tv Nightly Business Report PBS August 1, 2011 7:00pm-7:30pm PDT
>> susie: its looking more and more likely that the u.s. will avoid default and keep its triple-a credit rating. qt so, what happens next and what does the debt deal mean for your portfolio? we ask bond guru bill gross of pimco. it's "nightly business report" for monday, august 1. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by: this program is made possible by contributions to your pbs
station from viewers like you. captioning sponsored by wpbt >> tom: good evening and thanks for joining us. after weeks of bickering, it will be another busy night in washington, susie. the house is debating the measure now and is expected to start voting any moment now. >> susie: tom, if the bill passes the house as expected, the measure heads to a senate vote tonight and could land on the president's desk as early as tomorrow morning. >> tom: the bill calls for raising the debt ceiling by $2.4 trillion by the end of next year and cutting nearly $2.5 trillion dollars in government spending in two steps. washington bureau chief darren gersh joins us from washington with the latest. darren?
>> reporter: tom, this is going the senate is expected to follow as soon as tonight or tomorrow. we're going down to the wire. congressional leaders spent most the day selling the debt limit package to the last holdouts. >> my goal is to get this bill passed, signed into law to solve this debt crisis, and help get the american people back to work. >> reporter: many democrats lashed out at the bill for cutting spending without raising revenues. a defensive white house tried to put the best face on an agreement that many democrats felt fell far short of the president's goals. >> in the end, compromise won out and an agreement we believe strongly is in the interest of the american people was achieved. >> reporter: the agreement now sets the stage for nonstop budget battles. in the next few months, lawmakers will begin to wrangle over where to find $756 billion in specific program cuts needed
to meet the new budget caps. after that, attention will turn to a bipartisan "super committee" charged with producing another $1.5 trillion in spending cuts and revenue increases. expectations in and outside of congress are low that lawmakers will succeed in doing in november what they couldn't do this summer. >> the early feedback that i hear from people on capitol hill is that it probably won't agree to anything like that in the second round. >> reporter: that would mean republicans and democrats will spend 2012-- a big election year-- arguing whether to raise taxes and how to reform medicare and social security. the showdown comes in 2013, when the debt limit agreement calls for automatic cuts in defense and medicare at the same time the bush tax cuts expire. >> 2013 was always going to be the big battle to settle these cosmic questions of how much we are going to have to change entitlements, how much we are going to have to raise revenue. >> reporter: in the meantime, a debt limit agreement makes it less likely congress will extend
the payroll tax cut that is scheduled to expire at the end of the year or provide any additional stimulus to the economy. it does however, eliminate some near term uncertainty over a default and reduces the threat of repeated government shut- downs. but the key uncertainty over the federal government's fiscal outlook remains. >> our problem really isn't the current deficit, it's that we have no rules in place that sends the deficit assuredly down quickly enough that we don't accumulate even more debt at an increasing pace. >> tom, i hate to tell you this, but that means that the really hard work is still ahead. >> tom: like we haven't done a lot of hard work already. where do we know the first round of cuts will be made? >> reporter: i think a lot of people will be surprised given all the anxiety that's come about so far, but the immediate cuts in 2012 are going to be
about $25 billion out of the spending category in the budget that's about $1.2 trillion. part of that is by design -- they didn't want to hit the economy real hard with cuts right away -- but it also shows you how hard it is to cut the budget. >> tom: how hard it is to find those cuts. any kind of consensus, though, beginning to build about where those cuts may be, what types of programs, what industries may see a pare-back of government spending? >> reporter: yes, it's pretty clear that defense is going to come in for cuts, so people who have been saying the defense gravy train could roll on forever, at least as far as contractors are concerned, that looks like it's turning a corner and we're arguing over the depth of those cuts. health care is going to start coming under increasing pressure. the government really realizes that that is where the spending problem is for the government, so health care is going to be a target. >> tom: we saw the stock sector hit today. we'll mention more in "stock focus." you mention the stimulus in the
debate. we continue to see weak economic numbers. with all the political rancoring built up in the capital city and the weak economic data, what are the odds of an economic stimulus? >> reporter: pretty low. the president might be tempted to ask for additional stimulus -- after all, he pushed really hard for the extension of the payroll-tax holiday, a lot of people haven't noticed that but economists say that's been a big help with the high gas prices, so the president could push for that. the problem is the natural place to push for that is in this super committee where they're going to consider another $1.5 trillion in cuts. it might naturally fit under there but nobody i have talked to really expects that super committee will be able to deliver a package that will go forward, because it's the same problem. the republicans don't want tax increases. the democrats don't want to give up spending increases -- i mean,
spending cuts without more tax increases. >> tom: we're back to square one where it comes to that as we're speaking live on the eastern coast, the house vote beginning in moments. darren gersh, thank you. >> susie: wall street's debt deal rally lasted about 30 minutes this morning, when the dow surged 140 points. but by mid morning, investors had shifted their focus to worries about the economy after a disappointing report on the manufacturing sector. by the close, the dow was down just 10 points, the nasdaq lost 11 and the s&p 500 was off five. the losses came on heavy volume, over a billion shares on the big board, over two billion on the nasdaq. american manufacturing activity barely grew last month. the institute for supply management's manufacturing index fell to its lowest level in two years with a reading at 50, indicating very weak growth. so does this mean investors now have new anxieties beyond the u.s. debt problems? erika miller reports.
