Transcript: Monday, January 27, 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: Whose apple? Fewer iPhones sold and revenue won`t be as strong as expected. So, what should investors do with shares of one of the world`s most valuable companies?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Global hot spots. With the emerging markets in focus, which countries in crisis could have the biggest impact on your money?

GHARIB: And now, it`s the Fed`s turn. Central Bank policymakers meet this week. Will they or won`t they continue to cut back on stimulus, especially with the recent turmoil in the markets?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, January 27th.

MATHISEN: Good evening, everyone, and welcome.

A rough day for stocks got rougher after the market closed, that`s because Apple (NASDAQ:AAPL) reported its quarterly earnings. The revenue and profit numbers were fine. They beat Wall Street estimates, in fact, but sales of iPhones at 51 million units fell short of forecast, and Apple`s own revenue predictions for the current quarter disappointed investors, and they initially sold the stock hard in after hours trading.

Seema Mody joins us now from the NASDAQ with some insight into Apple`s results.

Seema, what are the big takeaways you see in the numbers tonight?

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tyler, those disappoint iPhone sales. That seems to be what`s worrying the street. Apple (NASDAQ:AAPL) sold 51 million iPhones in the first quarter whereas Wall Street was expecting around 54 million phones to have been sold. Gartner (NYSE:IT) analysts telling me that means Apple (NASDAQ:AAPL) is dealing with saturation at the high end of the smartphone market.

Now, the amount of iPads sold in the first quarter also fell short of street consensus. So while the overall earnings and revenue numbers beat estimates, it`s the iPhone and iPad sales that seems to be worrying the street. That`s why we`re looking at shares down after hours — Tyler.

MATHISEN: All right, Seema. Seema Mody, thank you very much.

Well, it was an up and down session on Wall Street today, but mostly down, despite some brief flurries and I`m not talking snow. The major averages all extended last week`s losses. Investors were chilled by a 7 percent decline in new home sales and lingering worries about China`s economy and the currencies and economies of several emerging market countries. Oh, and there`s also that Fed meeting that begins tomorrow. Taper talk didn`t cheer the markets very much today, either.

The Dow down 41 points, the NASDAQ was off 44 with the tech sector weighing on the index. The S&P lost eight.

GHARIB: The biggest gainer in today`s losing session for the Dow was Caterpillar (NYSE:CAT). The giant equipment maker reported earnings and revenues that topped analysts` estimates. Shares surged nearly 6 percent on that news.

Morgan Brennan has more on what drove Cat`s strong quarter and why investors are buying in.

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MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With profit up almost 50 percent from a year ago, Caterpillar (NYSE:CAT), the world`s largest maker of mining and construction equipment, blew past expectations. Some are saying the better than expected numbers represent a watershed event for a company that struggled in recent years.

ELI LUSTGARTEN, LONGBOW SECURITIES: Mining is weak and remains weak, but the other two parts, (INAUDIBLE) and construction will more than offset it and with head winds you`re going to have a better year in `14. This really changes the outlook for Caterpillar (NYSE:CAT) to a much more positive scenario for the next couple years.

BRENNAN: Because Cat`s heavy machinery supplies a variety of industrial needs across the globe, it`s considered a good early indicator for the global economy. Cat`s good numbers are particularly encouraging after the drop in demand since 2012, taking the stock town 6 percent over the past year and more than 20 percent over the past two.

Demand for Caterpillar (NYSE:CAT) products may be coming back, especially in North America where construction is beginning to rebound. But the earnings also reflect aggressive cost-cutting measures. Caterpillar (NYSE:CAT) has cut almost 10,000 jobs in the past year and slashed inventory levels. The company`s profits also shine a spotlight on China where recent data is fueling worries about the health of the world`s second largest economy. Even so, Caterpillar (NYSE:CAT) says sales and revenues grew 20 percent last year and analysts note that it`s exposure to the country means relatively small.

ANDY KAPLOWITZ, BARCLAYS CAPITAL: China is a pretty small portion of the business and obviously, it affects their mining business quite a bit. If we can just get some stability in emerging markets, I think that`s where you could see the stock really perform really well.

BRENNAN (on camera): But these headwinds may not keep the stock down for long. Shares of Caterpillar (NYSE:CAT) hit their highest level since late 2011 during today`s trading, and with the company planning to buy back another $10 billion worth of stock, a number of analysts continue to rate it a buy.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

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MATHISEN: Coming up, remember 1997? Well, many investors do and now, they are wondering if this is the start of a similar currency crisis and what it might mean for your money.

