Transcript: Tuesday, October 1, 2013

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

(COMMERCIAL AD)

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Day one. The shutdown has begun. But is the government closure good historically for the markets and investors?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Strategy shift. Merck (NYSE:MRK), one of the world`s biggest drugmakers, Dow component, widely held stock, is undergoing a massive makeover — shedding jobs, slashing costs as it looks for a way to compete with the generic manufacturers.

GHARIB: And, open for business. The health exchanges are up and running. And the CEO of WellPoint, one of the system`s biggest players, tells us what to expect as the uninsured begin shopping for coverage.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 1st.

MATHISEN: Good evening, everyone.

It is day one of a partial federal government shutdown, and if you`re like most people, you didn`t see this one coming — stocks ended the day higher.

Here`s what a congressional stalemate and failure to reach a budget deal looks like in Washington. Two-fifths of all government offices have been shuttered, including national parks and monuments, medical research products put on hold. Eight hundred thousand federal workers furloughed, told to stay home without pay, and President Obama warning Republican lawmakers about how harmful past shutdowns have been and why Congress needs to reopen the government, restart federal services, and get people back to work.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We may not know the full impact of this Republican shutdown for some time, it will depend on how long it lasts, but we do know a couple of things. We know that the last time Republicans shut down the government in 1996, it hurt our economy. And unlike 1996, our economy`s still recovering from the worst recession in generations.

(END VIDEO CLIP)

MATHISEN: Meanwhile, on Wall Street, here`s how the shutdown looked — all the major stock market averages recorded modest gains, climbing right out of the opening bell. The Dow ended the day 62 points high, the NASDAQ was the biggest gainer, up 46 points, more than 1 percent leap. And the S&P added 10.

GHARIB: Well, believe it or not, there have been 17 federal government shutdowns in the past, the last one in 1996. So, how have the markets reacted in previous budget impasses and what if the standoff lasts longer than traders are counting on?

Dominic Chu joins us now with a look at how the markets have reacted in the past and whether a shutdown may be good news or bad news for investors.

What did you find out, Dominic?

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Susie, Tyler, take a look at this. I mean, it happened, right? The government shutdown not completely, but it did for a lot of employees.

For the most part, markets seemed to shrug it off, all those of major indices posted gains. So, just how much does a government shutdown really matter for stocks? Well, analysts and economists at research firm IHS (NYSE:IHS) estimate that the U.S. will lose about $300 million of economic activity each day. They go on to say that a week-long shutdown could shave 0.2 of a percent off economic growth in the fourth quarter.

Now, other economists say that a more prolonged shutdown will take a greater toll on consumer confidence. In other words, the longer any shutdown last, the incrementally worse consumer spending could be.

So, with stock markets, with trading around government shutdown, we looked at the last 12 times it`s happened, going back to 1978. Now, on average, the uncertainty leads to losses in all three major U.S. averages a month prior to the shutdown, but fast forward to a week after each shutdown, on average, the Dow was up a percent we`ll call it. A month later, that gain was nearly 2 percent, and a year later, the Dow was up an average of, get this, 15 percent.

Same thing with the S&P 500, up by a half a percent or so a week after the shutdown ends, up 2 percent a month later, and 15 percent a year later.

And how about the NASDAQ? It`s actually down marginally a week after a shutdown, up marginally a month later, but get this, up 20 percent on average a year later.

Now, the caveat here, guys, is that we`re obviously seeing other moving parts to all of these different markets, simply besides the shutdown, but still this would be one reason why investors aren`t all that concerned. Now, of course, with the debt ceiling debate, that`s a complete other story.

MATHISEN: Maybe we should shut down the government every year with that kind of return — 19 percent on NASDAQ.

(CROSSTLAK)

CHU: There you go.

GHARIB: I feel a lot better already.

MATHISEN: Yes.

Dominic Chu, thank you very much.

All right. Another impact of the government shutdown, a delay in the release of market-moving economic data. That includes today`s August construction spending report, which was never released by the Bureau of Economic Analysis. Thursday, though, we do expect to get last week`s figure on initial jobless claims, because that data was already collected.

But the real biggie, the report that all of Wall Street waits for every month may not be coming out this Friday, that is the Labor Department`s September jobs report. And right now, officials say it`s not expected to be released until government funding is resumed.

GHARIB: Here`s another possible causality of the shutdown, the Justice Department`s trial to stop the merger of American Airlines and U.S. Airways maybe postponed. Right now, it`s slated to begin in late November.

