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118> <Type: SHOW> <Head: NIGHTLY BUSINESS REPORT for August 6, 2013, PBS> <Sect: News; Domestic> <Byline: Susie Gharib, Tyler Mathisen, Diana Olick, Hampton Pearson, Courtney Reagan, Phil LeBeau> <Guest: Dean Baker> <Spec: Barack Obama; Economy; Financial Services; Housing; Policies; Energy; Internet; Utilities; Safety; Business> <Time: 18:30>
ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you by --
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Home economics. The president wants to phase-out the two government companies at the heart of the financial crisis, Fannie Mae and Freddie Mac. Will the plan make mortgages costlier and harder to get? And is that the price of getting Uncle Sam out of the housing business?
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Power outage. How vulnerable are the nation`s utilities to a cyber attack. Experts say it`s not a matter of if but when. And the cost to you could be high.
MATHISEN: Compete and beat. How mom and pop manufacturers once left for dead are making a big come back and competing successfully against foreign rivals.
Our "Made in America" series continues tonight on NIGHTLY BUSINESS REPORT for Tuesday, August 6th.
GHARIB: Good evening, everyone.
President Obama taking aim today at boosting homeownership by proposing an overhaul of the nation`s massive mortgage market. His targets: long-time political hot potatoes, mortgage companies Fannie Mae and Freddie Mac.
Diana Olick joins us from Washington with more on what all this might mean.
Diana, over to you.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Suzie, it should come as no surprise that mortgage finance is front and center for the president as interest rates are rising, some say credit is the last barrier to full housing recovery.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Our housing market is beginning to heal.
OLICK (voice-over): President Obama returned to Arizona, one of the hardest hit states in the housing crash four years after using this desert backdrop to announce his housing bailout. It was part victory lap, part call to action.
OBAMA: We`ve got to turn the page on this kind of bubble and bust mentality that helped to create this mess in the first place. We`ve got to build a housing system that is durable and fair and rewards responsibility for generations to come.
OLICK: The president`s sights are set on reforming the nation`s $10 trillion mortgage market, making the profits easier for home buyers and putting private capital at the center of housing finance while pulling government out. That means a gradual wind down of giants Fannie Mae and Freddie Mac, which together with the FHA, now back over 90 percent of new loans.
OBAMA: I believe that our housing system should operate where there`s a limited government role and private lending should be the backbone of the housing market.
OLICK: The president`s plan to make investors pay up front for a limited transparent government guarantee of mortgage securities mirrors a bipartisan bill now in the Senate. That bill put forth by Senators Corker and Warner so far has the most support of any proposal.
JARET SEIBERG, GUGGENHEIM SECURITIES POLICY ANALYST: We`re really at a critical time for housing finance reform. If they can`t get a bill through the Senate Banking Committee this fall, you may be able to write off housing finance reform for the entire Obama administration. In many ways, it`s now or never.
OLICK: The concern is winding down the mortgage giants will inevitably make loans more expensive. Low rates have been credited for much of the housing recovery.
VICTOR CONTREAS, COLONIAL REALTY: The fact interest rates were so low, it made buying a home affordable for a lot of people.
OLICK: Now, in addition to overhauling mortgage finance, President Obama called on Congress to allow borrowers who do not have government backed loans to refinance through Fannie, Freddie and the FHA. That would transfer risks to taxpayers yet again, something Congress is unlikely to do -- Tyler.
MATHISEN: Diana, I got a complicated double-header question for you. If Fannie and Freddie stop buying mortgages from banks that want to get them off their balance sheet and thus ensuring a continuous flow of lending capital, who would buy them? And second, you say the president`s plan would require investors to pay up for a limited government guarantee of mortgage backed securities. How would that work, and who`d pay the cost?
OLICK: Well, to start with your first question, it would be investors who would have to buy these loans. Right now, there is very little private market. There is some in the jumbo loan arena. But for conventional loans, really, it`s Fannie, Freddie, and the FHA.
So, the idea is to get private investors back into markets. The said, the second part of you question is, how much would it cost and how would it all work? Again, you know, the devil is going to be in the details.
These are broad spectrum proposals. There`s still a lot going on in Congress and we don`t know how it would work but we do know that it`s going to have to be carefully done and there`s going to be all kinds of overlays for investors and it could, critics say, at least, make mortgages more expensive by passing those costs that investors have unto borrowers and higher interest payments.
