Transcript: Thursday, January 16, 2014

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: Turnaround in question. Best Buy (NYSE:BBY) shares dive and the company sheds billions in market value, as deep holiday discounts hurt more than they help. Can the retailer get itself back on track?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Inside Intel (NASDAQ:INTC). Earnings miss. Revenues beat. But what`s the most important takeaway for investors?

MATHISEN: Critical condition. California suffering from an extreme drought. And now, farmers are making tough decisions that could impact the price you pay for things like beef and lettuce.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, January 16th.

GHARIB: Good evening, everyone.

A miserable day for investors in Best Buy (NYSE:BBY). The world`s largest electronics retailer didn`t live up to its name at least when it comes to its stock. It plunged almost 30 percent today. Investors dumped the shares after the company reported it had poor sales during the holiday shopping season, saying it suffered from heavy competition and deep discounting.

Hot-selling products were in short supply. Smartphone sales were slow. And with so many people shopping online, fewer people came into its stores. Sales fell nearly 1 percent instead of rising.

Courtney Reagan spoke with Best Buy`s CEO and has more on what`s next for the struggling retailer.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Best Buy (NYSE:BBY) shares gained a staggering 240 percent in 2013, as Wall Street began to put stock in its turnaround strategy. But today, Best Buy
(NYSE:BBY) shed more than $3.5 billion in market cap value after revealing a bummer of a holiday season. Sales at Best Buy`s U.S. stores open at least a year fell 0.9 percent compared to the year prior. Wall Street had forecast same store sales growth.

On a conference call with analysts, Best Buy (NYSE:BBY) CEO Hubert Joly remained resolute in his commitment to the longer-term turnaround strategy.

HUBERT JOLY, BEST BUY CEO: It`s hit a speed bump. And we don`t want to minimize it, because frankly we care people about our month-to-month performance. But our sense is that it doesn`t change the overall story.
It doesn`t change the long-term perspective. It doesn`t change the priorities and the trajectory.

REAGAN: In order to compete in the most promotional holiday season in years, Best Buy (NYSE:BBY) joined rivals and cut prices to get shoppers into the stores.

On the phone this morning, Joly told me this holiday promotional environment was extreme but it didn`t create industry demand. Joly also said he didn`t think anyone expected mobile sales to fall, but it happened.

UNIDENTIFIED FEMALE: Sometimes, I find products here a little more pricier than others. I`ll go home and I`ll look for it on Amazon
(NASDAQ:AMZN) or eBay (NASDAQ:EBAY).

UNIDENTIFIED MALE: In-store purchase are more clothing, retail, that kind of thing. I think I still mix up a little bit and check out stores.

UNIDENTIFIED FEMALE: I look online, go to the store, then I come back and purchase it online if I can`t get a bargain in the store.

JOE FELDMAN, TELSEY ADVISORY GROUP: Electronics category in general has been tough. Target (NYSE:TGT) had said that, too. You know, even though Amazon (NASDAQ:AMZN) probably did take a little bit of share, I`m not so sure yet that they`ll come out and say they had gangbuster electronics sales.

REAGAN (on camera): But electronics are the key pillar of Best Buy`s product offering. Oppenheimer`s Brian Nagel is downgrading shares, saying today`s report is, quote, “a stark reminder of the vulnerabilities in the company`s business model.”

Janey`s David Strasser (ph), however, thinks Best Buy (NYSE:BBY) is just a victim of a tough environment, and recommends buying shares on the dip, because the company continues to gain market share. Gaining share is good but marking prices lower and lower compresses margins, cuts into profit, and frustrates investors.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEO CLIP)

MATTHEWS: Earnings out after the closing bell this evening from Dow component Intel (NASDAQ:INTC), even with shrinking sales of personal computers, net income at the world`s top chipmaker, last quarter rose 6 percent to more than $2.5 billion. And revenue was slightly higher than expected.

But Intel (NASDAQ:INTC) did miss forecasts on earnings per share by a penny at 51 cents a share. As for the stock, shares fell initially on that report.