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GHARIB: Two big events this week that are worrying investors here in the U.S. and all over the globe — the selloff in currencies in emerging markets and the Federal Reserve`s two-day policy meeting.

Michelle Caruso-Cabrera has more on the global currency hot spots, and why they matter to American investors.

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MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The troubled emerging markets this week weren`t necessarily the biggest or most important economies, at least not yet. Turkey and Argentina are the cornerstone of the recent massive sell off, especially when it comes to their currencies. It started with political troubles, which has made investing in those countries far more risky, and that led investors to abandon their investments.

When you leave a country as an investor, you sell the currency because you don`t need it anymore. We`ve seen the selling occur though also in other parts of Latin America, including Brazil and Mexico, plus, parts of Southeast as Indonesia and India, and you can add South Africa to the mix, as well.

These countries have the particular issues, but here`s what`s true of all of them — when interest rates were extremely low in the United States, investors were willing to go to riskier places in the world in order to get paid higher interest rates. But as the U.S. economy improves, and the Fed begins to take its foot off the gas pedal, U.S. interest rates are expected to rise.

That makes those other countries less attractive unless they rate their interest rates too. The problem is that slows down their economy.

The Turkish central bank is holding an emergency meeting tomorrow where they are expected to hike rates between 2 percent and 4 percent. Those are extreme moves to American whose are used to the Fed moving only a quarter percent out a time. But desperate times call for desperate measures.

For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.

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MATHISEN: More now on the other big concern for the markets this week, that would be the Fed`s meeting kicking off tomorrow. Steve Liesman has more on how the decisions on the asset-buying stimulus plans and interest rates could further roil world markets.

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STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Broad expectations on Wall Street that neither emerging markets problems or currency volatility, nor a weak December employment report will stay the Federal Reserve from its appointed rounds of completing Q.E.3 this year. It`s expected to continue the process it began in December with another cut to bond purchase at its January meeting which ends on Wednesday.

This is, of course, Fed Chairman Ben Bernanke`s last meeting after eight years in the leadership seat. Janet Yellen takes over as chair on February 1st and the first meeting will be in March when there will be a press conference.

But for now, here is market observers think the Fed is likely considering recent market volatility. Does it change the forecast? Answer, probably not. Does it represent systemic risks to the U.S. and global systems? Again, the answer is probably not, and are there underlying macro economic troubles that link all of the countries again? The answer appears to be no.

Officials who I spoke with say the events of the past several days is more linked to specific events in specific countries, more political than economic.

ROBERT HORMATS, KISSINGER ASSOCIATES VICE CHAIRMAN: Several of them have very key elections, and most of these elections have a high level of uncertainty attached to them. India is having elections. Turkey is having elections. Brazil is having elections for just to name a few, and these are all very complicated.

LIESMAN: But there is also a link to Fed policy, a lot of money has flooded into emerging markets seeking higher rates of return on those countries` bonds. Now that the Fed is reducing efforts to keep rates low here in the U.S., and interest rates have risen a bit, some of that money is fleeing emerging markets and coming back home.

But there is another reason, the outlook for growth has also changed, with less great expected in the emerging countries and more in developed countries like the U.S. and Europe. So, money is following the growth.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

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GHARIB: The currency sell off in the emerging markets bring back bad memories of the 1997 Asian crisis. Back then, there were fears of a world-wide economic meltdown. But as Sara Eisen reports, this time, things are different.

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SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Plunging currencies from Argentina to Turkey to Ukraine are triggering bad memories on Wall Street. It all goes back to 1997, when a sharp drop in Thailand`s currency, the baht, set off a chain reaction in other markets, nailing economies in Malaysia, Indonesia and the Philippines. It sent shock waves around the world, and multiple bailouts from the IMF and even the United States.

Investors are wondering, could Argentina or Turkey become the next Thailand? But some on Wall Street say this time is different.

MARC CHANDLER, BROWN BROTHERS CHAIRMAN: This isn`t a crisis level. This is a couple of base selloff. I`m not sure that it`s going to be sustained to affect policy or to affect economic outcomes.

EISEN: So, what`s changed? China is a bigger economic power house. Now, the world`s second biggest economy, share of the world economy is four times what it was in 1997.

That means China could act as an anchor of stability if developing markets shake or cause trouble if it shows signs of weakness.

ALAN RUSKIN, DEUTSCHE BANK: There is capital that`s actually come back into China and that`s the point of maximum vulnerability.

