Market briefing --- Matt (slow)
Interview: SANFORD BERNSTEIN---GRAY, JONATHAN---Analyst
NYSE --- Bob (fast)
Hurricane --- Su (fast)
welcome to “world financial report.” i’m michael mckee. fannie mae will correct its accounting and boost capital to a level 30% above the required minimum. the moves come after its federal regulator found errors raising doubts about the validity of earnings. we welcome sanford c. bernstien analyst, jonathan gray. you brought with you a display to show us how difficult it will be for fannie mae going forward.
>> this is the accounting rule, one rule called fas-133, the number of the accounting on, pinion that fannie mae was found technically not to be in compliance with, the head of the accounting board himself has called it a bad accounting standard. it’s so complicated that it’s very difficult to apply and different accounting firms have different interpretations. that said, once they comply with regulators, demand for new capital, will reduce earnings in the next year or two but to levels we still find attractive.
>> so in your opinion, we shouldn’t lose faith in fannie mae management?
>> the allegations against fannie mae remain to be proven, in my mind. i do know that the accounting rule itself takes account of losses of $5 billion on debt while ignoring gains of $12 billion on mortgages because it doesn’t fall under this particular complicated accounting rule. i believe fannie mae is well run from an economic standpoint, it’s a very profitable, sound, safe business that unfortunately, apparently, is going to be punished by its regulator, whether the reasons are legitimate or not. we think the business is safe and sound and still a safe investment.
>> how are they going to raise capital?
>> they already have more capital than the minimum they’re required to hold. they’ll stop growing their balance sheet and probably reduce the volume of mortgages they hold over the course of the next year by perhaps as much as $90 to $100 billion, in my mind. this could cause disruptions in the mortgage market , may raise mortgage rates somewhat versus what they otherwise would have been.
>> if they restate, how big is that likely to be?
>> i don’t know. honestly, i don’t think it particularly matters.% i think this is a little technical. i think from an economic standpoint, i think that we -- the earnings they’ve reported are by and large the earnings they have earned. i think the earnings power going forward―we were looking for more than―we were looking for $8 or $9 a share in earnings each of the next two years. we would now expect the company to report $7 to $7.50 a share in earnings less, but still the company. this is not going to lead them to have to make any big personnel changes or kind of undergo the changes that we saw freddie mac go through?
>> i don’t know about the personnel and changes. i think the company itself as a business and investment would survive senior personnel changes.
>> you don’t think investors will put the pressure on for a big change?
>> i honestly don’t know. i think it’s critical to the investment case. i think the company’s behavior and its prospects are not likely to be materially affected by a change in management if there were to be one.
>> thank you very much, jonathan gray, analyst with sanford c. bernstien, talking about fannie mae. oil weighing on investors’ minds. the dow falls below 10,000 for the first time in nine weeks. the dow jones industrials with a 59-point loss on the day -- for more on today’s trading action, we bring in bob bowden at the big board. robert?
>> with crude oil reaching an all-time high, many of the energy stocks rallied particularly early in the morning and then we saw deterioration in stock prices throughout the day, although many set 52-week high marks. this is a list of a couple of pages, all stocks that fell on the day but all hit 52-week highs early in the morning when we first heard of the high oil prices, including baker hughes, b.j. services, weatherford international and teekay shipping. the commerce department reported that august new home sales came in at 1.18 million, higher than expected. these two homes both rallied on the day. k.b. shares hit an 18-year high since they began trading in 1986. moving on, m.d.c. holdings, not in the s&p 500, but shares of that homebuilder hitting a 20-year high. those shares up 1.7% on the day and up nine of the last 10 sessions. tom i hilfiger shares down strongly on the day. they had a great year in 2003, up 113%. so far in 2004, down 28% and down 22% on this monday session. the company received a grand jury subpoena requesting documents on commission payment s. delta air lines, the worst performing stock in the s&p 500, down 10%. this stock has lost over half of its market value in the last 30 day was trading. delta air lines down almost 10%. that’s the latest from the nyse, bob bowden, bloomberg news.
>> in economic news, new home sales in the u.s. surging 9.4% in august, reaching an annual rate of almost 1.2 million, sales boosted by mortgage rates. treasury notes rose on speculation a surge in energy prices may slow economic growth and we won’t see those kind of housing numbers again. the 10-year note finishing up 5/16, the yield down four basis points to 3.99%. a closer look at new supply concerns that drove today’s energy rally. there are concerns about rebel attacks in nigeria and a white house spokesman says the energy department might receive new oil loan requests from refiners hurt by hurricane disruptions. su keenan has been on hurricane-energy-nigeria watch all day.
>> oil prices already flirting with $50 a barrel and it goes higher in the view of boon picken, oil more likely to rise to $60 than fall to $40. the billion dollar energy-related hedge fund has tripled its value this year and pickens correctly predicted oil would rise to $50 a barrel. nariman behravesh of global insights does not see $ 60-a-barrel oil as out of the question.
>> i think it’s entirely possible in the next few hours or day we could get above 50 but unlikely we would stay there because the supply-demand balance suggests between the $42 to $43 range.
>> fimat’s john kilduff, who predicts oil would rise as high as $53 a barrel, says the winning streak for oil investors has been like none other, but we’re not popping the corks as we did for dow 10,000, he says.
>> it has taken the edge off on economic growth and that is likely to continue. we have said that a decline in the price of oil down toward the low 40’s or high 30’s probably necessary for an equity rally to be sustained so it is a problem here at 50, no doubt about it.
>> greg mankiw, economic adviser to president bush, says the oil rally hurts but does not halt the u.s. economic recovery.
>> standard economic models suggest that a $10-a-barrel spike in oil prices would reduce g.d.p. by .3% to .5% over the course of a year or two.
>> in the past year, oil futures have rallied 75%. mike, we’ll monitor those prices from here.
>> su keenan. stocks headed lower as concern grew that higher oil prices will dampen earnings growth. steve massocca, co-c.e.o. and head of trading with pacific growth equities, joins us next.