>> reporter: the big relief rally that wall street was expecting did not happen today, but don't give up on tomorrow. stock market strategist jeremy zirin says investors won't exhale until a debt deal is signed, sealed and delivered. >> markets are going to remain on edge, only because of the potential tail risk-- low probability tail risk, but high- impact negative event that could occur if we default on our debt. >> reporter: assuming the debt agreement becomes law, zirin thinks the s&p 500 could rally 3% to 5% in the next month. that would be more than the index has risen this year. part of the reason most strategists do not see bigger gains is uncertainty about the u.s. credit rating. strategist nick colas worries spending cuts in the current debt deal won't be deep enough to satisfy ratings agencies like standard & poors. >> they are going to either leave us on some kind of watch or, worse case, downgrade the sovereign debt of the u.s. >> reporter: that's not the only headwind for stocks.
another big concern is the soft economy, which could get even softer if a debt deal leads to sweeping cuts in government spending. but colas believes stocks can still power higher. >> even though the economy is still very slack, even though job growth isn't where it should be, corporate profitability really is at absolutely record and very impressive levels. and ultimately stock markets respond to corporate profits as much, or more, than they respond to the tenor of the economy. >> reporter: so what does all this mean for stock investors? is now a good time to buy? u.b.s. says yes, betting the s&p 500 will end the year about 10% higher than it is today. >> so while we might see a bumpy period with a lot of equity market volatility over the next few weeks, the low valuations of the market and the sustainability of the corporate profit cycle should lead investors to favor equities over fixed income in asset allocation. >> reporter: market strategists say the biggest risk for stocks is recession, and some economists now peg the odds at 30%. if it happens, experts warn corporate profits will suffer,
sending stocks sharply lower. erika miller, "nightly business report," new york. >> susie: our guest tonight says even with a debt deal, a downgrade of the u.s.' prized triple-a credit rating is coming. joining us now, william gross, the founder and co-chief investment officer of pimco, the world's largest bond fund. >> susie: nice to have you with us. we have a lot to talk about. >> thank you, nice to be here. >> susie: if a downgrade is coming, as you are predicting, what should investors be doing with their treasuries? >> well, there won't be an immediate reaction in terms of the credit spread or the credit quality of this triple-a, soon to be perhaps double-a paper. that would be a 10-15 basis-point reaction or maybe a point in price, so that's not the immediate threat. the real threat to the treasury
paper is the enormously low yields, near absolute zero, susie, five-year treasurys at 1.3%, 10-year treasury the s 2.7, the combination of low yields and deteriorating quality suggest that treasuries are not a good holding relative to other assets. >> susie: the u.s. government and u.s. treasuries has always been a positive bias by investors all around the world. do you think other countries are still interested in investing in the u.s.? >> i think they have to be. countries like china and other surplus nations such as brazil basically have to use that money to buy treasuries. they do it in order to maintain and to fix their own currencies relative to the dollar, to make sure that those currencies don't depreciate and therefore to gain a trade advantage, so china basically has to buy treasurys, but at the margin, that's the critical element to investigate,
at the margin, china, brazil and other countries are looking for not only other countries in terms of their currencies and their debt but commodities. real assets as well. >> susie: we got a weak manufacturing report today. we got a weak g. d.p. report showing weakness in the u.s. economy friday. this friday we have the july jobs report. how are you investing ahead of that? >> well, we're investing with a will rogers adage in mind. that is, to make sure that we're more concerned about the return of our money as opposed to the return on our money. with returns so low, you want to make sure that you get your money back, so we're investing in what we call safe shirt, clean-shirt economies -- those would be countries with cleaner balance sheets like canada, like australia, like brazil, and believe it or not even mexico has half the debt of the united states with much higher interest
rates, so there are alternatives in high-quality space relative to the united states where an investor in bond terms can earn higher yields. >> susie: how much of your portfolios are still in u.s. bonds? >> the united states still represents about 80%, susie, and that would be, i think, a little bit underweight relative to most investment managers. the markets these days, however, are going global. it's a global economy. there are global choices, and thank goodness, because with the yields that are represented by treasurys it's incumbent upon managers not only to make sure that that principal is safe but that you earn a higher return. >> susie: bill, we have not heard much from ben bernanke during this whole debt debate in washington. the federal reserve has a policy meeting next tuesday. is there anything that the fed can do to boost the economy and its growth? >> well, i think there is.
