NBR Transcripts-August 26, 2009
Wednesday, August 26, 2009New Home Sales Are Resuscitated But Real Estate Remains In Critical Condition
JEFF YASTINE: It looks like the economic recovery gained steam last month. July's durable goods orders and new home sales both soared, boosting arguments the recession is ending. And with that, much bigger than expected 9.6 percent jump in new home sales, some are wondering if the housing market is finally starting to turn. Scott Gurvey gets an answer.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was the fourth straight month of increased new home sales and although this is a number with a wide margin of error, it did encourage those who see a bottom in housing. Beth Ann Bovino of Standard & Poor's notes there has also been increased buying of distressed properties and existing homes.
BETH ANN BOVINO, SR. ECONOMIST, STANDARD & POOR'S: Those homeowners were actually free to move and actually buy something elsewhere. So you're starting to see it trickle through. Will it continue through next year? W ell, we do expect that is something that is going to see some -- basically to get some stability and continue through next year, although we're not expecting any kind of blockbuster sales through this year or the next. It's just something that we'll slowly climb out of that hole.
GURVEY: Stocks in the home construction sector began rallying in early July. But Maury Harris of UBS warns there will be a shakeout among the companies in the group.
MAURY HARRIS, CHIEF ECONOMIST, UBS: You're going to have more concentration among the top five of six sellers in the market. It is partly because of credit conditions and the small builders not being able to get the financing. So when you talk about what's going to happen to the homebuilders and their fortunes, they should outperform overall home sales because they're going to get a bigger market share.
GURVEY: But how big a market will they share? Some of the current buying is a result of the government's first time buyers' tax credit, which expires December 1. And before the housing bubble burst, 25 percent of home mortgages were in the non-prime credit category. Assuming that kind of lending is history, the new normal for housing will be much lower than the two million starts seen in the year before the sector collapsed.
BOVINO: While it does look like housing starts, the numbers that were out a little while ago, were also starting to show signs of stabilizing and that would be a good sign for home builders. It doesn't look like we're going to really see anything near what would be considered an average rate of say about 1.6 million for housing starts, until probably 2011.
GURVEY: Home prices are expected to continue to decline next year, but recent data indicates the rate of decline is itself decreasing. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
How to Buy a Failed Bank According to Alex Pollock of the American Enterprise Institute
JEFF YASTINE: It just got a lot easier for private equity firms to buy failed banks. The FDIC voted this afternoon to lower the proposed minimum capital requirement for those private investors to 10 percent of the failed bank's assets. The FDIC proposed higher capital ratios last month and that drew howls of protest from the private equity community. Joining us now for more about the decision is Alex Pollock, a resident fellow at the American Enterprise Institute and Alex, the FDIC has already brokered two failed bank deals this year, two private equity firms. Will today's decisions open those flood gates?
ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE: I don't know about flood gates, but it seems to me it's a sensible decision that they made to back off from their 15 percent requirement to 10 so you could get more interest on private equity. The bank failures of course as we know are mounting and look like there could be quite a few going forward. So you want to have as many pools of capital as are interested be able to come in and take a serious look at investing in the new recapitalized bank that will go forward.
YASTINE: I counted more than 70 failed banks just this year alone on the FDIC website.
POLLOCK: It's 81 this year-to-date.
YASTINE: 81, OK.
POLLOCK: Now if you put that in a little perspective, if we look back to the late 1980's, I'm not talking about savings and loans, I'm talking about commercial banks. There were eight years in a row at which more than a hundred commercial banks failed.
YASTINE: With that in mind does the FDIC really have a choice on this? They have to bring in these deeper pockets from somebody who has the cash and at this point it seems like it's only the private equity funds that have those deep reserves.
POLLOCK: Well they certainly have to look for sources of capital and this is one of them. So that's why I think this is a reasonable step for them to take.
YASTINE: You know, for a bank to buy a failed bank, it only takes 5 percent as a minimum capital requirement. Why doesn't the FDIC just bring it all the way down to parity so private equity funds and the banks are competing on an equal level.
POLLOCK: As I understand it, it's eight for a bank to buy one. I think it's a strong argument that it would be better to have one set of rules that's consistently applied to everybody. There was one vote against the proposal today by the acting director of the Office of Thrift Supervision and as I understand it from the press, his reason was he thought there should be one set of rules and everybody should have the same set of rules applied to them. That's a pretty strong argument, I'd say.
