November 27, 2007
By: Paul Kangas and Susie Gharib
JEFF YASTINE, NIGHTLY BUSINESS REPORT ANCHOR: Stocks soar as Citigroup gets a $7.5 billion cash infusion from Abu Dhabi. Details and analysis of its stake in Citi and what that could mean for the beleaguered financial sector.
Then, stock market volatility, sky high energy prices and housing industry turmoil are taking their toll on the American consumer. Confidence plunges for a fourth straight month.
The mayors of major cities around the country say a rising tide of foreclosures could quote break the back of our national economy. Tonight, a look how the housing crisis is impacting local economies as we talk with Detroit Mayor Kwame Kilpatrick.
And late today, Freddie Mac moved to shore up its bottom line. The mortgage giant`s cutting its dividend and selling billions in preferred stock as it tries to raise capital.
I`m Jeff Yastine. Paul Kangas is off tonight. This is NIGHTLY BUSINESS REPORT for Tuesday, November 27.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Good evening, everyone. A big overseas investment in Citigroup restored investor confidence on Wall Street today. The Dow surged 215 points and the NASDAQ jumped nearly 40. Even battered Citi shares rose almost 2 percent after a Middle Eastern investment firm agreed to invest billions of dollars in the struggling financial services giant. Scott Gurvey has more on why Citi and other American assets look attractive to international investors.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big cash transfusion for Citi was the trigger and a rebound for the battered financial sector was the result. The Abu Dhabi investment authority is paying $7.5 billion for Citi bonds yielding 11 percent. The bonds can be converted into a nearly 5 percent equity stake. Several analysts today warned that Citi will still have to raise funds by selling assets or cutting its 7 percent dividend. Meredith Whitney of CIBC World Markets says the Citi board is not doing shareholders any favors. Citi is a client of CIBC.
MEREDITH WHITNEY, BANKING ANALYST, CIBC WORLD MARKETS: The board, who masterminded — and I use that term highly sarcastically — this 11 percent borrowing rate to pay 7 percent, have not dealt with the fact that what would be better for shareholders would be a break up of the company. Unfortunately, the company is severely undercapitalized, but you`re going to have to sell key assets to shore up capital levels. Otherwise, you`ll have a death spiral of the share price.
GURVEY: There is also the possibility that Abu Dhabi will invest additional funds. Currently, Citi`s biggest shareholder is Saudi Arabian Prince Alwaleed, who made his first investment in the company in 1991. He added to his stake over the years and currently owns 3.6 percent. Most foreign investors stick to U.S. Treasury securities. But they are increasingly looking to diversify their portfolios into other assets, including equities and currencies. Economists say there is nothing inherently wrong with foreign investment. They say the funds are put to productive use and represent confidence in American assets. But Bob Hormats of Goldman Sachs warns there will be a problem if foreigners take their money elsewhere.
ROBERT HORMATS, VICE CHAIRMAN, GOLDMAN SACHS: The negative side is that we have such a low savings rate in this country that we depend so heavily on foreign capital and if, as a result of financial problems in this country or a sharp decline in the dollar or some other traumatic event, foreign capital were to slow down dramatically, that would be of even bigger concern to American policy makers.
GURVEY: Net foreign investment in the United States now totals $3 billion a day. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
GHARIB: Well, Citi`s not alone in looking for cash. Late today, mortgage giant Freddie Mac said it will sell a big chunk of preferred stock as it tries to raise $6 billion. Freddie is also slashing its dividend in half to $0.25. This is the first time it has cut its dividend since it became a publicly traded company in 1989.
YASTINE: High gas prices, a slumping housing market and stock market volatility are weighing on consumer attitudes. The Conference Board says its index of consumer confidence tumbled nearly eight points to a reading of 87.3 this month. That was its fourth monthly decline and the lowest level in two years. Bear Stearns economist Conrad Dequadros blames a combination of factors.
CONRAD DEQUADROS, SR. ECONOMIST, BEAR STEARNS: We`ve recently seen a bit of a pullback in oil prices, but we don`t know whether that will be sustained. We don`t know that will translate into lower gasoline prices. And also, there is not yet any evidence that either the housing market or the financial markets are really stabilizing. So in order for consumer confidence to improve, I think we will need to see some relief on consumers.
