tv Nightly Business Report PBS June 23, 2012 1:00am-1:30am PDT
>> this is n.b.r. >> tom: good evening. i'm tom hudson. susie has tonight off. lower credit ratings for several big banks could wind up costing their customers. the supreme court ruling on the health care reform law is due next week. tonight, we look at what the outcome could mean for two small businesses. and general motors is growing in russia. that and more tonight on "n.b.r." the outlook for the biggest of the big banks in the u.s. and europe isn't pretty, at least according to credit ratings firm moody's. it cut the credit ratings of six big u.s. banks late yesterday, months after warning it would do so. but investors mostly shrugged off the worries even though the action threatens to make banking more expensive for customers.
suzanne pratt reports. >> reporter: of the five u.s. banks downgraded by moody's, citi, j.p. morgan chase and bank of america deal directly with consumers. today, people were still trying to figure out what the move means for them. >> i'm familiar with the issue. i just read the headline l+s1 night. i wasn't that concerned until now. >> yeah, it's kind of scary, like i wasn't expecting to hear that. >> actually, it doesn't really change anything. you're not really making any money. >> reporter: experts say there's no reason for consumers to fret about the safety of their money. what they should be watching is their banks' bottom lines. some companies have already estimated the downgrades will cost them billions of dollars. and, the banks might try to make up for the lost revenue by passing costs on to customers, either in fees or higher interest rates to borrow money.
>> what's happened at these banks is profitability has been under pressure. and, as profitability has come under pressure they are looking to try to get fees where they can to offset loss of profits in other areas, whether it's this derivative market globally or just right here. >> reporter: since the financial crisis, many banks have raised fees to defray the costs of new regulations. looks like higher fees could be here to stay. suzanne, "n.b.r.," new york. >> tom: still ahead, in february he predicted a 20% drop in stocks. is tonight's "market monitor" sticking to his forecast? economist harry dent will join us. "nightly business report" is brought to you by: captioning sponsored by wpbt
>> tom: credit ratings agency moody's may be worried about big bank profitability, but that didn't hurt today's stock market action. neither did business confidence in germany falling to a two-year low. at the closing bell, the dow was up 67. the nasdaq gained 33. the s&p 500 was up 9.5. today's action capped off a mixed week for the major indices. the dow fell 1% this week. the nasdaq gained 0.7%. the s&p 500 was down 0.6%. on monday, spain's government will make an official plea for money to shore up its failing banks. it's been estimated spanish banks need $77 billion of the $125 billion in aid that has been offered from the european union. more on the business of banking. mike mayo is a banking analyst at c.l.s.a., a hong-kong based investment firm.
he's also author of "exile on wall street: one analyst's fight to save the big banks from themselves." the threat pose bid spapish banks and the likelihood of a bailout in the next couple weeks to u.s. banks. >> well, when spain sneezes or when europe sneezes, the u.s. can catch cold. it's not the direct exposure of u.s. banks, but it's the indirect, unknown, posher, the domino effect so to speak. so we're all on watch on what's taking place in europe. >> tom: we did have one kind of unknown get some clarity late yesterday. the credit downgrades on the part of moody's to a half dozen u.s. banks. what's the threat to shareholders? we didn't see much of a stock reaction today. >> no, not at all. it's been five years since the crisis and five months since moody's said they were looking at the banks. so this was mostly anticipated. but isn't it a sign of the times when the large banks can be downgraded not one notch but two notches and everybody
breathes a sigh of relief. >> tom: talk about it's not being as bad as feared, right, is that essentially take away? >> yes, in the short term with the rating downgrade. but we still have the situation in europe as you talked about. we still have more of a risk mentality for capital marketss and decelerating u.s. growth. so it could be a false sense of relief over the medium term. >> tom: to the weaker u.s. economic growth, this gets into a negative cycle that you and others have pointed to as worry some. the weaker economy feeding into government budget troubles, that could put the government credit rating at risk, which could hurt banks that hold a lot of treasuries, which hurts the economy, again and the cycle continues. how do banks try to stop this cycle from repeating? >> you're absolutely right, it becomes a vicious cycle. you cannot separate the health of the banks from the health of the overall economy or the government. and to the extent that the banks aren't able to lend as much as they did in the past,
that slows down economic growth, slows down the receipt of taxes by the sgo. you have a downward spiral. so the best solution is additional realism, let's accept the slower growth and have realistic policies by the government. >> tom: for instance like what? is realism also more capital for banks? are you addressing that? >> well, first let's all get on the same page. there's many chefs in the kitchen right now, all trying to find the right recipe for the largest banks. have you the rating agencies as you've talked about today, have you the regulators, saw that with the j.p. morgan hearing this week. you have politicians, and they're all talking from different scripts. so for starters let's be on the same page. but i would say let's have less leverage, that is more capital to the largest banks, let's make sure we go back to 1950's type banking, when the banks were stronger, they had more stability with their earnings and you didn't have to worry about the health of the banks from one day to the next. >> tom: does that also mean
lower profits for shareholders? >> lower profit, lower margins, less growth is not the end of the world. and this is the one point that i think so many people are missing. that the interest of taxpayers can be on the same page as the interest of investors. because when you have strong balance sheets, stable earnings, stock prices go up, while the taxpayers are protected more. >> tom: mike mayo on the business of banking, mike which is the investment firm and broker age csla. thanks, mike. >> tom: next week the u.s.