that's called quantitative easing part three, and in addition to the meeting next week there is an important meeting in jackson hole later in the month. i think fed officials will be discussing potential changes in terms of their policy statement. it's important that the language connotes an impression that the fed will stay at 25 basis points in terms of their policy rate for an extended, extended period of time and that's -- >> susie: but in terms of action. in terms of action. >> no, i think it will basically be language, i don't think there will be any definitive action. >> susie: we're going to have to leave it there, bill. thanks so much for coming on the program. we have been speaking with william gross of pimco. >> it would be a crisis of biblical proportions. >> tom: still ahead tonight, i talk with the chief medical officer of one of the nation's biggest public hospital systems about the uncertainty that continues even with a debt deal. >> susie: tom, the dow went up
140 points, then it went down 145 points. we talk about whipsaw and volatility, we haven't seen anything like that in more than a year. >> tom: and we haven't seen the string of down days for the dow jones industrials since last june, as a matter of fact, susie, tough day no doubt for shareholders despite the likelihood of a debt deal. let's look at tonight's market focus. after the initial relief rally on the debt limit agreement, stocks fell into the red. and stayed there. health care stocks led the selloff over worries about spending cuts to medicare and medicaid. this health care sector exchange-traded fund fell more than 1.5%. volume was heavy, as it is at its lowest price since mid- april. drug maker merck was the biggest loser among dow industrial stocks, off 2% on more than twice its average volume.
takign down to springtime prices. hospital operators really got hit. h.c.a. is the largest by market capitalization. its stock price shrunk by 6.5%. look at this move lower here today! while medicare does not face immediate cuts, if there is no agreement on further cuts, medicare payments would be slashed. medicare did announce an 11% cut to payments made to skilled nursing facilities. kindred healthcare lost almost a third of its value on that news. skilled healthcare group dropped more than 40%, and sun- healthcare fell by more than half-- off 52%. health care landlords got hit as well. these three real estate investment firms invest in long- term care facilities. nursing homes and whatnot. omega fell more than 9%. healthcare r.e.i.t. was off 8.5%. h.c.p. dropped almost 6%. meantime, it was a solid quarter for health insurer humana, easily beating profit estimates. the company also lifted its outlook for the rest of the year
thanks to its growth medicare business. but growing that business in light of the debt deal may have hurt its share performance today. as we can see. the stock fell 3% as volume more than quintupled. this is a four-month low tonight. shares in home and auto insurer allstate were in good hands today, finishing up more than 2%. last, week the stock dropped to its lowest price since its 52- week low last august. allstate posted a smaller-than- feared quarterly loss. catastrophic losses stemming from the springtime midwest tornadoes topped $2.3 billion. telecom stocks were the strongest today. tomorrow, at&t may be able to add to today's almost 1% gain. because after the closing bell today, the company announced it was selling its stake in a mexican phone company, raising
$1.4 billion into the treasury and adding up to three cents per share to its earnings. also helping telecom? could have been a $900 million deal. shareholders of telecommunications services firm paetec will get $5.59 per share from windstream. paec stock closed below that buyout price. windstream was off a fraction. and that's tonight's "market focus."