YASTINE: Investors today though shrugging off concerns about the consumer and focused on Abu Dhabi`s move to take a $7.5 billion stake in Citigroup. That set up a nice relief rally in the broader market, with the Dow shooting 240 points higher by midday. Oil prices fell by more than $3 a barrel to below $95 a barrel and that also provided a bullish tone to equities. The NASDAQ suffered an early afternoon swoon after Goldman Sachs said it saw weaker home prices and a higher chance of a recession in 2008. But the indexes came back strong in the last hour and finished near their highs of the day. The Dow closing up 215 points at 12,958.44. The NASDAQ rising 39.81 to 2,580.80 and then the S&P 500 gaining 21.01 to end at 1,428.23. And in the bond market, the 10-year note falling 28/32 to 104, excuse me, 102 14/32, lifting the yield to 3.95 percent.
GHARIB: The nation`s major metropolitan cities will lose billions of dollars in revenues next year because of the housing crisis. That`s the conclusion of a report released today from the U.S. Conference of Mayors meeting in Detroit. Also today, a separate report issued by Global Insight predicted foreclosures could reduce U.S. property values by $1.2 trillion in 2008. Half of that drop in value would come in California. But as Diane Eastabrook reports, foreclosures are spreading well beyond the golden state.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: This brick two-flat on Chicago`s south side goes on the auction block this week. It is among 100 foreclosed properties in and around the city that Rick Levin and Associates will be selling.
RICK LEVIN, PRESIDENT, RICK LEVIN & ASSOCIATES, INC.: Certainly, there is a lot of potential here for an investor to pick this up, hopefully at an attractive price for them.
EASTABROOK: But Levin`s optimism that a buyer will bid on this property is tinged with caution. The building is located down the street from two other boarded up homes, also the victims of foreclosure and that makes this property a tougher sell.
LEVIN: One of the realities of the real estate market in certain pockets of the United States is that there is not just one troubled property in the neighborhood, but there are several.
EASTABROOK: Chicago is hardly the poster child when it comes to soaring foreclosures. The city didn`t see the huge amount of investment in real estate the way cities like Las Vegas did, nor has it fallen on tough economic times the way cities like Detroit and Cleveland have. Experts say what is happening in Chicago is happening in a lot of communities. Consumers, especially in lower income neighborhoods, purchased homes with sub-prime adjustable rate mortgages. When interest rates on those loans adjusted upward, the borrowers couldn`t afford the payments and defaulted on their loans. As a result, there are entire blocks in some Chicago neighborhoods with several vacant homes. Geoffrey Smith, research director for Woodstock Institute, has been studying the impact of foreclosures on the city. He says one foreclosure on a city block can decrease the value of properties around it by 1 percent and several foreclosures can ripple through the entire community.
GEOFF SMITH, RESEARCH DIRECTOR, WOODSTOCK INSTITUTE: We have also documented that increases in foreclosure rates can lead to increases in violent crime in a community. We have also seen that increases in foreclosures have an effect on the property tax base of various communities across the region.
EASTABROOK: One local bank is trying to prevent future foreclosures. Shorebank estimates up to 10,000 families on Chicago`s south side could be at risk of foreclosure. A few months ago, it launched a rescue loan program which helps at-risk borrowers with adjustable rate loans lock into fixed rates. Shorebank President and CEO Joseph Hasten says the program helps the bank and the community.
JOSEPH HASTEN, PRESIDENT & CEO, SHOREBANK: Our bank is founded on the notion that you can pursue private gain such that it is not incompatible with doing social good. So, our mission is to maintain and improve the vitality of the neighborhoods we serve.
EASTABROOK: So far, Shorebank`s rescue loan program has helped 30 borrowers. Hasten hopes his bank can reach even more homeowners before foreclosure reaches them. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
GHARIB: Detroit is another American city hard hit by the mortgage crisis and the city hosted today`s emergency meeting of mayors. Joining us now to talk more about the problems facing local economies, Detroit Mayor Kwame Kilpatrick. Mayor Kilpatrick, welcome to NIGHTLY BUSINESS REPORT.
MAYOR KWAME KILPATRICK, DETROIT, MI: Thank you for having me.
GHARIB: Well, tell us how the housing and foreclosure crisis has impacted the Detroit economy. What has been the biggest issue?