EISEN: Another difference now, the Federal Reserve is in the middle of a balancing act, tapering or scaling back its stimulus it put in place to help fight the financial crisis without disrupting the economy and market. The worry for U.S. investors, the world economies are now much more intertwined, and an emerging market meltdown could hit U.S. markets and companies particularly multinationals. That have depended on faster growing developing nations for growth.

RUSKIN: The big worry is that the E.M. currencies and E.M. countries share of GDP is much larger than it was back 1997, 1998. So, you had developing countries roughly about 20 percent of GDP and then, it`s now about 40 percent of GDP. So, the ripple effect can be much larger.

EISEN (on camera): And while analysts say brace for more financial swings and turbulence ahead, it doesn`t appear to be a full-blown crisis ala 1997 yet. The key will be reaction to the Federal Reserve announcement Wednesday and any news on the health of China`s economy.

For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.

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MATHISEN: Well, here to discuss everything under the sun from currency turmoil to the Fed, to the faith of emerging market economies, maybe even the Super Bowl, is Chris Hyzy, chief investment officer for U.S. Trust.

Chris, welcome. Good to have you with us.

CHRIS HYZY, US TRUST CHIEF INVESTMENT OFFICER: How are you doing, Tyler?

MATHISEN: Let`s start where Sara Eisen left off and that is with the currency turmoil currently rattling everywhere from Thailand to Argentina to Turkey to South Africa. Is this possibly going to become a kind of contagion that can do really sustained damage to developed markets or not?

HYZY: You know, when you take a look at the picture going on now versus the mid to late 1990s as you`ve referenced, virtually, every emerging market had a currency crisis. From 1994, starting in Mexico, and going all the way to the Russian ruble in 1998, and again with Argentina and Brazil in the early 2000s. You would say it`s back to the future all over again.

But the key main difference is, number one, the United States is on firm footing and getting better from a growth outlook perspective — obviously from a monetary policy perspective — there is fed tapering concerns, pulling liquidity away from particularly those countries that need it. That`s still going to be there.

But from a financial contagion perspective, putting what`s going on today, making it very similar to back then, complete polar opposite as far as we`re concerned and the other big difference is, $17 trillion in cash around the world, Tyler, that`s out there, that`s very liquid, that`s still trying to find a home to invest in for the next few years.

GHARIB: You know, Chris, on Friday, after the markets closed, people were really freaked out going into this weekend. I mean, there is the Dow down over 300 points, and all this talk about crisis. What changed that today it was just like a normal, you know, middle of the road kind of sale off on Wall Street?

HYZY: You know, part of it is the fact the selling pressure just didn`t pull through as much as everyone expected. They tried it around midday when the Dow and S&P were down around 1 percent or so.

But everyone is pointing to the fact we haven`t had a big correction. We had a six to seven percent correction, somewhere around May, June, when tapering talk about the first initial shot. Emerging markets never came back except for the one episode in the fall.

But the reason it`s not pulling through right now, is because the outlook for 2014 is a much better growth outlook than last year. Europe is going to grow at 1 percent versus negative one. Japan is probably going to repeat their performance and the U.S. will grow close to 3 1/2 versus two.

So, the outlook economically in profits, even in fair valued markets is a lot better this year than last year.

MATHISEN: Let`s talk about the Fed a little bit. Since they last met, some of the economic data have not been exactly rosy — a poor jobs number. Today, some housing numbers were a little bit soggy.

Do you think that will change in any way their proclivity to taper or pull back on stimulus?

HYZY: It really doesn`t look that way, Tyler. The only thing that`s really going to change their so-called measured tapering under the Yellen Fed is that this particular noise in the system around the emerging markets becomes a contagion. We think that`s extremely low probability event. It`s out there, but it`s the low probability event.

The job numbers going back to December, there is a lot of noise in the system and any one month jobs number. When you go back and look at the three-month trends, they are robust and, yes, they`re not as strong as prior cycles, but I would argue that there is a lot of reason for that, a lot is demographics.

The one thing that I think a lot of investment participants are getting wrong is they`re looking at the participation rate, and they`re assuming that people are leaving the job force because they are discouraged. Actually, the growth in jobs is heavier than the growth in the participation rate. So, the unemployment rate goes down. You know, that`s actually a pretty good thing and that`s why we should see a lower unemployment rate than the Fed even expects by mid-year.

MATHISEN: Chris, thank you very much for your insight tonight.

HYZY: You bet. Thank you.

MATHISEN: Chris Hyzy, chief investment officer for U.S. Trust.

GHARIB: Well, economists are not only worried about slowing growth in China, but also the rise of what`s called a shadow banking system there. From Beijing, Eunice Yoon explains what that is and the risks involved.