supreme court is due to deliver its judgment of the nation's health care reform law. the decision will define the next steps in trying to get a handle on rising health care costs. sylvia hall tonight talks to small business owners about what's at stake for them and how a decision could affect their bottom lines. >> reporter: especially in the summer heat, this job is a tough one. that's why brett mcmahon thinks it's important to offer his employees a strong health care plan. but he thinks the affordable care act steps on his toes. >> i hope they're wise enough to just kind of toss the whole thing and say "let's start over again." >> reporter: his biggest concern is the individual mandate-- the part of the law requiring everyone to have health insurance. if the law stands, companies with more than 50 employees will have to offer appropriate insurance or pay penalties. >> i don't believe for the life of me that the fine-- the $2,000 fine is even remotely close to covering what health care actually costs. i can tell you that it's almost
an order of magnitude too low. >> reporter: he worries the fines don't solve the problem of rising health care costs, but instead give employers in his industry the option of just paying the fines and dropping health coverage altogether. he worries it would become the industry norm. >> but there are plenty of businesses so small they wouldn't have to offer insurance under health care reform. those business owners view the law a little b differently. >> reporter: laura smith can't afford a health care plan for her 13 employees. but, she wants her employees to be able to afford coverage on their own. that could cut down on her employee turnover and training costs. >> if people have a stable lifestyle where they have health insurance, if they're able also to pay their bills, pay their rent, they're going to stay. >> reporter: they may not agree on the affordable care act, but both employers say rising health care costs are a big burden on their businesses. a burden that top health consultant paul keckley says just can't last. >> regardless of what happens, with the supreme court and the affordable care act, the health system reform will continue, probably accelerate.
because we can't afford it. it's costs are unsustainable. >> reporter: keckley says whatever form our health care system takes in the future. employers will need to get wise about the health industry and how it works. then, they can help reduce demand on the system and bring costs down. sylvia hall, "n.b.r.," washington. >> tom: it has been a big week for the u.s. federal reserve. it extended it's latest effort to boost the u.s. economy as it remains on guard against european financial problems washing ashore in the u.s. financial system. this week, we have looked the
historic role of the federal reserve and what it is doing today to help the economy. greg ip is the u.s. economics editor at the economist. greg, it's always great to have you. has the bank been forced to deal with problems that it wasn't designed to tackle back in the last century? >> i'd say what you have is a situation where the circumstances it's facing are such that the tools it has simply are not up to the task. think about it. through the whole post-war period there was never a time when unemployment was so bad that they couldn't deal with it with short-term interest rates. but they've had their short-term interest rates at zero since the end of 2008 and we're still stuck with high unemployment. so they've gotten more creative with i count seven major unconventional types of monetary policy, of which this week's was the seventh. but what's interesting is that eve installment gets a little less aggressive tonight last one, and the reason is i think these are like experimental
drugs and the fed is very worried about the side effects. so you get the situation where you become much more careful about using them, because you're afraid the side effects are basically worse than the benefits you'll get from them. >> tom: brings up an interesting point about how much has changed with the federal reserve policy makers in the last four years. how has the credit collapse and its response changed the institution? >> i think you've seen that the institution become much more transparent, things like the press conditions we had from ben bernanke this week has become more consensus driving, so they are publishing all these forecasts from the policy makers. that has in some ways made the job harder, bought the chairman has to work harder to get all his colleagues to agree with something before he can proceed. i suspect if he were making decisions by himself he would have moved more aggressively by this point, but he has to be deferential to his colleagues. >> tom: have we seen the limbs of the federal reserve's power as well? we have heard the chairman go to congress and essentially point his finger at congress
and say they need to do more for the economy. >> we haven't seen the limbs in the sense there's nothing more they can do. i think the odds are quite high that they will do more. what you are in is a situation of diminishing returns where each new round of benefit achieves less benefit. what good is it if the people who need credit cannot borrow because they want qualify. that's why chairman bernanke would like congress to act. >> tom: we appreciate you joining us tonight, thank you so much. >> sure, any time. >> tom: greg ip. >> tom: g.m. is cranking up production in russia. the company is expanding a plant in st. petersburg, doubling production there within three years and adding roughly 1,500 jobs. while russia isn't as big a market as china or the u.s., it's a market that is still growing. diane eastabrook has more. >> reporter: g.m. executives laid the foundation this morning on the st. petersburg expansion, calling it one of the company's most significant projects.