KILPATRICK: Well, biggest issue has been quality of life more than anything else. We have not seen the full impact of the decline in property tax revenue. We`ve seen property values decrease substantially. But as far as revenue into the city, we haven`t seen that yet. It is more of the quality of our neighborhoods, the quality of our housing stock, neighborhood deterioration issues. But you also, you know, you see people who continue to lose hope in communities. And so the human toll right now is more than the economic toll. I think after the recess of 2008, if we don`t do something, we`ll really feel the crunch of the economic woe.
GHARIB: So what do you propose to do? What ideas do you have or other mayors today at the conference about turning the situation around?
KILPATRICK: Today`s meeting was a very serious, focused and I think tenacious meeting, industries sitting across from mayors. You had Countrywide, Wells Fargo, Bank of America. You had all the different banks from across the country that were sitting there with us saying what are the solutions. We found three areas: one, communication, how do banks, borrowers and lenders talk to one another? Fifty percent of the foreclosures that we saw in America last year were from people who never contacted or had any communication with their lender at all. We want to improve that. So we hooked up with a lot of nonprofit organizations and people who can serve as counselors. So the first thing that came out is that the industry is going to invest and hope for borrowers and counselors and create an infrastructure and build capacity so people have a number to call, 888-955-HOPE was the number that we have. And that goes live December 1st in terms of the investments.
Second, neighborhood deterioration. Who do mayors call when there is a dilapidated property or a property with a broken window? We all heard of the broken window theory. Many of us in our cities, we want to remarket that home, sell it but we can`t get in contact with anyone. We talked about today having access to the service — of service of the loans or even third party people who are supposedly property maintenance working with the mortgage bankers to go live with the web site that went live today so you can click, put your address in and we learn who the mortgage holder is. So that was another thing. And then the biggest issue of re-modification or restructuring of the loan. And that is the bigger issue. We`re going to give ourselves a time limit all the way out to April because of the resets of 2008 in May, to really focus and deal with that issue. We have $1.2 trillion in property values that are eroding are going down over the next year. $519 billion of that is from foreclosures alone. So we want to tackle that issue in a much more expansive, broader, multilayered approach.
GHARIB: Would you like the Federal government to play any role here or other policymakers? Do you want them to step in or is this strictly a local issue?
KILPATRICK: Well, we thought first that mayors had to engage the industry. Who was missing from the table was Wall Street. We still need to get them to the table as well. I mean the volatility of the market doesn`t help us and our cities sell our paper on the bond market. I mean we`re still looking at our international paper that we`re selling. But that is a whole other issue. But the Federal government has to be involved. They have to be at the table. I mean when Katrina hit, the Federal government worked to get $20 billion. This is like three – this is like 10 Katrinas when you really look at the magnitude of it. We expect next year alone 1.4 million more people to be in foreclosures. The Federal government has to step up. They have to do something now.
GHARIB: Let me ask you about the job market. I know that a lot of construction jobs have been lost because of the slowdown in home building. Are you seeing the job market be affected in other industries in the Detroit area? And what can you do about it?
KILPATRICK: Our industry, of course, that we relied on for 75 plus years has been the automotive manufacturing industry. And that is where we are seeing job losses. I mean we sold a million less cars this year than we did last year. I mean GM, Ford, DaimlerChrysler, I mean Chrysler, excuse me, they are fighting back. But you know, we can`t gain jobs fast enough. And our construction industry, we`ve picked up jobs. We built seven casinos. Detroit hasn`t built — I mean seven hotels. Detroit hasn`t built a hotel since 1989. We`ve built more houses in the city than we ever built before. So development is going well. We have to diversify the industry base and our heavy reliance on one industry. So there are job growth in the health sector, technology sector, venture capital, finance, service, but we`re losing so many jobs in manufacturing that it is not balancing out. So
GHARIB: Mr. Mayor, I`m sorry, we`re going to have to.
KILPATRICK: continue to grow other sectors in our city.
GHARIB: We`d love to hear more. I`m glad you left us on a little bit of a positive note. Thank you so much and good luck to you and everyone in Detroit as you work through this crisis.
KILPATRICK: Thanks a lot.
GHARIB: My guest tonight Kwame Kilpatrick, mayor of Detroit.
YASTINE: Now let`s take a look at our stocks in the news tonight.
