NBR Transcripts-October 28, 2009
Wednesday, October 28, 2009GMAC Begs for More From Uncle Sam
SUSIE GHARIB: Call it bailout, the sequel. GMAC is asking the government for a third bailout. This time the auto and mortgage lender needs around $5 billion. That's on top of two others totaling $12.5 billion and a debt offering today of almost $3 billion. Meanwhile, published reports today say General Motors could announce this week plans to tap into its government bailout account. If that happens, we'd get a fresh picture of GM's economic situation. So what does all this mean for American taxpayers? I asked Mark Zandi, chief economist of moodyseconomy.com whether the government should give GMAC more bailout money.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Yes. I think we as taxpayers have invested an enormous amount into GMAC, GM, Chrysler and we need to protect that investment. If we don't make this further investment, these institutions could fail. These companies could fail and we'd be out of all that money. So I don't think we have much of a choice at this point.
GHARIB: Well Mark, it is a lot of money and what does this mean for taxpayers?
ZANDI: Well, it's obviously very costly. If you total up all of the aid we've been giving to the auto makers, it's $70, $80 billion so far, in addition to this extra aid. That's a lot of money. Now hopefully down the road, vehicle sales will pick up. These companies will be viable and we'll get most of that money back. I don't think we'll get it all back, but hopefully we'll get most of it back.
GHARIB: How important is GMAC for the economy in terms of its systemic risk? How important is it?
ZANDI: Well, it's important. I think it could fail and the economy could digest it without pushing us back into recession. But I think again it would probably make little sense for us as tax payers to allow that to happen because we'd lose all that money we've already invested in GMAC, GM and Chrysler.
GHARIB: So is it just a matter of time that General Motors and Chrysler maybe will be going back to the government asking for more bailout money?
ZANDI: I think that's likely. The problem is vehicle sales are still very weak. We're running at around 10 million unit annualized sales base and just to give you context, in a normal year the auto maker sells 16, 17 million units. So conditions are really still very difficult and until that improves, I think these auto makers are going to need more help.
GHARIB: This whole situation with GMAC has brought up this subject of too big to fail. And as you know, there is some draft legislation in the works with Barney Frank and his committee in Congress. What is your initial take on the proposal and how it would deal with this too big to fail financial firms getting into trouble?
ZANDI: I think the legislation is in the right direction. It acknowledges that we will have institutions that are very large and if they do fail that they will create all kinds of problems for the entire financial system. But it also attempts to make those institutions pay for that, so it is a privilege that these institutions are too big to fail, that taxpayers will come to their rescue at the end of the day, but they have to pay taxpayers back if in fact that eventuality actually does occur.
GHARIB: Now there is -- there are some people, including former Federal Reserve Chairman Paul Volcker who are saying that these giant financial institutions that are too big to fail should be broken up, in fact they are too big to exist. What is your view on that?
ZANDI: I don't agree. I think we need large financial institutions because they need to provide services to large multi-national corporations that are all over the globe doing lots of different things and they need big financial institutions to provide those services. Moreover, we are going to compete with large financial institutions from across the globe. Think about the European banks, the Chinese banks, the South American banks. These are very large institutions and we won't be able to compete against them if we break up our banking institutions.
GHARIB: Mark, while you're with us, I just want to ask you a question about stimulus and the economy. There's a lot of buzz now that it's time for the government to pump in more money, more stimulus money into the economy. Is it necessary? Should the Obama administration do that?
ZANDI: Yeah, I think the economy needs more help. The recession is over. A recovery has begun, but it's very fragile, as all of us know. We're not creating any jobs yet and unemployment is still rising, so I think it's important to extend some of the provisions of the current stimulus that are set to expire by the end of the year, extend them into 2010 to make sure that this recovery evolves into a self-sustaining economic expansion that creates jobs and starts to bring down the unemployment rate.
GHARIB: How much money do you think is needed?
ZANDI: I think if you extended the unemployment insurance benefits for people who are running out of those benefits, make extensions of business tax cuts that are in the current stimulus, total it all up, probably cost about $100 billion.
GHARIB: $100 billion. Do you think the Obama administration and Congress will go for that?
ZANDI: I think they should and they will at the end of the day because nothing will be worse than having unemployed workers running out of their benefits and not being able to find jobs. It's not only going to be very difficult for their families, but it will be very psychologically debilitating to all of the rest of us because we know that could also be us.
GHARIB: All right Mark, a lot of good information today. Thank you so much for your time.
ZANDI: Thank you.
Boring Bonds Are Starting to Excite Investors
PAUL KANGAS: The government auctioned off a record amount of Treasuries this week ending with today's $41 billion sale of five-year notes. Bond experts say the demand has been strong despite the unprecedented supply. Erika Miller takes a look at why investors' appetite for bonds appears to be growing.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Other than perhaps annuities, Treasury bonds are probably one of the most boring investments around. But recently, bonds have been getting a lot of unexpected attention from investors. Demand for Treasury securities has been remarkably strong this week, despite a record $123 billion amount being sold. Financial planner Scott Brewster believes many individual buyers are seeking safety, after the stock market's poor returns last year.
