Transcript: Friday, January 17, 2014

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

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: As goes January, so goes the year. Or so goes the folk wisdom. And three weeks — and three weeks in, stocks have been down more than they`ve been up, leaving investors to wonder whether there`s more selling ahead.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Unwanted delivery.
UPS warns. But why is the world`s largest package shipping blaming the demand surge for weaker profit?

GHARIB: And market monitor. Our guest today says he`s investing in a blue chip, a value stock and a cutting edge tech company.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Friday, January 17th.

MATHISEN: Good evening everyone, and welcome.

Stocks continue their somewhat tentative start to 2014 today. It was as has been the case quite often this year, a classic mixed market. The Dow was the only one of the three major barometers to end the session with a gain and that mostly because positive showings in four of its higher priced constituents — American Express (NYSE:EXPR) (NYSE:AXP), Visa (NYSE:V), Goldman Sachs (NYSE:GS) and IBM. Only eight of the Dow 30, but that was enough to power the index to its first weekly gain of the year.

But don`t get giddy. It was only about 1/10 of 1 percent. And so far in 2014, the Dow is off about three quarters of a percent, and the S&P down about a half a point.

Today`s soggy trading was marked by worries over earnings and outlooks. For G.E., the concern was manufacturing margins. For Intel (NASDAQ:INTC), revenue forecast. For UPS, flat out profit warning.

On this Friday, heading into a three-day weekend, the Dow gained 41 points. The NASDAQ today down by 21 and the S&P lost seven.

GHARIB: Let`s turn to Chris Gaffney for his analyst. He`s senior market strategist with EverBank.

So, Chris, you know, you heard at the top of the program, the saying on Wall Street is as goes January, so goes the year. So, should investors be bracing themselves for a down year?

CHRIS GAFFNEY, EVERBANK SENIOR MARKET STRATEGIST: I don`t think so.
I — we certainly have had a bit of a rocky start to the year. It`s been a short time period so far and I think there`s a lot of things that will support the market going forward. Namely lower interest rates and I think increased consumer confidence.

MATHISEN: I was speaking, Chris, earlier this week to a portfolio manager who said, well, we had a market that was up about 30 percent last year on earnings gains of about 6 percent. You do the math. This gives me the sense that maybe the market is getting very close to fully value. What do you think?

GAFFNEY: We are I think more fairly valued right now, maybe slightly overvalued. But it`s going to be all about earnings in 2014. I think, Tyler, it`s definitely going to be depending on companies having earnings catch up with those price earnings multiples.

GHARIB: You know, they say on Wall Street that it`s all about expectation and we`ve gotten a lot of warnings this week. You know, guidance is weaker than expected. Should investors just ignore this information? I mean, what are you saying?

GAFFNEY: Don`t ignore. But I think it`s become almost commonplace for companies to, you know, give some guidance, as far as negative guidance, and then, you know, earnings have traditionally been better than expected.

Now, we have some people on the desk that always say, you know, the key to happiness is reduced expectations. So, perhaps that gives here.

MATHISEN: Six of the 10 S&P sectors so far this year are actually in negative territory. But —

(VIDEO GAP)

MATHISEN: — outlook for the latest quarter. That despite a record number of shipments.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Investors getting an unexpected and welcomed delivery from UPS. The shipping giant warning that when it reports earnings at the end of this month, its fourth quarter profit will be smaller than expected. It`s also forecasting full year 2014 guidance below the street`s expectation. UPS blaming the level on an unprecedented level of shopping that caught the company off guard, particularly, a surge in last minute orders as online retailers like Amazon (NASDAQ:AMZN) extended offers.

Analysts the resulting strain on its system forced them to spend more money.

KEITH SCHOONMAKER, MORNINGSTAR EQUITY ANALYST: Operating expenses in terms of extra overtime and in terms of significantly larger temporary employment than the company normally would use, to the tune of 30,000 more than they were expecting for temporary head count.

BRENNAN: The season`s biggest delivery day came six days later than the company expected and it was bigger, representing a 13 percent increase from 2012`s busiest day. That coupled with bad weather and a holiday shopping season that almost a week shorter than last year, meant some packages didn`t arrive in time for Christmas, causing the company to refund shipping costs for many customers.

(on camera): While today`s news wasn`t welcome for investors, analysts do see a silver lining, saying last holiday season`s hiccup could actually lead to a long-term growth opportunity.

