Transcript: Wednesday, December 18, 2013

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

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(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Starting in January, we will be purchasing $75 billion of securities a month, reducing purchases of treasuries and mortgage-backed securities by $5 billion each.

(END VIDEO CLIP)

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Off to the races. Stocks zoomed to record highs on news the Fed thinks the economy is healthy enough for it to scale back its stimulus — but not strong enough to raise interest rates, perhaps for years.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Budget deal. Congress gives final approval to a government spending plan without any drama. Will the agreement help the economy continue its recovery?

MATHISEN: And, rate watch. Could today`s decision by the Central Bank cause mortgage rates to spike, making it more expensive to buy a house and throwing a wrench in the economic turnaround?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, December 18th.

GHARIB: Good evening, everyone.

All those months of taper talk are done. The Federal Reserve said today it will begin winding down its landmark stimulus program, a process Wall Street dubbed “The Taper”. Starting in January, the Central Bank will cut back on the huge bond purchases by $10 billion a month.

Why now? Speaking at his last press conference as Fed chairman, Ben Bernanke said the economy is healthier and the job market is making progress.

So, this marks the beginning of the end of the Fed`s historic easy money programs that were launched in 2008 to stabilize the economy during the debilitating financial crisis.

The reaction on Wall Street was surprisingly positive. Stocks skyrocketed and the Dow and S&P 500 hit new record highs. Here are the numbers — the blue chip Dow soared almost 300 points rebounding from a 60-piont loss, and closing well above the 16,000 level. The NASDAQ jumped 46 and the S&P surged almost 30 points.

Over in the bond market, prices on the 10-year Treasury fell and yields rose to 2.89 percent.

MATHISEN: We have two reports tonight on the Fed`s big decision. One, on the massive record-setting reaction in the stock market. Bob Pisani has that story.

But we begin with Steve Liesman in Washington tonight on what the Fed did, why and what Chairman Ben Bernanke said about it at his last press conference as central bank chief.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Outgoing Federal Reserve Chairman Ben Bernanke, a historic move, engineering a $10 billion reduction in quantitative easing or the purchase of assets by the Federal Reserve to take effect next month. It is the last press conference for Federal Reserve Chairman Ben Bernanke in the second to last meting and he explained why the Fed felt comfortable reducing the amount of quantitative easing in the economy right now.

BERNANKE: Our modest reduction in the pace of asset purchases reflects the committee`s belief that progress towards these economic objectives will be sustained. If the incoming data broadly supports the committee`s outlook for employment and inflation, we will likely reduce the pace of securities purchases in further measured steps at future meetings.

LIESMAN: Bernanke suggested that the Fed would reduce the $85 billion of monthly Q.E. in measured increments. It sounded like $10 billion a month, reduction depending upon the economy. He said the course of reductions is data dependent.

But he also said when the Fed hits the 6.5 percent unemployment threshold, in which the Fed said it would raise rates — no, that`s not going to happen anymore. The Fed giving substantial guidance that the Fed would remain on hold once they hit the 6.5 percent unemployment rate.

BERNANKE: We couldn`t put it in terms of another unemployment rate level specifically. So, I expect it will be time passed the 6.5 percent before all of the other variables that we`re looking at will line up in a way that will give us confidence that the labor market is strong enough to withstand the beginning of increases and rates.

LIESMAN: Bernanke`s last meeting is in January and Fed chair nominee Janet Yellen is supposed to be confirmed by the Senate this week as his replacement. Bernanke was asked if Yellen supports the program and he said she fully does.

So, policy is expected to continue to be pretty much the same under Janet Yellen as it was under Fed Chairman Ben Bernanke.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The markets had been calm going into the Fed statement, indicating that many in the trading community were expecting Mr. Bernanke to find a way to begin tapering their bond purchases either this month or early next year. But they are also expecting him to calm fears that the Fed will begin raising interest rates any time soon. He delivered on both counts.

After a brief drop, stocks rallied, with the Dow Jones Industrial Average closing at the highest for the day, up almost 300 points. It was a historic closing high for the Dow Industrials, for the S&P 500, and it was a 13-year high for the NASDAQ.

Yields on the 10-year treasury bond initially vacillated wildly, rising then dropping, but ending the day not far from where it was prior to the Fed announcement. At the end, it was a very tamed reaction in the bond market.