And where else would you expect to find Citigroup (C) today except at the top of our list, gaining $0.46 of course on news about that $7.5 billion bail out from the Abu Dhabi investment authority. An analyst at Punk Ziegel (ph) issued a “buy” despite the threat of more write offs and defends the bank`s earnings potential after a major restructuring.
Pfizer (PFE) gaining $0.58.
General Electric (GE) gaining $0.72.
Fannie Mae (FNM) up a little over $0.40, $0.48 to be exact. “BusinessWeek” noting a number of Fannie Mae executives buying large blocks of shares in the open market at these levels the past few days.
EMC Corp (EMC) advancing $0.82.
Ford Motor Co (F) then gaining a fraction. Bank of America
Bank of America (BAC) gaining $1.06 in sympathy with Citigroup.
AT&T (T) rising $0.38.
JPMorgan Chase (JPM) gaining $1.89.
And Countrywide Financial (CFC) also advancing with the financials today, up $0.33.
Defensive stocks like Altria Group (MO) helping the Dow`s performance today. Goldman Sachs giving higher odds for a recession next year and that gave the green light for investors to move into defensive shares like Altria. The stock gaining $1.91.
Barclays Plc (BCS) up $3.49 after the British bank backed its full year 4 percent earnings growth forecast.
Cummins (CM) logging a gain of $3.25. The company received a $400 million credit line from GE Capital.
Alaska Air Group (ALK) climbing $1.33. Goldman Sachs upgrading those shares.
And then Tesoro (TSO) sliding $3.04. Kirk Kerkorian`s investment firm withdrawing its $64 a share tender offer which would have given them a 20 percent stake in Tesoro. The company recently adopted a poison pill strategy designed to thwart a takeover attempt.
Genesco (GCO) getting socked for a loss of $4.73. Federal prosecutors want information on Genesco`s proposed merger with Finish Line. UBS was supposed to provide financing for that deal, but now alleges fraud.
Now let`s look at Arbitron (ARB) which hit a 52-week low. The company delaying the roll out of a portable device that automatically measures what radio station someone`s listening to, helping their ratings there.
Signet Group (SIG) down $3.55. The parent company of the Kay and Jerod jewelry store chains says weakness in U.S. consumer spending will tarnish holiday sales.
On the NASDAQ, Apple (AAPL) rising a little over $2.25.
Google (GOOG) up $7.50.
Baidu.com (BIDU) advancing another $15 today.
Research in Motion (RIMM) up $4.14. An analyst at UBS giving the stock a $150 price target.
Microsoft (MSFT) gaining a fraction.
But Cisco Systems (CSCO) going the other way.
Intel (INTC) though up $0.74.
Genlyte Group (GLYT) getting that buyout deal from Phillips Electronics at $95.50 yesterday, down a little bit today on profit taking.
Garmin Ltd (GRMN) advancing another $6.
First Solar (FSLR) though down about $4.38.
Staples (SPLS) rising a little over $2. Nice bounce after 2 1/2-year lows touched yesterday, profits $0.02 a share ahead of estimates. The emphasis on selling ink and toner, much higher profit margin items there.
Activision (ATVI) advancing $2.61. The company raised its profit estimates for the quarter and the year. The CEO says the company`s most profitable year ever should be 2007.
And finally, AspenBio Pharma (APPY) logging a gain of $1.77. The biopharmaceutical firm developing a blood test to screen for appendicitis for emergency room use. The company pursuing a pre-market notification clearance with the FDA.
Those are our stocks in the news tonight. Susie.
GHARIB: Jeff, some late developments tonight at the Federal Communications Commission. There could be a vote on a controversial plan to open up the cable industry to new regulation. As Stephanie Dhue reports, the plan has been a hot potato all day.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: There should have been five commissioners sitting here this morning, voting on proposed cable regulations, but behind-the-scenes maneuvering kept that from happening. FCC Chairman Kevin Martin wanted the agency to sign off on a report that showed 70 percent of U.S. households with access to cable now subscribe to it. That would trigger potential new rules for the industry. But he couldn`t get the votes needed to move forward. Former FCC Commissioner Gloria Tristani says OKing the report would have laid the groundwork for tighter FCC regulation of the industry.
GLORIA TRISTANI, FORMER FCC COMMISSIONER: It would give the FCC opportunity to open proceedings to examine what should we do to address this market power.