YASTINE: Do you think the FDIC will eventually go all the way to that level?
POLLOCK: I don't know these things are all about negotiations subject to a lot of uncertainty when we're in these pressured financial situations. So that's anybody's guess, I'd say.
YASTINE: How does the FDIC make sure that it is not brokering these deals on too cheap of a basis? We saw Indy Mac at the start of the year. They were the first of this year to get bought by a private equity or a series of private equity firms, a group of them. And I've seen some criticism after that of some who say that perhaps Indy Mac was brokered or sold too cheap by the FDIC.
POLLOCK: That's always a problem and it's a worry that you're going to have if you're the receiver who has taken over the bank and now selling it, that later on somebody's going to say you sold too cheap and somebody made a pile of money because you gave them too good a deal. That certainly happened in the early 1990's when you had the RTC, if you remember that, liquidating thrifts and selling them pretty cheap. And some people made enormous amounts of money buying things cheap. So you got to worry about that financially but also politically. On the other hand, if there are few buyers, the prices are going to be cheap. If there are lots of buyers dying to buy, the prices wouldn't be so cheap. That's the nature of a market and this is a sort of specialized market in taking over the ongoing assets of failed financial institutions.
YASTINE: We'll have to see how the reaction of the private equity community to this latest change in decision by the FDIC. Alex, appreciate you coming on the program.
POLLOCK: Thanks, great to be with you.
YASTINE: Our guest Alex Pollock of the American Enterprise Institute.
What Will Become of Health Care Reform Without Senator Ted Kennedy
PAUL KANGAS: The nation is mourning the passing of one of the most influential senators in our history. Representing Massachusetts for close to half a century, Ted Kennedy helped re-write the nation's laws on bankruptcy, immigration, and education. But as Darren Gersh reports, Kennedy's passion and most likely legacy will be health care reform.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: For millions of families Senator Ted Kennedy is one of the reasons their children have health insurance. Health policy expert Chris Jennings worked with Kennedy, as the senator pursued his life-long dream of extending care to every American. This was Senator Kennedy's, one of his big legacies here, right?
CHRIS JENNINGS, FORMER CLINTON HEALTH CARE ADVISER: Yes, this is actually the signing of the children's health insurance legislation.
GERSH: Senator Kennedy's passion for health care reform and his legislative prowess have been sorely missed this year. Now, as has often been the case with the Kennedy's, Jennings thinks the senator's death will inspire many of his colleagues in Congress to act.
JENNINGS: Unfortunately, it sometimes takes this moment of them leaving us, departing us, if you will, to really focus on the fact that they had a point, that there really was an issue worth addressing and it's long overdue that we addressed it.
GERSH: To be sure, Kennedy was controversial. Republicans delighted in campaigning against the liberal lion of the Senate. But that reputation also gave Kennedy the clout to cut bipartisan deals on health care that sometimes disappointed core Democratic constituents. Mark McClellan, a health care policy adviser to Presidents Clinton and Bush, says that kind of pragmatism is badly needed now.
MARK MCCLELLAN, DIR, HEALTH CARE REFORM, BROOKINGS: If there is a model from what Senator Kennedy has done, I think it's that we can find a bipartisan way to solve these problems and address them.
GERSH: Kennedy's legacy extends far beyond health care. Nick Allard, a close Kennedy adviser, says some 300 major pieces of legislation carry the senator's name.
NICK ALLARD, FORMER KENNEDY STAFFER: I recall, for example, providing relief from the bankruptcy laws for small family farmers, always keeping his eye out for the little guy.
GERSH: Kennedy's friends are still hoping for one more victory, a bipartisan health care reform covering all Americans and signed into law by the man Kennedy endorsed for president.
ALLARD: I think the current health care debate is in the president's hands right now, but I wouldn't be surprised if there was some divine intervention from the senator. He's probably starting to lobby already from up there.
"Street Critique"-Patrick O'Hare, Chief Market Strategist at briefing.com
PAUL KANGAS: Tonight's "Street Critique" guest says Oreos aren't the only reason he likes Kraft stock. It's got a tasty dividend, too. He's Patrick O'Hare, chief market strategist at briefing.com and author of the site's bargain hunting column. Patrick, welcome back to NBR.
