Transcript: Friday, January 24, 2014

NBR ThumANNOUNCER: 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: Global rout. The Dow caps its biggest weekly decline in more than a year as investors around the world shun risky assets. Why the fear? And is something bigger brewing?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Emerging market turbulence. Political and economic unrest in countries thousands of miles away is having an impact on your investments. We`ll explain why.

MATHISEN: Market monitor. With overseas markets in focus, Morningstar`s International Stock Fund Manager of the Year will tell us which companies he thinks can ride out the storm and make money for you.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, January 24th.

GHARIB: Good evening, everyone.

An ugly day for stocks on Wall Street and all around the world. The Dow tumbled more than 300 points but stocks in Europe, Asia and Latin America were down between 2 percent to 3 percent. Argentina, the biggest loser, plunging 4 percent.

Now, the worries started yesterday as we reported on concerns about a slow down in China`s economy. Those worries spread to Latin America and other emerging countries that are big trading partners with China. Add to that, lackluster earnings news from corporate America and you get the picture. The Dow fell 318 points, the NASDAQ down 90 and the S&P lost 38 points.

Bob Pisani has more on today`s market action from the New York Stock Exchange.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was another tough day for the markets. The second day there`s been concerns over emerging markets. But it`s really a concern about China.

There`s lots of reasons why traders don`t like China. But the main problem is that it`s a bit of a black box. Not only is there economic uncertainty, there`s a lack of transparency. There`s just not much information coming out of the country, and investors aren`t sure they can trust the numbers.

These issues have been around for a very long time, but recently there`s been some signs of economic weakness and also a credit crunch. So investors have been getting nervous and pulling back.

In the U.S. there was red right across the board. But the biggest decline came in industrials and materials. Those are two sectors that are very exposed to emerging markets.

Now, two groups that have been strong all year reversed today. The Dow transports were down over 4 percent. That`s the worst showing in nine months. And the small cap Russell 2000 dropped almost 3 percent.

The yield on the 10-year treasury dropped below 2 3/4 percent. That`s the lowest level in two months. Gold also rallied to its highest level in two months.

Now, for the week, the Dow is down nearly 4 percent.

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

(END VIDEOTAPE)

MATHISEN: So why is stress in smallish or even tiny foreign economies and in their currency and stock markets having such a negative impact on Wall Street and on your portfolio?

Sara Eisen explains.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): They were the bright spots. They had a catchy name the bricks that became a shorthand for the fast growing emerging markets that helped lift the world from the depths of the financial crisis.

UNIDENTIFIED MALE: China, the Ukraine, Argentina, Brazil.

EISEN: Investors are heading for the door in these emerging markets right now because of mounting economic and political tensions in countries like Turkey and Argentina, uncertainty in Russia and South Africa, and worries about China`s super fast growth slowing down.

The big worry is that problems in these individual countries could escalate into a bigger crisis.

LLOYD BLANKFEIN, GOLDMAN SACHS CHAIRMAN & CEO: When it`s one country specific like credit, if it`s name-specific and we`re at that part of the world, how is this country doing, that country doing. But at some point, it becomes kind of a macro event, when all these countries that are very far apart on the globe are very, very close together in investors` minds.

EISEN: And these countries are starting to look worse to investors now that the federal reserve is in tapering mode, scaling back some of its massive stimulus that, giant flood of money that has masked some of the world`s problems.

The big fear is that a currency crisis could spin into a major economic and financial crisis. Think 1997. A steep slide in Thailand`s currency, the baht, triggered a full-blown Asian crisis, causing economic pain in the United States as well.

ANTHONY SCARAMUCCI, SKYBRIDGE CAPITAL MANAGING PARTNER: I think there`s a balancing test going on right now between the strength in the United States and a little bit of a slowdown in the E.M. My guess is that this is not the correction that people are expecting, and primarily because we`re still in dramatic Q.E.

EISEN: Whether it will spark a full-blown crisis or not, economists are getting more gloomy on prospects for growth in the developing world.
And instead, it`s the united now that the world is looking to be to be the engine of global growth.

For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.

(END VIDEOTAPE)

GHARIB: Joining us now to talk more about the big global selloff, David Gordon. He`s chairman and head of research at the Eurasia Group.
Also with us, Mark Luschini, chief investment officer with Janney Montgomery Scott.

And, gentlemen, thank you both for joining us to discuss this big issue.

David, let me begin with you. You heard our reports. China, China, China — everybody is saying that that`s what got it started. But you don`t see thought way.

