Transcript: Wednesday October 9, 2013


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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: An historic day. Janet Yellen tapped to be the next chair of the Federal Reserve. She`d be the central bank`s first female chief in its 100-year history. But who is she and what could she mean for your investments?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: What`s at stake? The world`s largest retailer group says that the government shutdown could severely damage a key driver of economic activity. The consumer.

MATHISEN: Just do it. The CEO of Nike (NYSE:NKE), the Dow`s newest member, says the company is designed to win. But does it have the right strategy to stay one step ahead of its rivals?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October 9th.

Good evening, everyone. I`m Tyler Mathisen.

HERERA: And I`m Sue Herera, in for Susie Gharib tonight.

Well, it was an historic day for Washington and also for the U.S. economy. As expected, President Obama nominated Janet Yellen, currently vice chairman of the Federal Reserve, to be the first woman ever to head up the nation`s central bank. If her nomination passes in the Senate and it`s likely to, Yellen is expected to continue the easy money bond buying stimulus policies championed by Ben Bernanke and that`s what people on Wall Street want.

But who is Janet Yellen? What`s her record at the Fed and her plans for the struggling economy? And what does her appointment mean for your money?

Steve Liesman takes a closer look at the woman who would be chairman.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Obama in an historic announcement nominated Janet Yellen to become the first female of the Federal Reserve, putting the longtime Fed governor and economist in the hot seat at one of most controversial moments in the central bank`s 100-year history.

In accepting the nomination, Yellen called for unity among a fractious Fed that`s divided of whether to continue extraordinary and controversial policies to stimulate the economy.

JANET YELLEN, FEDERAL RESERVE CHAIRMAN NOMINEE: The Fed has powerful tools to influence the economy in the financial system, but I believe it`s greatest strength rest in the capacity to approach important decisions with expertise and objectivity, to vigorously debate diverse views and then to unite behind its response.

LIESMAN: Yellen somewhat broke with the predecessor Ben Bernanke by striking a more populist tone today, pledging to address the concerns of average Americans to be Fed policy.

YELLEN: The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can`t find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help if it does its job effectively.

LIESMAN: Obama had strong words and praise for Bernanke who will leave January 31st, words that pretty much eluded the president during much of Bernanke`s tenure.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: For nearly eight years, Ben has led the Fed through some of the most daunting economic challenges of our lifetime. So, today, I just want to take a minute to pay tribute to Ben for his extraordinary service.

LIESMAN: Most in the market believe Yellen will continue policies of Bernanke and is thought to be someone quicker to do more stimulus for the economy if the economy doesn`t improve and unemployment doesn`t fall as fast as the Fed would like.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Well, the minutes from the Federal Reserve September policy meeting, the one where the central bank decided not to pull back on its bond buying program, show that the meeting was a contentious one with that decision being a, quote, “relatively close call.”

For policymakers, the note shows every member of the bank ultimately decided they needed to see more encouraging economic data before slowing bond purchases, even though they were aware Wall Street was expecting a pull back.

HERERA: And on Wall Street most stocks appeared to get a slight Yellen bounce today with the Dow and S&P ending a bit higher despite continued political stalemates in Washington. The Dow added 26, the S&P was up a point, but the NASDAQ ended down again today, falling to a one-month low.

MATHISEN: Well, today`s session marks the third straight day of declines for the NASDAQ index, with a lot of pressure on technology stocks, which have seen some of the street`s largest gains this year so far.

Josh Lipton joins us now from Silicon Valley with more on what`s driving the NASDAQ lower.

So, Josh, which kinds of stocks, which specific ones are getting hit the hardest?

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, I think, Tyler, in general, what you`re seeing right now is a lot of high-flying stocks getting hit the hardest. So, it is a lot of those Internet names. You know, the higher they go, the harder they do fall — as my friend Paul Hickey at Bespoke likes to say.

So, you are talking about those Internet stocks, names like Facebook (NASDAQ:FB), which is now down about 8 percent from the record high, LinkedIn (NYSE:LNKD) is down about 13 percent now from its record high. But even with that pullback, of course, Tyler, you know, these stocks have soared this year. The analyst at Kantor Fitzgerald, they actually tracked this index of the 65 biggest Internet names, so, it`s Facebook (NASDAQ:FB), it`s LinkedIn (NYSE:LNKD), it`s Amazon (NASDAQ:AMZN), it`s Netflix (NASDAQ:NFLX). As of Friday, year-to-date, that index has surged about 52 percent.

So, a big move in these names, Tyler.

HERERA: So, is that what`s behind it, Josh, or is there a timing element here, because you wonder what is going on, why stocks are getting hit at this particular point?