PATRICK O'HARE, BRIEFING.COM: Hi Paul, thank you, nice to be back with you.
KANGAS: Why has Kraft stock landed in your bargain hunting radar?
O'HARE: Well, what we've seen in the broader market rally of course is not the most exciting stock pick, but we think it's the right stock pick at this juncture. Our belief is that the easy money from that March rally has been made so we're urging investors with conservative disposition to start looking to a name like Kraft which offers a nice dividend yield and in this case Kraft's yield is 4.1 percent, which exceeds all of its peers in its group.
KANGAS: KFT is the symbol on the big board. Do you have a target price and time frame for Kraft stock?
O'HARE: We think Kraft could move into the mid 30's over the 12 to 18 months. The company just completed a five-year restructuring program that has taken out a lot of costs and we think that there's good room here for margin expansion potential. As those margins improve over time here, it's going to increase profitability. It's going to give the company (INAUDIBLE) raise its dividends and buy back shares. So for the patient- minded investor, we think there's good return potential here.
KANGAS: Now you saw similar themes at JM Smucker (SJM) when you recommended it in May and let's look at that chart. It's up 43 percent since then. I have to congratulate you on that and some of your other recent calls. For instance in mid July you liked discount retailer Dollar Tree and to this very day with very strong earnings, the stock is already up almost 14 percent from the time of your recommendation. And on March 25th you said the spiders were the best way to play the recovery. You were right on. They're up almost 27 percent. Do you still like these securities as long-term investments Pat?
O'HARE: Sure, I think they are all still attractive as long-term investments. But I should put the caveat they have had some tremendous runs here at a pace that's not going to be sustained. We would urge investors to take something off the table here. These gains just aren't going to continue like we've seen in the past several months.
KANGAS: All right. But do you feel that we are in bull market or is it still one of these rallies in a bear market that a lot of people still think?
O'HARE: We're in the camp that it's a cyclical bull market within a secular bear market. So like I said the easy money's been made here on this rally. We're not as optimistic on the economic recovery as the stock market would like for us to believe we should be. We just don't see that V-shaped recovery taking shape given the travails of consumer and the way that's going to keep consumer spending in the months ahead.
KANGAS: So you are saying time for a little caution here correct?
O'HARE: Indeed.
KANGAS: Pat, do you own any of the stocks we have mentioned here or have any disclosures about them.
O'HARE: Don't own any of them and no other disclosures to make right now.
KANGAS: Okay Pat it's always good to hear your ideas thanks for being with us.
O'HARE: Great. Thank you Paul.
KANGAS: My guest Patrick O'hare of briefing.com
"Money File"-Safe Money Solutions
JEFF YASTINE: In the "Money File" tonight, some smart things to do with your money now. Here's Jonathan Pond, author of "Safe Money in Tough Times."
JONATHAN POND, AUTHOR, "SAFE MONEY IN TOUGH TIMES": The great recession has taken its toll on our money and our psyches. Here are five smart and feel good things to do with your money this year. First, pay extra principal on your mortgage, credit cards and other loans. Paying off principal gives you a guaranteed return equivalent to the loan's interest rate. Second, home improvement contractors are eager to work for you during this dour economy. But make sure you can afford the improvements and make sure they enhance the value of your home more than they enhance your ego. A third smart thing to do with your money is to purchase big ticket items that you need. Manufacturers and retailers are hurting, so prices are declining. In short, this is a good time to buy expensive stuff, but only if you really need the stuff. Idea number four is to continue your education. One of the best investments you can make is to obtain more education and training in your chosen line of work. Maintaining top-notch skills is doubly important amidst what is likely to be a weak employment climate for several years to come. And finally, helping younger generation family members fund retirement plans, like IRAs, is one of the best ways to show them the importance of saving for retirement. And even minors can contribute to IRAs if they have job income. I'm Jonathan Pond.
"Last Word"-California's Garage Sale
JEFF YASTINE: And finally tonight, in California's latest attempt to raise money, the state is holding a two-day garage sale this weekend. A warehouse in Sacramento is housing thousands of surplus or confiscated items, ranging from jewelry and computers, to coat racks and cars. Some of the vehicles have been autographed by Governor Arnold Schwarzenegger. Other items are being sold on Craig's list and eBay and those listings were aimed at attracting shoppers outside California. All together, the state hopes to make about $1.5 million to help ease its budget crunch.
