NBR Transcripts-June 30, 2009
Tuesday, June 30, 2009John Myres of KQED on California's Budget Crisis
SUSIE GHARIB: The clock is ticking for California tonight. Governor Schwarzenegger and state lawmakers are battling on ways to balance the budget and close a $24 billion deficit. They have until midnight. California's economy is the nation's second largest and its budget crisis could have implications for the rest of the economy. Joining us now with more on this breaking story, John Myres, Sacramento bureau chief at public radio KQED. Hi, John, nice to have you on the program.
JOHN MYERS, SACRAMENTO BUREAU CHIEF, KQED: Thanks, Susie, nice to be with you.
GHARIB: So John, tell us, where do things stand right now?
MYERS: Where things stand is where they stood for the last several weeks. We have an impasse here at the state capital in Sacramento about how to resolve this problem. It's a $24 billion short fall and for some context, this is actually the third time that state lawmakers and Governor Schwarzenegger had to resolve California's financial problems in just the last 10 months. $79 billion of red ink they have had to resolve partly because of California's systemic imbalance between spending and taxes, but also really because of the global recessionary problems. California's revenues have just evaporated over the last 10 months.
GHARIB: So what's the stumbling block to getting the governor and the lawmakers to get rid of this deficit?
MYERS: Well, really what we're talking about is a strong philosophical problem here that we've had in California for years about the size and role of state government, Republicans obviously wanting a more limited government and no new taxes, Democrats wanting to preserve the social safety programs, (INAUDIBLE) the welfare to work programs, how it works health care for poor children and Governor Schwarzenegger saying that the state can't afford a lot of these issues. I think the real question is going to be, can they solve the entire problem just in the next few hours. The state comptroller here in California has said he's going to issue IOUs on Thursday, $3.5 billion worth in July, because the state will run out of cash. So a lot of things to do and not a lot of time to do them.
GHARIB: We've always thought of California as a very robust economy. I know that the recession has impacted every state. How is the California economy doing? Is the housing market stabilizing? Are those unemployment numbers improving?
MYERS: Well, most economists that you talk to in California say that at best, we have a mixed sense of economic recovery here. At worst we have no economic recovery. The housing market has somewhat stabilized. Some people will tell you although the real value of these homes has gone down as foreclosures have been huge in California. Unemployment at 11.5 percent. Some economists think it could go even higher than that. We already obviously have one of the highest unemployment rates in the country. And again, all this trickles back to state government. Personal income tax revenue is down. Corporate taxes down, sales tax revenues are down. California is a state of 37 million people. One in eight people in America live in California, so it's very difficult to keep that state government running with the way the economy has been going.
GHARIB: A lot of people who are watching the program might be wondering why should I care about a budget crisis in California? How does the California situation impact people living outside of the state?
MYERS: Well, first and foremost as we said, a lot of Americans do live in California, but a lot of national economists have been telling us in the last few weeks that because California's economy is so big, let's remember one of the things we often say is that California, if it was a country would have the eighth largest economy in the world. So, because California is so big and so much of the American economy depends on it, a lot of national economists are saying, as California goes, so goes the nation. And one of the real concerns right now is that whatever solution that California lawmakers come up with, it may actually dampen the economic recovery across the country. The effort of the president's stimulus package could see thwarted right here in California.
GHARIB: Now John, California got a huge amount of stimulus money, something like $50 billion. Does it need more and what are the chances that Washington will give it the money if it needs it?
MYERS: Well, no one in California has been asking for more money now. Obviously we all know that one of the most toxic words in America these days is bail out and so what California really wanted from Washington was a guarantee for its loans on Wall Street. California has got to go to the market in the next few weeks and borrow several billion dollars just to keep the state running. Short-term cash problem have been really bad here. So the state really wanted a guarantee, because the markets are somewhat sketchy of loaning California the money. We haven't asked for money specifically from Washington, but there are some economists again who say, again, California is too big to fail, another term that we've heard across America in the last several months.
GHARIB: Real quick question, how much of this problem in California is about economics and how much of it is really politics?
MYERS: Well, this certainly is an economic component, but I think you're exactly right with the way you phrased that Susie. It's a big political issue. It is a very big philosophical discussion about how you resolve, what government needs and Arnold Schwarzenegger, the governor says he believes one version and he's trying to move it through in the next few hours.
GHARIB: All right. Looks like you're going to be busy over the next few hours. Thank you so much John for coming on the program.
MYERS: Happy to be here, thanks.
GHARIB: My guest tonight, John Myers, Sacramento bureau chief at public radio's KQED.