LIPTON: Yes, I mean, it`s interesting. I was actually talking to some traders today at the Nice (ph) today, and some of them said listen, if you were concerned about this shutdown, if you were worried about the shutdown, if it had gone on longer than you first anticipated, then why not trim some of those gains and some of these really high flying stocks moved to the sideline until you see some resolution or at least clarity about what`s going to happen next inside the Beltway, Sue.

MATHISEN: You know, Josh, obviously, Washington is the trump card, but earnings are very potent, as well. Could that cause further volatilities? We begin to get the numbers from some of these tech companies.

LIPTON: Yes, sure. I mean, listen, Alcoa (NYSE:AA), of course, informally kicking off the earning season. If you`re a bull then you`re wagering you are going to see, Tyler, some resolution in D.C. and also, you`re going to get a positive earning season, that you`re going to get better than expected data points for traders, investors and analysts to look over and that will provide hopefully the next positive catalyst for the stock market, guys?

MATHISEN: All right, Josh. Josh Lipton reporting for us from Silicon Valley tonight. Thanks, Josh.

LIPTON: Josh mentioned the situation in Washington — well, it`s day nine of the partial government shutdown and just eight days to go before the government hits its borrowing limit. But today, some signs of a possible thaw in Washington to end that political deadlock.

President Obama will meet with Republican leaders at the White House as pressure builds on both sides to resolve the budget impasse and avert another financial crisis, and a possible default on the debt obligations. Also today, congressional leaders from both parties met in a charity called the Fisher House Foundation, announced that it would pick up the cost associated with the suspension of death benefits for fallen members of the military.

MATHISEN: Many on Wall Street say they are sure that officials in Washington will work out a deal to raise the nation`s borrowing limit and avert another financial disaster but one of the biggest money market mutual fund manager appears to be hedging. Fidelity Investment says it`s been selling off its government bonds over the past few days, or at least the debt that comes due right around the nation will hit the credit limit next week.

The company remains confident it says that the debt ceiling issue will be resolved, but said it`s taking these precautions to protect investors.

HERERA: And for business leaders, the gridlock in Washington cannot end soon enough, from Wall Street to the boardroom, they are calling for a resolution in Washington.

(BEGIN VIDEO CLIP)

SAM ZELL, EQUITY GROUP INVESTMENTS: You were elected to lead the country in all issues, all of the people in country, not just your constituents.

JOE ECHEVARRIA, DELOITTE CEO: We need to basically listen to the will of the people. We need to stop fighting yesterday`s elections and we need to move on to solving tomorrow`s problems on the long-term basis.

MICHAEL EISNER, FORMER DISNEY CEO: It`s an anathema to anybody in business who has ever negotiated where you make mistakes, the end of the game where you put the whole institution at risk. It`s just absurd and frankly, shame on Congress.

(END VIDEO CLIP)

HERERA: Well, the National Retail Federation joined those voices today. The organization says the shutdown could hurt consumer spending.

Here to discuss more the NRF chief lobbyist David French.

David, welcome. It`s a pleasure to have you here tonight.

DAVID FRENCH, NRF CHIEF LOBBYIST: Thanks, Sue.

HERERA: Has that already begun to affect the consumer, as we see the infighting and the impasse in Washington stretch on?

FRENCH: Retailers are on the verge of a $600 billion holiday sales season. We anticipate adding 720,000 or more seasonal jobs this fall and holiday season. And we`re very concerned the consumers are watching what`s going on in Washington and reconsidering whether or not they will be involved as aggressively as we were anticipating.

The economic — Gallup`s Economic Consumer Index showed a 12-point drop last week. It`s the largest one week drop since the Lehman Brothers` collapse in September 2008.

MATHISEN: David, what are you telling your friends on Capitol Hill?

FRENCH: We`re telling both sides to put aside their differences and get back to work. There are serious issues at stake in Washington. We have a tax code that is uncompetitive globally. We have an immigration system that`s broken. We need new trade policies that will help us compete around the world.

And these discussions aren`t happening while the shutdown is going on.

HERERA: You know, David, how long does it take the consumer, once they do start to pull back, which apparently, it sounds like they are doing according to the latest poll, how long before they regroup and get back in the swing of things, or do you think we`ll feel the effects of this impasse in Washington for sometime to come?

FRENCH: Well, it`s not too late and we`re encouraged both sides are starting to talk again and encouraging both sides to continue those discussions and end the gridlock right now.

