Transcript: Tuesday, February 25, 2014

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


SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Where do we stand? Home Depot (NYSE:HD) and Macy`s (NYSE:M) say spring is the thing to look toward. But one survey on housing says the best of the recovery may be behind us. So, is the economy in the winter doldrums or are there real problems ahead?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Grand Canyon. A controversial bill in Arizona has big business ratcheting up the pressure on the state`s governor.

GHARIB: And being nimble. In the second part of our health care series, how one health insurance start-up is trying to compete with the big boys.

We have that and a whole lot more on NIGHTLY BUSINESS REPORT for this February 25th.

MATHISEN: Good evening, everyone, and welcome.

After months of punishing snow storms and bone-rattling temperatures across much of the nation, a lot of people — along with retailers, real estate agents, auto dealers — and just about everyone else seem to have bad case of spring fever. And with the first official day of spring just three weeks away, we`re getting now some hard numbers on the weather`s toll on the economy, specifically its toll on two of the nation`s biggest store chains and the price it`s exacting on the housing market.

We start today with a read on how economy is doing right now after Home Depot (NYSE:HD) and Macy`s (NYSE:M) both saw profits rise last quarter, but still felt the sting of bad weather in the form of weaker than expected sales. But again, spring is just around the corner, they say. And both chains have a lot to look forward to.

Courtney Reagan has more.


COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Extreme winter weather kept millions of Americans sidelined indoors throughout much of January and February. And it shows in retail earnings reports. While the weather weighed on retail during the height of the storms, the good news is winter ends. And today, retailers and investors are moving on, looking towards spring.

Macy`s (NYSE:M) says while it expected a sales decline in January, the month was worse than expected, due in part to the harsh winter weather that caused nearly 30 percent of the retailer stores to close at some point during the month. But CEO Terry Lundgren is thinking spring, saying, “Once warm spring weather arrives and our full assortment of fresh spring merchandise is in place, we believe customers will return to a more normalized pattern of shopping.”

CHUCK GROM, STERNE AGEE MANAGING DIRECTOR: I think what we have to do is look at the November-December period for Macy`s (NYSE:M). They`re up close to 3.6 percent. Their online business remains robust. So, we`re looking past it and clearly with shares up today I think most of the street is as well.

REAGAN (on camera): For Home Depot (NYSE:HD), the weather impact balanced out. The negative hit to sales of outdoor and building material goods was partially offset by the increase in sales of heating, weather stripping and snow removal-type products.

(voice-over): But Home Depot (NYSE:HD) is looking even more forward to spring than Macy`s (NYSE:M). Not only does the home improvement retailer think strengthening home values will continue to lift sales, but the first quarter is also the most important one to home improvement retailers as consumers begin spring planting and sprucing up their homes.

GROM: We think there`s probably going to be a massive release of pent up demand. People have been stuck in their houses for six weeks. We think they get out and we think retail sales for the first quarter probably start better than they started.
REAGAN: While changing seasons won`t cure everyone`s retail ills, for those with strong underlying trends like Macy`s (NYSE:M) and Home Depot (NYSE:HD), spring fever is just what Wall Street ordered.



GHARIB: Meanwhile, bitter cold weather along with higher home prices and a tight supply of homes on the market caused home prices to fall in December. According to the Case-Shiller Home Price Index, prices fell one-tenth of 1 percent, the second month-to-month decline in a row.

But survey also reported that in December, home prices in the 20 biggest U.S. cities rose more than 13 percent since December of 2012.

Yale economist Robert Shiller, namesake of the closely watched survey, predicts more uncertainty in housing prices in the year ahead.


ROBERT SHILLER, CO-FOUNDER, CASE-SHILLER INDEX: I think prices will continue to go up for the first part of the year at a fairly good pace. But I think they may weaken. There`s a lot of signs showing that the labor — that the housing market is weakening.


GHARIB: The survey also says that the strongest part of the housing recovery may be, quote, “over.”

MATHISEN: Well, no matter where home prices are ultimately headed, you can be sure of one thing: your grocery bills are heading higher.

The USDA predicts that food prices will rise between 2 1/2 percent and 3 1/2 percent this year, which is right in line with overall inflation. But that is based on a normal weather pattern. And with a devastating drought out West and a few polar vortex visits, things have been far from normal lately. The agency admits that California`s drought may have a large and lasting impact on fruit, vegetable, dairy and egg prices.

GHARIB: Gus Faucher joins us now to talk more about just how economy is doing. He`s a senior economist at PNC.

So, Gus, is the economy — is it just winter doldrums or is something more going on, and we just keep talking about prices going up?