As for volatility, the VIX, or the fear index, which is a measure how much protection traders are seeking against market declines went down, and it went down dramatically, about 15 percent. That is a very large drop indicating that Bernanke is managing expectations in a way that`s not causing traders to run out and to panic.

The bottom line, this was an almost perfectly crafted statement that clearly said first, low rates were going to be around for a very long time, and second, clearly said that there is no preset course for this taper program. So, if the economic data worsened, for example, the Fed could stop the taper program or even reverse it. The Fed`s thread of this needle about as well as could be expected.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

GHARIB: We turn now to Mohamed El-Erian for his perspective on today`s Fed decision. He`s the CEO and co-chief investment officer of PIMCO, the world`s largest bond fund.

And, Mohamed, nice to have you on the program tonight. So, I know you think the Fed did the right thing. So, tell us why and what does this mean for consumers, investors, and most importantly, for businesses?

MOHAMED EL-ERIAN, PIMCO CEO & CO-CHIEF INVESTMENT OFFICER: It means the most for investors.

Mr. Bernanke gave investors a big Christmas present and it has three parts to it.

First, he removed the uncertainty when the Fed will taper and how they will taper. In fact, in his press conference, he even gave us a road map for the next 12 months.

Second, they compensated what they are taking away with a lot, in particular they said interest rates would remain low for a long time.

And thirdly, they upgraded their economic projections.

So, put all that together and the markets love this. For investors, it`s great. For businesses, it`s quite good because it increases the wealth effect and therefore households are better off.

But for the average person and particularly for the unemployed person, it is not clear whether this will materially influence their outlook.

MATHISEN: You know, Mohamed, Mr. Bernanke was asked today and it was a question he didn`t really seem to have a particularly adroit answer to, that is why hasn`t quantitative easing or the stimulus program created more jobs than it has, or has it at all done that? What do you say?

EL-ERIAN: So, I think what it has is avoided something much worse. So, I`m with him when he says the counter factual would have been much worse. I`m also with when he says that we`ve dealt with unexpected things from the European crisis, to what`s been happening on Capitol Hill.

But, fundamentally, it is not a perfect instrument. If you want to get very wonkish, it acts to what`s called the asset channel. It`s about making you feel better so that you go out and spend more and business investors. It`s a very indirect way of stimulating the economy, a much better way would be on public investment, removing long-term uncertainty, doing all this other stuff.

Unfortunately, the Fed is the only policymaking entity in play and therefore, they are using imperfect policy and they are getting imperfect results.

GHARIB: One thing that we kept hearing today from Chairman Bernanke is that this promise, this reassurance that interest rates will stay exceptionally low, and we know that the markets, the stock market has rallied on these low interest rates. So, can we expect that through 2014, and does this change your approach to investing in stocks or bonds?

EL-ERIAN: So clearly, what they want to do is maintain control of the short end of the yield curve. And why is that important? Because of the mortgage rate.

So, they don`t want to shock the market because it`s a critical element of the recovery. So, they are using aggressive forward policy guidance to try to convince people that short-term interest rates are going to remain stable.

And today, they largely, largely succeeded on the short end. It`s amazing that we had 300 points on the Dow and yet, the bond market was very well-behaved.

Now, in terms of what it means, you heard us say this over and over again, Susie. Bill Gross has said it. I`ve said it. Be careful of where you invest on the yield curve. Do not go out 30 years. Do not go out 20 years. That`s dangerous territory.

Stay focused and stay concentrated on the short-end of the curve. That`s where the value is and that`s where (INAUDIBLE) safety is.

GHARIB: All right. Lots of great information.

Thank you so much, Mohamed. Hope you have a happy holiday.

EL-ERIAN: You, too.

GHARIB: Mohamed El-Erian, CEO and co-chief investment officer at PIMCO.

MATHISEN: At his press conference today, Ben Bernanke said he was pleased Congress has reached a federal budget deal, covering the next two years and he likes the way it looks.

(BEGIN VIDEO CLIP)

BERNANKE: Relative to where we were in September and October, it certainly is nice that there`s been a bipartisan feel. It`s also at least directionally what I have recommended in testimony, which is that it eases a bit the fiscal restraint in the next couple years, a period where the economy needs help to finish the recovery.

(END VIDEO CLIP)

MATHISEN: And tonight, that deal is a done deal after the senate passed it late this afternoon.

John Harwood joins us from Washington with more on today`s vote, and what it means.