MATHISEN: You know, David, I noticed over the past couple weeks, a number of companies, Wal-Mart (NYSE:WMT) among them, Amazon (NASDAQ:AMZN), also adding or intending to add tens of thousands of seasonal workers to their payrolls. The government shutdown must throw a wrench into that — both with respect to the paper work that you need to file for the IRS but also to the extent that some individuals may have immigration issues involved in their hiring that you can`t get that stuff done as easily with the government shutdown.

FRENCH: That`s right. Many businesses use E-verify to check immigration status, and you can`t use the E-verify system right now. It doesn`t mean you can`t hire but makes it more complicated and costly in order to add additional jobs.

The uncertainties — the uncertainties weighing down on a number of different retail operations. If you`re trying to bring products in from overseas, the customs service is working, but other U.S. agencies that support imports aren`t working, so it`s much harder.

HERERA: You know, just the smaller retail outlet suffer more than the big retail outlet? Or are those small businesses having gone through the `08 financial crisis better prepared this time around?

FRENCH: Well, I think everybody is suffering and certainly, if the consumer pulls back, the suffering will be spread widely, but I think the — I think the — in previous — in previous consumer confidence shocks, the customers come back reasonably quickly once the situation`s been resolved.

HERERA: All right. David, thank you very much.

FRENCH: Thank you.

HERERA: David French with the National Retail Federation.

MATHISEN: And still ahead, we told you about hidden dangers of Puerto Rico`s bonds last evening, and how they are tough to way on a large number of muni bond funds, maybe some you own. Tonight, we`ll tell you what one politician is doing about it.

But, first, how the international markets closed today.

(MUSIC)

HERERA: Hewlett-Packard (NYSE:HPQ), one of three companies kicked out of the Dow, met with analyst to talk about the past year, one that CEO Meg Whitman called a fix and rebuild year. But Whitman also told investors she expects revenue to stabilize next year and for business to accelerate again in 2015. Confidence about the company`s turnaround is exactly what Wall Street wanted to hear, sending shares of HP 9 percent higher on the day.

MATHISEN: Also meeting with Wall Street analyst and investors today, Nike (NYSE:NKE), one of three newly added members of the Dow Jones Industrial Average.

Jane Wells went to company headquarters in Beaverton, Oregon, today, getting a first-hand peek at the athletic footwear and apparel giant`s outlook for growth.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT (voice-over): Nike (NYSE:NKE) long ago raced past competitors but the CEO still insists this is a growth company because the world is a great company.

MARK PARKER, NIKE CEO: Over the next decade, we will see the world`s middle class population grow by 1 billion consumers.

WELLS: That`s a lot of feet to cover. Nike (NYSE:NKE) is projecting revenues will grow from $25 billion to last year to $36 billion by 2017. Nike (NYSE:NKE).com sales could nearly quadruple, apparel sales should grow over 30 percent and there`s a special emphasis on attracting more women.

UNIDENTIFIED MALE: If you run a mile, run a race, you know what — run a marathon.

WELLS: The company is revamping its strategy in China, hoping to entice shoppers to wear more than shoes, and it`s preparing to grow in Brazil with the World Cup and Summer Olympics.

DON BLAIR, NIKE CFO: Well, you know, women`s is a fantastic opportunity and most people don`t realize this, but we have a $4 billion women business today at wholesale. So, the retail value of that is probably about double.

WELLS (on camera): This could be a big part of Nike`s future but isn`t yet. The top of this flyknit shoe is basically made of one piece and cuts down on materials and labor, but it cost $160. There is a less expensive version coming out in April. Some analysts wonder, though, how long it will take for a shoe without any visible bells and whistles to catch on.

TREVOR EDWARDS, NIKE BRAND PRESIDENT: I think we trust that consumers are smarter, they realize more and more that they can get a great product because when they put it on, the feel and experience of that products is far more innovative than just actually seeing a technology that doesn`t really work.

WELLS (voice-over): Nike (NYSE:NKE) shares recently swooshed to an all-time high, but so did Under Armour (NYSE:UA), a smaller but fast-growing competitor with huge ambitions. Nike (NYSE:NKE) may have Tiger Woods but Under Armour (NYSE:UA) has his girlfriend.

SAM POSER, STERNE AGEE ANALYST: Nike (NYSE:NKE) responds better when their competitors are doing better. They want to keep the distance they innovate harder.

WELLS: In an economy where consumers seem hesitant to spend, analysts say athletic apparel is a standout. Can Nike (NYSE:NKE) protect its lead? The pressure is on to just do it.

For NIGHTLY BUSINESS REPORT, Jane Wells, Beaverton, Oregon.

(END VIDEOTAPE)

HERERA: And now to our “Market Focus” where Men`s Warehouse says to Joseph A. Banks, you`re not going to like the way this looks. Men`s Warehouse rejected an unsolicited offer — a takeover offer from Joseph A. Bank, which offered to buy its bigger rival for $2.3 billion. Men`s said the bid was undervalued.