Justice officials asked a federal judge to postpone proceedings in its challenge to the merger, due to a cutoff in federal funding. Meanwhile, just today, the Texas attorney general announced a split from the Justice Department, saying that his office now supports that airline merger. Shares of U.S. Airways and Americans` parent company, AMR (NYSE:AMR) Corp., which trades on an alternate exchange, both closed higher today.

MATHISEN: Well, the red hot auto market, Susie, seems to have cold off a little bit in September. A 27-month-long streak of sales gains for the U.S. car business has ended. Ford sales did rise nearly 6 percent and Chrysler had its best September in six years, but sales fell sharply at General Motors (NYSE:GM), Toyota (NYSE:TM), Volkswagen. G.M. says weak demand for its redesigned full-sized pickups was a big driver of its 11 percent sales drop last month.

Now, the auto industry`s annualized sales rate dipped to 15.3 million units last month, down from 16 million in August.

GHARIB: Over in the commodity markets, gold prices took a tumble today, settling at a two-month low after the government shutdown sparked a lot of investors to pull out of commodity and put their money into less risky assets like cash. Gold prices fell more than 3 percent, losing nearly $41 an ounce.

MATHISEN: Pharmaceutical giant Merck (NYSE:MRK) is slashing costs, along with thousands of jobs, as it battles competition from cheaper generic drugs and a stalled pipeline of new medications. Investors, though, rallied around the Dow component today, sending shares nearly 2.5 percent higher.

Mary Thompson has more on Merck`s restructuring and what`s next for the company.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Drug giant Merck (NYSE:MRK) is slashing expenses to sharpen its focus.

Here`s CEO Kenneth Frazier.

KENNETH FRAZIER, CEO, MERCK: This is not a change in our strategy. This is all about greater focus and about generating greater operational efficiencies.

THOMPSON: The changes betting Merck`s future on four areas, vaccines, diabetes, oncology, and acute care. To get there, it`s cutting $2.5 billion in costs by 2015. It`s trimming 8,500 jobs, on top of the 7,500 cuts already announced, shrinking its workforce by 20 percent. It`s reducing its real estate footprint and abandoning research projects with little promise.

And while Merck (NYSE:MRK) still expects to earn between $3.45 and $3.55 a share this year, independent consultant Barbara Ryan says recent product delays and the failures from key drug trials forced Merck (NYSE:MRK) to act now.

BARBARA RYAN, MANAGING DIRECTOR, FTI: Clearly, that hasn`t delivered results for shareholders that are competitive with their peers. And so, I think this represents the fact there`s pressure for them to find ways to improve their return.

THOMPSON (on camera): The expense cuts seen helping Merck`s bottom line in the near term while it works on bulking up the key to its long-term health, that being its pipeline.

Analyst Tony Butler says the company has two important drugs in the works.

ANTHONY BUTLER, BARCLAYS CAPITAL: One in oncology and one in Alzheimer`s. Just to be clear, there are others, but those two are the biggest opportunities that Merck`s seen in a long, long time.

THOMPSON: Merck`s been hampered by slowing sales of its blockbuster diabetes drug Januvia, and generic competition for its asthma drug, Singulair. Recent successes like HPV vaccine Gardasil have been few and far between, prompting Merck (NYSE:MRK) to take some medicine to cure what`s ailing it.

For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.

(END VIDEOTAPE)

GHARIB: We begin “Market Focus” tonight with earnings from the largest U.S. drugstore operator. We`re talking about Walgreen (NYSE:WAG). Strong sales of generic drugs offset spending on nonessential items. The company also said its customer loyalty card program helped boost sales and that it sees the trend improving.

Walgreen (NYSE:WAG) was one of the top-performing stocks on the S&P today, rising 4.5 percent to $56.24.

More investors bailing out of JCPenney. This time it`s hedge fund Perry Capital. It sold about half its position in the retailer only a month after it had increased its holdings. The move comes days after JCPenney said it would issue $1 million in new shares to shore up its cash reserves. The stock closed at $8.75, is down more than 30 percent just over the past four weeks.

MATHISEN: Well, a weak outlook pressuring sales of Diamond Foods (NASDAQ:DMND), the maker of Pop Secret, Kettle Chips and Emerald Nuts, recorded a wider than expected quarterly loss and agreed to pay $96 million to settle a securities lawsuit. The company said it expects first quarter results to be hurt by costs associated with the relaunch of Emerald Nuts and a reduced supply of walnuts. If you`re in the nut business, that hurts you.

The stock dropped almost 10 percent to $21.16.

Shares of Yahoo (NASDAQ:YHOO)! getting a lift after Citi raised its price target on the stock to $39 from $31. The analyst citing recent strong user growth and search trends, as well as higher valuation of Alibaba. That`s the Chinese e-commerce company in which Yahoo (NASDAQ:YHOO)! holds an ownership stake. Shares rose about 3 1/2 percent today to $34.31.