What's Ahead for the Third Quarter?
PAUL KANGAS: Stocks closed out this last day of the quarter on a down note, but the major averages posted strong performances for the three months between March and June. The Dow, the Standard & Poor's 500 and the NASDAQ all saw double digit percentage gains. Now the question is what will drive the markets in the coming quarter? It could depend on corporate earnings reports and what CEOs say about how their businesses will perform the rest of this year. Erika Miller has a preview of what to expect.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Make no mistake, second quarter earnings will hurt. But in an interesting twist, the General Motors bankruptcy will ease the pain. GM was removed from the S&P 500 index earlier this month after filing . Its absence will remove a roughly 3 percent drag on earnings for the index. But don't be fooled. As UBS' Mike Ryan points out, most companies are still feeling fallout from the recession.
MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: You've seen a tremendous loss in profits. So, what we're seeing now is that while companies are in recovery mode and that we do expect to see a stabilization in the earnings outlook, don't expect to see earnings bounce back sharply.
MILLER: Wall Street is bracing for a 35 percent slide in second quarter earnings, identical to the first. It will mark the eighth straight period of profit declines. But the news isn't all bad. Wall Street analysts have been raising second quarter earnings estimates not lowering them. So there's hope profits might come in better than expected. But the market is interested in more than just headline numbers. Where the profits come from also matters.
RYAN: We need to see some evidence that this process of simply cost reduction and efficiency gains, that that's winding its course and that we start to see some genuine improvements in the overall revenue cycle.
MILLER: Another question is whether consumer spending is picking up. So earnings from retailers, housing and autos will be examined more closely than other industries. Market strategist Tobias Levkovich says he's focusing on what companies say about the second half.
TOBIAS LEVKOVICH, CHIEF US EQUITY STRATEGIST, CITI: I think you are going to probably start to hear hints of increased production trends. Companies that had been cutting their production so severely to reduce inventory can actually start to lift production and by the way continue to reduce inventory but at a more moderate pace.
MILLER: Call it the show me stage for the market. It's no longer enough to see that earnings are not getting worse. Now investors want proof that business is actually getting better. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Short Sales Can Bring Long Problems
SUSIE GHARIB: Another glimmer of improvement in the U.S. housing market. Home prices fell in April but the rate of decline is slowing according to the Case-Shiller home price index. Today's report showed prices in major U.S. cities fell by 18 percent from a year ago. Economists were expecting a slightly bigger drop. The nation's hardest hit areas: Phoenix and Las Vegas, where home prices have lost more than half their value since peaking in October. While home prices are falling, loan modifications are rising. The government says loan modifications were up 55 percent in the first three months of the year. But that number isn't as positive as you might think. That's because there's been a huge jump in mortgages becoming seriously delinquent, so more and more loans need to be changed. Working with lenders to modify a mortgage or do what's called a short sale is difficult these days. Stephanie Dhue introduces us to one borrower who learned just how tough a short sale is.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Heidi Burgess saw the handwriting on the wall and tried to be proactive. With home prices down and knowing her husband's military assignment would force a move, seven months ago she began working with their lender, then Indy-Mac, to lower their mortgage payment.
HEIDI BURGESS, HOMEOWNER: We were encouraged because Indy-Mac had been taken over by the Federal government, so our taxpayers owned this bank. And we thought, OK, maybe this was to our advantage. This is a Federal bank, bought out by Federal money, by taxpayers' money. And here we are, a military family, not asking for anything that isn't being done for anybody else.
DHUE: But the bank said no, because the Burgesses were current with their loan. So the couple decided on a short sale, where the bank agrees to take a loss. Two offers later, the house still hadn't sold, because the bank, now Onewest, insisted the Burgesses put up money.
BURGESS: So who's winning? The people don't get the house. We're stuck in a mortgage where we're forced to stop making our payments and the values keep dropping. So when the bank goes to sell it, if the bank were to sell it at foreclosure, once we leave, the house will deteriorate. We're not going to keep it up. We're not going to do the lawn and they'll get a whole lot less than what they're even being offered now.
DHUE: After we asked Onewest about the situation, the bank accepted a short sale that doesn't require the family to put up cash. The Burgess situation is typical of how challenging it is to complete a short sale these days. Banks say it's common to require cash from homeowners. Realtors complain banks are inconsistent because there are no standards and the transactions are complicated says Steve O'Conner of the Mortgage Bankers Association.