the auto manufacturer is investing $1 billion in its russian operations over the next five years to boost production of chevrolet and opel vehicles. >> the burgeoning economy and rising personal incomes have spurred strong demand for passenger vehicles. today, few markets are growing as quickly as the country of russia. >> reporter: while russia is growing, it is still a small market when compared to more developed regions like china, the u.s. and western europe. standard and poor's auto analyst robert schulz thinks the market has tremendous potential despite fears about a global economic downturn. >> vehicle sales tend to be tied to g.d.p., so if the economy was to soften, it would hurt sales, but we think it's still an emerging market, but a place they're not putting so much money into that the investment would put the company at risk if it came to that.
>> reporter: g.m. opened the st. petersburg plant four years ago. it hopes within the next few years this plant and another in russia will more than triple production in the country from 98,000 today to about 350,000. diane eastabrook, "n.b.r.," chicago. >> tom: while g.m. is expanding in russia, it's recalling more than 400,000 of its chevrolet cruze sedans. the recall affects chevy cruzes built in the u.s. between 2010 and 2012. owners will be notified next month about a 30-minute fix, keeping flammable liquids from being trapped in the engine. but this isn't the only vehicle in the spotlight today. the national highway traffic safety administration says it received complaints about a power steering problem with 2011 ford explorers. federal safety regulators also are looking at 2011 chrylser 200 models with 3.6 liter engines. some drivers report the engines stalling unexpectedly at low no injuries have been reported in any of these cases.
u.s. stocks fought back against the bank credit downgrade late yesterday and anticipation of a spanish bank bailout request early next week. the s&p 500 spent the entire session in positive territory after yesterday's selling rout. buying interest picked up as the day wore on with the index hitting its highest price of the day less than ten minutes before the closing bell. stock volume was heavy thanks to expiration of futures and options. almost 1.6 billion shares traded on the big board. 3.4 billion on the nasdaq. leading the market higher: technology. the information technology sector recovered 1.2%. the defensive-focused healthcare sector gained 1% and despite the bank credit downgrade, the financial sector rained 0.9% payment processing firm visa was among the tech stocks behind today's sector rally. shares jumped 4.6%. volume doubled with the stock moving up to a new high.
the stock has battled back since late may when the company reported a drop in transactions using visa cards in the u.s. first solar was shining up 9.2%. the company got the okay to resume building a big solar farm in southern california. the company plans on operating the site when it is operational and generating electricity. the stock has suffered from project delays, but also a global decline in solar panel prices. within health care, investors were looking for growth from biotech firms. the sector leaders were life technologies, rising 5.3%. and celgene rebounded 3.7% after yesterday's sell-off. celgene pulled its application for a blood cancer drug over concerns from european regulators. investors seemed relieves today the credit downgrade of big banks wasn't any worse as many of the banks effected were higher. bank of america was up 1.5%. j.p. morgan rallied 1.4% and morgan stanley recovered 1.3%.
despite the higher market today, there still were warnings, including one from truck-leasing giant ryder. the firm lowered its earnings outlook. the company's fleet management business gets the blame. shares were hit hard, down 13%. volume jumped more than five fold with the stock falling to its lowest price since october. it expects weaker demand to continue through the end of the year. a different type of transportation company-- carnival cruise lines fell 2.7% on heavy volume. earnings were hurt by fuel hedging and revenues were disappointing. still, the cruise ship operating increased its financial outlook thanks to lower fuel prices. all five of the most actively exchange traded funds were higher, led by the funds tracking the russell 2,000 index and the nasdaq 100 index. those funds regained 1.1%. and that's tonight's "market focus."
