NBR Transcripts-November 2, 2009
Monday, November 02, 2009Ford's Surprise Profits
SUSIE GHARIB: A big surprise from Ford today, a quarterly profit of almost $1 billion. Those earnings are the first for the Detroit auto maker in nearly two years and that's partly because of cash for clunkers. Excluding special items, Ford earned $0.26 a share in the third quarter. Analysts had been expecting a loss of $0.12. Revenue came in at about $31 billion and Ford's U.S. market share rose to 14.6 percent, benefiting from declines at General Motors and Chrysler while they were dealing with bankruptcy. Joining me now from the CME Group in Chicago, our Midwest bureau chief Diane Eastabrook. Diane?
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hi Susie. Well as you said, Ford did make a U-turn in the last quarter thanks to cost cutting, improved market share and the government's cash for clunkers program. Ford CEO Alan Mulally says the company's strong third quarter paves the way for solid profits within two years. He also told shareholders quote, while we still face a challenging road ahead, our One Ford transformation plan is working and our underlying business continues to grow stronger, end quote. IHS Global Insight auto analyst George Magliano thinks Ford is headed in the right direction.
GEORGE MAGLIANO, AUTO ANALYST, IHS GLOBAL INSIGHT: They have really done a lot with their product offering and the consumer has viewed them more favorably than GM or Chrysler because they didn't take the government money. And so, they've been doing it all along even before cash for clunkers.
EASTABROOK: But Magliano says Ford faces significant potholes on the road to solid profits. One is the weak economy. Magliano thinks rising unemployment and fewer stimulus dollars could keep many buyers from dealer showrooms. Another is the United Auto Workers Union. Late today, hourly workers rejected contract concessions negotiated by Ford and the UAW. Magliano says those concessions are critical to Ford's turnaround.
MAGLIANO: The reality is, if they don't make the concessions, Ford is going to go back to bleeding and it's going to make it very difficult on them and it's also going to make it very difficult on them to keep a lot of the programs they want in the United States.
EASTABROOK: And Susie as you probably recall, both General Motors and Chrysler have got concessions from the UAW while they were in bankruptcy. Ford says it needs those concessions as well in order to compete with those two domestic competitors.
GHARIB: Well, Diane, what are the chances of Ford getting those concessions now that it's making money? Doesn't that give the union a bargaining chip?
EASTABROOK: Absolutely. In fact, the UAW today said that the good financials that Ford reported today were part of the reason that the rank and file voted down these concessions. They said that they would not go back to the bargaining table, but obviously if the financials would deteriorate from here, they might be encouraged to go back. We'll have to wait and see.
GHARIB: Another issue about where things are financially with Ford, a lot of headlines today about that billion dollar profit, but Ford also has a lot of debt, something like $27 billion. So how does that play into its forecast? Isn't that a serious problem?
EASTABROOK: It is a problem. As you probably recall, they mortgaged a lot of assets to keep themselves out of bankruptcy. Analysts say if the economy continues to improve, if the credit markets continue to improve and if the companies can sell vehicles, then it should be able to go back and refinance that debt. But there are a lot of ifs there.
GHARIB: A lot of ifs and in terms of sales, I know that the October vehicle sales numbers are coming out tomorrow. What should we expect from the numbers as far as Ford is concerned?
EASTABROOK: We don't know yet about Ford. Overall we know that the situation in October was a little bit better than September. There was a little bit of hangover after cash for clunkers. People really didn't go into showrooms. We saw sales drop off to about 9.5 million units on an annualized basis. Analysts think tomorrow we're going to see it around between maybe 10 and 10.5, a little bit better but certainly not where we were a few years ago when the auto industry was selling about 16 million units a year in the United States.
GHARIB: I know your focus is going to turn to Chrysler on Wednesday because you are going out to Detroit to meet with Chrysler executives and to learn about what Fiat's plans are for Chrysler. What do you expect them to say? What are you hearing as a preview?
EASTABROOK: What we are hearing is the Fiat people are going to be coming and talking about the kinds of products that they are going to be bringing to the United States. We think there is going to be a small car similar to the Minicooper that will probably be built in Mexico. We are hearing that they are going to be bringing Alpha Romeo back to the United States. They should -- the Fiat people would probably also be talking about what Chrysler and Dodge products they are going to be ending production in the United States, so a lot of information. We're really looking forward to it.
GHARIB: Very interesting stuff and we're going to be looking forward to your report on Wednesday. Thanks a lot, Diane.
EASTABROOK: Thanks, Susie.
GHARIB: Midwest bureau chief Diane Eastabrook.
One on One with Henry Johnson, CEO of Fiduciary Trust
SUSIE GHARIB: Our guest tonight says he's cautious when it comes to investing money for his clients. Joining us now, Henry Johnson, CEO of Fiduciary Trust, a big money management firm based here in New York. Henry, welcome to NIGHTLY BUSINESS REPORT.
HENRY JOHNSON, PRES. & CEO, FIDUCIARY TRUST: Thanks for having me.
GHARIB: Let me start off by just asking you your outlook on the market. You know investors see stocks are rallying and they see them selling off. There is a lot of confusion. What is your analysis of the next phase for the stock market?
JOHNSON: You know, we're still reasonably cautious. A lot of the news items that you lead with this evening, whether it's Ford and the question of how much demand has been pulled forward by government stimulus programs. But then the good news on housing and the consumer, we believe those are going to hold things in place here. But we're definitely cautious going in the next three to four months.
GHARIB: You told me earlier today that when we talked that you have in terms of your approach with client portfolios, the allocations something like half of them in stocks and the rest of it in cash and in a fixed income and bonds. Tell us more about your investment strategy.
JOHNSON: You know, we manage money for families -- taxable investors primarily here in the U.S. And our view is one as I said that is somewhat cautious. So we dampen some of our equity exposure really since the beginning of this year, pulling back from a typical 60 to 70 percent weight to more like 50. At the same time we've taken sort of a risk barbell approach, doubling our exposure to emerging markets. In the fixed income side of the equation, we are focused on asset quality and security selection, making sure that we are buying the right names for clients.
GHARIB: So on the equity side, where are you putting your investments, like what kinds of sectors?
JOHNSON: Well, it is really right here we have seen such an extraordinary rally since March. In the last couple of weeks, what we've been trying to do is pull back some of those names, take gains here. We're filling up positions in financials right now and in consumer discretionary but we are fairly close to a market weight. That is atypical for us and it is really a symptom of our being more defensive right now.
GHARIB: Can you give us any kind of idea of the sectors that you find attractive for your client portfolios where you are putting new money to work?
JOHNSON: As I mentioned sort of right now looking to sort of refill on financials. We've had a conservative weight there in which you have seen in some of the lower quality names really come through since the beginning of the year. We're trying to build solid positions and high quality financials, same thing in consumer discretionary. At the same time we're taking a little off the table in health care and information technology where we've seen such strong rallies.
GHARIB: What is your attitude about taking risks in this environment? I know you say you are cautious but are there, you know, under what circumstances do you feel like it's good to be a little more aggressive?
JOHNSON: There is no question there is enormous number of opportunities in a market with this much volatility. For us it is -- our chief investment officer has used an analogy recently of it's sort of like you are being in a greenhouse, that with the stimulus programs, with demand pulled forward as a result of them, with the housing and general consumer sentiment where they are, there's still so many questions about how much of that is upheld by the government. We don't yet have a sense of how we are going to do when we open the windows and the weather comes in. That said there are enormous opportunities since the beginning of the year. We've done very, very well in emerging markets, for example and in big cap U.S. names. Some of the highest quality names that were areas where defensive investors were fleeing in the beginning of the year, that is where we were already positioned and we've done well for clients as a result of it.
GHARIB: Just to wrap up our conversation, is there any advice that you would give to investors in our audience listening to this?
JOHNSON: Well look, the last two years have been a period of extraordinary education for all of us and I think the one piece of advice that we are saying to all of our clients is now is a time to really sit down. You've learned a lot about your risk tolerance, about the issues of liquidity and transparency. Now is a great time to sit down with your partners and be sure as you position yourself into the next year, that you are really ready to open the windows and let the air come in if you will.
GHARIB: OK, all right. Thank you so much for coming on our program. Hope to get you back again.
JOHNSON: It's been a pleasure, thanks, Susie.
GHARIB: My guest tonight, Henry Johnson, CEO of Fiduciary Trust.
CIT Files for Bankruptcy Protection
PAUL KANGAS: Nearly a million small business owners are struggling tonight to come to grips with the bankruptcy of CIT. That's the company they depend upon for financing. As Scott Gurvey reports, the failure of the 101-year-old commercial lender is being felt as much on Main Street as Wall Street.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: CIT is a lender to a million businesses ranging in size from Dunkin' Donuts and Eddie Bauer to mom and pop storefronts in neighborhoods across the U.S.A. Bankruptcy attorney Ed Neiger says his phone has been ringing off the hook with calls from clients seeking help.
EDWARD NEIGER, BANKRUPTCY ATTORNEY: They borrow money from CIT and they just don't know how this will impact their business. They don't know whether CIT will continue lending money to them. They don't know whether they can look for another lender to lend money on their receivables. They don't know whether another factor will lend them money on their receivables that are encumbered to CIT. They just don't know.
GURVEY: Neither does anybody else. CIT has an agreement with a majority of its creditors for a prepackaged reorganization which will leave the creditors owning the company, but the reorganization of a major financial firm like CIT is uncharted waters. The Lehman Brothers bankruptcy ended in a court-supervised liquidation, while AIG was deemed too big to bankrupt and so it was bailed out by the Federal government. After getting one round of bailout money, Washington decided CIT was not too big to fail, a decision questioned by Todd McCracken of the National Small Business Association.
TODD MCCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS ASSOCIATION: They felt that they couldn't go as far as some would have liked and do as much as they thought they needed to do to protect taxpayer money. Of course, we have some sympathy for that argument, but we're just a little bit frustrated that they reached the point where they were more concerned about taxpayer money than other things at the point where it was a small business lender that was in jeopardy of failing.
GURVEY: The CIT saga has raised again the issues of Main Street versus Wall Street and big business versus small. But for the time being, the experts advise that small business owners hang tight and let the process play out.
NEIGER: Right now, I'm telling them what the company is telling me and that is: business as usual. They're going to continue getting funds. They have to continue repaying what they owe and balancing that against the receivables that they have.
GURVEY: CIT's common shares will be worthless after this bankruptcy and that includes the shares owned by taxpayers at a cost of $2.3 billion. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Supreme Court on Mutual Fund Fees
SUSIE GHARIB: The U.S. Supreme Court today took a look at a critical issue for every investor: how much money you pay your mutual fund's investment adviser. The question is: when do you know if fees are too high and what can you do about it? As Darren Gersh reports, the justices appeared uncomfortable with the idea of the courts setting pay for the nation's 8,000 mutual funds.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investment advisor Harris Associates charges individual investors in its Oakmark mutual funds twice as much as it charges pension funds and other institutional investors. Attorney David Frederick argued before the Supreme Court on behalf of three individual investors who say that's unfair.
DAVID FREDERICK, ATTORNEY FOR INVESTORS: The same manager looks at the same stocks from the same research and allocates after buying the same stocks some to the mutual fund portfolio, some to the institutional investor portfolio. But the mutual funds get charged twice as much.
GERSH: Arguing for Harris, attorney John Donovan says there is a big difference between advising a pension fund and a mutual fund. He says mutual funds are more complex and have to worry about taxes and redemptions which is why, the industry contends, it's not right to compare the two. And once courts get into the business of investment advisor pay, Donovan warns there will be a flood of litigation.
JOHN DONOVAN, ATTORNEY FOR HARRIS ASSOCIATES: If the court sides with the plaintiffs here and any plaintiff can say the fee is too high, it will turn judges into goldilocks where judges get to say that a fee is too high, too low or just right.
GERSH: Chief Justice John Roberts seemed to agree, wondering how a court would decide what's a fair fee for an investment adviser who beats the market. Roberts and other justices noted investors can also vote with their feet, dropping a fund if an adviser isn't earning his or her paycheck. The justices did not seem to think it would be a good idea to rewrite long-standing legal precedents on mutual fund pay, but they are also struggling to find the right standard to make sure investors are protected. A ruling is expected next year. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-Reality TV In DC
SUSIE GHARIB: In tonight's commentary, money, power and reality TV in the nation's capital. Here's Maya Macguineas, director of the fiscal policy program at the New America Foundation.
MAYA MACGUINEAS, DIR. FISCAL POLICY PROGRAM, NEW AMERICAN FOUNDATION: At the end of a long day of worrying about budget deficits, W-shaped recessions and Fed exit strategies, I will admit that on occasion, I partake in that dirty little pleasure of watching reality TV. I know, you say that you don't watch it, but even so, trust me, your neighbors do. Bringing it closer to home, the "Real Housewives," the show that tracks rich and hoping-to-be famous women in various cities, is being filmed right here in Washington, DC. So what should we expect? Not Botox parties like the Orange County cast had. This is a city more about brains than beauty or at least people keep their plastic surgeries private. Nor will it be about conspicuous consumption like in the New York City series, even if Washington is the new Wall Street. We just don't have that kind of money and non-stop spending sprees would play poorly as the economy continues to limp along. The currency in Washington is of course power, but the truly powerful wisely don't want to do the show. Members of Congress, White House staff, Supreme Court justices and the media elite already have cameras trailing them; the last thing they need is more. And in DC, the truly powerful, they trade on relationships but they don't advertise when they do. They sprinkle their money around but they try not to look like they are buying favors or access. Some of the most important people are those whose names you've never heard of and that's how they want it to stay. So, as fun as I am sure the show will be to watch, it won't be a very good insight into the real power pockets of this city. Nonetheless, I can't wait for the show to begin. I'm Maya MacGuineas.