KANGAS: I'd be happy to bid on one of those autographed vehicles if they'll take my IOU.
YASTINE: Mine too.
KANGAS: OK, fair enough.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street started the day on a narrowly mixed note, but buyers soon took control on that solid rise in new home sales and a 4.9 percent jump in July durable goods orders. By 11:00 a.m. the Dow posted a 21 point gain with the NASDAQ up 4 points. Stock fell into modestly lower ground during mid-session as investors showed caution after a string of six straight winning sessions for the Dow. Optimism that tomorrow's second quarter GDP revision would show strength helped stocks close with miniscule gains. The Dow Industrial Average ended up 4.23 at 9543.52. The NASDAQ was up only .20 at 2024.43, while the Standard & Poor's 500 edged up .12 to 1028.12. Over in the bond market, the 10-year note edged up 1/32 to 101 19/32, putting the yield at 3.43 percent.
Most active big board issue today on 100 -- let's make it 81.7 million shares, Citigroup (C) down $0.12.
Followed by Fannie Mae (FNM) with a $0.01 loss.
Bank of America (BAC) up $0.04.
And Freddie Mac (FRE) a $0.03 loss. Those top four stocks today have accounted for 40 percent of New York exchange volume in the last several weeks, almost for the whole month so far.
General Electric (GE), fifth in volume, was down $0.19. Reportedly, the company has put its security business up for sale. Some analysts think it could fetch up to $2 billion and possible suitors are United Technologies and Tyco.
Moving along in the active list, Alcatel-Lucent (ALU) up $0.26 on speculation that a Chinese telecom company just might make a takeover bid.
Hartford Financial (HIG) $0.34 gain.
Sprint Nextel (S) $0.14 advance.
Pfizer (PFE) was down $0.03.
And then EMC (EMC) $0.49 gain.
Nokia (NOK) a $0.51 advance there. The company is launching a financial management and payment service for mobile phones.
Canadian Imperial Bank (CM) down $4.02. Third quarter earnings were $.136 a share Canadian. That was $0.03 below the Street estimate and it was due largely to worse than expected loan losses.
Another Canadian company, Thompson Creek Metals Co (TC) off $1.15 on the company's plan to sell up to 15 million of its common shares to the public at $14 each Canadian.
Jacobs Engineering (JEC) $1.30 loss there. Johnson Rice brokerage downgraded it from "equal weight" to "under weight" on concern about a slowdown in spending by oil and gas customers of the engineering firm.
Dycom Industries (DY), this is another engineering firm, down $1.94. Fourth quarter earnings excluding one-time items, $0.17. That's down from $0.23 a year ago, but $0.02 above the Street estimate. However, revenues fell $4 million short of estimates. That hurt the stock.
Williams Sonoma (WSM) up $1.74, nice move there. The company had a break even second quarter versus earnings of $0.17 last year, but the Street was actually looking for a loss of $0.09 a share. Standard & Poor's however did repeat a "strong sell" on the Williams Sonoma today.
International Rectifier (IRF) up $1.42. A real turnaround in earnings, fourth quarter $0.41 in the plus column versus a loss of $0.69 last year and that earnings did include $96 million gain from divestiture of its power control system business.
And then we see Affiliated Managers (AMG) up $2.54. Credit Suisse upgraded it from "neutral" to "out perform."
NASDAQ's most active was Apple (APPL) down nearly $2 a share.
Followed by Intel (INTC) up $0.33.
Microsoft (MSFT) $0.09 loss there.
And Google (GOOG) fell $3.37.
Human Genome (HGSI) up $1.29. Stock had been strong on speculation of a takeover and some say it's GlaxoSmithKline that's the suitor.
Cisco Systems (CSCO) a $0.07 loss.
Qualcomm (QCOM) up $0.71.
Research in Motion (RIMM) fell $0.73.
First Solar (FSLR) down $1.43.
And Baidu (BIDU), tenth in NASDAQ volume, down $4.10.
Myriad Genetics (MYGN) a $5.01 gain. Strong fourth quarter earnings of $0.37, up from $0.23 last year. Revenues jumped 33 percent.
And finally, Isle of Capris Casinos (ISLE) fell $1.83 after posting lower than expected first quarter profits of $0.02 per share, $0.11 below analyst estimates and revenues fell 6.3 percent.