Both stocks took off, though. Shares of Men`s Warehouse rose 27 percent to $45.03 and Joseph A. Bank were up more than 6 percent to $44.33.

The Cloud computing software maker Citric Systems warns investors that results will miss current estimates. In a statement, the CEO says he`s disappointed but remains confident in the company`s strategy. Shares fell sharply after the closing bell after the regular session at $66.66.

Costco (NASDAQ:COST) missed its earnings estimates. The bulk sales company said higher cost, currency exchange swings and lower gas prices were to blame for their weaker than expected numbers. Costco (NASDAQ:COST) also announced plans to open 36 new clubs this year. The company shrugged off the miss and ended the day 2 percent higher at $114.59.

MATHISEN: United Technologies (NYSE:UTX) board of directors voted today to increase the company`s dividend by 10 percent for the fourth quarter. The company says it has paid a cash dividend every quarter since 1936. The stock rose fractionally to $102.84.

And the FDA has placed a partial hold on an Ariad Pharmaceuticals drug trial after a number of patients involved in the study of its leukemia drug experienced blood clots and heart damage. That sent the stock tumbling almost 66 percent, to $5.83.

Yesterday, NBR told you about the looming municipal bond crisis in Puerto Rico. Today, Massachusetts Secretary of State William Galvin announced that he is launching an investigation into the sale of those bonds to the residents of the Bay State. His office sent letters to Fidelity Investments, Oppenheimer Funds and UBS, inquiring about what fund managers knew about the safety of the islands bonds and when they knew it, whether it was before selling them to investors in the state.

MATHISEN: Well, joining us to talk more about Puerto Rico`s looming debt crisis and how it might affect your investments is Candice Lee. She`s associate municipal credit analyst at Morningstar (NASDAQ:MORN).

Candice, welcome.

How many municipal bond funds have Puerto Rican debt in them and who`s got the most?

CANDICE LEE, MORNINGSTAR MUNICIPAL CREDIT ANALYST: Well, thanks for having me. Based on the latest numbers available to Morningstar (NASDAQ:MORN), we found that there are more than 400 open-end mutual funds with exposure to Puerto Rico debt and the aggregate market value of that exposure is roughly $16 billion.

HERERA: Puerto Rico had trouble for sometime now so why would these funds buy that debt? I assume they are reaching for a yield, for an interest rate that is higher than they can get elsewhere, is that correct?

LEE: Yes, that`s exactly right. So, I mean, Puerto Rico has been facing some pretty severe fiscal strains for a number of years — their economy contracting since 2006, unemployment still very high. But at the same time despite all these strains, they have been able to maintain an investment grade rating, but have traded at relatively attractive yields compared to other municipal bonds.

In addition, they also offer triple tax exempt benefit, which has been very attractive to U.S. investors in that the interest comes from Puerto Rico bonds is except from federal state and local income taxes where they exist.

MATHISEN: As I understand it, Candice, a lot of the muni bonds that have large slugs of Puerto Rican debt in them are off a lot this year, and that presumes investors are marking down the prices on a possibility of a default. How do you handicap the possibility of a default and how should I, if I invest in a municipal bond fund, how — at what level does the exposure to those bonds become troublesome?

LEE: Yes. So, first, I would preface by saying that there is a lot of different types of Puerto Rico debt. What`s generally been talked about has been the commonwealth general obligation bonds, which actually have a constitutional guarantee on that debt repayment. So, the Puerto Rico constitution stipulates that payment of that debt supersedes in priority the payment of current payroll expenditures, as well as current pension obligations.

They also have the flexibility to reclaim other revenue —

MATHISEN: So, it`s a general — excuse me for interrupting, if it`s a general obligation bond, you`re going to get paid?

LEE: That`s what their constitution is promising, and, you know, the government made a number of statements, you know, confirming they are diligent about their commitment to repaying that debt. Now, this doesn`t — you know, this doesn`t necessarily soften the severe amount of stress that they are currently facing still, however.

So, as an investor, I would probably want — if I`m invested in general obligation bonds, I probably want to hold shorter-term bonds than longer term because we don`t know how the economy may or may not further deteriorate, you know, further into the future.

HERERA: Right. So, if default is not the likely outcome, what about a downgrade, though, and what would that do to the value of those bonds and to the portfolios that hold it?

LEE: Yes. So, a downgrade is certainly something that we don`t rule out the possibility of. To my knowledge right now, all the credit rating agencies have negative outlooks on Puerto Rico citing concerns about the very weak economy and whether Puerto Rico will manage to bring in revenues that they are budgeting for this year.