Tell us what you think is a catalyst for this big selloff.

DAVID GORDON, EURASIA GROUP CHAIRMAN & HEAD OF RESEARCH: So, I think a little bit of this is bad news in China. But I think a lot of this was mounting concern in Argentina, a deteriorating political and economic situation in Turkey, huge unrest in Thailand, increasing instability in Venezuela. So I think a lot of this that the worst cases here are quite country specific.

And even on China, I think to the extent that China was the spark in the last 36 hours, I think it`s overstated. I don`t see the kind of severe downturn that I think that some people in the markets are pricing in. A lot of this, frankly, is Davos yesterday where there were these hostile issues around China, Japan, and I think there`s a lot of group think — negative group thinking. Huge numbers of big players in international markets are in Davos. I think a lot of this is a negative Davos effect.

MATHISEN: That`s a very interesting point. Mark, do you see it that way? I mean, David focuses on a political uncertainties, instability in some key players. Do you see it that way?

Or do you see it more a sort of reverberation of a slowing Chinese economy with its strong appetite for commodities affecting some of those countries that are in many cases — though not necessarily Turkey`s case — commodity-driven?

MARK LUSCHINI, JANNEY MONTGOMERY SCOTT CIO: Tyler, I think it`s more the latter than the former. We know that China has been deliberately attempting to engineer a slowdown in this economy. It just happened to be in the context of global economic activity slowing over the last couple of years until recent. And as a consequence, it has already had a backlash effect on so many other emerging market countries that are today much more reliant on exporting amongst themselves, particularly to China, than so to exporting to markets like Europe and the United States.

Within that context, though, certainly some countries have specific issues, some of which were named previously by the other guest. But I don`t think individually those countries are necessarily the cause for concern.

This emerging market story is not new. I mean, there`s a reason why last year in 2013 where you had the S&P up 32 percent, the E.P. up 25 percent and emerging market index down 3 percent that was already signaling problems in the emerging market area.

I think what we basically are seeing is after basically two to three months of economic surprises that kept mounting on each other, if you look at the Citigroup (NYSE:C) economic surprise index that`s gone parabolic since November of last year, met the intersection of rich valuations. That combination took less than perfect news to trigger the most anticipated correction that anybody`s seen in about 27 months.

GHARIB: So David, you just talked a moment ago about negative Davos think. Let`s bring it forward to next week and see what you think the Fed thinks is going to be, because a number of people have been speculating that maybe several policymakers are look at this big selloff may dial back on their plans to taper back on these stimulus measures. What do you think?

GORDON: You know, I think the Fed still overwhelmingly will base their decision on the dynamics internal to the U.S. economy, but I think if you do have this continuing market volatility, that will definitely have a negative impact domestically. So, I very much do think we could see a little more caution on the part of the Fed policymakers, yes.

MATHISEN: All right. Quick thought, Mark. Should I get out — should I get out of emerging markets right now and just let this blow over?
Got about 25 seconds.

LUSCHINI: I think real quickly, emerging markets are the basket, yes.
We are not constructive on emerging markets overall. We think it`s going to be a much more nuanced story on a go forward basis.

We like Vietnam, we like Mexico, we like developing Europe, i.e.
Poland. But in the aggregate, to hold emerging market equities we think there could be more pain yet still to come.

GHARIB: All right. Mark, David, thank you both so much. We really appreciate it. Have a good weekend.

LUSCHINI: Thank you.

GORDON: Thank you.

MATHISEN: Another market investors are paying attention to is Puerto Rico. Seventy percent of all municipal bond funds have some exposure to the island`s mounting debt. And now, there are questions about whether it can ever be paid back.

Michelle Caruso-Cabrera reports from San Juan on the small island with big debts.

(BEGIN VIDEOTAPE)

MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-
over): Seven years of recession, chronic deficits, lots of borrowing.
Now, Puerto Rico with a population of only 3.7 million people owes more than $70 billion. The Island`s bonds have been selling off sharply as investors flee, fearing they won`t get paid. Trying to turn the situation around, David Chafey, chair of the Puerto Rico Government Development Bank and Melba Acosta, treasury secretary.

DAVID CHAFEY, PUERTO RICO GOVT. DEVELOPMENT CHAIR: We need a little time in the process. But currently, we have taken a significant amount of measures that should give people comfort that we are well on our way.