Seema Mody joins us now from the NASDAQ Exchange with more on Intel (NASDAQ:INTC).

Seema, good evening. And what`s the most important take away you see in Intel`s latest quarterly profit report?

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Tyler, Intel
(NASDAQ:INTC) is not expecting a big jump in sales this year. I think it`s one of the big key takeaways. Intel`s revenue guidance for 2014 came in lower than street expectations.

There have been ongoing concerns about Intel (NASDAQ:INTC) adapting to the shift in the marketplace from PCs to smartphone and tablet demand.
Although Intel`s management did mention that there were signs of stabilization in the PC segment and financial growth from a year ago. It`s also putting more focus on supplying chips to the growing smartphone and tablet markets.

Intel (NASDAQ:INTC) recently said it plans to sell 40 million chips for tablets in 2014. The big question is, will this all result in bigger sales for Intel (NASDAQ:INTC)?

Back over to you.

MATHISEN: All right. Seema Mody reporting from NASDAQ for us tonight. Thanks, Seema.

GHARIB: And joining us now to talk more about Intel (NASDAQ:INTC) and what to expect from other tech companies when they report their earnings next week is Kim Forrest, senior equity analyst at Fort Pitt Capital Group.

So, tell us, Kim, what you think of Intel (NASDAQ:INTC)? What was your take? You just heard what Seema Mody reported. Do you agree with what she said?

KIM FORREST, FORT PITT CAPITAL GROUP SR. EQUITY ANALYST: I do. I was pleasantly surprised to see that they beat on earnings. That really hasn`t happened in awhile. They also had very good margins.

And I think most of the penny miss was in the below the operating line, probably in taxes, and maybe a little bit of spending and R&D. But I don`t think it was that big of a deal, the earnings miss.

And it was a good mix of revenue from PCs, the server group, and even newer chips that are going into tablets.

MATHISEN: Has Intel (NASDAQ:INTC), Kim, been nimble enough in adjusting to a new environment?

FORREST: No. And they were punished accordingly.

You know, a couple of years ago when it was pretty clear that the consumer PC market was going to crater in favor of more mobile devices, you know, it took them a very long time to come out with products and technologies that were exciting enough to be included in design plans of the makers of tablets and phones.

However, I believe they have done really great in trying to catch up.
They have some really great technology. And I think that we`re going to see in 2014 more design wins that Intel`s going to be able to report.

GHARIB: Kim, we have a number of other tech companies that are reporting over the next couple of days. And a lot of people have been saying that these tech earnings are going to be really good. But the companies reporting next week have some of their own problems to deal with.

FORREST: Right.

GHARIB: I`m going to talk first about Microsoft (NASDAQ:MSFT) reporting on January 23rd. We know they`re in the CEO search. They`re changing their Windows 8 operating system reportedly to Windows 9.

What can we expect Microsoft (NASDAQ:MSFT) to tell us next week?

FORREST: Well, I think the big focus next week is going to be on Xbox sales, because that was just in this last quarter. It was a new product for them.

And even though the number of people that are interested in owning a console is probably down, I still think that they have a great market share in their core market, and they`re going to be able to report some pretty good numbers.

The CEO search is incredibly important, and an update would be nice, but I don`t think that will be forthcoming. And again, PC sales and how it`s impacting them in the long run, that`s always the focus as well.

MATHISEN: Give me a quick thought on IBM also reporting next week.
How`s Big Blue likely to do?

FORREST: Big Blue, I think they are strong in the U.S. still. But the big question mark over IBM for us is China.

China has really been an area of growth for them, and I think everybody who is selling big complex machinery and big complex systems in China — there`s a question mark over those numbers at this time as the one regime transitions to another.

So, it`s going to be an interesting time for them.

GHARIB: All right. It`s an interesting week coming up. Thank you so much for getting us ready for it. Thanks a lot, Kim.

FORREST: Thanks for having me.

GHARIB: Kim Forrest with Fort Pitt Capital Group.