GUS FAUCHER, PNC SENIOR ECONOMIST: No, I think it`s primarily the weather. People have put other car sales, put off home purchases because of the bad weather. But I think once things get a little bit better consumers will go out and start spending again.

MATHISEN: You know, a couple of weeks ago, Gus, we were all concerned about unrest and turmoil in the emerging markets, concerns about Asia and China. Should we be concerned about those things? Is Asia the emerging markets? Is China slowing so much that it`s going to affect us?

FAUCHER: You know, I think it may be a slight drag on growth, but overall, the global economy looks like it`s in pretty good shape. We have seen growth in Asia and China in particular slow over the past year or so, but developing economies continue to expand. Europe has come out of recession. That`s a big positive for the U.S. economy, because there are a lot of exports to Europe.

And so, I think that in general, the global economy will be a plus for the U.S. this year. Certainly, there is some concern about what`s going on with the Federal Reserve that is causing some uncertainty in emerging markets. So, that maybe a slight drag on their growth.

But overall, I think trade is going to be positive for the U.S. this year.

GHARIB: Gus, let`s talk a little bit more about some of the fundamentals right here at home. You just heard our report about housing, prices going up and, you know, also, just in the last couple of weeks, we`ve seen that builder confidence is down. Today, consumer confidence lower than expected.

How do you explain all of that in your scenario for how the U.S. economy is doing?

FAUCHER: Well, I mean, we did see a slight decline in consumer confidence in February, but the current conditions part of the index was actually at its highest level since the spring of 2008. So, that`s very good news.

You know, we have seen home sales come down. I think some of that`s tied to what`s going on with the weather. Some of it is higher mortgage rates.

But if we look at the fundamentals of the economy, they look very solid. We continue to see job and income growth so consumers are spending a little bit more. They`re also seeing greater wealth from higher stock prices and house prices, so that`s supporting their spending.

For businesses, they`re very profitable. Their balance sheets are in great shape. They`re looking to invest and take advantage of low interest rates.

And then, on the government side we have less drag from tax increases and spending cuts than we had last year. So, I think this year will be noticeably stronger than it was in 2013.

MATHISEN: Let`s get a quick thought on housing. I agree with most of what you said there, but I quibble with the idea that incomes are actually going up very much. There is I`m told a bit of a squeeze on affordability. That incomes have not gone up enough to keep up with rising mortgage rates and rising prices.

Is housing going to slow markedly this year because of that?

FAUCHER: Well, I mean, certainly, affordability has declined from where it was a couple of years ago when we had mortgage rates at 3.25 percent and prices were down tremendously. However, prices are still down by about 1/5 from where they were at their peak in 2006. We are seeing some job growth, we are seeing some income growth, and we do see lenders a little bit more willing to lend.

So, I think although affordability is down somewhat, it`s still pretty good on a historical basis. And I think that will be enough to bring people into the housing market.

GHARIB: All right. Thanks a lot, Gus. Appreciate your coming by to talk to us.

Gus Faucher, senior economist at PNC.

MATHISEN: On Wall Street today, stocks up early gains falling in the final hour of trading after a choppy session. Investors weighed those earnings from Home Depot (NYSE:HD) and Macy`s (NYSE:M) last quarters, against the drop in consumer sentiment for February. We`ve just been talking a little bit about that.

The Dow fell 27 points, the NASDAQ ended lower by five, and the S&P slipped two points. It is now just three points shy of a fresh closing high, though.

GHARIB: Stock investors and bond traders were transfixed over a “Wall Street Journal” article today about what was behind the breakup of two of the biggest names in fixed income investing. The article recounted the heated tension and personal clashes between PIMCO cofounder Bill Gross and his departing co-chief executive officer, Mohamed El-Erian. Gross disputed the characterizations of the article, saying El-Erian`s disagreement over his business plan for PIMCO was a factor for El-Erian`s resignation and not Gross` high-intensity style of management.


BILL GROSS, CO-CIO AND FOUNDER: A month or two months before he resigned, he basically told the executive committee that he thought it was a good plan, an excellent plan, but that he wasn`t the man to carry it forward. And so, you know, all of this — all of this discourse about — an autocratic style from my standpoint and the conflict between Mohamed and myself is overblown.


GHARIB: El-Erian, who will stay on with PIMCO`s parent company, that`s the German insurer Allianz, did not respond to requests for a comment.

MATHISEN: After months of political crisis, Ukraine is now in a financial crisis. Its economy paralyzed by those massive protests that ended in bloodshed last week. As the nation`s leadership appeals to the international community for a $35 billion bailout, its citizens now are shocked to find out that the former president lived a secret life of extravagance and opulence.