CARUSO-CABRERA: To raise revenues, they`ve hiked sales taxes, corporate taxes and income taxes. Utility rates are up dramatically. Some water bills have doubled.

And to cut costs, government workers have been laid off, their retirement benefits cut sharply, leading to strikes and protests.

AIDA DIAZ, PUERTO RICO TEACHERS ASSOC. PRESIDENT: It`s unfair, because if you`re going to retire in two or three years and you are supposed to receive $2,000 monthly in benefits, and now you know you are going to receive $600 less monthly, it`s unfair.

CARUSO-CABRERA: Besides pension cuts, teachers union president says newly hired teachers will have to work until 62. That`s a dramatic change from once being able to retire at 55, and sometimes even as young as 47.

(on camera): And it`s not just the government that`s under fire.
Now, many clients of UBS are taking legal action against the Swiss bank which runs one of the largest brokerage firms here. They say they were put into closed and mutual funds that were inappropriately risky for them.
Those closed end mutual funds contained lots of Puerto Rico debt.

(voice-over): Marco and Maria Galzignato are brother and sister, and have lost more than $1 million combined in the last year. They think they were misled by their broker.

MARIA T. GALZIGNATO, UBS CLIENT: I write to him at 2:00 in the morning. I`m sorry. I`ve gained about 15, 20 pounds and I`m very anxious.
I`m fighting all the time with my husband. I don`t know.

CARUSO-CABRERA: In response, UBS says, quote, “For more than 20 years, investors in Puerto Rico municipal bond and closed end funds received excellent returns that frequently exceeded the returns available through investments in other bonds or bond funds.”

But securities lawyers like Jake Zamansky are flocking to the island in search of UBS customers.

JAKE ZAMANSKY, ATTORNEY: The customers have told me that the brokers said these were safe and conservative investments. They were never told that these were risky investments, that there was limited liquidity.
They`ve lost everything once the bonds started collapsing.

CARUSO-CABRERA (on camera): But Puerto Rico hasn`t missed a payment yet, and there are still buyers of the bonds because the yields are so high, as much as 8 percent or 9 percent. That`s tax free to boot. But with higher yields always comes higher risks.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera, San Juan, Puerto Rico.

(END VIDEOTAPE)

GHARIB: And still ahead on NIGHTLY BUSINESS REPORT: why this bone- chilling winter across much of the country could also be an expensive one.
Very expensive.

(MUSIC)

GHARIB: Get ready to pay a lot more to heat your home this winter, with much of the nation in the grips of another blast of arctic weather, the price of natural gas spiked to a multiyear high today.

Sharon Epperson has more on how and why the bills will add up.

(BEGIN VIDEOTAPE)

SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: With the extreme cold, this year`s best performing commodity is bad news for consumers. More than half of U.S. households heat their home with natural gas. And as well below average temperatures are expected to last into February, prices for the heating fuel are skyrocketing. Natural gas futures trading at the NYMEX are the highest price in 3.5 years, surging 20 percent in a week. And cash prices in the Northeast have hit new records.

ADDISON ARMSTRONG, TRADITION ENERGY DIR. OF MARKET RESEARCH: The market was unprepared for this level of cold. And really, we`ve done — we`ve seen big drops in inventories which is really what`s driving prices higher.

EPPERSON: The recent price spike could trickle down to consumers who are already expected to see higher heating bills this winter. In a report released earlier this month, the U.S. Energy (NASDAQ:USEG) Information Administration predicted consumers would spend $665 on natural gas this winter. That`s $62 or about 10 percent more than they spent to heat their homes last winter.

Those in the Northeast are expected to pay significantly more, spending over $1,000 to heat their homes this winter, about $150 more or a
17 percent increase from last year.

But the severe cold is lingering longer than some forecasters had expected. So, utilities that did not lock in prices before the winter and their customers could be in for an even greater shock.

ARMSTRONG: As a consumer, you really don`t have any protection or way to know just whether your particular utility is one that is well hedged or one that is going into the winter short and therefore in a winter like this has to pay up to get gas in times of high peak demand.

EPPERSON: Tradition energy`s Addison Armstrong says many consumers could be in for a rude awakening when they open their heating bills in March.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.

(END VIDEOTAPE)

MATHISEN: Bristol-Myers Squibb (NYSE:BMY) beats but shares sell off.
That is where we begin tonight`s “Market Focus”.

Earnings topped estimates, thanks to cost cuts and growing sales of cancer treatment drugs. But the drugmaker says it isn`t ready to move ahead with a study for a new cancer drug, including one of its top prospects. The stock fell 5.5 percent, finishing the day at $50.94.