Were there any surprises, John, in the vote?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: No, the Democrats voted, 55 of them in favor. You had three fewer Republicans voting yes than voted to end debate earlier in the week. So, it was a 64-36 vote.

But this is something that both parties wanted to — and both parties` leaderships even though Mitch McConnell voted. Both leaderships wanted this to happen for the reason that you heard Ben Bernanke expressed. It`s not often Washington these days gets a chance to please anybody but they know that markets wanted this, they know that the country wanted this, after all the turbulence this fall with the shutdown.

GHARIB: All right. So, now, that they are all getting along in Washington, will that carry over to 2014, John?

HARWOOD: Possibly to a limited extent, Susie. I do think that we can expect there will not be a shutdown when the government runs out of money in January. That they will extend government funding along the lines outlined by this deal, and I do think that even though some Republicans have said, yes, we`re going to make some demands for the debt limit, I don`t think they`re going to push that to the brink, so that we are going to have a smooth process on the debt limit.

The question is, can we get anything bigger than that? Can we get immigration reform? Can we get a grand bargain?

That is by far from clear and I think is actually unlikely.

MATHISEN: So, if you`ve got a two-year deal on the federal budget, then if the debt limit debate becomes cantankerous, what would the GOP be looking for in particular to let the administration raise the debt limit?

HARWOOD: You certainly could have them return to some of the issues of Obamacare, that they have loved to talk about during 2013, want to talk about in 2014, while they are trying to retake the Senate, hold the House. You could have them hold out for things like the Keystone Pipeline, which is something that`s been an issue for Republicans. They used that as a job issue, pitting that against Democratic environmentalism.

Those are examples. But again, I don`t think they are willing to take that to the max.

The Republican Party was wounded badly by the shut down in the fall. I don`t think they want to repeat the same kind of experience in 2014.

GHARIB: The conversation to be continued. John, thank you so much.

HARWOOD: You bet.

GHARIB: John Harwood, reporting from Washington.

More now on how the Fed`s decision to taper could impact treasury yields and mortgage rates. Many home buyers and sellers are worried those rates will rise in 2014 making homeownership more costly.

Diana Olick reports.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT (voice-over): At Apex Home Loans in Rockville, Maryland —

UNIDENTIFIED MALE: Will they taper?

OLICK: — lender Craig Strent watched today`s Fed announcement with some trepidation, worried mortgage rates might spike.

CRAIG STRENT, APEX HOME LOANS CEO: I was relieved how they reacted so far and that we didn`t see a sharp rise as a result of the Fed telling us that they`re going to start tapering. That certainly could have happened.

OLICK: The moderate pull back in both treasury and mortgage bond purchasing did not push rates dramatically higher. The average rate on the 30-year fixed has been sitting at 4.75 percent since the middle of last week, but concern over the Fed`s potential move today may have been behind a sharp in weekly mortgage applications, down 5 1/2 percent to the lowest level in a dozen years.

STRENT: Mortgage interest rates generally hate the idea of uncertainty. And so, uncertainty is not a good thing. So, this definitely brings some certainty in terms of the Fed kind of showing cards as far as the direction of rates.

OLICK (on camera): But this is not the end for rate moves. The Federal Reserve is just beginning the pull back, and this week, the regulator for Fannie Mae and Freddie Mac announced they would raise dramatically the fees they charge to lenders for loans with medium credit quality. Those fees will be passed on directly to borrowers.

CHRISTOPHER MAYER, COLUMBIA BUSINESS SCHOOL PROFESSOR: Of the two announcements in the last 24 hours by far, the bigger of the two announcements was by Fannie Mae, particularly if you`re a first-time home buyer who is looking to putting, you know, less than 20 percent down, you could see mortgage rates rise, you know, by as much as 4/10 of a percent.

OLICK (voice-over): While it doesn`t sound like a lot, combine that with rising home prices and lackluster wage growth, and buyers, especially first time buyers, will continue to struggle even to make the necessary downpayment.

MAYER: I think absolutely the rate increases will be painful.

OLICK: Just not as painful as they could have been had the Fed made a bigger move and beginning its bond-buying retreat.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: Still ahead, Oracle (NASDAQ:ORCL) was a darling of Wall Street until it hit a rough patch. As the company reports earnings, does it have a plan now to get back on track?

