NBR Transcripts-July 3, 2009
Friday, July 03, 2009"The Economy and the Markets at Mid-Year"-Big Ticket Failures & Auto Giants Fall
SUSIE GHARIB: The U.S. financial markets were closed for Independence Day. So tonight we'll look at the state of the economy and the markets at the year's half-way point. Paul?
PAUL KANGAS: The effects of the recession continue to be felt across the nation and the world. As we await official word on economic growth since April, there have been some hopeful sign for the economy with upturns in home sales and durable goods orders, but otherwise there hasn't been much to cheer about in first half as housing prices continue to drop off and layoffs sent unemployment soaring past 9 percent to a 26-year high. Consumers responded by delaying buying big-ticket items like cars. As Dana Bate reports, that helped drive Chrysler and General Motors into bankruptcy.
DANA BATE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Back in January, at the Detroit auto show, GM and Chrysler seemed hopeful about the future. Chrysler's CEO at the time, Robert Nardelli said the company was making progress.
ROBERT NARDELLI, CEO, CHRYSLER CORPORATION: I think we're doing all the right things. It isn't that we haven't made some mistakes over the 83 years. You know people who do things make mistakes. They never make the biggest mistake all of which is doing nothing. And so we're doing a lot to try to cement our viability for the future.
BATE: But neither company was prepared for sustained double-digit sales drops, as the worst economic downturn in decades intensified. In February, they appealed to the government for additional money to stay afloat -- up to $16.6 billion for GM and $5 billion for Chrysler. The companies submitted restructuring plans that show the money would be well- spent. But the White House found those plans lacking and rejected them.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars. These companies and this industry must ultimately stand on their own, not as wards of the state.
BATE: The administration's auto task force concluded Chrysler could not survive as a stand-alone company and arranged a quick bankruptcy and shotgun marriage with Italian car maker Fiat. It also ousted GM CEO Rick Wagoner and gave the company 60 days to come up with a new cost-cutting plan. GM's interim CEO Fritz Henderson admitted he had a lot of work to do.
FRITZ HENDERSON, CEO, GENERAL MOTORS: The conclusion is, the environment has done nothing other than be equally difficult if not more difficult than it was even let's say late last year. And so we need to do more.
BATE: On June first, after tough negotiations with auto workers and bond holders, the company entered bankruptcy and the new restructuring plan went into effect, giving the government a 60 percent stake in General Motors. GM's original plan assumed only modest declines in market share and had the company in the red for six more years. Its new plan assumes an 18 percent market share by 2012 and gets the company to positive cash flow. Chrysler and GM plans call for closing a combined 889 dealerships -- a move that drew harsh criticism from Capitol Hill. But GM's Henderson said his company needs a drastic overhaul.
HENDERSON: No matter how you look at it, whether professionally and personally, you have to realize that this is a new beginning for GM. It's a reinvention of the corporation.
BATE: Even if their reinventions result in big changes, the future of the new GM and the new Chrysler hinges on one question: will they come out of bankruptcy as profitable companies? Dana Bate, NIGHTLY BUSINESS REPORT, Washington.
"The Economy and the Markets at Mid-Year"-Josh Feinman of Deutsche Asset Management & James Awad of Zephyr Management on Chrysler & GM's Survivability
SUSIE GHARIB: So ultimately, will Chrysler and GM survive as leaner and meaner players in the auto market? To answer that, we turned to Josh Feinman, chief economist at Deutsche Asset Management and James Awad, investment strategist at Zephyr Management. I began by asking Josh how much does the success of GM and Chrysler depend on what happens in the economy?
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: I think quite a bit they need the economic conditions to improve, to perform a better base for car sales. I mean, they need to see labor markets start to get better and confidence come back, credit markets improve. I think we're starting to see a little bit of that. But we need go a lot further before, you know, the outlook for GM and Chrysler can materially improve.
GHARIB: Now, GM and Chrysler say that this is a new beginning. They're reinventing themselves. Do you think that they will be able to pull that off? In other words, what will we be seeing from GM and Chrysler a year from now?
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MGMT: I think it will still be a work in progress. We won't be able to admit defeat or declare victory. They will be smaller and more efficient and there will be new products. We will have to look at what it is they're putting in the marketplace. It will be absolutely key to determining their future success.
GHARIB: So Josh, when do you expect Chrysler to get better?
FEINMAN: I think it will be a graduate process. I think we hit bottom. I think we're going to see edging up over the second half of the year and then further improve in 2010 but I think it's going to be still a level of car sales well below the peaks that we got to before the crisis.