Earnings out of Kimberly-Clark (NYSE:KMB) and Proctor & Gamble were also better than expected, thanks to growth in emerging markets, cost cuts and a bump up in organic sales helped Kimberly-Clark (NYSE:KMB). And Proctor & Gamble had positive results in all of its units except for beauty supplies. Shares of both companies were higher on this very down day.
Look at Kimberly-Clark (NYSE:KMB) up nearly 3 percent to $108.45. And Proctor & Gamble up 1 percent, finishing at $79.18.

GHARIB: A recovering housing market helped Stanley Black & Decker
(NYSE:SWK) boost its revenues, but restructuring charges demolished that increase. Earnings were off almost 90 percent. That`s because of millions of dollars in charges related to mergers and acquisitions. Shares slumped
3 percent to $77.81.

And earnings at Juniper Networks (NYSE:JNPR) topped Wall Street estimates. The networking equipment maker credits its solid results to increased spending by its core telecom customers. Separately, activist investor Jana Partners has reportedly taken a big stake in the company and is trying to get Juniper to cut costs and return cash to shareholders.

Both developments pushed up Juniper stock to a 52 week high, up 6.5 percent to $27.82.

MATHISEN: Our market monitor tonight is David Samra, Morningstar`s
2013 International Mutual Fund Manager of the Year, an honor he shares with his co-manager, Dan O`Keefe. David runs Artisan International Value Fund and Artisan`s Global Value Funds. Both are five-star rated and his international entry is in the top — get this — 1 percent of its category over the past one, three, five and 10 years.

David, welcome. Good to see you again.

DAVID SAMRA, ARTISAN INTERNATIONAL VALUE FUND: Thank you, Tyler.

MATHISEN: Let`s talk first about the emerging markets. And often when there are sharp selloffs as there have been this week, it points to opportunities to buy.

Do you see that in emerging markets today, or do you think it`s kind of game, set and match there?

SAMRA: Well, interestingly, Tyler, what we do see are aggregate multiples that make those markets look very cheap. But we very much believe that that is a reflection of two different parts of the market.

On the one hand, there are a lot of large cap government-controlled, commodity-oriented businesses that look relatively cheap. But we think that the earnings power coming out of those companies as you`re starting to see China slow down and commodity prices coming off are not reflective of what the normalized earnings power is. So we don`t believe on a long term they`re very cheap.

Now, below that you find higher quality businesses. And there, the valuations are still relatively high. Now, those are starting to come down now, and we are very selectively finding some opportunities.

But on a broad-based basis, we still think that these markets have a long way to go before we`ll find a broad swath of attractive investments.

GHARIB: You know, David, you talk about opportunities. A lot of times when you see these big international selloffs, the knee jerk reaction of American investors is I`m going to stay away from these non-U.S. stocks.
And yet you have a couple you say selectively will be good.

Let`s go down your list. You start off with Royal Bank of Scotland.
It`s trading now at about $11.14. Tell us why you like this.

SAMRA: Well, I think the backdrop here is the U.K. economy, where under Prime Minister David Cameron the economy has really turned around and is starting to grow now.

Royal Bank of Scotland is one of the U.K.`s largest banks. It has a terrific franchise but has been beaten down as a result of the financial crisis. And the company is still working through some of its losses. And as the economy starts to improve, as the company works through its losses, we see that the earnings should start to grow.

The valuation here is what really pulls us in at 80 percent of tangible book. And it looks like to us it`s trading on about 5 1/2 times normalized earnings. So, from the target price perspective, we think it should trade at about 10 times. And that will take a few years to come in.

But from 5 1/2 times earnings to 10 times earnings you just about double your money on that stock over the next few years.

MATHISEN: The second holding of yours that you like very much is Tesco (NASDAQ:TESO), the U.K. retailer. There`s a British theme here, David.

SAMRA: There is a British theme. And I thought it was appropriate in an environment like this to highlight that there are parts of the developed markets that are improving today, and within the European context, the U.K.
economy is out in front of that improvement.

Tesco (NASDAQ:TESO) fits right into the wheel house. It is the largest food retailer. You can think of it as sort of a Walmart of the U.K. It has very strong market position, about a third of the market. Its valuation is very cheap at about 10 times earnings. And the valuation is underpinned by the fact that the company owns real estate that approximates the market cap.

GHARIB: OK.