(MUSIC)

MATHISEN: Guilty on all five charges. That`s the jury verdict in the insider trading case against money manager Michael Steinberg of SAC Capital, the hedge fund company run by the embattled financier Steven A. Cohen. Steinberg faces up to 85 years in prison. He appeared to faint briefly as the jury filed into the room to announce its verdict.

The former portfolio manager is the first of eight criminally charged SAC employees to face trial for insider trading in the shares of several technology companies. Six colleagues have already pleaded guilty and one more defendant goes on trail in January.

The verdict brings to 76 without a loss. The number of successful insider trading prosecutions brought by the U.S. attorney in Manhattan since 2009.

And earnings from software giant Oracle (NASDAQ:ORCL) which reported a 2 cent a share beat in revenues. It rose 2 percent, topping $9 billion. But profit last quarter was one percent lower on a slight drop in new software sales and subscriptions.

Oracle (NASDAQ:ORCL) is a company in transition, playing catch up in offerings like Cloud computing, something that has weighed its revenue, and its troubling outlook for the next year.

Josh Lipton now with more.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Larry Ellison built Oracle (NASDAQ:ORCL) into a powerhouse in Silicon Valley, a company generating billions in revenue with 120,000 employees and 400,000 customers.

Corporations around the world use its software to help manage their businesses, everything from human resources to accounting. Along the way, Ellison also built himself a fortune. “Forbes” pegs his net worth at $41 billion.

But in recent years, the technology landscape has changed dramatically and software giant`s future isn`t as clear.

Oracle (NASDAQ:ORCL) is dealing with a weak tech spending environment, which is one reason its executives have offered cautious guidance in the past. But there also issues specific to Oracle (NASDAQ:ORCL). Rivals like Salesforce and Workday are attacking Oracle (NASDAQ:ORCL) from the Cloud. Meaning, they offer web-based software sold as subscriptions, rather than licenses. I.T. departments are fans of the Cloud because it can help them save cost and streamline operations.

Analysts at Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) say their survey work shows 38 percent of Oracle`s customers are already using Salesforce. That`s way up from just a year ago.

BARBARA COFFEY, S&P CAPITAL IQ ANALYST: There are a lot of things going on in the software sector.

LIPTON: Barbara Coffey, an equity analyst at S&P Capital IQ, says Oracle (NASDAQ:ORCL) missed the Cloud trend, which has weighed on its stock, now on track for the smallest yearly gain since at least 1987.

COFFEY: The fact they are in catch-up mode is a damper on the stock price as they watch others seeing greater growth from this new business model.

LARRY ELLISON, ORACLE CEO: And we worked again and reworked.

LIPTON: Oracle (NASDAQ:ORCL) is fighting back. Analysts say the company`s new database designed for the Cloud announced in July could see growth pick up next year and despite the issues Oracle (NASDAQ:ORCL) is facing, Coffey still thinks the stock is attractively valued. Investors used to think of Oracle (NASDAQ:ORCL) as a cornerstone investment. The question is whether Larry Ellison convinced them it still is.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.

(END VIDEOTAPE)

GHARIB: Ford shares shifted down today after the automaker predicted a bumpy road ahead. And that`s where we begin tonight`s “Market Focus”.

The company said the cost of launching a record number of new vehicles will reduce profits next year which could fall by as much $1.5 billion. The forecast caught investors off guard, sending shares 6 percent lower to $15.65, its worst one-day drop in two years.

General Electric (NYSE:GE) says expected double-digit profit growth in the industrial unit next year. The company has been shedding units that don`t fit its new focus on manufacturing. So it now expects profits in aviation, health care, and other areas of its businesses to rise at least 10 percent next year. G.E. said it also plans to continue aggressive investments in manufacturing in 2014. Shares rose more than 1 percent to $27.41.

Well, some key management changes at Boeing (NYSE:BA) today. The company promoted the head of defense to the post of chief operating officer and named two other executives vice chairman. The moves might be part of the Boeing`s CEO succession plan since chief executive Jim McNerney retires next year. The stock fell slightly to $135.49.

FedEx (NYSE:FDX) reported an earnings miss and blamed it on a drop in revenue in its biggest unit, Express (NYSE:EXPR) Delivery. But, despite the weaker than expected numbers, the company forecasted a strong holiday season and outlook for 2014. Shares were up a fraction to $139.72.

MATHISEN: General Mills (NYSE:GIS) reported a second quarter profit that lagged estimates. The packaged food company saw sales slide in part because this late Thanksgiving meant the quarter ended before the holiday. Increased commodity cost and unfavorable currency changes didn`t help the Cheerio cereal maker, either. Shares however were up slightly $49.73, the close.

