Transcript: Tuesday, May 20, 2014

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

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BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Dow drag. The blue chip index tumbles triple digits, as retail earnings disappoint, and a Federal Reserve official says rate hikes may be coming sooner rather than later.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: On sale. A number of retail stocks get slammed. Is weak consumer spending a sign of more problems ahead?

GRIFFETH: Meeting of the minds. What President Obama says leaders from across the globe to convince them to invest in the United States?

All that and more on NIGHTLY BUSINESS REPORT for Tuesday, May the 20th.

Good evening, everybody. I’m Bill Griffeth, in tonight for Tyler Mathisen.

GHARIB: And I’m Susie Gharib. Good evening for me as well.

We begin with the bears coming back to Wall Street today. Stocks fell sharply after comments from two top Federal Reserve officials. The presidents of the New York Federal Reserve and the Philadelphia Fed gave conflicting speeches on when interest res would go up. Investors got the jitters after the Philly says, Charles Plosser says a stronger U.S. economy means policymakers might decide to hike interest rates, quote, “sooner rather than later.”

Now, even before Plosser said that, stocks were already in the red, following a round of disappointing earnings and outlooks from some top retailers, which is fueling concerns that the American consumer is just tapped out.

Here’s how things looked at the closing bell. The Dow fell 137 points, the NASDAQ down 29. The S&P lost 12 points. Also weighing on the blue chip average, Caterpillar (NYSE:CAT). It tumbled almost 4 percent after reporting a decline in retail machine sales.
Bob Pisani has more on today’s action on Wall Street and what investors are really worried about.

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BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks started weak, and they stayed weak. The immediate catalyst was disappointing earnings from a number of big retailers, including Staples (NASDAQ:SPLS), Dick’s Sporting Goods (NYSE:DKS), TJX, and Cato (NYSE:CATO).

Not only did they disappoint on earnings, several lowered guidance for the current quarter. Now, you can’t blame that on the weather. Regardless, the consumers are definitely not buying as much apparel. It’s not clear if the reason is because they’ve got less money or because they’re spending it all on cell phones and other electronics and games.

Stocks have drifted lower again in the middle of the day with heavy volume in the small cap Russell 2000 ETF as biotech and Internet names were once again under pressure. Those names sold off big in March and April, but they’ve been more stable in May. Commodity stocks like BHP Billiton (NYSE:BHP) and Vale were weak as well as there were worries about slower growth in China.

Philly Fed Chief Charles Plosser also commented in the middle of the day, saying a strengthening U.S. economy may force the central bank to hike rates sooner rather than later to stay ahead of inflation. But stocks did not act like the economy was improving today.

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

(END VIDEOTAPE)

GRIFFETH: More now on those weaker than expected earnings and outlooks from a host of big retailers today. First, a look at how the shares performed.

Dick’s Sporting Goods (NYSE:DKS) tumbled by 17 percent. Staples (NASDAQ:SPLS) was down 12 percent. Clothing chain Urban Outfitters (NASDAQ:URBN) down by almost 9 percent. TJX, the parent of T.J. Maxx and other discounters fell by 7 percent.

Bucking the trend today was Home Depot (NYSE:HD). It was one of the few Dow components that closed higher today.

Courtney Reagan has a roundup now for us on the latest change store earnings and she tells us what’s pressuring consumers and retailers alike.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): From printer paper to crop tops to golf clubs, it seems anyone selling anything is struggling these days.

Staples (NASDAQ:SPLS) reporting weak sales, traffic, and a nearly 44 percent drop in profit as consumers buy more of their office supplies online. TJX, the owner of off price stores T.J. Maxx, Marshall’s and Home Goods says sales of apparel has been weak and as a result, the retailer cut its earnings forecast. Dick’s Sporting Goods (NYSE:DKS) also cutting its profit and sales outlooks after weak first quarter sales for golf and hunting gear.