SCHOONMAKER: I think this actually bodes well for UPS because what it does is it validates and maybe even amplifies our expectations for continued online fulfillment that benefits all of the integrated shippers like UPS and FedEx (NYSE:FDX) and in Europe, DHL and TNT.

BRENNAN (voice-over): Still, the shift in consumer behavior is likely to result in more logistical planning and higher operational expenses for holiday seasons in the future. But for a company like UPS, which has enjoyed good cash flow and revenue growth, analysts say the extra cost should not be hard to absorb. In fact, despite today`s lowered guidance, the shippers still expect to see as much as 15 percent growth in 2014.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

GHARIB: Intel (NASDAQ:INTC) is slashing jobs, 5 percent of its global workforce, 5,000 workers will get pink slips. The announcement comes one day after Intel (NASDAQ:INTC) reported disappointing quarterly earnings and a lukewarm revenue forecast. Intel (NASDAQ:INTC) says it`s shifting away from making computer chips, giving weak demand for personal computers and it plans to focus on faster growing areas like servers.

MATHISEN: Well, despite that, there is good news today about the job market.

In its latest survey on job openings and turnover, the Labor Department says advertised jobs rose to 4 million in November. That`s the most in five and a half years, and the number of people who quit their jobs that month, presumably to take on a better one was the highest in five years.

GHARIB: An update now on that massive security breach at Target (NYSE:TGT). A cyber security firm called InterCrawler says it`s uncovered six active attacks on other U.S. retailers. It says the credit card processing systems at those companies are infected with the exact same type of malware that was used to access at least 40 million debit and credit cards at Target (NYSE:TGT) stores.

MATHISEN: Meantime, we`re learning more about the cyber attack on luxury retailer Neiman Marcus (NYSE:MCS). “The New York Times (NYSE:NYT)”
reports now that the online thief of payment cards and customer data at the upscale chain may have begun as far back as July, and wasn`t fully contained until just this past week.

GHARIB: In Washington today, President Obama announced some big changes at the nation`s top spy agency while simultaneously defending some of its controversial surveillance programs. The president compared the National Security Agency`s electronic eavesdropping into our private lives into what some companies are already doing to find out who their customers are.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: The challenges to our privacy do not come from our government alone. Corporations of all shapes and sizes track what you buy, store and analyze our data, and use it for commercial purposes. It`s how those targeted ads pop up on your computer and your smartphone periodically. But all of us understand that the standards for government surveillance must be higher.

(END VIDEO CLIP)

GHARIB: Those higher standards involve changes about who the NSA will no longer spy on and about storing all that Internet, phone and e-mail data.

Eamon Javers joins us now from Washington with more on President Obama`s proposals.

Eamon, there`s a lot to talk about, but let me start with many telecom and tech firms were really upset and very critical of the reports of previously unknown surveillance. How is that going to change with these new proposals, or will it?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it`s not clear that anything is going to change here at all. Both Google
(NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) put out statements today, interestingly, they were identical word for word calling this a positive development, of praising the president today for at least getting the ball rolling here on intelligence reforms. But what we don`t know here is what is actually going to happen at the end of this. The president called for the attorney general and the director of national intelligence to get back with him on some ideas about what to do with all this telephony metadata, and he asked them to do it by March 28th.

MATHISEN: So, Eamon, as I gather, the government is no longer going to collect and store and analyze this telephone metadata, megadata if you will. But who is going to store that stuff? Are the telecom firms going to have to hold on to all of those records in case at some point the government wants access to them?

JAVERS: Yes, Tyler, that is the big question here. It`s a real hot potato. The president says he doesn`t think the government should be in the business of collecting and storing all that data itself. But the question is who is going to do it. That has been unanswered as of this point right now.

The telecom companies have been resisting. They don`t want to hold it either. So, it`s become a bit of a hot potato, another proposal out there is to create an independent third party entity of some kind that would be brand new, that would be in charge of holding all of that data.

But there`s no indication that that would be feasible either. And, of course, if such a repository was created, you could imagine, it would be a huge target for hackers and intelligence services around the world.

So, the question is, whether that would create more problems than it solves here. So, some real unknowns here going forward. The president says he wants to get out of this business, but where this business is going is anybody`s guess is right now.