Paul Kangas' Stocks in the News
PAUL KANGAS: Several better than expected reports on the economy today eased concerns about the strength of the recovery. The Institute for Supply Management says manufacturing grew at its fastest pace since last month since April of 2006. Pending home sales increased for the eighth straight month in September, rising over 6 percent. They were buoyed by that first-time homebuyer tax credit. Meanwhile, construction spending rose 0.8 percent in September, when a drop was expected. But President Obama today warned of more job losses to come in a White House pow-wow with his recovery advisory board. The president said creating new jobs is his administration's overriding focus. On Wall Street, that unexpected profit at Ford Motor helped Wall Street open with a rebound from Friday's steep sell-off. An hour into trading, the Dow posted a 135-point gain and the NASDAQ was up 21 points. Bullish enthusiasm was also fueled by today's better than expected economic readings. By midday, sellers started taking profits however, wiping out the early gains. But then a late rally lifted stocks to a positive close. The Dow Industrial Average ended with a gain of 76.71 at 9789.44. The NASDAQ was up 4.09 ending at 2049.20, while the Standard & Poor's 500 added 6.69 points to 1042.88. In the bond market, the 10-year note fell 10/32 to 101 21/32, putting the yield at 3.42 percent.
Big board volume leader on 109 million shares was Citigroup (C) losing a dime a share. Then came CIT Group (CIT), down $0.47, big percentage drop. You heard about the bankruptcy of course and the stock will be rendered worthless quite soon if not already. Bank of America (BAC) a nickel gainer. Ford Motor Co (F) up $0.58. Third quarter operating earnings as you heard up $0.26 in a very positive outlook. General Electric (GE) was up $0.21. Sprint Nextel (S) down $0.09. Followed by Pfizer (PFE) with an $0.08 loss. Motorola (MOT) up $0.46. Citigroup upgraded it from "hold" to "buy." AT&T (T) down $0.08. And then Wells Fargo (WFC) with a $0.09 gain. US Bancorp (USB) a $0.62 closing advance. This is a major holding of Warren Buffett's Berkshire Hathaway and USB will acquire FBOP Corporation. That's a failed bank holding company that owns nine smaller banks and incidentally, Sandler O'Neill upgraded USB today from "hold" to "buy." Black & Decker (BDK) closed up just $0.12, but after the close, Stanley Works said it will acquire the company for 1.27 (INAUDIBLE) of its share for each Black and Decker share and that's worth around $57.50 as of today. In after hours trading, Black and Decker was up over $10 a share at the $57.50 per share level. Stanley Works dropped $0.08 to close at $45.15. Encore Acquisition (EAC) up $7.60. Denbury Resources will acquire this company in a deal worth about $50 a share for EAC. It'll be comprised of a $15 share cash payment plus $35 in Denbury stock. Denbury was down $1.51 to $13.09.
Terra Industries (TRA), the fertilizer company, up $2.14. CF Industries has sweetened its takeover bid. It's now $32 a share cash, plus a little over a tenth of a share of CF. That deal's worth about $40.60 a share to Terra as of today.
Clorox (CLX) up $0.17. The company in with first quarter earnings 23 percent higher than last year at $1.11. The Street estimate was only for $0.95.
And Revlon (REV), which had a good move last week on better than expected earnings, up another $1.64 today. Moody's upgraded the company's outlook to "stable."
LDK Solar Co (LDK) down $1.55. A German firm called Q-Cells has ended its 2007 solar wafer contract because LDK did not fulfill significant contractual obligations.
In NASDAQ trading Apple (AAPL) topped the active list, up $0.81.
Research in Motion (RIMM) down nearly $3. Citigroup downgraded it from "buy" to "sell" on increasing competition from other smart phone makers like Motorola and Google.
Google (GOOG) itself down $2.13.
Microsoft (MSFT) $0.15 gain.
Amazon.com (AMZN) edged up $0.03.
Cisco Systems (CSCO) $0.19 gain.
But Intel (INTC) dropped $0.10. Human Genome (HGSI) up $6.59. Late stage trials of the company's lupus treatment are showing great promise.
Baidu (BIDU) down $2.47.
And Qualcomm (QCOM) $0.48 gain.
In other NASDAQ trading, Vertex Pharmaceuticals (VRTX) up $2.59. The company's hepatitis C treatment was effective in mid-stage trials, good news there. And those are the stocks in the news tonight.