MATHISEN: Diana, thank you very much. Appreciate your report tonight.
Joining us now with more on this gnarly topic is Dean Baker. He`s co-director at the Center for Economic and Policy Research.
Dean, the president says he wants to end Freddie and Fannie, or at least their business model. And he says private capital should be the backbone of the housing market. Do you agree?
DEAN BAKER, CENTER FOR ECONOMIC AND POLICY RESEARCH: Well, it`s kind of a mixed story here, because he wants private capital. And, in fact, private capital is there in the sense that who buys the mortgage-backed securities. Obviously, that`s private capital.
But he wants it to be issuing the mortgage-backed securities, which is what we had during the peak of the bubble. You know, Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) were issuing mortgage-backed securities. But this time, they`ll actually be guaranteed by the government. So, he doesn`t want to get the government out. He still wants the government to guarantee the mortgage-backed securities with some first dollar payments, first dollar losses absorbed by the issuers and investors.
So, it`s a mixed bag and to my mind it`s problematic because you get a lot of moral hazard issues here with private profit, government risk.
GHARIB: Dean, what does all of this mean to the person who`s looking to get a mortgage? Is this going to be more expensive? Is it going to be more available? You know, what does it all mean?
BAKER: It`s virtually guaranteed to be somewhat more expensive. I mean, in your introduction, you`re saying that the private market has virtually disappeared, that`s because they can`t compete with Fannie and Freddie. It`s not as though someone wants to issue mortgagebacked security today, they can`t go right out there and do it. But they can do it in a way to compete with Fannie and Freddie.
So, if we get them out, we`re going to see higher costs, because we know, let`s say it`s Goldman Sachs (NYSE:GS) issuing it, they`re making a profit on it. They have highly paid executives. All those people want money, that`s going to add to the cost of mortgages.
MATHISEN: There are an awful lot of people, I suspect, who would say that the government really has no role or no rightful role in the mortgage market at all, either standing behind companies as it did implicitly and then, factually, in the case of Freddie and Fannie or to guarantee mortgage-backed securities at all.
What do you say to that? Why should the government be involved in subsidizing or standing behind the mortgage market at all?
BAKER: Well, I think it`s a very good question. What I`d say is that the government can be very efficient in creating a secondary market, which we know from the history dating back from the early days of Fannie Mae, we know from the present, as government companies, when you get this mixed story with the government guarantee I think in many ways, you have the worst of all worlds. I think it would make much more sense to say, just leave it to the private sector.
And we know it can do it. I mean, we have the jumbo market. You`re talking about that a moment ago. So, it`s not as though we won`t have mortgages and even 30-year fixed rate mortgages. People would pay a little bit more for them.
So, basically, I see this as a story the government subsidizing mortgage-backed securities. I just can`t really see how that`s good public policy. You want to subsidize homeownership? Maybe. Mortgage-backed securities? A little hard to see.
GHARIB: As you heard in our report, you know, one of the people that Diana interviewed said it`s now or never to put this overhaul through. Will it happen? Do you think that we`re going to get some kind of a -- you know, reform of Fannie and Freddie?
BAKER: If I had to take a bet, I`d say no. The details, as you noted, are very complicated and I hope people ask the good questions. I don`t think they have a plan that gets rid of the moral hazard problem. That`s what everyone has to ask about. We don`t want the government taking the risks so that private banks could profit, as has happened in the past.
MATHISEN: All right. Dean Baker, thank you very much. Dean is with the Center for Economic and Policy Research.
GHARIB: Comments from two Federal Reserve officials weighing heavily on the stock market today. The president of the Atlanta Federal Reserve Bank Dennis Lockhart said the central bank could start reducing its bond- buying program as soon as September. But he cautions the Fed might wait longer if economic growth fails to pick up in the second half of this year.
Then, later in the day, it was the Chicago Fed president`s turn, Charles Evans, said much of the same stuff. He sees a pull back in the stimulus program sometime later this year, also, depending on the economic data.
MATHISEN: Well, those comments by Lockhart set the tone and stocks never really recovered, but they weren`t the only factors keeping the lid on things. IBM, the worst performer in the Dow 30, falling on a downgrade to sell. Big Blue also confirms it is requiring its hardware workers to take a week off with reduced pay.