Michelle Caruso-Cabrera is in the capital city of Kiev with more.


MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Ten miles outside the center of Kiev, Viktor Yanukovych`s massive estate, complete with a mansion, pool house, spa, zoo, and even an ostrich farm. Inside the main residence, it seems nearly everything is gilded in gold, except for this white baby grand piano, a Steinway.

Massive bedrooms, inlaid mosaic tile in this bathroom, a coat closet bigger than many a bedroom which still contains dozens of luxury cashmere coats.

The palace, as the Ukrainians now call it, is guarded by a group of voluntary militia, in ad hoc military uniforms. They say they`re there to prevent the thousands of Ukrainian tourists from looting what`s left.

Walking the entire length of the estate takes at least an hour. Along the way, we spoke to these gentlemen who came after seeing it on TV.

They can`t believe the former president lived like this in a country which is still so poor compared to the rest of the world.

In a guest house far from the crowds, dozens of journalists are working on another discovery — more than 100 binders of documents found in the nearby river apparently thrown there in an attempt to destroy them. The journalists are drying them, photographing them, and then posting them on the Internet so the whole world can see.

(on camera): Even though the journalists have only just begun to look at this vast trove of documents, they say they`ve already found evidence that will show the former president of the Ukraine, Viktor Yanukovych, was laundering millions of dollars worth of bribery payments to secret accounts.

(voice-over): Oleg Khomenok is a Ukrainian investigative journalist.

OLEG KHOMENOK, INVESTIGATIVE JOURNALIST: These are the originals of the documents. And this means that we have the original proofs, proven texts that can reveal the truth.

CARUSO-CABRERA: Now that the former president is gone, Ukraine`s stock market has shot up almost 20 percent, and the country`s bonds have rallied, too.

Tomas Fiala is the founder of Ukrainian investment bank.

(on camera): Is the change in leadership good for the economy?

TOMAS FIALA, DRAGON CAPITAL FOUNDER & CEO: It is very good. That`s what the economy has been waiting for. The economy is in such a bad state because of local mismanagement, corruption, like (ph) the rule of law by the previous president and his government which has mismanaged the economy for the last four years.

CARUSO-CABRERA: Before the country can get back on its feet, the parliament needs to form a new coalition government. The international community says it can`t begin negotiating a bailout until it has someone to negotiate with.

For NIGHTLY BUSINESS REPORT, I`m Michelle Caruso-Cabrera in Kiev.


GHARIB: Economists and investors are also keeping a close watch on China. Corporate debt there is at a record high. Its stock market is the Shanghai Composite Index has five fallen 5 percent over the last four sessions and China`s currency, the yuan, is down nearly 2 percent against the U.S. dollar in the past year.

So, what`s behind the steady slide in the yuan?

Eunice Yoon has more from Beijing.


EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investors are closely watching the Chinese yuan, which has hit a six-month low against the U.S. dollar. Many people believe the weakness is part of Asia`s plan to reform the currency. The yuan has been depreciating in recent days and traders say that the move which have been big for a controlled currency could set the stage for a widening of the daily trading ban for the current 1 percent limit, to 2 percent.

They say the authorities are hoping to discourage speculative bets from the yuan by showing there is risk the Chinese currency could lose value.

Some economists believe that the government could be dampening its security to help boost China`s manufacturing sector because economy is slowing down. But at this stage, most people believe that the forex moves are more about Beijing`s plans to reform than over concerns about economic growth.

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


MATHISEN: Coming up, the GOP takes on tax reform.

But, first, a look at how international markets fared today.


MATHISEN: Tax Day, April 15th, just seven weeks away. And now, House Republicans are preparing to unveil a new plan to simplify the nation`s tax code.

John Harwood joins us now from Washington with more on the GOP proposal.

John, what is Chairman Camp proposing?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: The comprehensive reform, Tyler, in the nature of what Ronald Reagan signed into law during the 1980s. It would collapse the current rates from seven rates down to two, 10 percent and 25 percent. That would drop the top rate from 39.6 percent down to 25 percent. It would have a surtax on incomes — earned income over $450,000 of 10 percent. And on capital gains and dividends, it would tax them at ordinary rates but it would exclude 40 percent of the income from taxation.

So, effectively, that takes the rate from the current 20 percent down to 15 percent.

GHARIB: All right. So we know, John, that any time there`s a discussion about tax on Capitol Hill, there are debates on both sides of the aisle. What are the biggest potential land mines in this plan?

HARWOOD: The biggest land mines are the things that the Chairman Camp, Dave Camp, the chairman of Ways and Means, has not revealed yet, and that is how he pays for this. In a revenue-neutral plan if you take the rate down from 39.6 percent to 25 percent, you`re going have to raise a whole lot of money elsewhere. And that`s where the trouble is.