Should a downgrade happen, I think this will probably exacerbate the Puerto Rico bond sale off that we`ve already been seeing so far. Recently they downgraded, recently Moody`s (NYSE:MCO) downgraded sales tax bonds in Puerto Rico and already we`ve seen that the yields for those bonds have jumped up quite significantly.

So, certainly, I think that the market activity that we see now would be further exacerbated if the downgrade were to happen.

MATHISEN: Candice, this has been very helpful. I guess the bottom line here is that even if you own just a mutual fund, it`s not just mutual fund, it`s a collection of individual securities and you better know what`s in your fund, right, Candice?
LEE: Absolutely. We always reiterate that due diligence at the investor level is extremely important. We`ve seen that there are a lot of single state muni funds, especially from Oppenheimer, Nuveen, Rochester, some of these single state muni funds, that have a significant exposure to Puerto Rico, sometimes 20 percent, 30 percent. And they`ve suffered some pretty significant losses year-to-date because of that exposure.

MATHISEN: All right. Candice, thank you very much.

Candice Lee is associate municipal credit analyst at Morningstar (NASDAQ:MORN).

HERERA: Coming up, the intersection of technology, education and business. We`ll show what startups are doing to make learning more effective and more accessible.

First, though, how commodities, treasuries and currencies performed today.

MATHISEN: There may — underscore may — be a deal in the works to make federal charges against the hedge fund and the billionaire funder go away, but it will cost him a ton of money if it happens. “The Financial Times” says the Securities and Exchange Commission is asking for $1.8 billion to make a criminal insider trading case against Steven A. Cohen disappear.

Cohen and his SAC Capital Advisers hedge fund has already agreed to pay $600 million to settle civil SEC charges and avoid a trial.

HERERA: High on the agenda, at the Annual Education Summit in New York City this week is combating the skyrocketing cost of higher education.

So, some investors and entrepreneurs are jumping on a new opportunity, Ed Tech Startups. Companies and schools (ph) and use the new technology to bring educational opportunities to students almost everywhere.

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A hot top pick at NBC`s education nation conference is Ed Tech — startups that use technology to make education effective and accessible. The Internet mobile devices and social tools are giving students new potential, giving those thousands of miles away free access, the best educational institutions in the world.

ANANT AGARWAL, ED-X PRESIDENT: Anybody in the world should be able to take high quality courses whether at the college level or high school. They should be able to take it freely.

BOORSTIN: The amount of investment in Ed Tech quadrupled from $154 million in 2003, to $630 million in 2012. Over the same period, the number of companies funded in Ed Tech quadrupled from 23 to 95.

TOM VANDER ARK, LEARN CAPITAL: With inexpensive tablets, with open content, we`ll be able to create these blended high schools that give hundreds of millions of kids a shot at college and the idea economies.

BOORSTIN: One of the areas in Ed Tech drawing the most attention is higher education. Startups offering free online courses from top universities, like Coursera, which has raised more than $65 million. It recently started offering paid certification for completed online courses, already generating more than a million dollars in revenue.

Rival Udacity last month launching an alliance of educators and employers, nine major companies including Google (NASDAQ:GOOG) and AT&T (NYSE:T), to help them provide training for employees and to offer online classes and curriculum to help students prepare for tech jobs. Udacity also helps schools like Georgia Tech offer a paid masters program for less than $7,000.

But it`s not all for-profit companies. Harvard and MIT created a non-profit called Ed-X.

AGARWAL: Online learning technology and applying technology to a field is win-win for students, they get better education, they get more access.

BOORSTIN: Ed-X partnered with a corporate giant Google (NASDAQ:GOOG) to launch what it`s calling YouTube for free online courses — to make a class as accessible as a funny video.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin from Education Nation in New York.

(END VIDEOTAPE)

MATHISEN: And finally tonight, an unexpected consequence of the partial government shut down, no new craft bewers. The federal work stoppage has closed the little known Alcohol and Tobacco Tax and Trade Bureau, part of the Treasury Department that`s in charge of approving new craft beers recipes and labels and even gives the OK to open new breweries. There will still be plenty of beer on shelves and in bars, but it`s the seasonable brews from small beer makers that may have to await the shut down`s ending.

HERERA: Is nothing sacred?

MATHISEN: Nothing is sacred. Don`t mess with my beer.

HERERA: Exactly.

All right. That`s NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herrera, Susie Gharib is back tomorrow night.

MATHISEN: And I`m Tyler Mathisen. Thanks for joining us. Have a great evening everybody and we hope to see you back here tomorrow night.

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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