Well, weather certainly was more severe than normal in the beginning of the year, but it doesn’t explain everything. Some of the broader issues consumers are grappling with include stagnant wages, a still tight job market, and a housing market that hasn’t shown consistent signs of strength.

PAM QUINTILIANO: I covered the specialty apparel retailers, and there was a lot of problems as well with the fashion in the market place, and it’s just not resonating. And then you layer on to that, traffic issues. No one was going to the mall and the customer wasn’t inspired. And we’re seeing results, you know, out there now. It’s just not a good quarter.

REAGAN: There are also internal factors at play for some retailers. Target (NYSE:TGT) and American Eagle are both working with interim CEOs. Lululemon and Coach (NYSE:COH) have new CEOs getting first quarters in the books.

But there have been pockets of positivity this retail earnings season. While Home Depot (NYSE:HD) said weather was the main culprit, causing sales and profit to fall short of expectations, its chief financial officer classified May sales as robust on the earnings conference call, adding the retailer isn’t seeing evidence of a softening housing market.

Beleaguered department store JCPenney surprised Wall Street to the up side with nearly every metric, including traffic and sales, but most analysts believe retail is a tricky area for investors as it’s getting harder to predict which names will be winners.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: Michael Farr joins us now to talk more about the markets and what investors should be doing with their money. He is president of Farr, Miller, and Washington.

Hi, Michael.

MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Hello, Susie.

GHARIB: All right. So, with all the Fed speak today, it looks like interest rates — I don’t know when — but they are going to be going up. When that happens, what does that mean for the direction of the stock market, and what does it mean for investors and their portfolios?

FARR: Great question because we’ve seen the stock market kind of take a head-fake from previous Fed warnings. A year ago when Bernanke talked about the taper, the treasury market and the treasury yield went way up and the Treasury bond fell off, and stocks didn’t like it very much.

Once they began to taper, of course, treasuries rallied, yields fell, and the stock market has seemed to like it pretty well. So, I’m wondering if perhaps we’re not seeing a bit of a repeat. They’re now talking about hiking rates and stocks are pulling back. I think we might have a different experience when indeed rates start to rise.

Overall, they’re looking at the slack labor market is what Bill Dudley said in his comments today, and as long as the slack labor — there’s slack in the labor market, they’re not seeing any real wage inflation, then we don’t have other inflation and the pedals I think probably stay on the sidelines for a long period. Stocks will have some more room to the up-side. Stocks are also one of the asset categories that tend to appreciate and act as a bit of an inflation hedge. So, investors kind of once again have to ignore the noise in the fish market and pay attention to the price of fish.

GRIFFETH: As the tapering continues here, Michael, and the Fed keeps pulling back on the number of bonds that it buys and the treasury market and the mortgage market here, do you think the economy is where they thought it was going to be? Housing still not reviving as much as we all thought it should. Retail, we just hear, they had a lousy first quarter this time around. Interest rates and inflation are not picking up to any great degree right now.

What’s going on? What do you think the Fed is thinking about right here?

FARR: Bill, I think it’s an excellent question, and I think the Fed is in large part puzzled. I mean, they have created this balance sheet over $4 trillion. We’ve had over $6 trillion in deficit spending over the past is six years to generate 2 percent GDP growth.

So, for all of this stimulus everywhere, we haven’t really been creating that many more jobs. We haven’t seen the economy rebound in terms of organic demand, and what we really saw out of Wal-Mart (NYSE:WMT) was they told us that the Wal-Mart (NYSE:WMT) shopper, which is middle America, the Wal-Mart (NYSE:WMT) shopper doesn’t have more money to spend, so when your GDP is two-thirds consumer and the consumer doesn’t have more money, you know, I think they’re a little confused that they haven’t seen inflation yet. They’re biding their time, but they would like to see it.

GHARIB: Let’s get some advice from you for investors, Michael. What should investors do with their portfolios? Are you changing your investment strategy?