MATHISEN: Well, the two-day rally in the market hitting the pause button today with the financial sector leading a modest selloff following some disappointing bank earnings before the bell, and then that big selloffs throughout the day at Best Buy (NYSE:BBY).

After two days of double-digit gains. The Dow fell 65 points today, the NASDAQ ended 3 points higher and the S&P 500 retreated from yesterday`s all-time high closing down a modest 2 points today.

GHARIB: American Express (NYSE:EXPR) (NYSE:AXP) was another high profile financial company that delivered a disappointing earnings report today. After the market close, the credit card giant said it earned $1.25 a share. That was a penny below analysts` estimates. Still, profits of the company more than doubled thanks to higher consumer spending over the holidays. Revenues also rose, but they came in a bit below forecast.

MATHISEN: Goldman Sachs (NYSE:GS) reported earnings earlier today beating estimates. But company saw its net income take a tumble. Shares of the newest member of the Dow fell 2 percent today after reporting that profits fell 21 percent last quarter, mostly on a decline in bond trading revenue.

GHARIB: United health care was another Dow component out with earnings. Quarterly profits rose 15 percent as more people enrolled in its insurance plans. But UNH said implementing the new health law and private Medicare funding cuts will eat into 2014 profits. The stock was the biggest decliner in the Dow today, falling nearly 3 percent.

MATHISEN: And some other big financial firms reported today with mixed results. Profits at Citigroup (NYSE:C) rose 21 percent as expenses declined and it set aside less money for bad loans. Net income at PNC shot up 46 percent, mostly by originating more loans, especially in commercial real estate.

And Blackrock, the world`s largest money manager, had higher profits on more money coming into its exchange-traded funds. And it was a mixed finish for all three stocks today. Two up, PNC and Blackrock, one down, Citigroup (NYSE:C) by about 4 percent.

GHARIB: Still ahead on NIGHTLY BUSINESS REPORT, last year was the driest on record for California. Now, farms are being forced to make some tough decisions. And that could mean higher food prices for you.

(MUSIC)

(BEGIN VIDEO CLIP)

GREGG STEINHAFEL, TARGET CEO: We don`t note full extent of what transpired. But what we do know was there was malware installed on our point of sale registers. That much we`ve established. We removed that malware so that we could provide a safe and secure shopping environment.

This investigation is ongoing. And it`s going to take some time before we really understand the full extent of what`s happened.

(END VIDEO CLIP)

MATHISEN: Well, now we do know at least a little bit more. In a 16- page report prepared by the government and sent to Target (NYSE:TGT) and other retailers, it described the malware hackers used to get ahold of customer data. According to security intelligence firm iSIGHT which helped to draft the document, the code enabling the breach was written in Russian.
But that does not mean it necessarily originated there or was deployed by Russian nationals.

The report also said it was a fairly widespread targeting of retailers that use those point of sale systems. But as of now, we don`t know whether other retailers were similarly breached.

GHARIB: A court ruling today could mean another big financial blow for the bankrupt city of Detroit. A federal judge rejected a deal to get the city out of a financially disastrous agreement that it made with two banks back in 2009 in order to pay some pension debts. But paying $165 million to end so-called interest rate swap agreements with UBS and Bank of America`s Merrill Lynch unit was determined to be too high a price for the bankrupt city.

MATHISEN: Just two weeks to go before Ben Bernanke`s second term as chairman of the Federal Reserve ends, and in his final scheduled public appearance as head of the Fed, Bernanke reflected on his eight dramatic years at the Central Bank and said the Fed should give the economy the stimulus it needs during this tough recovery, even if it puts financial stability at risk.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: We`re watching this very vigilantly. We`ve developed tremendous additional capacity for doing that.
But at this point, you know, we don`t think that — I think I can speak for my colleagues in this — we don`t think that financial stability concerns should at this point detract from the need for monetary policy accommodation.

(END VIDEO CLIP)

MATHISEN: Very interesting there.