Shares of Myriad Genetics (NASDAQ:MYGN) jumping after the company said a clerical error was responsible for a proposed cut in the Medicare reimbursement rate for one of its tests. The stock took a hit yesterday. Today, they showed a 48 percent pricing cut for the company`s breast cancer test. Today, Myriad said that that low number was the result of a clerical error and will be corrected so the shares bounce back, closing up almost 8 percent to $25.31.

GHARIB: And now is your chance to own a piece of the nation`s best-known skyscraper. The Empire State Reality Trust, these are the owners of the New York City`s Empire State Building, set prices this evening for shares of its initial public stock offering at $13 a piece. This is at the bottom of the inspected range. The company hopes to raise just under $1 billion when shares begin trading tomorrow. The ticker symbol, ESRT, on the New York Stock Exchange.

MATHISEN: Well, still ahead, the tough decisions small business owners now face with as the health care industry undergoes a dramatic shift.

First, though, let`s take a look at the international markets today.

(MUSIC)

MATHISEN: Well, despite the partial shutdown of the federal government, new health care insurance exchange is open for business today, the most ambitious initiative of President Obama`s signature legislation, the Affordable Care Act.

So how did things go on this inaugural day for those state and federal online and telephone marketplaces? Bertha Coombs joins us now from one of the busiest, the call center of the New York Health Exchange, in the state`s capital city, Albany — Bertha.

BERTHA COOMBS, NIGHTLY BUSINES REPORT CORRESPONDENT: Tyler, you know, officials have been saying all along, expect to see glitches on the early stages of this open enrollment process on the exchanges. Well, they certainly weren`t wrong. We saw plenty of them today.

Maryland`s couldn`t come up, Hawaii couldn`t come up on time today, and a lot of people had trouble logging on. Even so, we saw here in New York, officials say some 10 million visitors to the site. Not necessarily unique visitors, but that gives you an idea of the kind of volumes they were seeing today. In some cases, more volume than they could handle.

(BEGIN VIDEOTAPE)

COOMBS (voice-over): New York state`s call center handled more than 2,500 calls, and its exchange Web site, more than 2 million hits during their first two hours of operation.

DONNA FRESCATORE, NEW YORK STATE OF HEALTH EXEC. DIR.: Well, we certainly anticipated there would be a very high volume, 2 million hits in a couple of hours, honestly, exceeded even our estimates of the initial need.

COOMBS: While New York scrambled to add server capacity, Maryland officials struggled with connectivity issues, which prevented the state`s health connector from going online until noon. While there were no major problems reported with Colorado`s exchange, some residents there still preferred in-person information.

UNIDENTIFIED FEMALE: Coverage, of course, would start January the 1st and we`re going to see if you qualify.

UNIDENTIFIED FEMALE: OK.

UNIDENTIFIED FEMALE: Once we help you apply, we`ll go through the process with you online.

COOMBS: In Texas, one of 36 states with a federally built exchange, residents had better luck trying to get information on the phone and at in-person information centers than online.

Kimberly Heacock got the answers she needed at the health center, after finding she could not log on to healthcare.gov.

KIMBERLY HEACOCK, HEALTH EXCHANGE CUSTOMER: The Web site was overwhelmed, so we couldn`t get on the Web site to find out actually how much it would cost.

COOMBS: What`s key now is getting those issues resolved over the next two months, when enrollment applications are expected to peak for the January start of coverage.

FRESCATORE: Our systems folks are able to have capacity added to the system. They are — there`s a technical group of experts that are monitoring the performance of the Web site and will adjust it as needed.

(END VIDEOTAPE)

COOMBS: Federal officials say some 2.8 million people logged on today on healthcare.gov, that`s the federal portal for all of those states where they built the exchanges. And imagine if they`ve actually had better capacity, it was very slow, they might have had even more people logging on.

But what everyone continues to say, this is just the opening day of what is going to be a marathon.

Back to you.

GHARIB: Thanks a lot, Bertha Coombs reporting from Albany, New York.

Well, one company that could benefit in a big way from these exchanges is WellPoint. It`s the nation`s second largest insurer. And CEO Joe Swedish recently predicted that the new business could boost his company`s revenue by $20 billion by the year 2016.

When I talked with him earlier today, I asked him of the 46 million Americans uninsured, how many does he expect will become WellPoint customers?