FARR: We never change our investment strategy, but I think this is not a time when the market is making new highs to take on additional risk, so I think multi-national companies with solid balance sheets, good clear market share, good strong cash flow and not too much debt and a good little bit of a dividend on the side make a whole lot of sense to me. Be defensive —

GHARIB: Can you give an example? Give the name of one stock at the top of your list?

FARR: Yes, Johnson & Johnson (NYSE:JNJ) has been a favorite of mine for a long time. The stock is in the mid-teens in terms of a P/E multiple. They have a AAA balance sheet, a 2.5 percent, 2.6 percent dividend. I mean, you make as much money or more on a AAA balance sheet from Johnson & Johnson (NYSE:JNJ), than you do on the U.S. Treasury, which is no longer AAA. I think that’s the way to go.

GHARIB: It makes a lot of sense. Michael, thank you so much. Michael Farr with Farr, Miller & Washington.

FARR: Thank you.

GRIFFETH: Yet another round of recalls for General Motors (NYSE:GM). This time, they are recalling another 2.4 million cars, sport utility vehicles, and pickup trucks for a variety of safety problems.

Most of the latest recalls are for possible faulty seat belts in Buick Enclave, Chevy Traverses, General Motor Arcadias and Saturn Outlooks. They’ve been made over the last five years. Now, other vehicles are being recalled for concerns about air bags, transmissions, and fire issues. This makes 29 recalls for G.M. so far just this year, involving more than 15 million cars and trucks.

GHARIB: We’ve got a sobering reminder today about the troubles that remain in the U.S. housing market. This is seven years after the housing bust. Zillow, the online real estate site, says that during the first three months of this year, nearly 10 million American homeowners with a mortgage are still under water. That means they are owing more on their loan than their homes are worth.

GRIFFETH: And while the real estate market struggles to attract more home buyers, President Obama turned to some top corporate leaders from around the world for advice on attracting more investment here to the United States.

Hampton Pearson has more on today’s meeting and what those CEOs are looking for in return.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Top executives from both U.S. and foreign-based companies were invited to the White House for a select USA business roundtable, focused on attracting more direct investment in the U.S. A 3-year-old federal effort aim at helping firms navigate government red tape is beginning to pay dividends. U.S. assets of foreign affiliates topped $4.5 trillion in 2014, an all-time high according to Commerce Department data. The president told the business leaders there’s more to be done.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We have the most dynamic and creative and innovative economy in the world, but we don’t always do what it takes to go after business around the world and make sure that they know the benefits of investing in the largest market on earth.

PEARSON: While the Obama administration was touting new incentives for more foreign direct investment on Capitol Hill, new legislation was introduced cracking down on American businesses that reincorporate offshore just to avoid paying taxes. Drugmaker Pfizer’s pursuit of British AstraZeneca is one of two major big tax inversions on lawmakers’ radar screens. Today, 14 Senate Democrats backed legislation calling for a two-year moratorium.

SEN. CARL LEVIN (D), MICHIGAN: We need to act because these schemes are unfair to companies and individuals who don’t engage in similar gimmicks to lower their tax bills.

PEARSON: Republican tax writers say combating inversion should be part of comprehensive tax code reform.

Former Mississippi Governor Haley Barbour, who got Toyota (NYSE:TM) to build a manufacturing plant in state years ago is no stranger to the business investment debate.

HALEY BARBOUR (R), FORMER MISSISSIPPI GOVERNOR: It’s a heck of a lot harder to get foreign direct investment from overseas companies in America when America has the highest corporate tax rate in the world. I mean, that is something you have to really get over.

PEARSON: And, yes, tax reform was at the top of the list of incentives from the 11 executive from American and overseas companies who met with the president today.

ANGEL RUIZ, ERICSSON NORTH AMERICA: Every angle that we can muster on our side to bring business back to the U.S., you know, tax benefits, any kind of corporate benefits, to have the company stay and do business in the U.S. That’s a huge advantage for us.