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EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Joe Zhang is a shadow banker. He runs a micro credit firm in southern China. A former investment banker, he now funds small-time clients, anyone from fruit growers and street hawkers to mom and pop shops.

JOE ZHANG, SHADOW BANKER: We are a very important supplement to the traditional banking system. Small and medium-size companies and under privileged consumers have no way to access a bank credit, but they can come to us.

YOON: China`s financial sector has long been controlled by the government. The big state-run banks funnel funds to other state-owned enterprises, or industries and projects targeted by government economic policy.

(on camera): State-owned enterprises easily get funding for big projects like this one.

(voice-over): That means some companies can cash in whenever they want, while others, usually private companies, are largely cut off, fostering an alternative shadow financial sector.

Jong charges borrowers 24 percent a year on loans that need to be paid back in three to nine months.

ZHANG: That`s really scapegoating people like us. And we are doing an achievement business.

YOON: But not everybody in shadow banking is. The $6 trillion industry encompasses all sorts of untraditional financing, everything from micro-lenders to indirect or off balance shut loans.

Recently, some of those investments have gone sour, raising fears of defaults in an unregulated sector that could endanger the nation`s banks and ripple throughout the world. Zhang says his clients are riskier, but he argues shadow bankers like him do more rigorous credit analysis than government-backed banks.

ZHANG: We have skin in the game, so to speak. We`re very careful with the management of our money. If we — our loans go bad, it hurts our own pocket.

YOON: Yet, if too many loans go bad, many believe it will hurt China and the world.

For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon.

(END VIDEOTAPE)

GHARIB: Coming up, why two Dow components, both big drug makers, are having very different days.

MATHISEN: Some big tech firms have reached a deal with the Justice Department over the NSA`s spying on Americans. The agreement settles how much tech and telecom companies will now be allowed to disclose to the public about the NSA`s phone and Internet recordkeeping on U.S. citizens.

GHARIB: Back now to our top story. Apple (NASDAQ:AAPL), our guest tonight owns shares of the company and says he`s adding more to his portfolio. He`s John Stephenson, portfolio manager at First Asset Investment.

John, thanks for joining us.

You know, everybody this afternoon was talking about what`s wrong with Apple (NASDAQ:AAPL) and it`s stock was selling off, and you`re adding to your portfolios. What does Apple (NASDAQ:AAPL) have going for it?

JOHN STEPHENSON, FIRST ASSET INVESTMENT MANAGEMENT: Pretty much everything. The stock is cheap. That`s the first thing. It`s trading at nine times ex-cash versus the overall market of 15 times and tech sector 13.6.

And if you throw in the implications of cash, you`re at 12.7 times or so, so still cheap. It`s got early days with China, Brazil, India, so emerging markets are a growth story. It hasn`t done anything in enterprise.

Plus, it has a ton of potential. I mean, it`s got 575 million customers that they can tap into new services, internet based services, or just additional offerings. So, that`s something and then, of course, there`s a widely rumored iWatch, iTV, maybe a combined iPad/MacBook Air.

So, there is tons of potential the company has and again, it`s a company that is very inexpensive. So, I think it really has everything going for it.

MATHISEN: John, the company had record revenues in the quarter. It beat estimates on the top and bottom lines. And yet, investors seem to focus on two things — iPhone sales, which didn`t quite measure up to the forecast and the outlook for the current quarter`s revenues.

Are they getting it wrong?

STEPHENSON: Well, I think there is some concern. I mean, first quarter is seasonally weak. Of course, you have this last quarter, very, very strong because of the holiday season. I think what really came down to guidance — iPhone sales were a little bit light of 51 million, versus the street expectation of 56 million.

But when you look at what happened is earnings were quite substantial. They really beat quote handedly, 1450 versus 1409.

MATHISEN: Yes.

STEPHENSON: And I think the deal was the iPhone 5S, which is high margin, really carried the day. So, I think the good news is they are selling more of the high margin stuff and again, all of China Mobile (NYSE:CHL) is huge and I think you`ve got the potential of $10 billion or more in addition revenue over the course of the next 12 months because this is just a new deal.

So, I think overall, it looks very attractive going forward. But again, the guidance was a little weak and people were disappointed. I mean, it came in quite a bit lower than people were hoping.

GHARIB: Right, right. You know, I hear what you`re saying, John, but I just wonder — do you think Apple (NASDAQ:AAPL) management, Tim Cook, is going to will feel pressured that he has to do something to, you know, stem the sell off in the stock, maybe raise the dividend, maybe, you know, buy back shares, these are the things that Carl Icahn, the activist investor, has been calling for.