Bernanke also recalled to the Brookings Institution in Washington, D.C. what he called those very intense periods during the financial crisis, periods that he likened to trying to keep a car from going over a bridge after a collision.

GHARIB: It may be a tough year ahead for your grocery bills. That`s because California where so much of the nation`s food is grown and cattle are raised just wrapped up the driest year in its history.

Jane Wells has more on what that drought may mean for your dinner table and your wallet.

(BEGIN VIDEOTAPE)

JUSTIN GREER, CATTLE RANCHER: You know, we`ve just had zero rain.

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Stop me if you`ve heard this one. It looks like drought in California. This time, though, they say it`s really bad.

GREER: We don`t just need a normal rainfall. We need above normal to get back to zero. We`re so far behind.

WELLS: 2013 was the driest year on record in the Golden State, going back 160 years, in a place where 38 million people compete with the nation`s largest farm economy.

Justin Greer says this time of year there`s usually a few inches of grass. Instead, he`s paying high prices for hay and shipping cattle at lighter weights, meaning less beef on each animal and officially higher prices. Beef has already been expensive due to droughts in Texas.

GREER: Beef isn`t and has never wanted to be the low-cost protein alternative. We want to be the best protein alternative. And, you know — but with everything there`s a breaking point.

WELLS (on camera): What`s causing all this dryness? I mean, high fire danger in January is unheard of. There is a very large, very stubborn high pressure system off the West Coast causing this. It`s four miles high and 2,000 miles long.

(voice-over): Farmer Mark Borba has so little water available, he`s letting a third of his land go to dust this year. This is where most of the nation`s fresh vegetables are grown, things like lettuce. Expect less lettuce and higher prices for it at least in the short term.

MARK BORBA, FARMER: Our populations have gone from 16 million people to 38 million people, and we`ve not built a new reservoir to capture the abundance of our snow pack and rainfall. If you can`t predict where you`re headed, you better kind of gather up your acorns and find out how to survive.

WELLS: Governor Jerry Brown has yet to officially declare a state of drought, which would allow some water to be reallocated. He may be holding out for rain. None is forecast.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

MATHISEN: News that Chinese officials are investigating Nu Skin sent shares of that beauty products maker nose-diving. And that`s where we begin tonight`s “Market Focus.”

Now, Nu Skin couldn`t sell off fast enough today. In fact, shares were halted a few times because of excessive movement. That after Chinese officials said they would investigate accusations that the U.S.-based company is operating an illegal pyramid scheme in China. The stock plunged more than 26 percent to $84.80.

Viacom (NYSE:VIA) declared a quarterly cash dividend of 30 cents a share on both on its class A and class B shares. The media giant will return that cash to shareholders on April 1st.

Despite that, shares of both stock classes were down slightly today.
Class A shares closed at $85.14. And B shares closed at $84.94.

United continental will furlough about 685 of its junior flight attendants as part of a plan to cut costs. The furloughs are a new addition to a money-saving plan United announced last year which aimed to save $2 billion annually. That`s because the original cuts failed to attract enough workers for voluntary furloughs and job-sharing. Despite that, shares there were up 1.5 percent today to $47.21.

GHARIB: CEC Entertainment (NYSE:CEC), this is the parent of Chuck E.
Cheese, will be bought by the private equity firm Apollo Global. The fund will pay about $1.3 billion, including debt for the kid-centric restaurant chain. Both stocks up after the buyout news broke. Apollo rose slightly to $36 a share and CEC popped 13 percent to $54.75.

And Hershey`s and 3D Systems (NASDAQ:TDSC) have a sweet deal in the works. They`re coming together to develop a 3D printer that cranks out chocolate. There`s no news as to when this magical device will be on the market or how much it will cost, but just the idea of it sent shares of Hershey up 1 percent to $99.50. 3D Systems (NASDAQ:TDSC) also rose more than 2 1/2 percent to $92 and change.