Also, mixed signal on the jobs front, according to government data. The number of job openings in June hit its highest level in five years.
All this added to a second day of losses for stocks. The Dow fell 93 points to close at 15,518. It was the biggest point and percentage decline since June 28th. The NASDAQ was off 27 and S&P was down nearly 10.
GHARIB: More legal trouble for Bank of America (NYSE:BAC). The Department of Justice filing two civil lawsuits against the bank for what it calls misleading statement, related to the sale of $850 million in residential mortgage-backed securities. The securities date back to the beginning of the global financial crisis, January of 2008.
Just last week, Bank of America (NYSE:BAC) warned investors about possible new civil charges linked to the sale of one or two mortgage bonds.
MATHISEN: And UBS has agreed to pay about $50 million to settle charges it misled investors. The SEC is accusing Switzerland`s biggest bank of violating securities laws related to the sale of risky mortgage bonds. Under the terms of the settlement, UBS did not admit any wrongdoing.
GHARIB: Cybersecurity is topic A in Washington these days. And today, attention turned to the nation`s power grid.
Security officials from some of the largest utilities met to discuss the threat of a cyber attack and figure out how to prepare for one.
As Hampton Pearson reports, most believe it`s not a matter of if but when.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voiceover): Top security officials from some of the nation`s largest utilities told a Washington forum it`s only a matter of time before the power grid is hit with a major cybersecurity attack. One official said his company views preparations on par with natural disasters.
CHRIS PETERS, ENTERGYCRITICAL INFRASTRUCTURE VP: We have to treat the cyber threat with the same respect that we give to forces of nature that impact our grid -hurricanes, floods, ice.
PEARSON: The power grid links some 3,200 utilities, thousands of generating units, a nationwide transmission and distribution network serving millions of customers. The kind of prolonged power outages and economic devastation that followed super storm Sandy our experts say were the worst-case scenario following a major cyber attack might look like.
DOUG MYERS, PEPCO: The actual starting point of a cyber event may not be known into well into the event and the systems that a utility relies upon for critical operations may be the targeted attack.
PEARSON: Better information technology and more data sharing between utilities and the federal government are on the cyber security short list.
But former NSA director, Michael Hayden, says the cost of beefing up cybersecurity is a challenge for the utility industry.
MICHAEL HAYDEN, FORMER NSA & CIA DIRECTOR: It`s really hard to build a business case for this. OK? I mean, it really is. OK? So it`s more of a broader responsibility case.
PEARSON (on camera): At some point, increased cybersecurity for the electric grid will mean higher costs for the rate fares, and the industry fully realizes that, in fact, could be a very tough sell to its customers.
For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.
GHARIB: Still ahead on the program, investors are eating up food stocks. Some are hitting all-time highs. Others are struggling. We`ll separate the winners from losers.
But, first, here`s a check on how the international markets closed today.
MATHISEN: The war of words between CBS (NYSE:CBS) and Time Warner (NYSE:TWX) heats up. CBS`s CEO Les Moonves fired back at Time Warner (NYSE:TWX) Cable`s latest proposal to end its blackout of CBS (NYSE:CBS) network, dismissing it as a publicity stunt. In a statement released today, Moonves said, "After reviewing your letter, we concluded that there is not a sincere or helpful proposal in it."
But Time Warner (NYSE:TWX) Cable spokesman said they were disappointed and that the offer was sincere. The outage is affecting 3 million customers in the largest U.S. markets.
GHARIB: We`re learning more today about the deal to sell "The Washington Post (NYSE:WPO)" to Amazon (NASDAQ:AMZN) CEO Jeff Bezos. Chairman and CEO Donald Graham of "The Washington Post (NYSE:WPO)" says he knew the newspaper that his family owned for 80 years could survive and grow. But he wasn`t sure if his company was the one to do it.
Then came Bezos who called the acquisition a personal endeavor. It took just a few meetings, and the deal was done.
(BEGIN VIDEO CLIP)
DONALD GRAHAM, WASHINGTON POST CO-CHAIRMAN & CEO: We met at a conference face-to-face twice the second week in July. We spent an hour together. He asked for time to study the numbers. We spent another two hours together. And at the end of it, he said he thought he wanted to go ahead.