SAMRA: And as the economy improves, the multiples should go up and you should generate a very good return.

GHARIB: Let`s see if we can squeeze in one more. You have Samsung and it`s not cheap, over $1,000 a share. Tell us about this.

SAMRA: Well, cheap to us is relative to its earnings. Samsung is a global powerhouse in handsets, semiconductors and displays. And the stock trades at about 6 1/2 times earnings.

If we can just get it up to a modest discount to where Apple
(NASDAQ:AAPL) trades who`s their major competitor, it should trade on nine or 10 times earnings and you should earn a very good return on that investment.

MATHISEN: All right. David, thank you very much. I assume all these stocks you mentioned are in your portfolio in one way or another.

SAMRA: They are. Very much so.

MATHISEN: David Samra, thank you very much. Manager of the year in the international category, Artisan International Value and Global Funds.

SAMRA: Thank you.

MATHISEN: You bet.

And coming up, what some of the world`s business and political leaders are saying about the global economy as the World Economic Forum comes to a close.

(MUSIC)

GHARIB: CEOs and dozens of other attended this year`s World Economic Summit in Davos, Switzerland. It just wrapped up today.

Andrew Ross Sorkin has more on the big topics of this year`s meeting and what those leaders will be focusing on now.

(BEGIN VIDEOTAPE)

ANDREW ROSS SORKIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The curtain falls on another Davos. The big issues this year: the future of the Middle East and inequality in developed nations.

LARRY SUMMERS, FORMER SECRETARY OF THE TREASURY: America succeeds by raising everybody up. It doesn`t succeed by tearing anybody down. It`s never better to make somebody poorer, even if they`re very rich.

And the rhetoric of envy and the rhetoric of tearing down I don`t think is the right rhetoric. At the same time, I think that there are many who are prepared to cry Robin Hood and socialism at the very suggestion that we need to do something about inequality.

SORKIN: But perhaps the biggest issue was what to do about the emerging markets.

BLANKFEIN: Somebody said you take a position on the emerging markets and you can`t change your mind for fill in the blank, one year, five years?
I`d be long not short (ph).

UNIDENTIFIED FEMALE: OK.

BLANKFEIN: Doesn`t mean I`m going to feel good about the next — sure, in the long run you have to bet on growth. And you have to bet — and you see growth, education, mobility in these countries, you know, basically the flattening of the world giving tremendous opportunity in these countries.

SORKIN: And Europe is now looking better.

STEPHEN SCHWARZMAN, BLACKSTONE GROUP CHAIRMAN & CEO: We`ve been investing in Ireland and Spain and the U.K. and northern Italy. We`ve been pretty active in a lot of different areas in different asset classes there.

SORKIN: And, of course, being bullish on the American economy.

JACK LEW, U.S. SECRETARY OF THE TREASURY: The U.S. economy is doing quite a bit better. The projections for growth are consistently rising in forecasts. The confidence measures are rising. We`re seeing across sectors in manufacturing and services, even in constructions, good recovery.

In places where the recovery has been slow coming out of this financial crisis, take construction, there`s still more potential for improvement. I mean, you know, we haven`t seen the kind of turbo charge that comes to the economy when you have really increased activity in construction. And I think everything is queued up for the U.S. economy to continue to do well in 2014 and beyond.

SORKIN: It`s been a big week here in Davos, a lot of big names here.
The president of Iran was here, as was the Secretary of State John Kerry.
Bill Gates was here, as was Jamie Dimond.

For NIGHTLY BUSINESS REPORT, I`m Andrew Sorkin in Davos, Switzerland.

(END VIDEOTAPE)

MATHISEN: Andrew, turn off the lights in Davos.

Finally tonight, 30 years ago today, Steve Jobs introduced the world to Apple`s brand-new Macintosh computer. The Mac brought in a hefty price tag of $2,500 a pop at a time when the median household income in this country was a little over $22,000 a year.

But think about this. If you spent that $2500 in 1984 on Apple
(NASDAQ:AAPL) stock, with one share going for just $3 a piece, you could have now $450,000. A 15,000 percent increase.

GHARIB: Who would have thought those personal computers would be so personal to us?

MATHISEN: I wonder what one of those original computers would be worth today.

GHARIB: Not a half a million.

MATHISEN: No, but not that.

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. Have a great weekend, everyone. I`m Susie Gharib.

MATHISEN: And I`m Tyler Mathisen. The same for me. Thanks for watching. We`ll see you back 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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