Harland Clarke, a bank check printer, said it would buy the public company Valassis Communications (NYSE:VCI) for $1.8 billion. Valassis prints marketing products like newspaper inserts and coupons. The Harland Company said the deal would create a company now with more than $3 billion in combined revenue and that sent shares of Valassis way up, 22 percent to $34.60.

And shares of AMC Entertainment rose in the first day of trading. The theater operator raised more than $330 million in the market debut. The CEO said the company`s success is in the business model.

(BEGIN VIDEO CLIP)

GERARDO LOPEZ, AMC ENTERTAINMENT CEO: Not just adding more theaters but making the theaters that are already in all of these communities a little better. We find that resonates with our guests. People like it. They come more often. When they come, they spend more money and it makes for a good business model.

(END VIDEO CLIP)

MATHISEN: And that stock ended the day at $18.90, up 5 percent.

GHARIB: Another delay for the Healthcare.gov insurance marketplace. But this one his may help Americans still shopping and figuring out how to pay for a plan. The health insurance industry says consumers who choose a plan by the Monday, December 23rd deadline now have until January 10th to pay their first month`s premium for coverage to take effect on January 1st. That trumps the New Year`s Eve deadline set by the government.

And still ahead on the program, find out how much money the boom in America natural gas production could save you. That`s next.

(MUSIC)

GHARIB: Dow Jones is reporting tonight that Target (NYSE:TGT) was hit by a credit card breach over Black Friday weekend. The theft happened in stores, not on the line. The breach may be tied to malware at card swipe devices and according to this report, it was extensive.

MATHISEN: Well, if you like peace and quiet when you fly, Delta Airlines (NYSE:DAL) may be the carrier for you. The airlines CEO said that no matter what the FAA decides about lifting its ban on in-flight cell phone calls, Delta will not allow any on board calls on any of its flights. So there.

GHARIB: It`s been cold and snowy but the official start of winter is this Saturday. And despite forecasts of a colder than normal season, there is some good news for the millions of Americans who heat their homes using natural gas. There is a lot of it and prices keep falling.

Sharon Epperson explains.

(BEGIN VIDEOTAPE)

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There is a revolution brewing in America`s heartland, an American consumers have been big winners, especially the one whose heat houses with natural gas, or use electricity made with natural gas or even use detergents and plastics that are made from gas products.

The benefits may not have been readily apparent, yet economists say they are certainly significant.

MARK ZANDI, MOODY`S CHIEF ECONOMIST: It`s not like you can`t go to a store and say, aha, that price is lower because of the lower natural gas prices. But they are, and that feeds through. So, it`s not something that`s obvious to the eye but it is clearly adding up for most people`s pocketbooks.

EPPERSON: The ramp up in shale gas production over the last several years has contributed to a more than 60 percent slide in natural gas futures since 2008. A new study by consulting firm VCG finds lower prices are benefitting consumers and the economy in significant annual savings.

HAL SIRKIN, HOUSTON CONSULTING GROUP SENIOR PARTNER: Over the next five years, we expect the number to grow from 400 to $700 to $1,200 savings because of a natural gas revolution. This will have a big impact on our economy because it frees up a lot of discretionary spending.

EPPPERSON: But while the slide in gases prices from the shale boom has been a big plus to the economy, some say future benefits to consumers may be somewhat over stated.

ZANDI: I don`t think going forward, we`re going to see natural gas prices fall much further. So, the plus for the economy, it`s significant, but a lot of it is already in the economy already.

EPPERSON (on camera): Natural gas prices have been on the rise recently and are expected to continue to climb into the New Year, which may stall consumer savings for awhile.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.

(END VIDEOTAPE)

MATHISEN: Finally tonight, there were two lucky winners in last night`s mega millions lottery drawing. The winning ticket, one sold in Atlanta, the other in San Jose, will split a jackpot that ballooned to $648 million. If you take out the annuity fees and do the math, that means that the two mega winners will each get about $173 million.

I went and bought a ticket right after the program last night.

GHARIB: Since you`re here, you`re obviously —

MATHISEN: I didn`t win. Keep trying.

GHARIB: All right. That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for joining us.

MATHISEN: And thanks for me as well. I`m Tyler Mathisen, have a great evening, everybody. We hope to see you right 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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