GHARIB: And when consumers are ready Jim to start buying cars, they'll have a lot of choices. Do you think that there's a stigma about buying a car from a company that's been tainted by bankruptcy?
AWAD: I don't think so. It's interesting in the month after Chrysler declared bankruptcy, the sales were actually better than expected because people perceived the values so it's a very local decision. I think people are going to look at the product that's being offered, the price, the deal that they can get, the credit that they can get. So I think that bankruptcy will be viewed as something in the past. I know the government is behind -- in one case the government, in the other case Fiat are behind these companies so I think it's going to be a level playing field.
GHARIB: All right. Let's take a break here and we'll be back in a few moments with more of your thoughts.
"The Economy and the Markets at Mid-Year"-Stocks Half Year Recap
PAUL KANGAS: Detroit's troubles contributed to a bad winter on Wall Street. But by spring, investors began to look forward to better times ahead for the economy. As Suzanne Pratt reports, that led stock prices to get back on track.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The ultimate race to nowhere -- that's what some stock market pros call the action in the year's first half. That's because the Dow Jones Industrial Average ended the six months close to where it began. But a look at a Dow chart shows it was really a wild ride. First, there was a steep drop then a dramatic comeback as the index moved in a 2,500 point range. RBC Capital's Marc Harris says the price swings were unprecedented.
MARC HARRIS, CO-HEAD, GLOBAL RESEARCH, RBC CAPITAL MKTS.: There's no doubt it's extreme. I mean, you have 25 percent moves down and then 35 percent moves up. There's no mistake, for the U.S. equities market that's dramatic.
PRATT: While the Dow and S&P 500 were essentially unchanged in the first six months, the NASDAQ was up significantly. After the Dow reached 9,000 in early January, investors became consumed by extreme self-doubt. Worries about the solvency of banks led the market crash to resume in February and March. Not even a new president could keep stocks from going into a tailspin. By March 9, the Dow had fallen to 6,547, its lowest level in 12 years. Wall Street strategist Sam Stovall says investors were suffering from a serious lack of clarity on the economy.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POORS: Investors had donned their 3D glasses trying to ascertain, the depth, the duration and the diffusion of this global recession, I think they were also totally concerned about whether the U.S. government would be nationalizing the U.S. banks.
PRATT: But just as quickly as stocks entered the abyss, they shot right back out. From mid-March through mid-June, the blue chip index surged 34 percent. Experts say the game changer was policy measures from the White House aimed at restoring confidence. Investors began to think maybe the new administration was getting its act together. Strategist Craig Peckham also credits positive economic signs or green shoots that appeared in the early spring.
CRAIG PECKHAM, EQUITY STRATEGIST, JEFFERIES & CO.: What you saw happen from March to today was just a radical change in risk perceptions in the marketplace. It was born out of what was happening in fixed income markets as credit investors started to come back into bonds and select corporate credits. That spilled over into the equity marketplace.
PRATT: Experts say the market remains in a fragile state with investors still skeptical about the future. The good news is there's plenty of cash on the sidelines which given incentive could come pouring back into stocks. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"The Economy and the Markets at Mid-Year"-Tim Hayes of Ned Davis Research & Mark Leibovit of vrtrader.com
PAUL KANGAS: So is a new bull market underway or has the rally of recent months been just a temporary move in a bear market? To weigh in on that question, joining us now from Tampa is Tim Hayes, chief market strategist for Ned Davis Research and joining us from New York is Mark Leibovit, chief market strategist at vrtrader.com. Welcome gentlemen.
TIM HAYES, CHIEF MARKET STRATEGIST, NED DAVIS RESEARCH: It's a pleasure to be here.
MARK LEIBOVIT, CHIEF MARKET STRATEGIST, VR TRADER.COM: Thank you.
KANGAS: Tim, let's begin with you. Ned Davis Research has declared the recent bear market a waterfall decline. The big question now, is it over and is a new bull market underway?
HAYES: Well, the waterfall decline essentially ended what we'd classify as a cyclical bear market and following that waterfall decline, really high volume panic stage back in October. We've had several retests of the lows on diminished participation and finally, on the March lows in the major averages, that was the final bottom and subsequent to that we had enough evidence to call this a cyclical bull market and that's where we are at right now.
KANGAS: Mark, last New Year's day, you were the most bearish member of our "Market Monitor" panel. You predicted that the Dow would go up early in the year but would then fall back to close at 6500. Are you still expecting a big drop?
