and they work together and then one day you're the labor and management and at arm's length. It doesn't work. So we want the shareholders once a year to be able to vote and say, too much, not enough.
GERSH: I understand the proposal goes further and says the regulators are going to put principles in and that they're going to actually go in there --
FRANK: That's the part that we have, that we take credit for. The initial plan on compensation was that they would strengthen the compensation committees of boards of directors. I don't think that's possible. I think the boards of directors will never be able to take that relationship at arm's length. So we argued for and the administration has now picked up our proposal -- exactly what you said. The Security and Exchange Commission will be mandated to say, you cannot have a compensation system in which if people take big risks and they pay off they make a lot of money, but if they take big risks and they blow up they don't lose anything. That's the problem, not the dollar amount here but the incentive to take risks. If I told you that if you took a lot of risk and every time the risk paid off, you'd get richer but when the risk just absolutely dismally failed, you would suffer no penalty, you would have to be pretty stupid not to take a lot more risk than was rational.
GERSH: It seems like this proposal by creating these large institutions that are considered so big they warrant special regulatory attention. There's a penalty for getting too big.
FRANK: Yes and that's very important. I'm glad you said that. People have said, oh, you're going to get into this thing where they'll be too big to fail. We're going to make it very tough to be that big because we don't want this situation where you have these very large institutions, the failure of which causes a cataclysm. And in fact, I spoke to the secretary of the Treasury early this morning and said among the things we want is to say that if you are one of these very large institutions, first of all, you have to have more capital. You will be more tightly restrained. But beyond that, if you are going to collapse, if it happens, there are going to be some severe penalties. I want to say that if that does happen with one of these large institutions that we make sure the shareholders there have no equity left, that the CEO is fired. There have to be disincentives. Some people will say, well, they'll be an advantage. You'll be seen as quote, too big to fail, end quote and then and other people will think well I'll put my money there because it will always be safe and we have to counter that. We have to put a lot of disincentives into size.
GERSH: Chairman Frank, thank you for your time.
FRANK: You're welcome.
GHARIB: You can see more of Darren's interview with Congressman Frank on our website, NBR on pbs.org.
"Market Monitor"-John Hughes, President of Quantum Capital Management of New Jersey
PAUL KANGAS: My guest "Market Monitor" this week is John Hughes, president of Quantum Capital Management of New Jersey. Welcome back to NIGHTLY BUSINESS REPORT John. Good to see you.
JOHN HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: It's always good to be with you.
KANGAS: Wall Street's three-month rally seems to be running into considerable resistance here. Do you think this is a major top or is there more on the upside?
HUGHES: Well, we have no opinion on the direction of the markets, but we do have a view on the valuation and we believe that markets are fairly valued. That being said, whether they're expensive or whether they're cheap, we believe that we have to -- it's critical to invest in companies that generate cash flows that are a high percentage of their operating income and those companies that have the ability to reinvest those cash flows in an effective manner.
KANGAS: So you're very particular about what you buy in the way of securities.
HUGHES: Always, always.
KANGAS: And they have to meet high-quality standards.
HUGHES: They have to have ironclad balance sheets and durable business models and certainly the ability to redeploy cash flow in an accretive manner, yes.
KANGAS: Let's go for the broader picture. What do you think of this economy? Is it going to do well or falter? What do you think?
HUGHES: Well, blame the monetary system Paul. I mean this monetary system of ours, despite its longevity, despite its arguable efficacy, it has one fatal flaw and that is that a small group of people preside over the creation and the price setting of the money supply and we think that results in a capital structure which includes a high degree of debt, so large that the cash flows that emanate from the asset side of the ledger may not be sufficient to support it.
KANGAS: So you're a bit critical.
HUGHES: I think it's deflationary if the Fed will let is be deflationary. But we think one of the outcomes, one of the potential outcomes of it ultimately will be inflation.
KANGAS: Inflation?
HUGHES: Yes.
KANGAS: Which means you like the gold.
HUGHES: We look at gold as a hedge against inflation.
KANGAS: You would buy it in this range?
HUGHES: I would and I do, yes.