>> tom: in february tonight's market monitor predicted a 20% drop in stock prices before end of the year. harry dent is back with us. harry is president of h.s. dent. still sticking with the 20% move down before the end of december? >> yes, we are. we think this is likely to happen end of summer, early fall because the crisis in europe seems to be building. >> tom: that's the driver here, so how is that going to manifest itself in the u.s., wholesale selling or are there specific sectors you would still hold onto? >> we like natural gas here. we tend to like agriculture,
things like that but stocks in general move together. in europe, asia, the united states, small caps, everything. so we actually gave a cell signal this week on thursday morning, saying look, the up side is maybe 10% in our best scenario, the down side is 50 to 70% down, we see another crash, again with our book title that's obvious. because we have this major demographic slide, the baby boomers are aging around the world, you're going to save more, spend less. >> tom: we're seeing this in the work are participation rates in the labor field where there's fewer people available as we get older. >> some peep think it because jobs are bad. when people's kids get out of college, the second worker tends to say i'm going to work part-time or not at all so, some of this is voluntary, but people spend less from age 50 on and that's going to hit more and more in the coming years so, there's no way to stimulate our way out of it. >> tom: now works that in mind you said you had a cell signal
this week. one of the recommendations have you is to go short the s&p 500, this etfsh would profit one to one as the s&p moves down, this would go up one. is this a conservative play for you? >> you know, i think conservative investors should be in safe short-term bonds and sleep at night. but for investors that have made money investing stocks on the way up, this is the way to make money on the way down. >> tom: how much do you allocate in the portfolio on the short side? >> i'd say maybe 50%. it depends. for a normal growth aggressive investor, but we also have people in uup, which is an etf that tracks the u.s. dollar, the u.s. dollar has been going up in the last year. >> tom: you also are suggesting going short big european stock indices, and this etf is leveraged, for every one point that the european index goes down, this goes up by two, more aggressive. >> yes, the reason we
recommend this, it's the most highly traded etf in that. it's just the best one to trade. but we see that in the short term the pressures are building in europe. yet everybody knows that there was 1.3 trillion dollars in ltro, call that 2 e 2 from europe, i was surprised how fast that fizzled. under the table, there's been 156789 trillion in loans, ela 270 billion from te cb to help banks in spain and greece that are getting withdrawals. so they can make those, they can meet those withdrawals, and 1.25 trillion from the central banks in places like germany, most of it from germany, to the weaker banks saying you don't have to pay us for these trade imbams for now because we know you're in trouble, but how long can this go, so people are in the aware how much debt is building up in europe. so i think it's going to start to come to a head in the next few months. >> tom: what would make you quickly reverse that short call?
>> it's pretty hard, because even this morning europe came out in the ecb, well, we're going to do a little more, make loans easier. they have done everything they can do to stem this crisis. and just look at reality, greece had a problem two to three ears ago, several years ago and they piled more and more bailouts, which is debt, more and more short-term loans and guess what, greece is more in debt, worse economy. how do you get out of this? >> tom: you're going to stick with the short call do you have positions in the funds we mentioned? >> yes. >> tom: all right, harry dent with h. s. dent. >> tom: next week "n.b.r.": food and finance. it's the foodie craze, from t.v. to housewares. we'll look at the business of food, whether it's from a truck or your kitchen. also next, week we'll learn the fate of the health care law. the supreme court's decision will have wide ranging effect, from politics to your pocketbook. finally tonight, selling fantasies. it's an important part of business, especially those grounded in reality.
here's author and educator lou hecker. >> my wife and i decided we needed a new refrigerator. we talked budget and what features we wanted and headed for the main appliance chain. a salesman greeted us immediately. "we're looking for a refrigerator," i said. "how much money do you have," he spurted. seemed like a funny early question to me, so i replied, "you mean, how much do i have total?" i smiled. he didn't. he rolled his eyes and motioned us back to that section of the store. we didn't like what we saw or the way we were treated, so we went to a smaller store. hmmm, same questions, same departure without a purchase. we headed for one of the major national appliance sellers that night. i knew some of their evening help were school teachers by day and sales people by night. "we're looking for a new refrigerator," i told the pleasant-looking fellow who approached. "well," he smiled impishly, "tell me about your dream refrigerator and let's see if i can fulfill your fantasy!" we both laughed, told him what we were thinking. "oh, man, this is great," he continued.
"you're going to get your wish!" did we buy from him? yes? did we spend more? yes, about $300 more. were we thrilled? very much so. do you know what business you're really in? do your sales people? i'm lou heckler. >> tom: that's "nightly business report" for friday, june 22. goodnight, everyone. thank you for watching and we'll see you online at: www.nbr.com and back here next week. "nightly business report" is brought to you by: captioning sponsored by wpbt