(BEGIN VIDEOTAPE)

JOSEPH SWEDISH, WELLPOINT CEO: Our sense is that we`re projecting 2 million enrollees coming to WellPoint through the enrollment process into 2014 and beyond. So, we believe we`re perfectly positioned to bring in those enrollees as the enrollment process unfolds.

GHARIB: Now, Mr. Swedish, I know it`s a little too early to report on how many are coming your way today. But from what you`re hearing, how is the signup going so far?

SWEDISH: Well, we`re very encouraged, and I`ll tell you why.

One, there`s top of mind awareness.

Number two, people are shopping. And we`re seeing that in all of our states, which gives us a lot of encouragement regarding what the next six months will look like.

GHARIB: But we`re also hearing from a lot of people who are saying that they just don`t think it`s worth it to sign up on these insurance exchanges, that the premiums are still expensive and that they are worried that they`re not going to have limited access to doctors they can see. So, make a case on why they should sign up.

SWEDISH: If there is subsidy that is available to them, I would argue that the out of pocket is substantially less than what they would expect. So, they really do have to do their homework in that regard.

Regarding network configuration, that is a fundamental part of how the exchanges are built. Networks are built to create access, to create quality, and to create price competition. With respect to WellPoint, we believe we have met that test in terms of melding those three objectives together to create a product that is going to be highly desirable to enrollees who believe that the exchanges will bring them health care heretofore that they have not had.

GHARIB: Let`s talk a little bit about the direction on prices, because, as you know, big companies, as well as small companies outside of WellPoint, are all lobbying to get this new business and consumers also have lots of choices here. So, is all of that competition going to be bringing down prices? It would seem so, right?

SWEDISH: Absolutely. We believe the priced competition will be alive and well through the exchanges. We`ve certainly witnessed it regarding the pricing strategies that have been advanced by the various players on the exchange. We`re certainly doing our homework with respect to alignment, with key providers that want to participate in the exchange. Altogether, all in, we believe we`re advancing price that makes a lot of sense for the enrollees.

GHARIB: Now, we`ve been talking about uninsured Americans. But we`re seeing that some big companies take Walgreens, for example, that`s saying to their employees, here, take this money and go buy your own insurance.

Is that the direction that we`re going and that soon all of us will have to buy our own insurance?

SWEDISH: Well, I think it`s maybe not quite accurate to say all of us will be buying insurance on the exchange. We believe that there will be a very robust national account activity, large employers will retain their employees. Yes, there will be those that move their employees out to private exchanges, maybe ultimately public exchanges.

I think we`re just witnessing an incredible transformation that has begun on October 1, and we`re going to see a lot of moves and changes as the health care landscape changes. And I`d underscore it`s a dramatic shift.

GHARIB: All right. So, two, three years from now, what are we going to be saying about Obamacare, success or disappointment, failure?

SWEDISH: We`re betting that it will be a success. We`re betting the hallmark that we`ve administered by way of analysis of what the consumer wants, the consumer censure approach to delivering health care to these consumers, will translate to success in the long term.

(END VIDEOTAPE)

GHARIB: Swedish also told me that the government shutdown is not having an adverse impact on the Obamacare insurance exchanges, and for all the criticism, the program is getting from lawmakers in Washington, he still says it`s a, quote, “successful model.”

And coming up on the program, Amazon (NASDAQ:AMZN) is expecting a big rush for the crucial holiday shopping season and is hiring thousands to get ready.

But, first, here`s a look at how commodities, treasuries, and currencies performed today.

(MUSIC)

MATHISEN: Get ready for apartment rents to start edging higher, if you can find a place to rend. In the just completed third quarter, the nation`s apartment vacancy rate dipped to the lowest level in more than a decade, according to the real estate research firm, Reis (NASDAQ:REIS). Just 4.2 percent of the nation`s apartment units are currently unrented.

The firm says that despite the decline in vacancies, a weak job market and stagnant wages have prevented rents from rising.

GHARIB: A big settlement between Wells Fargo (NYSE:WFC) and Freddie Mac today. Wells is paying Freddie $669 million, most of it in cash, to settle claims of some mortgage loans that went bad. The nation`s fourth largest bank and biggest mortgage lender will repurchase risky home loans it sold to the government firm at the height of the financial crisis.

MATHISEN: Well, Susie, a big auto recall to tell you about in a year marked by several of them. BMW says it is going to have to recall 176,000 vehicles. The problem, apparently, is with the power brake system. All of the cars are from the model years 2012 to 2014, obviously, the most recent models there. And the company says that even if the oil is cut off to the brake-assist mechanism, which is apparently the part that is faulty here, the brakes will still work, but drivers may have to press harder on the pedal. It gets your legs a workout.