KANGAS: How do you see oil, the price of oil going?
HUGHES: I have no view on the price of oil.
KANGAS: You don't follow it closely.
HUGHES: We do not.
KANGAS: Now on your last visit with us in late January, you gave our viewers five "buy" recommendations. Let's see how they performed since then, John. Autodesk (ADSK) has been one of your favorites for some time and it really got a move on this time around, up 26 percent. And Copart (CPRT), that's an auto-type stock. They take junk autos, do they?
HUGHES: They are the largest processor of total loss vehicles for the insurance industry in the U.S. and the UK.
KANGAS: It's certainly not a junk stock, I'll tell you that, up 39 percent. Congratulations. Are you still with both of those?
HUGHES: I'm still with both of them, have been and will be for a long time.
KANGAS: So you'd buy them in this range.
HUGHES: I do and I recommend them, yes.
KANGAS: OK. How about some more of your previous recommendations. We have the Spider, the gold shares (GLD), up 3.8 percent. Not a runaway, but still on the plus side.
HUGHES: It's insurance, Paul; it's insurance.
KANGAS: And Microsoft (MSFT) finally came alive in the period since January, up almost 40 percent. Are you still with it?
HUGHES: I'm still with it. I wouldn't say that it's loved more, but it's certainly despised less. So we think its earnings power is two dollars.
KANGAS: And you had one other.
HUGHES: We have a recommendation.
KANGAS: The iShares didn't do much (LOD) but you were collecting 6 percent yield all along, right?
HUGHES: We were. In the interest of time we won't recommend it but we will recommend something else.
KANGAS: We just have a minute left. Do you have any new recommendations?
HUGHES: Yes, Progressive Company (PGR). It's the largest auto insurer, one of the largest auto insurers in the country.
KANGAS: PGR on the big board.
HUGHES: That's right. That's right. And the insurer is largely a manager of risk and a manager of assets. And they are competent at both. At 10 times earnings, we own them and we think its -- they are worthy of some of our capital.
KANGAS: Very good. John, do you personally own any of these securities yourself?
HUGHES: We own them all.
KANGAS: You own them all.
HUGHES: You bet.
KANGAS: That's a good sign, indeed.
HUGHES: Yes, yes.
KANGAS: You only gave us one new recommendation. Are you having a tough time finding new ones?
HUGHES: Well, we like what we own.
KANGAS: You like the way it is. OK. Thanks very much for being with us. Our time has run out, unfortunately. Great to see you.
HUGHES: Great to be here, Paul, thank you.
KANGAS: My guest, John Hughes, president of Quantum Capital Management.
"Commentary"-Bernanke Vs. The Bond Vigilantes
SUSIE GHARIB: Tonight's commentator says the Federal Reserve is readying for a fight with the bond vigilantes. He's Bernard Baumohl, chief global economist at the Economic Outlook Group.
BERNARD BAUMOHL, CHIEF GLOBAL ECONOMIST, ECONOMIC OUTLOOK GROUP: Anyone watching extreme fighters slug it out inside the octagon knows how brutal those battles can be. But now get ready for a super contest between two formidable heavyweights. Whoever wins this match may well determine the future course of the economy. In one corner is Federal Reserve chief Ben Bernanke, who is ready to spend trillions buying mortgage-backed securities and Treasuries to bring down long-term rates. By lowering borrowing costs, Bernanke hopes to encourage more spending by consumers and businesses and thus hasten an economic recovery. However, in the other corner is a tough adversary -- the bond vigilantes. They comprise of U.S. and foreign investors who believe Washington's spending and borrowing are so out of control, they will fire up inflation, debase the dollar and endanger America's triple A credit rating. These investors are backing away from U.S. government securities, pushing yields up and buying commodities, like oil. Of course higher yields and more expensive oil could KO the economy and defeat all the Feds efforts. Who has the advantage in this all-important battle? History favors the bond vigilantes, unless the Fed launches a surprise counter-punch. A small increase in the Fed funds or discount rate in coming weeks to sop up some liquidity in the economy could trip up the bond vigilantes and lower both Treasury yields and commodity prices. It's a gutsy symbolic move, but it may work. I'm Bernard Baumohl.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street headed higher this morning on the back of yesterday's modest blue chip rally. NASDAQ stocks were gainers after Goldman Sachs made positive comments about Microsoft. At 11:00 a.m. the Dow was up 55 points and the NASDAQ up 30 points. While the tech issues held on to most of their gains, the blue chips were undermined this afternoon by selling linked to the quarterly expiration of stock indexes and options. The Dow Industrial Average closed down 15.87 at 8,539.73. This week it rose only once for a net loss of 259.53 points. The NASDAQ Composite was up 19 3/4 points today at 1,827.47. It rose twice this week while falling three times for a net loss of 31.33 points. Standard & Poor's 500 up 2.86 closing at 921.23 today and for the week overall it lost 24.98 points. In the bond market, the 10-year note rose 9/32 to 94 22/32, putting the yield at 3.77 percent. Big board volume leader on 118.8 million shares, Bank of America (BAC) moving up $0.32.