GHARIB: OK, thanks a lot, Eamon.

Eamon Javers, reporting from Washington.

JAVERS: You bet.

MATHISEN: And still ahead, flying. Airlines start reporting their earnings next week and some say the results could be among the best the industry has ever seen.

(MUSIC)

MATHISEN: Today was a big day for Apple (NASDAQ:AAPL). The iPhone finally went on sale at China Mobile (NYSE:CHL) stores today. So, will Chinese customers pay more just to have an iPhone and will Apple
(NASDAQ:AAPL) stockholders see any benefit?

Eunice Yoon has the story for us tonight from Beijing.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
(INAUDIBLE) the chiefs of two tech titans celebrate their newfound friendship. Apple`s Tim Cook and the chairman of the world`s biggest cell phone carrier, China Mobile (NYSE:CHL), are at this Beijing store, handing out autographed iPhones to some of the first to buy one through China Mobile (NYSE:CHL).

TIM COOK, APPLE CEO: Today, we`re bringing the best smartphone to the fastest network and the largest network in the world.

YOON: For six years, the two have been courting each other, unable to see eye to eye on commercial terms in technology. But now, they`ve overcome those hurdles.

(on camera): This is what the fuss is all about, an iPhone that can tap into China Mobile`s high speed 4G network.

(voice-over): China Mobile (NYSE:CHL) can earn more as customers spend on data. Apple (NASDAQ:AAPL) could potentially sell millions more gadgets to the Chinese company`s 760 million subscribers, twice the size of the population of the United States.

China is Apple`s biggest market outside the U.S., but many wonder if it`s new partnership would be enough to fend off stiffer competition from cheaper smartphone rivals, and maintain its iconic status here long-term.

MICHAEL CLENDENIN, RED TECH ADVISORS MANAGING EDITOR: The bottom line is it`s going to help Apple (NASDAQ:AAPL) to sell more phones in China at a time when Apple (NASDAQ:AAPL) started to lose some of its allure, you know, globally, you know, in terms of their ability to sell a lot of phones. So, there`s no doubt it`s good for them.

YOON: For now, these customers happy to get a 5S or 5C, just as investors will have to wait to see if this new marriage will pay off.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.

(END VIDEOTAPE)

GHARIB: General Electric`s quarterly earnings were right on Target (NYSE:TGT), but investors weren`t impressed and that`s where we begin tonight`s “Market Focus”.

Fourth quarter income was up nearly 5 percent industrial revenue increased at G.E. But the company has been able to grow profits by cutting costs and increasing productivity. But profit margin came in below forecast. Shares fell more than 2 percent to $26.58.

Legal bills weighed on Morgan Stanley`s profit, but investors didn`t seem to mind. Legal expenses related to mortgage backed-securities topped
$1 billion. But the firm says strong investment banking performance helped give a big lift to earnings. Shares rose more than 4 percent to $33.40.

MATHISEN: Capital One`s profit missed street estimates, that`s because net interest fell in both the company`s credit card and consumer banking franchises. Revenues slightly above consensus. Still, shares fell more than 5 percent, finishing the day at $72.39.

IBM will invest more than a billion dollars to expand its Cloud services operation. The Cloud expansion will include building 15 new data centers around the world. This isn`t the first Cloud investment. It required soft layer, a Cloud computing business last year for $2 billion.
We`ll see how these investments were paying off when the company reports its earnings on Tuesday. Shares rose today slightly to $190.09.

GHARIB: Maybe airlines will also be reporting their fourth quarter results next week and profits are expected to be among the best the industry has ever reported.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
After years of struggling with soaring jet fuel prices, costly labor contracts and the inability to bring in more revenue, the airline industry is finally soaring.

SCOTT HAMILTON, LEEHAM AIRLINE ANALYST: By and large, the airlines are indeed finally getting it to where they`re operating as a business rather than as a market share entity.

LEBEAU: What lifted the airlines in the fourth quarter? For starters, they filled a higher percentage of their seats. United is a good example. Its load factor last month jumped 3 percent.

At the same time, airlines have been gradually adding capacity, allowing them to sell more seats while not deluding airfares. Couple that with the airlines continuing to bring in more ancillary revenue from fees for checked bags or services like boarding early and you have airlines bringing in more passenger revenue.