GHARIB: Meanwhile, a new index out today, shows that borrowing by small businesses last month hit a six-year high. The Thomson Reuters (NYSE:TRI)/PayNet small business lending index rose 1 percent in August, reaching its highest level since August of 2007, before the start of the great recession. This reading came as investors and business owners were preparing for the Federal Reserve to announce a reduction in its stimulus program, something the Fed decided not to do, citing uncertainty about the U.S. economy.

Well, Wal-Mart (NYSE:WMT) is gearing up for a big boost in web-based sales. The world`s biggest retailer announced plans to open two e-commerce distribution centers dedicated to a surging online shopping business. One center will be in Fort Worth, Texas, with 275 full-time associates. The other is planned for Bethlehem, Pennsylvania, which will eventually employ 350 staffers.

MATHISEN: In the meantime, a company firing on all cylinders, Amazon (NASDAQ:AMZN).com, is getting ready for an expected boost in online shopping this holiday season. It is hiring, get this, 70,000 — 70,000 — temporary workers at its U.S. fulfillment centers. That`s 40 percent more than it took on just a year ago. The world`s largest e-tailer says that so far this year, it has turned 7,000 seasonal workers into full-time employees.

GHARIB: Now, even though Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) are preparing for a boost in online sales this year, a new survey finds that more than half of all Americans do not save money for the holiday shopping season. TransUnion says that more than 64 percent of people surveyed say they don`t plan on putting aside money earmarked for holiday spending.

For many, this may mean using current credit cards, opening new lines of credit, or taking on extra debt. No matter how you look at it, all harmful for consumer financial health.

MATHISEN: And finally tonight, more and more women are taking the wheel and buying cars on their own. But one company that`s trying to capitalize on that trend is running up against some roadblocks.

Jane Wells has more.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): A lot of people put buying a car up there with root canal, minus anesthesia.

UNIDENTIFIED FEMALE: It gives me a migraine.

UNIDENTIFIED MALE: It`s like we`re getting an 8-hour shift.

UNIDENTIFIED FEMALE: That was not a good experience.

WELLS: J.D. Power and Associates says almost 40 percent of all new car buyers are now women, yet a survey by Capital One suggests the vast majority of them bring a man with them to buy a car. True car is trying to change that in an ad that is driving controversy.

UNIDENTIFIED FEMALE: I talk big, right, and at the dealership I was trying to hold my own. And it`s kind of tough.

WELLS: TrueCar provides free online pricing information about cars. The California-based company gives buyers guaranteed prices for cars, bought in its network of 6,500 dealers.

(on camera): A couple of year`s ago, TrueCar`s business model was challenged by some dealers and regulators and lost about half its net worth. It survived all that, is now bigger than ever, but is getting new heat over that ad aimed at women, especially this part.

UNIDENTIFIED FEMALE: TrueCar makes it a lot easier to go in by yourself.

UNIDENTIFIED FEMALE: I don`t need to bring a dude with me.

WELLS (voice-over): Some call that sexism. Ad week said, quote, “Apparently, women have to research pricing while men have the magical ability to guess it on the nose like they`re securing a spot on `The Price is Right`.”

The company`s founder has been caught off guard.

SCOTT PAINTER, TRUECAR FOUNDER: You know, my initial response is look at Go Daddy, look at Carl`s Jr., look at these companies that really do exploit women. We`re, in fact, positioning the female buyer as a strong buyer, who has the ability now to make great choices with great information, and in no way was it meant to demean anyone.

WELLS: Has the ad worked? Painter says business to TrueCar from women are up 40 percent, revenues this year should double to $135 million, as more women are negotiating car prices online, only finalizing the paperwork in person with or without the help of a, quote, “dude.”

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

GHARIB: You know, switching gears here, big day for health care. October 1st launch, and you gave it a test drive.

MATHISEN: Only time will tell whether these health care exchanges will work. But I tried to register today, I did have to wait about 10 minutes while the thing was overwhelmed with other people, and then I had several glitches in trying to register, getting the passwords right, they send you an email message, and then you have to click on something, you come back —

GHARIB: Did you finally get on? Did you give up?

MATHISEN: No. Never made it. Never made it on. I will try again tomorrow. We will report back to you.

GHARIB: A lot of glitches.

MATHISEN: It`s a lot of things that have to go right.

GHARIB: And that`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib, thanks so much for joining us.

For more stories you saw here tonight, join us on our Web site, NBR.com.

MATHISEN: And I`m Tyler Mathisen, thank you very much for watching this evening. Have a great evening, everybody. We`ll see you back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2013 CNBC, Inc.

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