And then Citigroup (C) with a $0.04 gain. Citigroup expects a very good performance by its wholesale banking operations in Latin America this year. Meanwhile, Rockdale (ph) Securities started coverage of the stock of Citigroup with a "buy" recommendation.
General Electric (GE) $0.13 gain there.
Wells Fargo (WFC) up $0.49.
JPMorgan Chase (JPM) rose $0.83 a share.
$0.20 gain for Keycorp (KEY). Second quarter results for Key are due out Wednesday.
Pfizer (PFE) an $0.08 advance.
Regions Financial (RF) moved up a dime.
ExxonMobil (XOM) losing $0.39. The company plans a second quarter charge of $150 million related to the Exxon Valdez oil spill.
Ford Motor Co (F) $0.04 gain, tenth in volume.
Hewlett-Packard (HPQ) moved up $0.80. The company signed a 10-year partnership with Alcatel Lucent to develop and market communications and computing products.
Carmax (KMX) $2.22 gain. First quarter earnings, $0.13, same as a year ago and that's despite a 17 percent drop in same store sales. The Street estimate was only for $0.04 to $0.05 so it did a lot better than expected.
Carnival (CCL) up $1.83. Wachovia Securities upgraded it from "market perform" to "out perform" after yesterday's lower but better than expected second quarter earnings of $0.33 a share.
Teekay Tankers (TNK) moved down $1.41 on news the company plans a seven million share public offering of stock. That represents a little earnings dilution.
Darden Restaurants (DRI) up $1.15, $1.16 let's make it. Goldman Sachs noted that the casual dining stocks seemed to have bottomed, positive word there.
And Hospira (HSP) up $2.01. A New Jersey district court grants a favorable judgment, allowing the company to produce generic versions of Sanofi Aventis Eloxitin (ph) and that's a chemotherapy treatment, Eloxitin.
Sasol Ltd (SSL) $2 loss. This is the world's biggest producer of motor oil from coal and the company sees up to a 50 percent drop in its annual earnings because of lower crude oil prices.
Apple (AAPL) topped the active list up $3.60, indication that the introduction of the new iPhone was fairly well received.
Research in Motion (RIMM) down $3.77. After the close yesterday as we reported, the company posted strong earnings but made a cautious outlook and that's what hurt the stock today no doubt.
Microsoft (MSFT) moving up $0.57 a share. Goldman Sachs said this stock has upside potential of 24 percent due to its new products and Goldman boosted its price target from $23 to $29 a share.
Google (GOOG) up $6.03.
Then Cisco Systems (CSCO) with a $0.07 loss.
Intel (INTC) $0.14 gain.
Qualcomm (QCOM) was a $0.72 advancer.
Oracle (ORCL) rose $0.41.
Amgen (AMGN) fell $0.69.
While Dell (DELL) was up $0.68.
Elsewhere, Smith & Wesson Holding (SWHC), the big gun company, up $1.10. Northland Securities upgraded it from "market perform" to "out perform" due to very strong recent sales. The company is also acquiring Universal Safety Response Corporation.
And those are the stocks in the news tonight.