LEIBOVIT: I am, Paul. I think ultimately I don't know if it will be this year but ultimately the Dow Industrials is going to give up 90 percent of its value in the next several years, so I'm pretty much a bear. Now over the near term, we can -- as we did in the 1930's we could see a 50 percent retracement of decline which gets you up to about 10,300 which is 1100 in the S&P. So that's a possibility here in the months ahead and I'm a short short seller. "Money" magazine had a bull on its cover just on June 19. So I think we're probably at or near short-term highs here, a pull back and then maybe another rally try before the waterfall decline resumes. So we are trading it and actually looking to get short right here.
KANGAS: So I take it that you don't share Tim's view that we are in a cyclical bull market?
LEIBOVIT: Not at all. I think that this is just a reflex rally and you know, there's a lot of manipulation going on. You've got the plunge protection team out there, a lot of things people don't want to talk about, but the Fed is out there wrestling with it, trying to get this market up and I think it's a temporary affair. We have lower measurements even right here at about 7500. So I wouldn't be surprised in the next month or two we get down to those levels first.
KANGAS: Now Tim, do you see any signs that the uptrend in the market is running out of steam?
HAYES: Not at this point. We'd have what you'd expect in a cyclical bull market. In fact this has been one of the -- it's been very similar to 1974, 1975 recovery and that we only had a 4 percent correction over the first three months. That's exactly what happened in 1975 when you were up 34 percent, the same amount that we had during the first three months of this cyclical bull market. So we have seen a normal consolidation recently but at this point we have good solid participation, good breadth numbers, no signs at this point that we're getting to that vulnerable point.
KANGAS: So what kind of stocks do you recommend to take advantage of this cyclical bull market? We just have a half a minute.
HAYES: Well, we're staying with right now the energy and materials are good areas to be in, also consumer discretionary and technology. I think materials and energy, once we have more confirmation that the recession has ended, we'll have more sustainability and then later down the road as we reach the end of the cyclical bull market, we look to more defensive areas.
KANGAS: Mark, since you see a multiyear decline on the horizon, what should investors do now?
LEIBOVIT: As I told you in the previous interviews, Paul, I'm very much a gold bug. I think you need to be in gold as a defensive play. And I see gold running up to that 2500, 3000 area in the next couple three years, whether it's deflation or inflation. So that's where I think investors should be. I don't think they would be in equities. I think this is a very tenuous period that we have entered over the next several years.
KANGAS: Tim and Mark, I want to thank you so much for your differing perspectives on the outlook for stocks. My guest Tim Hayes of Ned Davis Research and Mark Leibovit of vrtrader.com.
"The Economy and the Markets at Mid-Year"-Commodities Moved in the Right Direction
SUSIE GHARIB: Like stock prices, commodity prices also reversed direction in the first half of the year. As Jeff Yastine reports, traders started to worry that efforts to stimulate the economy might go a little too far.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: There's no argument that the economy was weak in the first half, as Americans cut back their spending. And yet for commodities traders, the first half of 2009 was one for the record books. Oil prices somehow rose more than 50 percent, even though the recession crimped energy demand. And amid a weak home construction market, copper prices posted a similar increase. So what gives? Well, Phil Flynn of Alaron Trading says it's all about that little piece of paper we carry in our wallets called the dollar. He notes that if the U.S. economy gets worse, the Fed can inject more dollars into the U.S. economy to restabilize it, but he says that action comes with one important side effect.
PHILIP FLYNN, ENERGY ANALYST, ALARON TRADING: If that happens, the value of our dollar get weaker and commodities that are priced in dollars get a lot more expensive. So if the economy gets worse, well, guess what, even though demand for commodities might be bad, the demand for the dollar is just going to be even worse and that's going to drive up the cost once again.
YASTINE: The price of gold provides another example, amid worries the Fed will succeed too well in reviving the economy. Doug Groh of Tocqueville Asset Management says jewelry sales, which consume a majority of the gold supply are way down.
DOUG GROH, SR. ANALYST, TOCQUEVILLE ASSET MGMT.: And yet gold is very strong. And what's taking up the demand that jewelry is not demanding is the investment demand for gold and I think it reflects that concern over inflation and the desire for (INAUDIBLE) value.
YASTINE: Alaron's Phil Flynn sees China as a factor in the rise of commodity prices this year. He says Chinese companies are stockpiling commodities, not just for future consumption, but also as a hedge -- a hard asset -- against a weaker dollar.
FLYNN: They're very, very concerned about the state of the U.S. economy. They are concerned about owning all of this debt that we've been selling them over the last 10 to 20 years and what the value of that debt is going to be when they finally get paid back.