PEARSON: The next select USA business roundtable will take place next March at the White House.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.

(END VIDEOTAPE)

GHARIB: Still ahead on the program, GoPro, famous for its action cameras, gets ready to go public. What are the possible risks and rewards for investors? That’s coming up.

(MUSIC)

GRIFFETH: Obviously when consumers make a request to a company, it should listen, but that apparently didn’t happen with Sprint. In the biggest fine ever of its kind, the wireless telecom company has been ordered to pay $7.5 million to the FCC for violating its “do not call” rule. Sprint will also have to insure that its employees are properly trained on how to record consumers do not call requests, so that the calls actually do stop coming.

GHARIB: Well, if you don’t like solicitation calls to your house, you may not like what Facebook (NASDAQ:FB) is up to. The social networking giant is teaming up with France’s biggest advertising company to tailor video ads that will pop up on your Facebook (NASDAQ:FB) or Instagram account.

Morgan Brennan explains.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Facebook (NASDAQ:FB) and Publicis Group announcing an extent of advertising deal that includes video ads. It brings the social media giant one step closer to a broad roll-out of premium video ads. Ads that could significantly boost Facebook’s revenue as much as $1 billion annually by some estimates and potentially change the way marketers target users online.

KEN SENA, EVERCORE PARTNERS ANALYST: Facebook (NASDAQ:FB) feels that they’re bringing scale to the table, they’re bringing measurement, and they’re bringing an edge in format in terms of whether its the newsfeed ad or the ability to experiment a little bit more around video.

BRENNAN: Publicis and its client which includes Verizon (NYSE:VZ) and Coca-Cola (NYSE:KO) will work closely with Facebook (NASDAQ:FB) to develop content. The high quality videos will run at 15 seconds a piece and appear automatically in the top of user’s newsfeeds.

Facebook (NASDAQ:FB) has already been quietly releasing test videos in recent weeks working with small advertisers like NBC and Macy’s (NYSE:M). It’s launched a dubbed soap video for Unilever (NYSE:UN) and its first test video was for the Lionsgate film “Divergent”.

But Facebook’s being picky, reportedly choosing which advertisers it wants to work with, having a say in the content displayed in those ads and then running them without sound, unless a user directly clicks on the video.

Analysts say it’s important that Facebook (NASDAQ:FB) gets this right.

SENA: What Facebook (NASDAQ:FB) has to be careful of is balancing the needs of the advertiser with the needs of the user, and they don’t want to put in some sort of pre-roll experience or forced roll where it’s in some ways it feels intrusive to the user when they’re going to check their home page, and their newsfeed.

BRENNAN: But the company may be late to the game. Competitors like Google (NASDAQ:GOOG) already offer premium video ads and Twitter has its own partnership in place with Publicis. But Facebook (NASDAQ:FB) is said to be bigger, worth a reported $500 million versus Twitter’s estimated $200 million deal. And then there’s the international advertisers.

Facebook (NASDAQ:FB) is introducing video capabilities in countries like Brazil and Germany now and perhaps in response to recent criticism that digital advertising is largely ineffective, it’s giving advertisers unprecedented access to its data analytics. To track just how well the videos actually target users.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Los Angeles.

(END VIDEOTAPE)

GRIFFETH: Elsewhere Microsoft (NASDAQ:MSFT) made some headlines today unveiling a brand new larger version of its tablet computer during an event in New York City. Microsoft (NASDAQ:MSFT) took the wraps off the Surface Pro 3 tablet which is lighter, faster, and with its bigger 12-inch screen, the company thinks it could replace laptops for a lot of consumers. The Surface Pro 3 goes on sale this summer. Low end on that price tag is $799.