>> tom: the debt ceiling deal spares government health plans-- medicare and medicaid-- from any immediate changes. that's the good news for those patients and their medical providers, but the deal does mean more uncertainty for them. >> i do home care services, physical therapy, and i think that that is something is going to be definitely scrutinized a lot more. >> reporter: susan murtha is a physical therapist assistant working with patients in their own homes. many of her patients are on medicare and she worries as health care spending comes under more pressure, certain treatments will be seen as less necessary. one of murtha's patients is rona bartelstone's husband. rona is a senior vice president at senior-bridge. that company works with medical providers to get care to patients in their homes. >> i just think there should be concerns about the impact of the anxiety on older adults who are already frail and compromised. they may already have many concerns about their own ability to care for themselves. this is not about numbers, this
is about real people. >> reporter: dr. michael bulter knows those patients and the money. he's chief medical director at jackson health, a public hospital system in miami. medicare and medicaid combined are responsible for over half of jackson's revenue. >> though we discuss it in terms of millions and billions of dollars, that these are services that are being rendered to people in a daily basis that you're talking about... who are most vulnerable and most at risk who have limited alternatives. >> reporter: dr. bulter acknowledges the rate of growth for health care spending is unsustainable. he worries politicians want to reverse that trend too fast. >> this has been the standard model for decades, and they expect changes to occur on a one- to two- to three-year basis for something that has been going on for decades is going to be very hard to do in an orderly controlled fashion. >> reporter: it's a concern echoed by those working directly
with patients, such as muthra the physical therapist assistant. >> it may not be a critical thing that or need the physical therapy... or it's no considered critical... but its definitely in the long term is necessary... and if we don't have it, i'm not really sure... it's a scary thought. >> tom: while the debt deal could go after federal health care spending in the second round of cuts, if there's no agreement on those cuts in 2013, medicaid would be left alone while medicare would face automatic reductions. >> susie: moving along, here's what we're watching for tomorrow: the personal income and spending numbers for june are released, and we'll see quarterly results from cbs, coach, pfizer, sirius xm radio and toyota motor. also tomorrow, speaking of autos, we'll see how the big automakers fared in july as the industry reports its monthly sales numbers.
big job cuts at h.s.b.c. holdings-- that's the parent of europe's biggest bank, h.s.b.c. it announced 5,000 cuts today, and said it plans to eliminate an additional 25,000 positions by the end of 2013. the moves would cut about 10% of the company's global workforce of roughly 300,000 people. competition is one reason the bank is exiting the retail banking business in russia, poland and the u.s. >> tom: big problems for the smallest city in the nation's smallest state. central falls, rhode island, today filed for bankruptcy protection. the tiny town's finances have been under state control for over a year, but a state- appointed receiver was unable to implement the cuts needed to clean up the city's finances. central falls has $21 million in outstanding debt and $80 million in unfunded pension and health benefit obligations to current and former city workers.
>> susie: after a whirlwind weekend of wheeling and dealing on capitol hill, the deal and the debate have left tonight's commentator wondering, "what just happened?" he's democrat jared bernstein, senior fellow at the center on budget and policy priorities and former economic adviser to vice president joe biden.
>> i'm happy to announce that we finally appear to have reached an agreement on raising the debt ceiling. here are three lessons i take from the really-quite-terrible great debt ceiling debate of 2011. first, a small but influential group of extreme conservatives are so intent on shrinking the federal government that they would credibly threaten national default. second, democrats, including the president, do not have a strategy to counteract such extremism, so they accepted a plan far less balanced than they would have liked-- the final deal could well turn out to be $3 trillion in spending cuts over ten years, with no revenue increases to balance the cuts. third, and perhaps most importantly, this debate took place in an information vacuum. most americans can't judge the deal, because they don't know its costs and benefits. what does it mean to cut $3 trillion in government spending? how will it affect retirement security? education? jobs in the short run and investment over the long run? on the benefits side, how much will it reduce the deficit, and
can we really get on a healthy fiscal path without some new revenues? i fear not. we can and should all breathe a collective sigh of relief this morning as the specter of default is behind us. but what have we accepted in its place? i'm jared bernstein. >> susie: tomorrow night, we'll get the conservative response. david keating of the club for growth joins us for a commentary on what the debt deal means to him. >> tom: that's "nightly business report" for monday, august 1. i'm tom hudson. the house has begun voting. good night everyone, and good night to you too, susie. >> susie: good night tom. i'm susie gharib. we'll see what happens on that vote tomorrow. good night everyone. we hope to see all of you again tomorrow night. "nightly business report" is made possible by: