Transcript: Tuesday, September 17, 2013

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and
Susie Gharib, brought to you by —

(COMMERCIAL AD)

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tale of the taper.
Tomorrow`s Fed decision is the most highly anticipated in recent memory.
And many expect the Central Bank to start cutting back on stimulus. But
are your investments ready?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Giving back.
Microsoft (NASDAQ:MSFT) hikes its dividend and renews its massive stock
buyback. But is it enough to get investors excited about the stock again?

HERERA: Five years later. Is the mortgage market any safer? And
are consumers better protected now than before the financial crisis?

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday,
September 17th.

Good evening, everyone. I`m Sue Herrera, in tonight for Susie
Gharib.

MATHISEN: And I`m Tyler Mathisen. Welcome, everybody.

It is almost here and the world awaits. The Federal Reserve kicked
off its two-day policy meeting today. By this time tomorrow, investors the
world over will know whether Ben Bernanke and his fellow Fed heads will
slow the pace of their bond buying. Now, $85 billion a month, designed to
help the economy.

So, here is what the waiting looked like today on Wall Street. The
Dow adding 35 points. The NASDAQ up 27, closing at a fresh 13-year high.
And the S&P 500 up seven, closing above 1,700 the first time in five weeks
and closed higher for the tenth time in the past 11 sessions.

So, will they or won`t they? And what do the experts think will
happen?

Just out today, a CNBC poll of Wall Street pros predicts the Fed will
pull back on stimulus plans by about $15 billion a month. As for when — a
majority of respondents say the Fed will start the tapering tomorrow.

HERERA: And here with his perspective on tomorrow`s big Fed
announcement, and how you should position your portfolio is Russ
Koesterich. He`s the chief investment strategist over at Blackrock.

Welcome back, Russ. Good to see you.

Are you —

RUSS KOESTERICH, BLACKROCK CHIEF INVESTMENT STRATEGIST: Sue, thanks
for having me.

HERERA: Are you one who thinks that the Fed will begin to taper?
And if so, by how much?

KOESTERICH: Probably and I think it`s going to be a modest tapering,
which means somewhere in the neighborhood of about $10 billion to $15
billion. Starting the process, also recognizing the economy is still
getting back on its feet, the labor market is healing slowly. So, I think
the Fed is going to be very measured in how they withdraw monetary
accommodation.

MATHISEN: So, Russ, if this happens, as you predict, what is likely
to happen in the markets, stocks and bonds? And what should I do with my
money?

KOESTERICH: Well, couple things. First of all, the amount of taper,
again, based on the poll you referenced, I think it is well-discounted into
the markets. If the Fed does go back $15 billion, I don`t think that is
going to provoke much of the market reaction. There will be color around
that guidance, which might move investors one way or the other.

But I think the reality is we`re in an environment which is the
economy is getting better. Rates are likely to continue to rise, albeit a
slow pace. So, this means a couple things for investors. One, probably
overweighting equity versus bonds. Second of all, with equity portfolios,
looking for stocks that are less rate sensitive, which means fewer
defensives, and probably lever to more cyclical parts of the stock market.

HERERA: Russ, you said that interest rates are likely to continue to
rise. But what kind of move up are you expecting? Is it going to be slow
and steady? And if so, where`s the ceiling on rates near term?

KOESTERICH: Well, I think it`s going to be slow. Now, steady may
not be the right word, because as we`ve seen, we`re likely to have more
volatility in the bond market, giving investors adjusting to less monetary
accommodation. We don`t expect rates to melt up. So, it`s a rough, you
know, gauge. We think rates will rise towards three in 2014.

The market can live with that, again, assuming it happens in the
context of a normalizing economy. I think the risk is if rates back up too
fast, and, obviously, the Fed knows this, you run the risk of impeding the
housing recovery which really is the one, unambiguous bright spot right now
in the U.S. economy.

MATHISEN: You know, Russ, you mention sort of avoiding interest rate
sensitive stocks and leaning towards I believe you said more cyclical
names. Could you give us some examples without naming names particularly –

KOESTERICH: Sure.

MATHISEN: — but of where you find those interest rate sensitive
stocks, and where you find the ones that you should lean toward?

KOESTERICH: So, let`s start with what we think you want to be
cautious on.

So, historically at least, the parts of the market that have been the
most sensitive have either been bond market proxy. In other words, you
know, stock that generally trades like bonds, utility companies in that
category, and also, parts of the market where leverage is very high.

So, again, companies with high leverage levels, of course, are going
to be more exposed, as the cost of money goes up.

What typically is likely to do better? Again, first of all,
companies that are more resilient, and companies that will benefit in the
form of faster top lying growth if the economy heals. I think in that
category, I would include technology companies, energy companies, also some
manufacturing companies, particularly those that are likely to benefit from
lower U.S. domestic energy costs.

HERERA: All right. Russ, we will leave it at that. Thank you for
joining us.

KOESTERICH: All right. Thanks, Sue.

HERERA: Russ Koesterich, he`s chief investment strategist over at
Blackrock.

MATHISEN: And shares of the Dow component Microsoft (NASDAQ:MSFT)
ended only slightly higher, despite making bold moves and costly ones to
attract more interest in its stock, as the company prepares for a lot of
changes in the months ahead.

Our Josh Lipton has more.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: This morning,
Microsoft (NASDAQ:MSFT) announced a $40 billion stock buy back as well as
boosting its quarterly dividend by 22 percent, to 28 cents per share, the
board approving the stock repurchase plan to replace the previous program
which was set to expire at the end of the month. Microsoft (NASDAQ:MSFT),
known for shareholder-friendly actions, that`s been paying a regular
quarterly dividend since 2004.

Colin Gillis of BGC Partners (NASDAQ:BGCP), covers Microsoft
(NASDAQ:MSFT), says he wasn`t surprised by the relatively mooted reaction
for investors to the news.

COLIN GILLIS, BGC PARTNERS: They increase the dividend most every
year, right? So, last year in September, you got a 15 percent increase.
This year, it`s a little stronger, 22 percent increase.

But the yield is still stuck somewhere 3.4 percent right now. That`s
somewhere between a 10 and 30 year bond. Better than the yield from owning
Apple (NASDAQ:AAPL) who just started to pay a dividend, but lower than you
get from owning Intel (NASDAQ:INTC).

LIPTON: The news today of the buyback coming in a lot of change at
the software giant, it announced earlier this summer that it would be
launching a major reorganization which would help shift the company`s focus
to tablets and smartphones. Earlier this month, Microsoft (NASDAQ:MSFT)
surprised analysts when they decided to buy Nokia`s device business for $7
billion, in attempt to compete with Apple (NASDAQ:AAPL) and Samsung in the
global smartphone market.

Then, last month, Microsoft (NASDAQ:MSFT) announced its long time CEO
Steve Ballmer would be retiring during the next 12 months.

The stock today moving higher on the news, now over 20 percent this
year. Last year remember, it was up just 3 percent. That stock is
currently on track for the biggest yearly gain since 2009.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton.

(END VIDEOTAPE)

HERERA: While Microsoft (NASDAQ:MSFT) grows, the federal deficit is
expected to shrink before expanding them once again. The Congressional
Budget Office says it expects the national deficit to decline to just 2
percent of gross domestic product by they year 2015. That`s from the
current rate of 4 percent.

But it`s also forecasting the deficit to rise back up to 3.5 of GDP
by 2023. And that`s mostly due to soaring health care costs for an aging
population.

MATHISEN: And another warning to Congress — this one from the
Treasury Secretary Jack Lew. Lew telling Congress that waiting until the
last minute to raise the nation`s debt ceiling could cause irrevocably harm
to the economy.

(BEGIN VIDEO CLIP)

JACK LEW, U.S. SECRETARY OF THE TREASURY: If Congress doesn`t act
and the U.S. suddenly cannot pay its bills, the repercussions could be
serious. The impact on families and businesses could be significant.
Investors losing confidence in the full faith and credit of the United
States could cause damage to our economy.

(END VIDEO CLIP)

MATHISEN: Well, the Treasury is slated to hit its borrowing limit of
$16.7 trillion about a month from now, mid-October.

HERERA: So, between tackling the next debt ceiling deadline and
reaching a federal budget deal, Congress has a lot on its plate that
directly impacts the economy, the stock market, and your investment. So,
the big question is: are lawmakers ready to work with President Obama and
can they really get any of these deals done?

John Harwood joins us now from Washington, D.C.

So, John, set the table for us if you will. Where do things
currently stand?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s pretty
bleak right now, Sue. There`s still time for the House and Senate to
strike a deal on extending government funding, which runs out on September
30th, but there`s no sign right now of an agreement that can pass both
chambers. The House is likely to pass an extension of government funding
for a couple of months to allow negotiation, but attached to that, the de-
funding or delay of Obamacare, which is a demand of many conservative
activists, that cannot pass the Senate.

And so, the question is, how can they get something going that keeps
the government funded and remember? And remember, two weeks after the
government is supposed to run out of money, the debt limit needs to be
raised according to the Treasury. That`s an additional problem, even a
harder problem than extending funding.

MATHISEN: So, John, tactically speaking as you mentioned, the House
GOP are tying actions to the de-funding of and some cases calling for
repeal of the Affordable Care Act. That`s a nonstarter.

When does that melt away as a tactical device?

HARWOOD: Not clear, may melt away once the House caucus sees that it
can`t pass the Senate, maybe it melts away once the Senate advocates like
Senator Ted Cruz of Texas try to run around and get votes for that and run
up against a brick wall when they see that it can`t pass.

Some people think — and I talked to Democratic leadership aide today
who said it may take a government shutdown with a lot of heat being
generated on the Republican Party. And that`s what both sides expect what
happen if we have a shutdown before they will buckle, give up that demand.

HERERA: The president in his news conference yesterday, the rhetoric
was strong. He is obviously very aggravated with inability right now to
bring the two sides together.

Does either side have to soften that rhetoric, John, or try to reach
across the aisle, just a little bit to make some headway, or is that really
off the table completely?

HARWOOD: Well, they`ve got to get to a place where the offers or
demands are things that the other side could conceivably accept. There`s
no possible way that the president named Obama will accept the stopping of
something called Obamacare. So, that`s not going to happen.

And the question is when the Republicans discover that. Republicans
are not likely to pass a straight, clean C.R. or debt limit increase —
C.R. being a continuing resolution extending government funding.

So, there`s going to have to be something to change the dynamic that
currently exists before we can get a solution.

MATHISEN: And very quickly, John, the president said he will not
negotiate on the debt ceiling, right?

HARWOOD: He absolutely won`t. He was burned by that in 2011. But
Republicans were also burned, and that is a memory that Democrats are
counting on that will impel Republican leaders to at some point force
members to accept a solution they don`t want to accept right now.

MATHISEN: John Harwood, thank you very much.

More on yesterday`s deadly rampage at a Washington, D.C. naval
facility that left 13 dead, including the shooter, who investigators now
say acted alone. His actions are raising questions about government
contract workers and the security clearances that give so many of them
access to military or other sensitive bases.

Hampton Pearson has more now on what`s being done about it.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
As civilian and military employees return to work at the Navy Yard today,
the White House says it will review standards for government contractors
after the fatal shooting of 12 people by a contract worker with security
clearance to be there.

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: DNI is currently
undertaking a review of security clearance policy for certain contractors,
and I can tell you at the president`s direction, OMB is examining standards
for contractors and employees across federal agencies.

PEARSON: More than 4.9 million people just in Defense and Homeland
Security have those clearances, according to the latest figures from
director of national intelligence.

So, how did the deceased gunman, 34-year-old Aaron Alexis, who had
two gun-related brushes with the law in Texas and Seattle, as well as
mental health issues, get a security clearance that gave him access to a
military facility in the heart of the nation`s capital?

It turns out the secret clearance for civilian it contractor is at
the low end of the security bar, and security experts say given the sheer
volume of background checks, Alexis` profile did not set off any alarms.

ROGER CRESSEY, FORMER NATIONAL SECURITY COUNCIL STAFFER: It`s not
that difficult to get a security clearance if you do not have major red
flags in your background. If you have anger management issues but you do
not seek treatment, if you have an arrest record that doesn`t trigger any
type of indications of violence, that there`s nothing else in there, then
there`s no reason to deny a person a security clearance from a safety
perspective.

PEARSON: Even with a security card, how did Alexis get a shotgun
into the building?

A just released Defense Department inspector general`s report says
efforts to reduce cost resulting in 52 convicted felons gaining
unauthorized access at various naval facilities to due to flaws in a widely
used access control system.

A former national security official says in the end, there`s no
substitute for hands on inspections.

MICHAEL BARRETT, FORMER NATIONAL SECURITY OFFICIAL: I think really
it comes down to increasing random inspections, and not trusting anybody
100 percent — understanding that anybody at any time could in theory be a
viable threat.

PEARSON (on camera): Whether it`s the government or private
employers, security experts say possible solutions include periodic
background checks, perhaps even using social media, and having an emergency
plan for a worst case scenario, a mass shooting event in the workplace.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: Still ahead, JPMorgan (NYSE:JPM) may be in trouble again.
But why does it seem different this time?

First, a look at how the international market closed today.

(MUSIC)

MATHISEN: Gasoline prices have gone where they`ve never gone before.
AAA says that as of today, the average price at the pump has remained above
$3 a gallon for the thousandth day in a row. If you`re counting, the
streak began on December 23rd, 2010, and since the average price of the
pump is now $3.52 nationwide — look for that streak to continue for a good
long time.

HERERA: Well, Ty, now to the skies, as Boeing`s next generation
Dreamliner made its maiden flight today, taking off from a company airstrip
in Seattle. This jet is the 787-9, and it`s a longer version of the
original Dreamliner. It`s designed to carry more passengers, 290 in all,
and travel 300 miles further without refueling, allowing the airlines to
sell more seats on longer routes.

And for more on the story, head to our Web site, NBR.com.

MATHISEN: Safeway (NYSE:SWY) wants to prevent a hostile takeover,
and that is where we begin tonight`s “Market Focus.” The super market
chain adopting a poison pill, which allows existing shareholders to acquire
more stock at a discounted price, to discourage take over by an outside
entity. Now, hours after the poison pill was announced, the activist hedge
fund Jana Partners disclosed a 6.2 percent stake in the company. Shares
did gain 10 percent to close at $30.99.

Sycamore Partners has taken an 8 percent stake in Aeropostale
(NYSE:ARO). The buy-out firm calls the teen retailer an attractive
investment and has a history of taking retailers private, including Hot
Topic (NASDAQ:HOTT) and Talbots (NYSE:TLB). Shares of Aeropostale
(NYSE:ARO) soared 18 percent to $10.17.

HERERA: Beauty cosmetics producer Coty reporting a higher than
expected quarterly profits, but it then warned that revenue was likely to
decline this quarter. The company says that U.S. customers are cutting
back on purchasers, and that growth is slowing over in Europe. And that
sent the stock lower by almost 4 percent to $15.64.

And Kythera Biopharmaceutics is surging after the company said that
its experimental drug to treat double chins met its goal in two late stage
clinical trials. The stock rose 25 percent to $41.95. That company went
public just last October.