HAMILTON: The airlines generally lose money or break even on actual ticket sales. Where they`re making all of their money, all of their profits right now, largely comes from these fees.

LEBEAU: Finally, the fact that jet fuel prices have stayed in check means airline costs have done the same thing. Put it all together and you see why airline stocks have climbed to multiyear and in some cases, record highs.

(on camera): Delta is the first carrier to report earnings next week with a profit that is expected to be substantial and that`s just the beginning. Later in the week, we`ll hear from United, Alaska and Southwest Airlines (NYSE:LUV).

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Our market monitor has something for everybody tonight, a classic blue chip of value play and a sexy tech stock.

He`s Larry Rosenthal, president of his own firm, Rosenthal Welcome.
Good to have you with us.

You know, our earlier guest said stock market performance going forward is all going to depend on earnings and so far from where I sit, earnings don`t look all that great. Do you think they are all that great?
Do you think they justify prices at current levels?

LARRY ROSENTHAL, ROSENTHAL WEALTH MANAGEMENT PRESIDENT: Well, when you take a look at — first of all, thanks for having me this evening and earnings is coming in just as we sort of thought they would. We keep a very close eye on earnings. And they`re coming in in a mixed bag and that`s exactly what we`re going to get in a moderate growth economy.

But when you look at the earnings yield on the S&P, it`s a little north of 6.5 percent and you put that over the top of a 10-year treasury, at 2.84, we have a risk premium there of about 3.75 percent, 3.8 percent, which is very attractive, given the alternatives to the marketplace.

GHARIB: You were telling us earlier that you like these normal kind of earnings season rather than shock and awe. You know, the really hot earnings. Tell us why.

ROSENTHAL: Absolutely, Susie. When earnings coming in and they`re shock and awe to the miss or exceed expectations, the markets kind of get a little bit jittery like that and we like to see a more normal earnings type of a season, where we`re coming in with a mixed bag and again, that`s to our expectation right now in a moderate growth type of economy.

MATHISEN: One other quick follow up on earnings. I mean, you said they`re kind of consistent with a choppy economy, a slow growing economy.
But stock prices have been anything but over the past year of a slow growing choppy economy.

They`ve been growing up 30 percent. How do you square the two very quickly?

ROSENTHAL: Well, when you look at the backdrop of monetary policy, you know, the market`s going to continue to punish savers and reward risk takers, that`s my point of the 10-year hovering at 8 1/2 — or 2 1/2 percent, 2.28 percent, with an earnings yield of 6 1/2 percent in the marketplace. That`s what we`re starting to see.

And the markets still carry a P/E of in the 15 range, which really isn`t that lofty right now. We think the S&P can get up to 1,900, 1,950, before we start to see some lofty ranges, if not even higher than that.

GHARIB: OK. Our viewers are going to be very curious about your stock recommendations in this market.

Let`s start with the first, Dow Chemical (NYSE:DOW). You say this is a classic blue chip.

ROSENTHAL: Absolutely, it is. Let`s take a look at estimates on GDP in 2014 of about 2.5 percent. The earnings growth estimate in Dow is 3.8.
So, here we have a company that`s estimated to earn more than GDP in the U.S., and then you take a look again at the 10-year treasury at 2.84 today.
The yield on Dow is 3.3 percent. So, we`re getting paid more than the 10- year treasury. It has a P/E in the low 15s, with earnings yield on it of over 6 1/2.

But the true underlying value of Dow Chemical (NYSE:DOW) here is, you know, it delivers, its products and services are plastics and chemicals and Dow`s major cost component is the use of natural gas. And was sort of the renaissance of the new natural gas explosion here in the U.S. Dow is going to be able to widen its margin substantially —

MATHISEN: Right.

ROSENTHAL: And deliver its products and services over a worldwide stage. We think Dow at this price is a very attractive buy for a long time to come.

MATHISEN: We`ve only got about 60 seconds left, so I`m going to ask you to cover your next two, the value play, Sino PAC (ph) and the tech stock 3D systems in about 30 seconds each.

ROSENTHAL: Let`s see if we can handle that.

OK. Sino PAC (ph), great, deep, deep value buy, sort of a Warren Buffett-esque type of a long-term buy and holds. It delivers oil to mainland China and one of the beautiful things about it right now is that we know that the rising middle class in the Asian region over there are — you know, going the use energy to consume as GDP continues to go very well.