(END VIDEO CLIP)
GHARIB: And it looks like investors want to go ahead with this, too. Shares of "The Washington Post (NYSE:WPO)" rose more than 4 percent today, closing at 55week high, $593.
MATHISEN: We begin "Market Focus" tonight with a late day earnings from Disney (NYSE:DIS). The company says profits rose 1 percent from a year earlier as revenue grew at its theme parks and media networks that helped offset weakness from the studio division and high marketing cost for the box office flop, "The Lone Ranger", and the company now says it expects to take a fourth quarter loss on the film of nearly $200 million. The stock finished the day higher by 1 1/2 percent, to $63.05 but it fell after hours, as you see there.
Twenty-First Century Fox, Rupert Murdoch`s newly separated company, missed earnings estimates by three cents a share but revenue beat expectations, thanks to growth at the cable operations and film studio. Twenty-First Century Fox holds Murdoch`s entertainment properties. The stock closed fractionally lower to $31.29.
And Michael Kors hit an all-time high today after beating earnings and boosting its outlook. The luxury apparel maker was helped by the rollout of shops within department stores such as Macy`s and Nordstrom (NYSE:JWN) and gains over in Europe. The company also has plans to open stores in India and Brazil.
The stock up almost 4 percent to $70.39.
GHARIB: And a similar story for Fossil (NASDAQ:FOSL). Its shares surged almost 18 percent. The fashion accessory maker and retailer, which has been revamping its affordable luxury image surprised investors with better than expected earnings on stronger watch sales in Europe and Asia. The company also raised its full year profit forecast. The stock was the best performer in the S&P 500, closing at $126.55.
But investors were disappointed with American Eagle Outfitters (NYSE:AEO). Shares fell sharply after the teen retailer slashed its second quarter earnings outlook because of weak sales,
especially in its women`s department and also reported weak traffic in its stores. The stocks closed $17.57, down 12 percent.
Tenet Healthcare (NYSE:THC) also reduced its outlook for the year, citing a drop in patient admissions. This is a trend across the industry as consumers choose not to see a doctor because they either lack insurance or face higher deductibles. The company, which is buying smaller hospital operator Vanguard Health Systems, also posted a loss for the second quarter. The stock fell more than 3 percent to $42.98.
Well, are you hungry for stocks hitting new highs? Hershey, JM Smucker, Hormel and Tyson are just some of the names that are soaring this year and trading in record territory. But while investors feast on these food names, others in the group aren`t as appetizing.
Courtney Reagan tells us why.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voiceover): The average U.S. supermarket carries nearly 40,000 different products, including both national and private labels brands. Getting consumers to choose one product over another is nothing short of a monumental task for food makers. But many of these more than century-old iconic food companies are still topping the shopping lists of both consumers and investors, despite the attraction of lower prices on grocers private label brands.
TOM GRAVES, STANDARD & POOR`S EQUITY ANALYST: By offering innovative new products and by supporting their brands with marketing, these big companies are better able to fend off the threat of private label alternatives.
REAGAN: Companies like JM Smucker and Hershey have gigantic marketing budgets to offer consumers promotions and blast with advertising, to make sure shoppers know about new products and remember old favorites.
In addition to stable sales growth, food company stocks are relatively low risk, higher dividend yielding investments, as a group, food company stocks are up 30 percent so far this year, bettering the returns of the benchmark S&P 500 index. Hershey, Smucker, Tyson and Hormel hit fresh all-time highs today.
(on camera): Food companies are investing in a number of areas to make sure shoppers and investors stay hungry for what they offer. General Mills (NYSE:GIS) is launching around 200 new products this year and Hershey is expected to increase its marketing by 20 percent in the second quarter.
(voice-over): But not all food makers are tasting so good. Kellogg (NYSE:K) is blaming sagging cereal sales on too busy consumers, saying sometimes consumers don`t have time for a bowl of cereal.
The world`s largest cereal maker may also be hurting as more Americans shy away from carbs and sugar at breakfast, though, it does offer healthier alternatives.
UNIDENTIFIED FEMALE: Just try to get things that are less -- low in sugar, and low carbs.
UNIDENTIFIED FEMALE: I also like to get Special K cereal because I know it`s healthy and tasty.