STEVE O'CONNOR, MORTGAGE BANKERS ASSOCIATION: It's important to remember that a lender has to do a certain amount of due diligence before they can execute a short sale. They have to see if there are other liens on the property. They have to get the approval of the other lien holders. They have to get the approval of the mortgage insurer if there's mortgage insurance. They have to determine the fair market value of the home and often times what's happening is the first time a lender hears of a proposed short sale is when the borrower contacts them and already has a contract.
DHUE: The Federal government is encouraging lenders to do loan modifications and short sales. So far the administration has put up more than $15 billion to help banks and borrowers restructure loans. About 50,000 loans have been modified under the program. Economist Mark Zandi says that's not enough to stabilize home prices.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: I had hoped that the president's modification plan would be kicking into a higher gear by now and that we would begin to see foreclosures peaking certainly by the end of this year. That looks now increasingly unlikely given that the modification efforts just aren't going at all well, so I do think prospects (INAUDIBLE) will continue to climb into next year.
DHUE: Zandi expects home prices to fall 40 percent from their peak. And once prices do stabilize he expects it will take a couple more years before they begin to appreciate. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
A Look at the 2nd Quarter Highlight Reel
PAUL KANGAS: The second quarter was a winner for investors, marking double digit gains on all the major indices. Sam Stovall, chief investment strategist at Standard & Poor's joins us to review the quarter and look ahead. Sam, welcome back to NBR.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Hello Paul. Good to talk to you again.
KANGAS: Let's have a look at some of these gains that the major indices made and get your thoughts on that quarter.
STOVALL: Well, Paul the S&P 500 gained the most this quarter than it did going back to December quarter of 1998 following the long-term capital management decline.
KANGAS: Let's look at some of the individual gainers among stocks. And we see two big, big financial institutions, Bank of America (BAC) and Genwerth (GNW) looks like the financials dominated the second quarter rally.
STOVALL: They sure did. I think it's because a lot of investors priced these companies to go out of business and when they did not, they had the greatest upside potential.
KANGAS: How about Wynn Resorts (WYNN), how did that make such a big gain?
STOVALL: Here is another situation of worst to first.
KANGAS: Simple as that. OK. Let's have some worst stocks in the major averages, Wal-Mart (WMT) of all stocks to be in there, what happened there?
STOVALL: Basically I think it was because they held up so well during the bear market that investors are now rotating into more of the discretionary retailers.
KANGAS: And Keycorp (KEY), a financial that did not do well, why?
STOVALL: No, it didn't do well because of their fairly hefty exposure to the construction market.
KANGAS: And Cephelon (CEPH), what was the problem with that company?
STOVALL: Problem there was one of its phase three trials.
KANGAS: OK. Let's now look ahead at the second half. Are we going to retest the lows?
STOVALL: I think there's a very good possibility, Paul, that we could see a correction. I think it will be on the order of 10 to 15 percent possibly bringing the S&P 500 down to about 800 to the 825 level. But I would then caution investors not to get notice, no to bail out and move in to cash because I think better times are ahead.
KANGAS: This chart pretty well illustrates what you think is going to happen then?
STOVALL: Exactly. Every rally off of these corrections since 1932 has brought us an average gain of 36 percent. But of course there's no guarantee that it will happen this time around as well.
KANGAS: So in plain English, you see a near-term pullback followed by a solid rally?
STOVALL: Yes, I do Paul. And I think that if we do get the green shoots morphing into young saplings, we do get an expansion, an improvement in corporate earnings that we could see stocks outperform bonds, small caps out perform large caps and these cyclical sectors out perform the defensive ones.
KANGAS: What are the best instruments for investors to play this coming rally if it occurs?
STOVALL: Well, certainly, Paul, instruments that offer good flexibility are ETFs, so in particular, if you are looking for large cap you could go to SPY, S&P 500, or the MDY for the mid cap 400.
KANGAS: The second half, what do you think -- which sectors will dominate that period of time?
STOVALL: Well, I think if we do get a classic rebound off of this correction, we probably could see the cyclicals do fairly well such as the technology sector. Energy should do relatively well and I also believe that we could see improvement again in the discretionary industrials and financials.
KANGAS: We have a minute left. Your thoughts on the economy and the recovery of the economy.
STOVALL: Well, I think that basically the free fall is over. We probably will end up posting positive advances to economic growth in the fourth quarter of this year, but only by about 1 percent. And we only look for a 1.3 percent gain in all of 2010. I think unemployment will peak in 2010 but it will be pretty much a jobless recovery so I would expect things to get better, but I wouldn't expect a V-shaped recovery.
KANGAS: There are some worry spots on your radar scope, are there Sam?