MATHISEN: Yesterday in Chicago, I helped present the Morningstar
(NASDAQ:MORN) mutual fund manager of the year awards. You can read about the winners at Morningstar (NASDAQ:MORN).com.

As part of the proceedings, I sat down with Scott Burns, Morningstar`s global head of fund research, and asked him how the fund business, which of course touches tens of millions of Americans, is changing in 2014.

(BEGIN VIDEO CLIP)

SCOTT BURNS, MORNINGSTAR GLOBAL HEAD OF FUND RESEARCH: There`s a couple interesting trend that are happening right now. In the U.S., there`s clearly a shift happening from active management to passive management. So, we`re seeing the growth of things, ETFs. Vanguard is quickly becoming the world`s largest asset manager and replacing names like Fidelity, where you normally associate active management. We`re also seeing some new things develop, and that`s where areas like alternatives come in. Multi-assets solutions are becoming very large.

So, 2014 I think is going to be a real banner year for some of these newer up type strategies.

MATHISEN: So, passive investing — which is basically another way of saying index funds and DTS (NASDAQ:DTSI). That`s one trend.

BURNS: Right.

MATHISEN: Alternatives, what are we talking about here when we say alternatives? And is this a case of mutual funds wanting to be hedge fund?

BURNS: It is that to a certain extent. And a lot of it is strategies that were formally only available in hedge fund moving into what we call the `40 Act Space, or the mutual funder or ETF vehicles. You know, alternative if you ask one person — if you ask five people, you might get five different answers.

You know, our answer is, alternative to equity and fixed income most simply. So, we think of the things that are off the style box.

MATHISEN: Like what?

BURNS: So, a commodity fund would be alternative, a fund that is market neutral.

So, to be on the Starbucks (NASDAQ:SBUX), you actually have to have market exposure, and you don`t.

There are other funds that we don`t consider alternatives that are still very popular, and these are these multi-asset solutions where you`re all over the Starbucks (NASDAQ:SBUX), but you`re not off it.

So, alternatives are really interesting growing.

MATHISEN: So, if someone comes to me and says, I think you need an alternative fund in your portfolio, Tyler or George or whoever, and it`s going to be managed futures, what`s the smart question for me to ask in that case? Because if this is a trend, it`s going to come into people`s living rooms this year.

BURNS: It is. And I think the first question is alternative to what?
And that`s a question we do a lot of work on. If something is going to go in, what is going to come out, right?

So, if we`re going to add managed futures what is the risk that we`re looking to reduce, what is the return that we`re looking to reduce. And alternatives, while a very nice umbrella, there`s a lot of diversity inside of alternatives. So, you`re going to want to understand, alternative to what? And then, also, what is this — what is this return that I`m getting?

MATHISEN: Are they as a class necessarily riskier than stock or bond funds?

BURNS: No. And I think that`s the interesting, you know, kind of misclassification that happens out there. The reality is if alternatives are happening correctly, the more risk averse you are, the more alternatives you actually want in the portfolio. Alternatives are meant to take risk out.

Now, that`s where hedge funds got their start. They were hedging.
What happened in the financial crisis was that hedge funds took a lot of leverage. They bought a lot of illiquid things. They actually weren`t risk reducers, they were kind of return chasers, right?

So, what`s happening in the mutual fund and ETFs base is actually a much lower risk profile sort of strategy.

MATHISEN: Has the business cut the baloney too thin in ETFs? I mean, they`re used — they used to be just sort of market matchers. Now, there are all kinds of ETFs for left-handed oboe players and so forth.

BURNS: Yes. I mean, I think those really niche-y diverse ETFs have probably taken it too far, and the good news is, there`s not a lot of money in them. So, while they`re out there, you know, ETFs are still products that are bought and not sold.

But there is a need the next generation of ETFs are coming, and we think of it as strategy beta, some talk smart beta. You know, this is that kind of active manager in a box. There`s a lot — you know, (INAUDIBLE) strategies are very popular. And a lot of just very interesting things are happening in that where you can get that alpha, the costs are a lot lower.