DHUE: Specifically, Martin proposed requiring cable companies to lease channels to independent programmers at reduced rates and forcing cable operators to settle disputes with programmers through arbitration. Martin has also championed an a la carte pricing, which would let consumers purchase channels separately. Cable companies have resisted a la carte pricing and dispute they have market dominance, pointing to increased competition from satellite and telephone companies. Analyst Paul Gallant says Martin`s failure is a victory for the cable industry.
PAUL GALLANT, CABLE ANALYST, STANFORD GROUP CO.: For the past few years, the FCC has been a pretty negative factor in the minds of Wall Street when it comes to the cable operators and so I think the cable industry is hoping that the setback today for Martin is the beginning of a more positive Washington environment for the cable companies.
DHUE: The battle may not be over. The commission may still consider an alternative proposal that requires cable companies report their market share to the agency. But analysts say the industry should be able to show it doesn`t have enough subscribers to warrant new regulation. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
YASTINE: Tomorrow, the economy and equities — an expert panel discussion on the recent market volatility and what`s next for oil prices.
GHARIB: Google wants to be green. The web giant plans to spend hundreds of millions of dollars over several years to promote cheap renewable energy. As part of its green push, Google says it will fund targeted research on solar and wind technologies. Google wants to produce one gigawatt of renewable power that`s cheaper than its coal equivalent. That`s enough to power a city the size of San Francisco.
YASTINE: Eighty three-year-old Texas oilman Oscar Wyatt, Jr., was sentenced to a year and a day in prison for his role in a conspiracy to violate the rules of the United Nations oil-for-food program. Wyatt pled guilty in October to Federal conspiracy charges and agreed to forfeit $11 million. While the judge issued what many call a very lenient sentence, he says there`s no doubt Wyatt broke the law.
GHARIB: Here`s a look now at what`s happening tomorrow. The Federal Reserve releases its beige book. Also tomorrow, October durable goods, existing home sales and the weekly report on crude oil and gasoline inventories.
Tonight`s “Of Mutual Interest” commentator says when it comes to bond funds, don`t chase the yield. He`s John Waggoner, mutual fund columnist at “U.S.A. Today.”
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Sometimes painful events can teach important lessons. Never peak into the nest of a large bird of prey. Making your own fireworks is not a good thing and never reach for yield in your mutual funds. Reaching for yield simply means buying investments whose income payouts are much higher than average. The current carnage on Wall Street and in some bond mutual funds, is a good example.
Like all good financial disasters, this one started with financial professionals. Low interest rates made housing more affordable, but it also made investments in mortgages boring. Who wants a 5 percent yield? So Wall Street pros invested in shaky mortgages, called sub-prime mortgages, which offered much higher yields. When the real estate bubble popped, sub- prime borrowers defaulted, saddling investors with losses. They had reached for yield. The bond funds with the biggest losses the past 30 days are those that have offered the highest yields. High-yield bond funds, which invest in bonds issued by shaky corporate borrowers, are down about 3 percent, including reinvested dividends. Emerging markets` bond funds are down about 2 percent.
The bond funds that are holding up the best invest in government securities, particularly TIPs, or treasury inflation protected securities. Why? Because when the whole world looks like its melting down, investors flee to the rock-solid credit of the United States government. They sell junk, no matter how high the yield and they buy quality, no matter how low the yield. The time to tiptoe in to high-yield funds is after a meltdown, not when everyone is rushing to them. But don`t rush — bonds may still have some melting left to do. So the next time you look at a fund whose yield seems too good to be true, remember — don`t reach for yield. I`m John Waggoner.
YASTINE: Recapping today`s market action, call it the Citi effect — stocks soar as Citi gets a new investor. The Dow gaining 215 points, the NASDAQ jumped 39. And to learn more about the stories in tonight`s broadcast, to watch our streaming video or to take part in our daily blog, go to NIGHTLY BUSINESS REPORT on pbs.org and you can also e-mail us at firstname.lastname@example.org
And that`s NIGHTLY BUSINESS REPORT for Tuesday, November 27. I`m Jeff Yastine. Good night everyone. Good night to you, Susie.
GHARIB: And good night to you Jeff. I`m Susie Gharib. Hope to see all of you again tomorrow night.
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