MATHISEN: Well, Sue, “The Wall Street Journal” reported this
afternoon that even as JPMorgan (NYSE:JPM) Chase prepares to pay upwards of
$800 million in fines to settle regulatory charges, the bank may face
criminal actions related to last year`s so-called “London Whale” trading
fiasco. The paper says the FBI and Manhattan prosecutors are collecting
evidence that could lead to criminal charges against the firm. The company
could face yet a third action tied to those trades. That one would come
from the commodity futures trading commission which regulates derivatives.

Here to discuss the trouble the big bank faces is former Securities
and Exchange Commission Chairman Harvey Pitt. He is now the CEO of
consulting firm Kalorama Partners.

Mr. Pitt, welcome. Good to have you with us.

HARVEY PITT, FORMER SEC CHAIRMAN: Good to be with you.

MATHISEN: What`s significant here, sir, apart from the size of the
probable settlements — and it`s massive — is that the bank, in a change
driven by the new SEC chair, apparently is going to have to admit to
wrongdoing. How big a deal is that? And what will it mean to JPMorgan
(NYSE:JPM)? For example, could they lose clients?

PITT: I think it`s a very big deal. They`re going to admit that
they didn`t discover the “London Whale`s” trades quickly enough, and that
they had lax procedures or lack of significant systems of internal control.
Those admissions will be used in subsequent proceedings that may be brought
against JPMorgan (NYSE:JPM). So, this is a major new step for the SEC, and
will have serious ramifications for JPMorgan (NYSE:JPM).

MATHISEN: And as we said, they may well face some criminal actions,
if the probes by the FBI and Manhattan prosecutor`s office bring them about
and the CFTC may do that. Are there ramifications beyond just JPMorgan
(NYSE:JPM) in the fact that they`re paying a lot of money to make this
issue supposedly go away, and having to admit some responsibility?

PITT: I think there are ramifications. First of all, this tarnishes
the reputation of the bank, which has prided itself on being very well run
and has that reputation. Secondly, I think for the SEC, this is going to
elevate the standards that it will apply. $800 million in a collective
settlement is a huge amount of money.

Getting admissions from JPMorgan (NYSE:JPM) of the nature that are
involved is also highly significant and it`s going to raise the bar for
future enforcement actions against banks.

MATHISEN: Turning back now to something that happened five years
ago, it is the fifth anniversary this week of the apex of the financial
crisis. So, I want to get your perspective. Do you think banks are safer
today, or the markets fairer today than they were then, and should ordinary
investors have more confidence in the system overall?

PITT: I`d like to tell you that they should, but I think there are
too many problems that we`re witnessing. Investors are watching the
markets constantly being subjected to technological glitches. Now, while
the glitches are probably unavoidable to some extent, what is avoidable is
not knowing how to respond when there`s a glitch, and not knowing how to
limit the amount of damage that can be done. It appears we`re not learning
a lot of lessons.

And the SEC chair efforts to bring the exchanges together is a great
first step, but we need a lot more ultimately if we`re going to restore
confidence.

MATHISEN: Mr. Pitt, thank you very much as always for being with us
tonight.

PITT: My pleasure.

MATHISEN: Harvey Pitt, former SEC chairman and now the CEO of the
consulting firm Kalorama Partners.

HERERA: Coming up, with new lending rules set to take effect, is the
mortgage market safer than before the financial crisis? We`ll look at how
things have changed and how they`ve stayed the same.

First, though, a check on how commodities, treasuries and currencies
performed today.

(MUSIC)

MATHISEN: Only 98 days to Christmas, and already predictions of slow
down in spending growth. A research firm ShopperTrak says retail sales are
expected to rise less this holiday season than in recent years because many
customers are still a bit cautious with their money while the economy
slowly recovers.

HERERA: Well, five years after the financial and fiscal crisis and
crash of the nation`s credit markets, new lending rules are set to take
effect just months from now. They`re designed to protect borrowers and
investors a like. Some say it`s the start of a safer mortgage market.
Others argue, however, the nation is no better off than before.

And that raises the question: can the housing market collapse again?