GHARIB: Strong earnings and sales from Salesforce.com (NYSE:CRM) after the market closed and that’s where we begin with tonight’s market focus. Quarterly revenue was up 37 percent. That was much better than expected. It was helped by increased demand for its sales and marketing software. The company also boosted its revenue values. Shares initially popped in after hours and then fell back during the regular session. The stock was off slightly closing at $52.89.

Intuit (NASDAQ:INTU) also announced strong results after the market closed today. The maker of TurboTax reported a jump in quarterly profit, thanks to strong demand for its tax preparation and accounting software, but its fourth quarter guidance came in a bit light from expectation. Shares sold off in after hours, and they were down a fraction during the regular session to $76.84.

Bill?

GRIFFETH: Target (NYSE:TGT) has replaced the president of its Canadian operations, replacing him with a 15-year company veteran. The move comes just two weeks after the retailer’s CEO was ousted. The company’s Canadian operations have been struggling. Last year, Target (NYSE:TGT) lost nearly $1 billion in that country and we’ll find out more about target when that company reports its earnings tomorrow. In the meantime, shares of Target (NYSE:TGT) were down about 3 percent to $56.51.

And shares of Red Robin gourmet soared after that company posted better than expected first quarter results. Same-store sales were also up at the casual dining chain by more than 5 percent. As a result, that stock rose 12.5 percent to $71.80. And reports of Verizon (NYSE:VZ) was in merger talks with Dish Network was shot down today.

Verizon’s chief said the idea of a merger was somebody’s, quote, “fantasy.” He also said owning a satellite company is not something he is interested in right now. Shares of Verizon (NYSE:VZ) were down 1 percent to $48.65. Dish fell 3 percent amid rising on this talk. They’re down $57.52 now.

GHARIB: GoPro cameras catch amazing video images from the helmets of skiers and hang-gliders or from surf boards and motocross bikes. Now the camera make is going to a whole new place, Wall Street. As it prepares to begin selling stocks to the public.

Josh Lipton takes a look.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: I’m headed to the park right now with my GoPro.

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Soon fans of GoPro will be able to own the camera as well as the company. GoPro publicly filed its initial public offering, getting investors their first look at the financials of the action camera-maker. The filing shows GoPro made nearly $1 billion in revenue last year, and $61 million in profits, evidence of how popular GoPro has become since its first camera debuted in 2004.

GoPro is synonymous with the action camera market, which it dominates with a 90 percent share according to NPD, and that’s a market that’s growing fast, jumping 70 percent last year.

BEN ARNOLD, NPD: They got an array of accessories that allow you to mount the camera to a snowboard, to a surf board, to a gun even, and it kind of falls into this larger theme in technology of personalization and devices that really fit into your lifestyle, and once you kind of capture that into your brand DNA, then you’ve got this group of consumers that really are loyal to your brand, and I think that that’s what the secret sauce is with GoPro.

UNIDENTIFIED MALE: They shared the footage with us, and we turned it into a commercial.

LIPTON: Billionaire founder Nick Woodman also has ambitions beyond just selling cameras. He wants to turn GoPro into a media company. The demand is certainly there for GoPro’s content. GoPro videos have attracted nearly 470 million views on YouTube —

UNIDENTIFIED MALE: Start the cameras.

LIPTON: — making it one of the most popular destinations for Google’s video web service.

Michael Pachter of Wedbush says GoPro could turn its content into a full programming channel which could run on cable and satellite TV networks in addition to the likes of Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN).

MICHAEL PACHTER, WEDBUSH SECURITIES: You know we watch shows like America’s funniest home videos. Why wouldn’t you want to watch America’s most extreme sports videos?

LIPTON: GoPro already now has a partnership with Microsoft (NASDAQ:MSFT). There’s a GoPro Channel on Xbox 360, and one coming this summer to Xbox One. There are risks for investors to think about before committing capital in this company. GoPro operates in a very competitive market where it has to compete against tech heavyweights such as Sony (NYSE:SNE) and other video camera and electronics manufacturers.