STOVALL: There certainly are, Paul. Certainly the World Bank recently said that they were downgrading their estimates for emerging market growth. I'm a little concerned that maybe we're getting too far ahead of ourselves in terms of corporate earnings improvements and what if Treasury yields start to spike up once again? Then that could slow the recovery in housing.
KANGAS: Sam, as always I want to thank you for sharing your insights with us.
STOVALL: My pleasure, Paul.
KANGAS: My guest Sam Stovall of Standard & Poor's.
GHARIB: So Paul, we onto the third quarter right?
KANGAS: Right you are and away we go.
GHARIB: Let's hope it's a good one.
Paul Kangas' Stocks in the News
PAUL KANGAS: Profit takers took command this morning as Wall Street closed out the second quarter, its first up quarter since the financial crisis began. A drop in June consumer confidence and a jump in oil prices were among the negatives adding to losses. The Dow was off 122 points by noontime with the NASDAQ down 15 points. The market remained broadly lower on end of quarter selling pressures which eased a bit enabling the Dow to close off 82.38 at 8447 even. The NASDAQ fell 9.02 ending at 1835.04. Standard & Poor's 500 Index lost 7.91 at 919.32. In the bond market, the 10-year note lost 15/32 to 96 19/32, putting the yield at 3.54 percent.
Most active big board issue on 55.8 million shares, American International Group (AIG) down $0.17. The company says it may have to recognize valuation losses on the credit default swap portfolio held by its troubled financial products unit.
Then Bank of America (BAC) managed to gain a penny.
Ingersol-Rand (IR) $0.30 loss, very active. Quanta Services will replace Ingersol-Rand in the Standard & Poor's 500 Index because Ingersol is redomesticating (ph) to Ireland.
Citigroup (C) with a nickel loss.
And Quanta Services (PWR) $0.10 loss there. That's replacing Ingersol-Rand in the Standard & Poor's 500.
Western Digital (WDC) up a penny. Here's another change in the Standard & Poor's 500. This will replace (INAUDIBLE) in the S&P 500, Western Digital will. That happened today.
General Electric (GE) $0.04 drop.
Pfizer (PFE) $0.26 loss.
Ford Motor Co (F) managed to gain $0.29.
And then Wells Fargo (WFC) $0.27 loss there.
Abbott Labs (ABT) down $0.78, traded as low as $46.26. A Federal jury ruled that the company's (INAUDIBLE) drug violates a Johnson & Johnson patent and the ruling calls for a $1.6 billion damage award. That's a lot of money, but JNJ stock down $0.16 showing little reaction. Abbott incidentally will appeal that ruling.
Deere & Co (DE) down $2.20. A larger than expected 800 employees went for the company's buyout offer and the result will be a bigger than expected $100 million in fourth quarter pre-tax expenses for Deere & Co.
H&R Block (HRB) moved up $1.56. Fourth quarter earnings came in at $2.09, same as last year, $0.04 better than expected and it happened despite a 3 percent drop in revenues. H&R Block will maintain its present dividend through 2010.
Trina Solar Ltd (TSL) up $1.64. Morgan Stanley upgraded it from "under weight" to "over weight."
And then Exco Resources (XCO) moving up $1.80 on news the company and BG Group are in a pact to jointly develop the Haynesville shale project and other natural gas assets in Texas and Louisiana.
And then Southern Co (SO) down $0.70. Citigroup downgraded it from "buy" to "hold," seeing a potential chink in regulatory armor.
Apple (AAPL) topped the active list on NASDAQ up $0.46.
Followed by Microsoft (MSFT) $0.09 drop there.
Research in Motion (RIMM) did well, up $1.45. BMO Capital brokerage is optimistic about Research in Motion's upcoming product line.
Google (GOOG) down $2.55.
Intel (INTC) edged up $0.17.
Cisco Systems (CSCO) $0.34 loss.
And Apollo Group (APOL) up $5.13. Third quarter earnings, $1.26, well above last year's $0.85. The Street was only looking for $1.12. The Stiefel brokerage repeated a "buy" on Apollo and some of the other profits for education companies did very well on the Apollo news.
Career Education (CECO), Devry (DV), ITT Education (ESI), Strayer Education (STRA) all good gains.
Cisco Systems (CSCO) a $0.34 -- we've been there.
Qualcomm (QCOM) down $0.89.
And an $0.08 drop in Oracle (ORCL).
Amazon.com (AMZN) fell $0.63.
Schnitzer Steel (SCHN) jumping $7.35. The company reported a first quarter loss of $0.05 a share versus earnings of $2.14 a year ago.
And those are the stocks in the news tonight.