YASTINE: Some market watchers like Flynn, think the commodity rally will continue, as traders use the commodities markets as the ultimate hedge against an uncertain U.S. economy. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.
"The Economy and the Markets at Mid-Year"-Josh Feinman & James Awad on Inflation
SUSIE GHARIB: So looking ahead, is inflation really a cause for concern? Picking up again with Jim Award and Josh Feinman, I asked Josh if inflation is the next risk for the economy.
FEINMAN: I don't think so. I think that the economy is going to be operating with a lot of spare capacity, a lot of slack so to speak, that will help put a lid on (INAUDIBLE) price pressures for the next couple of years probably. It's going to take a long period of strong growth to absorb all that slack and I don't see us getting that any time soon. So I think if anything inflation is more likely to drift a bit lower over the next one to two years than to move much higher.
GHARIB: But Jim, the message of the market seems to be different than that. It seems to be telegraphing that the Federal Reserve needs to raise interest rates or take some of the stimulus out of the economy and we have seen that the Fed has been slow to make changes in the past. Will it get it right this time?
AWAD: Well, it's going to be very difficult. They have a very narrow path to walk between doing it too early and doing it too late. But what's encouraging to see is you know they're talking about it now, when you read what actually went on in the meeting. There were people who think that we should wait longer and there are people who think that they should start now. So at least they're on the case, if you will. And if they're on the case, they have a better than even chance of being successful.
GHARIB: Josh, what is your forecast for economic growth for the rest of this year? Is the any going to go positive?
FEINMAN: I think it will. I think we're in the process of stabilizing. The free fall is over. We're stabilizing. I think we will return to some growth later this year and into 2010, but I think it's going to be fairly sluggish in the early going. The economy still has a lot of head winds from the housing and credit crises to work its way through, so it will be a while before we get back to any kind of a really strong growth.
GHARIB: And Jim, how is this all going to play out in the markets? We had a stock market rally the early part of the year. It's now pulled back. What's next?
AWAD: Well, it's going to be very frustrating for investors because I think economic growth will be stable enough. The economy will be stable enough that the bears won't be right. On the other hand, there's a lot of reasons to believe that the recovery will be very tepid which I think will be frustrating to the bulls. So I think it's going to be a market where what you own, what asset classes you own are going to be more important than the general direction of the market. The bear market is over, but you can't say the next bull market has begun.
GHARIB: All right. We'll be back in a few moments with more of your thoughts.
"The Economy and the Markets at Mid-Year"-Christine Benz of Morningstar on Mutual Funds
PAUL KANGAS: As we noted, stock prices took a turn for the better in March and kept rising until mid-June. So what did that rally mean for holders of mutual funds? To help us find out, joining us now is Christine Benz, director of personal finance for Morningstar. Christine, welcome back.
CHRISTINE BENZ, DIR., PERSONAL FINANCE, MORNINGSTAR: Hi, Paul. Nice to be here.
KANGAS: Now, starting off let's look at fund sectors that did the best in the second quarter and at the top, Latin American stock funds.
BENZ: Right. Emerging markets generally really soared in the second quarter of this year and Latin America came out on top, in particular, because Brazil which tends to be the most dominant market in Latin America also really rebounded nicely after a poor performance in 2008.
KANGAS: For the top funds of the quarter, let's begin with the best performer among growth stock funds, Burmiwal Oasis with a gain of over 50 percent.
BENZ: Right. This is a quirky fund, Paul. I took a look at its portfolio. It's really hard to know what's in here because the manager trades very frequently, but I did see a few leveraged index funds in the portfolio so I think investors here really need to be on the lookout for very volatile performance.
KANGAS: And the best performer among value funds was an index fund, namely Rydex S&P small cap 600 pure value.
BENZ: Not your typical broadly diversified index fund. Instead this is a micro cap value index fund that is very concentrated in its top holdings as well as in certain sectors, in particular in the consumer sectors, retail and restaurants, especially.
KANGAS: Interesting. And so no one will think we're ignoring bonds, the top bond fund of the quarter was Fidelity adviser high income advantage, up 33.4 percent. Tell us about that.
BENZ: This is a junk bond fund so it buys low quality bonds in general and it tends to actually buy lower quality bonds than the typical junk bond fund. That hurt it last year but has helped it more recently.
KANGAS: Now over the past year, the biggest upside moves were made by overseas, were made overseas but Oakmark global select still had a negative return.