So that`s something that`s another big track for 2014.

(CROSSTALK)

MATHISEN: Alpha excess return.

Scott Burns with Morningstar (NASDAQ:MORN), thank you very much.

BURNS: Thank you, Tyler.

(END VIDEOTAPE)

MATHISEN: Burns emphasizes that most mutual funds are sold, not bought. And because of that, he says it`s vitally important for you the buy for understand exactly what`s in a fund you`re considering such as an alternatives fund, and then how it fits with others in your portfolio.

GHARIB: Coming up, a fully loaded. Why some home buyers want a lot more than just walls and a title when choosing a new house.

(MUSIC)

MATHISEN: We told you yesterday about a small group of Amazon (NASDAQ:AMZN).com employees in Delaware voting on whether to unionize.
They voted no by a margin of 21-6.

GHARIB: There`s a new trend in selling luxury homes — homes that come fully furnished and loaded with just about anything you can think of and more, but with price tags to match.

Diana Olick takes us on a tour.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): This brand-new $36 million Beverly Hills home has everything you could possibly need. Correction: everything you need if you`re really filthy rich.

MICHAEL PALUMBO, PALUMBO DESIGN: We have toothbrushes here. We have putters here for our putting green. We`ve got all the linens. We`ve got all the towels.

You`re getting that convenience level. You`re walking into Neiman Marcus (NYSE:MCS). You`re walking into Saks (NYSE:SKS) and you`re saying, I want that, and I know what I want and I`m done.

OLICK: It is the very latest in high-end home selling. Well beyond staging the home but stocking it with high-end products that match the quality of the home itself.

The booze is ready to pour in the bar. The wine cellar fully stocked.

But if you prefer privacy, the Macallan is in the master, and the crystal is by the tub.

PALUMBO: The house is done to the nines. I mean, my mandate here was perfection by the owner. And I think we achieved it or as close as we could to it.

OLICK: Expensive art everywhere. Picture frames waiting for your photos, designer cutlery in the kitchen and books on the coffee table.
It`s precisely what many of today`s toniest buyers want.

MAURICIO UMANSKY, THE AGENCY REAL ESTATE AGENT: It`s the new billionaire. That young billionaire that just doesn`t have time to go through all of those things but rather concentrate on business, on what they`re doing.

OLICK: But make no mistake. It`s really catering to the international buyer whose cash can demand truly limitless luxury.

UMANSKY: International buyer, whether Chinese, Russian, London, anybody from there that wants immediate satisfaction that doesn`t want to go through the trouble of hiring a designer, figuring out what to do, what colors.

OLICK: It is all figured out and figured into the sale price, turn key with an emphasis on extravagance.

(on camera): Granted we`re showing you the highest of the high-end homes. But developers say this trend will trickle down to the lower ranges. By lower I`m talking the $2 million to $10 million range.

Now, we`ve already seen this in the vacation home arena. But this new focus on the very high end should have those same high-end retailers vying for a space in this market.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick.

(END VIDEOTAPE)

MATHISEN: Wow.

Well, finally tonight, “Fortune” magazine is out with its annual list of 100 best companies to work for. And here are the top three.

In third place, the Boston consulting group, the corporate strategist known for a rigorous recruitment process. Second place, software developer SAS, which offers unlimited sick time, subsidized Montessori childcare center and on-site health care center that`s open to family members of all employees.

And in first place, for the fifth time, Google (NASDAQ:GOOG). The biggest draw, every employee is a stockholder and Google (NASDAQ:GOOG) shares are now worth more than $1,100 a piece.

GHARIB: That`s nice. But I keep thinking about those homes that Diana showed us.

MATHISEN: Yes.

GHARIB: I`m drooling.

MATHISEN: But the Google (NASDAQ:GOOG) guys could afford that.

GHARIB: They could.

That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks so much for watching.

MATHISEN: And thanks from me as well. I`m Tyler Mathisen. Have a great evening, everybody. We`ll 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) 2014 CNBC, Inc.

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