REAGAN: Many think there is good news ahead in the grocery aisle, as the cost of ingredients fall. So, too, will prices.
S&P`s Tom Graves thinks lower prices could lead to consumers stocking pantries and an overall uptick in sales volume, another bullish indicator for investors feasting on food stocks.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
MATHISEN: And coming up, how a small American manufacturer is competing with and beating its larger foreign competitors. Our "Made in America" series continues with a look at the secret to this firm`s success.
But, first, how commodities, treasuries and currencies fared today.
GHARIB: Get ready for a price war for electric vehicles. General Motors (NYSE:GM) is knocking $5,000 off the sticker price of it`s new 2014 Chevy Volt. That reduces the starting price on the car to $35,000. Incentives on electric cars have been getting more aggressive as automakers try to improve sales. GM has already offered steep rebates on other versions of the Volt.
MATHISEN: And as automakers pushed to sell new cars, Americans are holding on to their old ones longer. According to Polk Research, the average car and truck currently on the road in the United States is more than 11 years old, slightly higher than last year and almost two years holder than a decade ago. It`s an all-time high.
And according to the study, the average age will continue to rise, even as new car sales increase.
GHARIB: For more than two decades, small American manufacturers have been closing shop. It`s just too hard to compete against larger foreign rivals. Today, all that is changing as more mom-and-pop manufacturers stage a come back.
Tonight in the second part of our "Made in America" series, Phil LeBeau shows us how one cabinet maker is undergoing a renaissance.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Woodways in Zeeland, Michigan, has never been busier.
SUZANNE RUDNITZKI, WOODWAYS OWNER: We added 18,000 square feet.
LEBEAU: With 40 employees working two shifts, Woodways makes custom cabinets for home and offices. This year`s sales are up 20 percent, a far cry from 2007 when Suzanne Rudnitzki and her husband bought the bankrupt company and carved out a new business plan -design, build and ship custom cabinets quickly.
RUDNITZKI: We can compete globally because a customer can call us. We can do a design and have it on the machine in an hour.
LEBEAU (on camera): Woodways and other small American shops are finding they can not only compete but actually beat larger, low cost foreign manufacturers, thanks to machines like these, which can quickly crank out precisely cut products.
(voice-over): Their CNC Machines, computer program to cut specific designs and parts -for years, these machines cost well over 100 grand, too much for many small companies, but not anymore. New CNC.com in Holland, Michigan, sells CNC machines for $40,000. Demand is so strong, it`s expanding, hiring workers. The key to its success: sourcing components globally.
TOM GALZIN, NEW CNC.COM OWNER: There is components that are from Germany, Italy, Japan. We get, obviously, stuff from China. It`s -- what we`re trying to do is to cherry pick the very best component.
LEBEAU: Automation and robotics, once feared by small manufacturers, now allows them to do more, sell more and add more workers. Still, job growth for small manufacturers has been tepid as they need to stay lean.
CLIFF WALDMAN, MANUFACTURING ALLIANCE FOR PRODUCTION ECONOMIST: Existing small manufacturers have learned that they have to sometimes turn on a dime.
LEBEAU: Suzanne Rudnitzki says her cabinet company is proof small manufacturers can adapt and grow.
RUDNITZKI: We`re inventive. We come up with new ways to use the CNC. We come up with new ways to design cabinets, and that inventiveness is what we have here in America. And that`s why we`re growing, and that`s why the jobs can be here and why manufacturing can be here.
For NIGHTLY BUSINESS REPORT, I`m Phil LeBeau, in Zeeland, Michigan.
GHARIB: And tomorrow, we continue our "Made in America" series when Jane Wells goes on a shopping spree to show us just how difficult it is to buy American in today`s global economy.
MATHISEN: And you ask, we answer. On Friday, our "Market Monitor" guest will take your questions about your favorite stocks. Tell us which one you`d like him to discuss by logging on to our Web site, NBR.com. Please do keep your question to one single stock, I know it`s hard, just one now, and include where you`re from.
GHARIB: It is hard.
MATHISEN: It is hard to resist.
GHARIB: That`s NIGHTLY BUSINESS REPORT for us tonight. Thanks so much for watching.
And remember, please support your public television station.
MATHISEN: And on behalf of your public television station, thank you very much for your support.
Good night, everybody. We`ll see you back here tomorrow night.
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