What are they going to do on health care costs which are currently — employer`s costs are excluded from taxation. What are they going to do on charitable donations, state and local tax deduction, home mortgages? All of those are things that will draw huge amounts of potential opposition.

And one other one that Wall Street is watching, a bank tax. It is expected this plan is going to have a variant of what President Obama proposed and called a financial crisis responsibility fee a couple of years ago. Chairman Camp is going to have something like that in there and Wall Street is nervous about it.

MATHISEN: If you want revenue neutrality and you cut rates, you`ve got to cut deductions as well. Is there any realistic chance of tax reform passing this year?

HARWOOD: No. In fact, Mitch McConnell, the Senate Republican leader came out this afternoon and said we`re not doing it, we can`t get it done. This is Dave Camp, the chairman, trying to lay a marker down. He leaves the chairmanship because he`s term limited out.

Max Baucus, his partner on the Democratic side in the Senate, now ambassador to China. He`s simply trying to say this is the culmination of the process and start a discussion that will go on for years.

MATHISEN: John Harwood, thank you very much.

GHARIB: Another legislative battle is raging in Arizona. Governor Jan Brewer has until the end of the week to decide whether to approve a bill that some say would allow businesses in the state to discriminate against gays. Proponents say the bill protects the religious freedom of business owners.

But as Scott Cohn reports, the biggest backlash is coming from businesses.


SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Opponents of Senate bill 1062 say it gives businesses a license to discriminate.

UNIDENTIFIED FEMALE: It feels like it opens the door for discrimination in a huge broad spectrum, the way the bill is written.

COHN: The bill doesn`t use the word “discrimination”, nor does it use the word “gay”. In two pages, it simply guarantees people and businesses` rights to act in a manner substantially motivated by a religious belief. Backers in the legislature say the bill is pro-business.

UNIDENTIFIED MALE: You should not have to forfeit your religious freedoms and rights merely because you want to work or start a business in the state of Arizona.

COHN: But some of the loudest voices against the bill are businesses. American Airlines, Marriott and Apple (NASDAQ:AAPL) have all urged Governor Jan Brewer to veto the bill. So has the organizing committee for next year`s Super Bowl outside Phoenix.

BARRY BROOME, GREATER PHOENIX ECONOMIC COUNCIL: We have four companies call us to tell us that we`ll be dropped from their list as a potential investment location unless Governor Brewer vetoes the bill.

COHN: But businesses that follow through could walk into the same controversy elsewhere.

(on camera): The expansion of same-sex marriage has triggered a tidal wave in the courts. What are the rights of a wedding photographer or a florist or a baker to refuse to do business with same-sex couples? So-called pro-family groups are pushing bills like Arizona`s across the country.

(voice-over): The libertarian CATO Institute thinks concerns about the economic impact of the law may be overblown.

ILVA SHAPIRO, CATO INSTITUTE SENIOR FELLOW: Well, it will create economic activity for lawyers. That`s to be sure. But we`ll just have to wait and see whether nationally, economic actors will take it out on the state of Arizona as a whole.

COHN: The last time an Arizona law triggered this kind of controversy, immigration reform four years ago, the state dropped to 16th place from seventh in an annual CNBC ranking for business friendliness. Governor Brewer has until the end of the week to decide if this law is worth the risk.



GHARIB: And add to the list of the big businesses against this legislation, Intel (NASDAQ:INTC) late this afternoon, it also called for veto of the legislation.

MATHISEN: Shares of InterMune (NASDAQ:ITMN) more than doubled on news its lung drug succeed in a late stage trial. And that`s where we begin tonight`s “Market Focus.”

The drug, which treats a fatal lung disease, slowed lung deterioration in the study, spurring hopes thought might be close to FDA approval. The stock surged 170 percent today to $37.80.

LinkedIn (NYSE:LNKD) is taking on China. The company will launch a Chinese language Web site to expand its presence there. Currently, the social network has 4 million users of its English language site in the country. It says the new site will let it connect to China`s 140 million professionals.

Shares of LinkedIn (NYSE:LNKD) were up 5 percent today to $209.84.

Zulily wowed Wall Street with its first earnings report since going public back in November. The daily deals site which sells clothing and accessories for women and kids saw fourth quarter sales double from last year. The company`s current quarter outlook also topped estimates — and watch these shares move up 36 percent to $58.41.