MATHISEN: And 3D Systems (NASDAQ:TDSC)?

ROSENTHAL: 3D Systems (NASDAQ:TDSC) is a great technology story.
It`s on the cutting edge. It`s helping deliver products and services to the marketplace much faster to its 3D putting (ph). The numbers are off chart right now. It needs to increase its revenue.

But if like technology and want to be on the cutting edge, find a good entry point, put some limits underneath of it and enjoy the ride with it.

MATHISEN: Do you own any of these guys personally or does your firm invest in them?

ROSENTHAL: Yes, the firm owns Sino PAC and 3D Systems (NASDAQ:TDSC).
I personally own 3D Systems (NASDAQ:TDSC) and Dow.

MATHISEN: All right. Larry, thanks very much. Have a great weekend.

ROSENTHAL: Thanks for having us. You, too. Bye-bye.

MATHISEN: Larry Rosenthal of Rosenthal Wealth Management, in the capital tonight.

GHARIB: And coming up on the program, 20 years ago today, a massive earthquake shook Los Angeles. Lives were lost. Homes were destroyed. So, why do fewer people have quake insurance today than they did back then?
That`s next.

(MUSIC)

MATHISEN: It`s official. California is now in a state of emergency over the severe drought hitting that state. As we reported yesterday, the entire state is experiencing the worst dry spell in more than a century and there is no rain in the forecast. This comes as firefighters battle wildfires and fierce winds in the Los Angeles area that have force thousands of residents from their homes.

GHARIB: As if Californians don`t have enough to worry about, there`s also the ever present threat of earthquakes. Twenty years ago today, the North Ridge quake struck, killing 57 and causing tens of billions of dollars in damages. Still, most Californians don`t have earthquake insurance. So, what can be done about it?

Jane Wells has more.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Hello? Is anybody there?

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two in the morning of January 17th, 1994, there was no reply. The 6.7 earthquake crushed Los Angeles, 57 people died. Over 40,000 homes and businesses were damaged or destroyed. The economic impact totaled $49 billion, a record at the time.

UNIDENTIFIED MALE: The first floor (ph) you come to is where they`re at.

WELLS: Back then, many walked away from their houses as total losses and home prices plummeted. Only 40 percent of Californians had expensive quake insurance.

Twenty years later, quake insurance cost more and fewer people have it.

GLENN POMEROY, CA (NASDAQ:CA) EARTHQUAKE AUTHORITY CEO: It`s stunning for a lot of people to realize that 90 percent of the homes out here in California have absolutely no protection for earthquake.

UNIDENTIFIED FEMALE: We were sitting in the living room and suddenly, everything started shaking.

WELLS: The state believes fewer than a million of California`s 38 million residents have quake insurance. The Insurance Information Network of California said insurers paid out $15 billion in claims from the North Ridge quake or $24 billion in today`s dollars.

That figure exceeded all earthquake insurance premiums going back 30 years and many companies stopped writing policies in California. Now, some owners believe federal taxpayers will bail them out in a disaster.

POMEROY: Government assistance falls short of that. It doesn`t rebuild a home.

WELLS: Then, there`s the problem of privately owned commercial buildings. No law has been passed in Los Angeles forcing landlords to make expensive upgrades.

(on camera): And while new construction has to meet new standards, it`s all a matter of location, location, location.

(voice-over): Hundreds of millions of dollars of new construction in Hollywood is going up, on top of 20 newly discovered fault lines.
Developers say geologists have detected no active quake activity, but opponents disagree.

ROBERT SILVERSTEIN, LAWYER SUING DEVELOPERS: This is an arrow in the heart of the most ill-conceived, dangerous, and reckless project in recent memory in the city of Los Angeles.

WELLS: The anniversary has spurred the state to spend more to map the cracks and crevices under California`s surface. After all, before 1994, no one knew about the fault that rocked North Ridge.

GOV. JERRY BROWN (D), CALIFORNIA: The people of L.A. should be cautious because earthquakes are just around the corner.

WELLS: It`s never a question of if, but when.

For NIGHTLY BUSINESS REPORT, Jane Wells, North Ridge.

(END VIDEOTAPE)

GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for watching.

MATHISEN: And thanks from me as well. Have a great, long weekend, everybody. We`ll see you here on Monday.

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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