Its IPO filing GoPro also said that growth actually slowed in the first quarter due to production delays. The company didn’t explain the reason for those delays, but Woodman will need to offer a good reason when he meets with investors.

(on camera); In just 10 years, GoPro has become a cultural phenomenon. We’ll soon find out if the company, synonymous with action video, is as hot with investors as it is with surfers, skiers, and sky divers.

Josh Lipton, NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

GRIFFETH: Coming up, a peek into the future and what the defense industry may look like 25 years from now.

(MUSIC)

GRIFFETH: More banks accused of behaving badly, including a member of the Dow. European Union officials have come down hard on three big banks, including JPMorgan (NYSE:JPM), for colluding to manipulate prices on financial products tied to a key London-based interest rate. JPMorgan (NYSE:JPM), HSBC, and French bank Credit Agricole face billions in fines if convicted of price — fixing prices on derivatives linked to the so-called LIBOR rate.

GHARIB: And finally tonight, what will the U.S. military look like in 25 years? And with the Pentagon working with smaller budgets every year, will we see a smaller military force? And in an industry that focuses more on computers and drones?

Jane Wells takes a look at the future of defense.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In 25 years, U.S. military forces will have fewer men.

UNIDENTIFIED MALE: We can throw it.

WELLS: More machines.

It’s one of the many trends which Frank Kendall must fund now. He is the man at the Pentagon with the checkbook.

FRANK KENDALL, DEFENSE UNDER SECRETARY FOR ACQUISITIONS: I’m worried about our pipeline of new products.

WELLS: Kendall says due to budget cuts, much of what we will see in 25 years is upgraded versions of what we have now. There will be some new programs for cyber defense, and he hopes to find money to protect our satellites.

KENDALL: There is, from the intelligence I’ve seen, an attempt at least by some countries to build systems that would allow them to dominate space, to take out our assets, which are very vulnerable.

WELLS: Potential solutions include breaking up large, expensive satellites with multiple functions into smaller more expendable ones, or having backup systems ready to launch.

REPORTER: Well, that’s expensive.

KENDALL: It’s all expensive.

WELLS: The biggest check, however, will be written for the F-35 by Lockheed Martin (NYSE:LMT), the most expensive program in Pentagon history. If the super stealthy jet delivers as promised —

LT. COL. MATT RENBARGER, USAF F-35 PILOT: In 25 years, this airplane is going to be all over the world.

WELLS: It will be a plane made so easy to fly that future pilots will need different skills.

RENBARGER: So instead of being more stick and rotor type skills, we’re going to have a lot more computerized type skills that are going to be required to fly airplanes.

WELLS: Another trend? Simulators being used for everything, and for a larger share of training to save money.

Then, there are the drones. No program has come further in 25 years, and none is now under greater scrutiny.

RYAN HARTMAN, BOEING’S INSITU PROGRAM MANAGER: There will be more unmanned aircraft than manned aircraft in the military.

WELLS: In a quarter century, one person will be able to control several unmanned aircraft at once, all on one operating system, while on the ground, armed robots may provide cover for soldiers and marines, while driverless convoys will resupply troops. The technology is already being tested.

UNIDENTIFIED MALE: I will say that I think the technology they have is better than the Google (NASDAQ:GOOG) car.

WELLS: But some things may not change. Robots and drones may never be given the freedom to kill on their own.

HARTMAN: I think that there are some things, some decisions that humans make that make the doctrine of war work, and so I think that is a distant probability.

WELLS: Whether war itself will be a low probability in 25 years of ever, unfortunately, seems unlikely.

For NIGHTLY BUSINESS REPORT, I’m Jane Wells.

(END VIDEOTAPE)

GHARIB: That’s it for us tonight NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks for watching.

GRIFFETH: I’m Bill Griffeth. Have a great evening, everybody. We’ll see you tomorrow.

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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