STEPHENSON: Yes. No, I think there`s going to be some of that. But I don`t think you`re going to see $142 a share coming back to investors any time soon. I mean, I think you`re looking at some potential per share buy back, some potential for dividend increase. I think that`s clearly where they need to go over time.

But I think what they should be doing is innovating for that next wave, because I think that`s really what the street is looking for. What is going to take it harder? Will it be the iPhone 6 potentially with the bigger screen? That will allow them to go more head-to-head with Samsung`s offering. But I think that`s where the focus will remain and should remain.

MATHISEN: That`s one of the things I`ve been curious about, whether they`re going to come out with a larger screen phone because my guess is what I seem to hear you suggesting, John, is that they need to get their wow back. They haven`t had the wow in the last year or two.

STEPHENSON: Yes, I don`t know if you`re like me, Tyler, but I mean, I have every Apple (NASDAQ:AAPL) product out there. And, you know, it`s pretty exciting at first and then you think I know my way around the 5 and the 5S, and, you know, I don`t see a huge implication for it.

But I do think that what they have done is they put together a lot of really good pieces. I do think the large screen iPhone that`s rumored to come out with a five-inch screen will be a big game changer for them. I do think their early days in the enterprise market, and keep in mind the biometrics with the 5S, that will help them in terms of security going forward.

And they have a fully integrated program with both the software and the hardware. And that allows them a tremendous user experience, when you buy an android phone and they are the bread and butter of this company, you`re stuck with the operating system. But, you know, within a month, 70 percent of the people have a new operating system when iOS is updated.

GHARIB: All right. John, thanks a lot for all that information. Really appreciate it.

John Stephenson, portfolio manager at First Asset Investment Management.

MATHISEN: Well, Comcast (NASDAQ:CMCSA) (NYSE:CCS) and Charter Communications (NASDAQ:CHTR) are reportedly nearing a deal to buy Time Warner (NYSE:TWX) assets, and that is where we begin tonight`s “Market Focus”.

Charter has agreed in principle to sell some of Time Warner (NYSE:TWX) Cable`s assets to Comcast (NASDAQ:CMCSA) (NYSE:CCS), but only if it succeeds in buying the remaining parts of Time Warner (NYSE:TWX) Cable for itself. The deal to sell off some assets will give Charter additional funds to complete the takeover of the cable company. Shares of Comcast (NASDAQ:CMCSA) (NYSE:CCS) up slightly $52.49, at the close there. Shares of Charter surged 4 percent to $136.92. Time Warner (NYSE:TWX) Cable fell a little, $133.45.

Pfizer`s experimental lung cancer drug failed to meet its goals in two late stage trials. Patients given the drug did not show improved survival without the disease progressing. The results disappointed investors and shares fell nearly 1 1/2 percent to $29.66.

Shares of Merck (NYSE:MRK) hit a record-high after Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) upgraded the stock to overweight from underweight. The analyst there said the company`s prospects for a new cancer drug have improved and could bring more than $6 billion in annual sales to the company by the year 2020. The drugmaker stock up 1 percent to $52.53.

GHARIB: Well, it was just the opposite at Cisco (NASDAQ:CSCO) Systems. Its rating was downgraded by JPMorgan (NYSE:JPM) Chase, from neutral to underweight. The firm sited Cisco`s high evaluation, as well as weakness in the emerging markets. Shares slipped a fraction to $22 a share.

AT&T (NYSE:T) told British regulators it won`t be making a near-term bid for European telecom giant Vodafone. Now that AT&T (NYSE:T) has denied a takeover bid, it must wait six months if it decides to make a buyout offer for the company. That`s according to U.K. takeover rules.

Shares of AT&T (NYSE:T) rose slightly to $33.51.

And Royal Caribbean posted an earnings beat thanks, to improved ticket sales. The cruise operator also gave investors a rosier full year outlook, despite a recent illness outbreak that affected 600 passengers on one of its ship recently.

The company CEO doesn`t think the outbreak will deter customers.

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RICHARD FAIN, ROYAL CARIBBEAN CRUISES CHAIRMAN & CEO: I don`t think it has a big impact on bookings because most people understand just how common this is. It`s the second most common illness in America. Of course, you up in the north are having bad weather and the winter, this kind of does occur. Unfortunately, an outbreak is defined as only 3 percent of the people and it`s still a very rare occurrence.

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GHARIB: And shares were up nearly 2 percent to $48.04.

And 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`ll see you back here tomorrow night.

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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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