GHARIB: Different story at Office Depot (NYSE:ODP). It stunned investors by reporting a surprise quarterly loss, and warned that sales will continue to fall in 2014. The loss was partly because of expenses tied to its recent merger with OfficeMax. The office supply retailer has struggled as more shoppers are purchasing office goods online. Shares of Office Depot (NYSE:ODP) tumbled nearly 9 percent to $4.88. Shares of Staples (NASDAQ:SPLS) also fell in sympathy, down almost 3 percent to $13 a share.

Western Union (NYSE:WU) shares also on the down side on word that U.S. authorities are investigating the company on whether money moved on its network that may have been tied to alleged fraud. The company says it`s received multiple subpoenas since November. Shares fell almost 1 1/2 percent to $16.12.

And shares of Tesla revved higher on an upgrade out of Morgan Stanley (NASDAQ:NBXH) (NYSE:MS). The investment firm more than doubled its price target of the heck carmaker`s stock to $320. The analysts wrote that Tesla has the opportunity to not only disrupt the auto industry but also the electric utility industry by building battery packs for energy storage. The stock rose about 14 percent today to $248. Look at this chart over the past 14 months, the stock is up 650 percent.

MATHISEN: And even more good news for Tesla. “Consumer Reports” says Tesla`s Model S sedan was the best overall car, bar none. It scored a 99 out of 100 by the magazine`s reviewers. The best auto brands, Lexus was number one again, followed by Acura then out Audi. Toyota (NYSE:TM) and Subaru were tide for fourth place. Ford and Jeep were at the bottom of the list.

GHARIB: Coming up of the program, how venture capital is hoping to shake up the insurance industry. That`s next.


GHARIB: More big job cuts coming to the nation`s biggest bank, JPMorgan (NYSE:JPM) Chase now plans to eliminate 8,000 workers as businesses at its mortgage and retail banking divisions continues to shrink. That number is double the number of cuts that had been announced, and it comes on top of more than 16,000 layoffs that took place just last year.

MATHISEN: And finally tonight, venture capital getting into health insurance. In the second part of our series, “Insurance Upstarts”, Bertha Coombs takes a look at the challenges and opportunities facing a startup in this environment.


BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): If Oscar`s New York City offices seem more like a tech start-up than an insurance firm, it`s no accident.

KEVIN NAZEMI, OSCAR CO-FOUNDER: We wanted to build a company that was like having a doctor in the family.

COOMBS: Co-founders Kevin Nazemi, Mario Schlosser and Josh Kushner, whose Thrive Capital helped fund firms like Instagram, set out to use big data much the way consumer-oriented tech firms do, as the driving force to their health insurance start-up.

NAZEMI: The big is interesting only if you can light up consumer experiences that point you to the type of doctor that you`re looking for, the type of care you`re looking for or give you the context on what care might cost relative to your specific plan.

COOMBS: They raised $45 million last year to launch Oscar from venture capital firms including the Founders Fund and Khosla Ventures, and got an additional $30 million this January.

NAZEMI: I think that the validation there is that people see the potential in action of a company coming into an industry that has had a history of giants that are slow moving.

UNIDENTIFIED MALE: You want more information about the Affordable Care Act? Sir, you have health insurance?

COOMBS: But they`re using old-fashioned shoe leather to help build word of mouth and whimsical online advertising.

And they say it has paid off on strong demand on New York`s health insurance exchange.

PAUL LAMBDIN, DELOITTE CONSULTING DIRECTOR: You may be able to configure what it takes to be a health plan more efficiently and effectively than a lot of the traditional players.

COOMBS: But longer term managing medical costs and pricing contracts could be a big hurdle for upstarts like Oscar.

Operating only in New York City, Oscar has contracted with a wide network of doctors and hospitals and with “Teladoc”, which allows members to access their doctor anytime for free over a phone or computer.

(on camera): The big question is about managing costs in terms of the medical costs. What have you seen so far that makes you feel that you`re on track?

NAZEMI: Because we utilize technology and data, we have early signals of what`s coming in. We feel comfortable that the risk that we have is manageable.

COOMBS (voice-over): In the first three months, they say their enrollment was in the thousands with a slightly younger demographic, mostly under 55 years of age.

(on camera): Oscar executives won`t give any specific numbers until after open enrollment closes March 31st. But in their regulatory filings, they had anticipated signing up 7,500 customers this year. Now, it appears they`ll easily exceed that.

(voice-over): Bertha Coombs, NIGHTLY BUSINESS REPORT, New York.


MATHISEN: And that`s NIGHTLY BUSINESS REPORT for tonight. I`m Tyler Mathisen. Thanks for watching.

GHARIB: And I`m Susie Gharib. Have a great evening, everyone.

Tyler and I will see you right back here tomorrow.

Nightly Business Report transcripts and video are available on-line post broadcast at 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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