SCOTT BREWSTER, CERTIFIED FINANCIAL PLANNER: Rather than learn the right lesson about prudent diversification, a lot of people learned that oh, I should have more bonds in my portfolio. And then rather than think about a good strategy, they just over weighted the bonds at the very time when investing heavily in bonds is a lot riskier because interest rates are a lot lower.
MILLER: Of course much of the demand in the marketplace is also coming from big institutional buyers. Interest rate strategist George Goncalves says many large financial institutions are opting to buy bonds, instead of lending out money.
GEORGE GONCALVES, INTEREST RATE STRATEGIST, CANTOR FITZGERALD: The banks are finding less and less credit worthy alternatives. So instead of giving to that sub-prime borrower, they're going to buy U.S. government bonds. If they have cash to put to work, they're not going to go risk it like they did back in '03 through '07.
MILLER: The large appetite for bonds has been going on all year, according to Investment Company Institute. Bond funds have either seen larger inflows or smaller outflows than equities in every month since the recession began in December 2007. Still, some people have been surprised by the strong demand for Treasuries given the record amount being sold to finance the budget deficit. The question is, will that strong demand be long lasting?
GONCALVES: I think that maybe supply becomes an issue in 2010 and 2011, when we have to roll over all this debt that comes due. But from now until then, there's enough uncertainties on the economy and how sustainable this growth really is before yields will have a major rise.
MILLER: There are also concerns about what happens once the economy starts picking up steam. Some analysts worry at that point investors will abandon Treasuries in favor of higher returns elsewhere. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
"Street Critique"-David Garrity, Principal at GVA Research
PAUL KANGAS: Tonight's "Street Critique" guest says there are a host of reasons why the tech sector continues to do well these days. He's David Garrity, principal at GVA Research. And David, welcome back to the program.
DAVID GARRITY, PRINCIPAL, GVA RESEARCH: Thank you, Paul.
KANGAS: Despite today's steep sell-off in tech stocks, they have done better than the broader market year to date. Why is that?
GARRITY: Tech is an early cycle sector and we've certainly seen that out performance unfold this year. You have better global exposure for these companies as a group versus other sectors in the S&P and also you have some very favorable product cycles unfolding as well as also stronger financials.
KANGAS: What was today's sell-off in the tech sector, just a kind of a correction?
GARRITY: Well, before the opening I had bad news coming out of SAP, the German enterprise software company, which certainly hurt the sentiment going into the open and obviously that unfolded as the market took its profits during the day.
KANGAS: Right. Now we're starting to see interest rate hikes around the world. How could that affect IT investment?
GARRITY: Obviously cost of capital is going to have an impact in terms of investments that are made by consumers as well as corporations for productivity and efficiency. But we think that the isolated increases that we've seen so far out of Australia and Norway probably will not be followed by the U.S. or perhaps up to 18 months.
KANGAS: OK. Microsoft's Windows 7 is now up and running in the market place. How do you see that product playing into growth for the tech sector?
GARRITY: Certainly it's expected to trigger a PC upgrade cycle. We've had confirmation coming from vendors such as Intel and others that we are seeing strength in demand and that this continues not only into the fourth quarter of 2009 but also into 2010.
KANGAS: In fact Microsoft (MSFT) stock is one of your sector picks. What else looks good to you in that area?
GARRITY: We're also looking at Cisco (CSCO), growth in Internet volume traffic, which will help build demand for infrastructure products, which Cisco provides, also looking at Intel (INTC).
KANGAS: Let's have a look -- we have a chart here on Intel. There's the chart, very good. They both have strong charts.
GARRITY: Certainly. We think that the likelihood is that Intel, higher operating volumes, expanding margins, benefiting from PC upgrade cycles, certainly a good performer going into next year. Looking elsewhere in the sector, Focus Media (FMCN), a company primarily focused on Internet advertising and out of home advertising in China, benefits next year from the World Expo in 2010. And then closing things off, Research in Motion (RIMM) certainly very strong in the smart phone sector, both with businesses as well as consumers, having a fairly significant number of new products coming out over the next six months, which arguably should support the stock and move it higher.
KANGAS: Some good bullish reasons there. David, do you personally own any of these stocks or have other disclosures to make?
GARRITY: Yes I do. I own Microsoft in personally, Intel in the firm, Cisco in the firm, Focus Media personally and then also RIMM personally.
KANGAS: OK. So you personally put your money where your research leads you. OK, fair enough.
GARRITY: Professionally and personally.
KANGAS: There you go. Thanks again for your time. My guest, David Garrity, principal at GVA Research.
"Money File"-Taxing Investments
SUSIE GHARIB: In the "Money File" tonight, a scary proposition: paying too much tax on your investments. Here's Jason Zweig, personal finance columnist at the "Wall Street Journal."