BENZ: It did. And that really is owing to its poor performance in 2008. But it has rebounded nicely so far this year thanks to good performance from both the domestic and the foreign stock portions of this portfolio.
KANGAS: And leading the emerging funds Dreyfus emerging Asia and I hear that lately that's really been hot.
BENZ: It has. This is a rags to riches story. This is a fund that did lose a lot in 2008 but has managed to really claw its way back over the past quarter. It's gained 60-plus percent in the second quarter alone.
KANGAS: Finally let's see what happened to the largest funds over the quarter and for a change, a lot of double digit gains.
BENZ: Right. This is something we have not seen from the biggest stock funds over the past year and a half or so. But what we see here is that American funds euro Pacific growth which is the sole foreign stock fund among these five largest has actually performed really well relative to the domestic stock funds here.
KANGAS: Christine, after the nice gains registered in this quarter, is it too late for fund investors to get in on the rally, yes or no?
BENZ: I don't think so, Paul. Most funds have not registered the kind of astronomical gains that we have just been talking about and our equity analysts here at Morningstar continue to think that the broad stock market is pretty undervalued relative to their estimates of fair value.
KANGAS: Very good.
BENZ: We think there's upside.
KANGAS: Very good indeed, Christine Benz as always, thanks for your insight.
BENZ: Thanks Paul. It's great to be here.
KANGAS: My guest Christine Benz of Morningstar.
"The Economy and the Markets at Mid-Year"-Jim Awad & Josh Feinman Talk Recovery
SUSIE GHARIB: So as we begin the second half of the year, the big question on everyone's mind is: will we emerge from recession anytime soon? As I wrapped up my discussion with Jim Awad and Josh Feinman, I asked Josh about those so-called green shoots that everyone's been talking about and whether he sees them as a sign that the recovery is for real.
FEINMAN: I think it is. I think the economy is stabilizing now after the free-fall it was in and I think we are going to return to growth later this year and into 2010. But I think that growth is going to be pretty sluggish in the early going.
GHARIB: Jim, do you agree with that?
AWAD: Yes, I do. If you look at the building blocks of the economy, none of them point to high growth. The consumers had a near death experience and is going to be very prudent. Business has excess capacity. Exports except for India and China are going to be sluggish and the government stimulus will eventually wear off and the government's got to raise taxes and lower spending so pay down the deficits so that'll be restricted, so I think it's going to be very a very tepid recovery.
GHARIB: And a lot of this depends on people having jobs. So Josh, what is your outlook for the job market and when will we see the unemployment rate coming down?
FEINMAN: I think it's going to be a while. I think the best we can hope for short run is a slower rate of deterioration in the job market. I think that'll happen over the course of the year but really going back to significant hiring net positive employment and declining unemployment, I think the earliest we can look for that is 2010.
GHARIB: You know so many of the CEO's and economists I talk to now say that because of the financial crisis, business is not going to go back to normal. There's a new normal that they're talking about. Is that how you see it, Jim?
AWAD: Well, I see the new normals for the time being, if you look at the building blocks of where growth comes from, none is going to get you back to above trend line or even trend line growth. But this is America and we have been through tough times before and some new paradigm will occur. Technology and the Internet came along. Something will come along to re-ignite growth in America. But as you sit here today, you don't see it.
GHARIB: Is there a new normal for the economy?
FEINMAN: I think it's going to be an adjustment process, but I think when the shakeout is over, maybe let's say a couple of years, I don't see fortunately anything that would really suggest to me that potential growth in the economy has been taking a big hit. Productivity growth has held up very, very well which is encouraging and at some point, you're going to have pent-up demand.
AWAD: Yes, but Josh, I think that pent-up demand could be very restrained, when people have lost this much money in their homes, when the job market is this bad.
FEINMAN: It's a question of timing. I think it will take a couple of years maybe but the longer you go without buying a new home, buying a new home-related item, buying a car and so on, eventually the pent up demand will be there. Maybe it's going to be three or four years down the road, but they'll be there and that will be the thing that galvanizes us back to above trend line.
AWAD: But the question becomes, how much of the behavior change is permanent? In other words will people be in smaller homes? Will they keep a car an extra year or two? How much of this is cyclical and how much is secular? We don't know yet.
FEINMAN: They might, but whatever the new level is that they get comfortable with, higher household savings rates, smaller homes, once they get to that, we have made that adjustment, from that point forward I think growth can return to what it was.
GHARIB: This is a conversation to be continued. Thank you both so much for coming on the program and happy Fourth of July.
FEINMAN: Thank you.
AWAD: A pleasure.