Diana Olick finds some answers.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): We
didn`t need a sign or thousands of signs like these to tell us that during
the housing boom lenders paid little attention to what their borrowers
could and could not pay.

RAJ DATE, FENWAY SUMMER MANAGING PARTNER: Somehow big swaths of the
mortgage market as it existed then had forgotten that basic rule.

OLICK: That`s why Congress added the so-called Ability to Repay Rule
to the recent financial reform legislation. All lenders must look at all
of the borrower`s finances to determine if the borrower can repay the loan.

FRANKLIN CODEL, WELLS FARGO HOME MORTGAGE EXEC. VP: I think we have
gone full circle back to having the customer at the center of ability to
repay, making sure they can have sustainable home ownership rather than
necessarily having products that investors buy that may not make sense for
the customer.

UNIDENTIFIED FEMALE: We did not have this five years ago.

OLICK: Wells Fargo (NYSE:WFC) now takes borrowers through clear
steps to determine which loan product is right for them.

JUDY CANTOR, WELLS FARGO HOME MORTGAGE E-BUSINESS: This is
specifically in reaction to what we learned from consumers about what they
want to make good decisions.

OLICK: And there are new rules to protect lenders. The Consumer
Financial Protection Bureau or CFPB created the qualified mortgage. A QM
mortgage must meet several standards, which includes that a borrower can
pay no more than 43 percent of income on debt. The loan also cannot have
risky features that were popular in the last decade.

A QM loan gives mortgage bankers protection from borrower lawsuits
and can be sold to Fannie Mae and Freddie Mac.

DAVID STEVENS, MORTGAGE BANKERS ASSOCIATION CEO: We created more
rules and regulations to protect the consumer than have been applied in
this industry in the history of mortgage banking today. Are there going to
be unforeseen risks? Absolutely.

OLICK: And that`s where critics argue that QM, by giving safe harbor
to lenders, leaves borrowers in the lurch yet again.

ALYS COHEN, NATIONAL CONSUMER LAW CENTER ATTORNEY: If you get a
certain kind of loan that meets certain terms, you have no recourse against
the bank. That should never be the case.

OLICK (on camera): Big lenders like Wells Fargo (NYSE:WFC) will do
the bulk of lending in the future under stricter new regulations. But they
can also operate outside them, it`s perfectly legal. They just have to
hold onto more risk.

DATE: These are important changes for consumers.

OLICK (voice-over): Raj Date, one of the architects of the new
rules, left the CFPB to start a firm that will lend to borrowers who don`t
meet QM standards. The loans will be more pricey.

DATE: Non-QMs are the only place if you want to make decisions and
bear the risk and reward of them where you can count on actually getting
paid for taking good risk. You have to be a non-QMs. And that`s where we
are.

OLICK: And that`s where the greatest risk could lie in the future.

STEVENS: I think we`re going to see the worst behaviors in the
marketplace are new breeds of companies coming into the nonqualified
mortgage area, where they can see much higher yields.

OLICK: The difference today, though, is that mortgage investors will
have to have skin in the game. Instead of betting on rising home prices,
they`ll have to insure their borrowers can pay, and face the consequences
if they can`t.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick, in Des Moines, Iowa.

(END VIDEOTAPE)

MATHISEN: What a concept, banks have to make sure that their
borrowers actually can repay the loan.

HERERA: Yes, can repay the loan. I know.

MATHISEN: Amazing idea.

HERERA: I hope they get it right this time because I certainly don`t
want to go through again what we went through the last time with the
housing crisis. We have seen several of those in our time, I think.

All right. That`s NIGHTLY BUSINESS REPORT for tonight. I`m Sue
Herrera. For more on the business stories that we`ve covered tonight, head
to our Web site, NBR.com.

MATHISEN: And I`m Tyler Mathisen. Thanks for joining us tonight.
Have a great evening, everybody.

We`ll see you back here tomorrow night. Big Fed day tomorrow.

HERERA: Yes.

END

Nightly Business Report transcripts and video are available on-line post
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