JASON ZWEIG, PERSONAL FINANCE COLUMNIST, WALL STREET JOURNAL: With Halloween upon us, here are a few tricks to make sure you don't get spooked by paying more investing taxes than necessary. If you invested in a company that died and sent to zero, you can take a capital loss up to the full amount that the shares cost you. That will enable you to offset capital gains in the same amount elsewhere in your portfolio. Make absolutely sure your brokerage firm gives you a written statement proving that it would cost more to sell the shares than they are worth. If you want to donate to a charity, consider selling out of an investment that is now worth less than you originally paid for it. Use the loss to reduce your capital gains tax, donate the proceeds and claim a charitable deduction based on the final market value of your investment. Finally, if you're in a low tax bracket, you can sell profitable holdings you've held for at least one year and pay no capital gains tax. Since the Obama administration may raise capital gains tax rates, this loophole might not be open much longer. I would never suggest dumping your holdings wholesale. But if you are in the 10 percent or 15 percent Federal tax bracket for 2009 and expect to be in a higher bracket next year, now might be a good time to take some long-term capital gains. With only two months left in 2009, you don't want to be haunted by the actions you didn't take. I'm Jason Zweig.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street headed lower this morning as doubts about the strength of the economic recovery grew more serious. Stocks were also undermined by an unexpected drop in September new home sales, which we'll detail next and there's also a smaller than expected 1 percent rise in September durable goods orders. By midday the Dow was off 50 points and the NASDAQ down 40 points. The market closed this afternoon at its lowest level after Goldman Sachs lowered its third quarter GDP forecast. So the Dow Industrial Average ended with a loss of 119.48 points at 9762.69. The NASDAQ tumbled 56.48 to 2059.61 and the Standard & Poor's 500 down 20.78, ending at 1042.63. A lot of new supply in the bond market this week and we'll take a look at that in a moment. But in bond action today, the 10- year note rose 10/32 to 101 24/32, putting the yield at 3.41 percent. Big board volume leader on 118 million shares, Citigroup (C) losing $0.19.
Followed by Bank of America (BAC) down $0.44.
General Electric (GE) fell $0.51.
Ford Motor Co (F) a $0.37 drop.
But bucking the trend was Qwest Communications (Q) with a gain of $0.09.
Sprint Nextel (S) moved up $0.07.
And CIT Group (CIT) a dime gainer. The company raised an extra $4.5 billion from bond holders despite investor Carl Icahn's attempt to stop that process.
Pfizer (PFE) down a nickel.
AT&T (T) bucked the trend, up $0.48.
And then JPMorgan Chase (JPM) down $1.22.
ConocoPhillips (COP) fell $1.91. The company had a 30 or a 73 percent drop in third quarter earnings to $1 versus $3.39 last year. The stock felt the sting.
Goodyear Tire (GT) down $3.28 even though third quarter earnings rose to $0.30 from $0.13 last year, but the company was not upbeat on the fourth quarter and that's what hurt the stock.
Ashland (ASH), a chemical firm, down $4.83. Fourth quarter operating earnings, $0.96 a share, $0.06 above the Street estimate, but Standard & Poor's downgraded it from "buy" to "hold."
Another chemical company, Quaker Chemicals (KWR) down, up $2.51 on slightly higher third quarter earnings, $0.45 versus $0.41 last year and that's despite a 25 percent drop in sales.
Unisys (UIS) up $4.10, a big move there. The third quarter came in at $1.48 in earnings, versus a loss of $0.96 last year, but keep in mind, these figures reflect the recent one for 10 reverse split in Unisys stock.
K-Sea Transportation (KSP) down $8.45, a $0.29 first quarter loss out today versus earnings of $0.19 last year and the company cut its first quarter distribution from $0.77 a share to $0.45 and also expects not to be in compliance with some of its debt covenants, which it will seek to amend.
SPW Corp (SPW), the coal company, down $2.65. Third quarter earnings fell to only $0.19 from $0.61 last year.
And Chiquita Brands (CQB), the banana company, up $0.88, traded as high as $16.87 today after reporting third quarter earnings of $0.20, versus a loss of $0.33 a share last year. The Street was looking for a loss of $0.16. Jeffries brokerage repeated a "buy," boosted its price target to $25 a share.
NASDAQ's most active, Apple (AAPL) tumbling nearly $5, the biggest drag on the NASDAQ Composite today.
Amazon.com. (AMZN) fell $0.43.
Microsoft (MSFT) $0.57 drop.
Baidu (BIDU) coming back over $13 after tumbling $49 yesterday on a shortfall in revenues.
Intel (INTC) $0.71 loss there.
Apollo Group (APOL) down $12.91. After the close yesterday as we reported, the SEC announced it's making an informal inquiry into the company's revenue recognition practices.
Google (GOOG) down nearly $8.
Research in Motion (RIMM) down nearly $3.
And Cisco Systems (CSCO) a $0.52 loss.
Qualcomm (QCOM) $0.63 drop or gain there.
First Solar (FSLR) up $1.36. After the close today, third quarter earnings out, $1.79, $0.05 better than expected, but the stock tumbled to a $129 a share on a revenue shortfall.
Finally, shares of Illumina (ILMN) fell $8.29 after reporting disappointing third quarter profits of $0.17, $0.03 below analysts' estimates and it warned it expects a shortfall in revenues this year.
