Transcript: Tuesday, May 27, 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: New heights. Investors are back from the beach and in an optimistic mood, sending the S&P 500 to a record close. The head of Charles Schwab, one of the nation`s largest investment advisers, tells us what his clients are doing with their money.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Stay tuned. Pfizer (NYSE:PFE) may have abandoned its bid for AstraZeneca and ditched plans to create the world`s largest drug company. But the story is far from over.

GHARIB: And power surge. Why utility stocks are this year`s darlings and can they continue to out-perform?

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

MATHISEN: Good evening and welcome, everybody. Back to work and back to setting records.

Investors return from the long holiday weekend in a buying mood, pushing the S&P 500 into record-closing territory and driving the enthusiasm today with deals and data. Pilgrims pride offering to buy Hillshire brands for more than $6 billion. More on that one in a moment. And on the economic front, orders for durable goods rose unexpectedly, confidence climbed, and according to Case-Shiller index, home prices are still increasing, though, not by as much as they have been.

By the close, the Dow gained 69 points to finish at 16,675. The NASDAQ added 51, the S&P 500 up 11 to close at that all-time high.

And there were other milestones in today`s market. The transportation and material sectors sitting now at all-time highs, while technology stocks are at levels not seen since the year 2000. But this year, believe it or not, the biggest winners as a group are utilities — yes, utilities. They are the top sector of 2014 so far, up more than expected.

Dominic Chu takes a look at why there`s so much interest in this stable industry, and why boring may be beautiful for you.


DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): They may not be all that glamorous but utility stocks have been Wall Street darling darlings so far this year. And there is a big reason why — dividends.

JEFFREY SAUT: The utilities tend to have a higher yield than say some of the S&P 500 companies, utilities tend to grow their dividends pretty consistently every year.

CHU: Utility companies tend to pay out more of their profits to shareholders rather than reinvest all those profits back into their business.

(on camera): So, if you`re an investor, looking for an income stream from your investments, utilities stocks can play an important role.

Jill Cuniff is president of Edge Asset Management, and her firm manages over $26 billion in client assets. They`ve got a specific focus on income generation and they invest in among other things, utility stocks.

(voice-over): Among her favorite picks in the sector are companies like Sempra Energy (NYSE:SRE), which owns utilities in southern California as well as Latin America. She also likes Wisconsin Energy (NYSE:WEC) in the Midwest. Both companies have a dividend yield of around 3 percent and have grown their dividends substantially over the course of the last five years.

Another big reason that investors like utility stocks is their relative immunity to the ups and downs of the overall economy. No matter what, customers will always spend money on electricity and natural gas. They literally power the economy no matter how strong it is.

But as with all investments, there are risks, utilities are no exception especially if bond prices start to fall and interest rates begin to rise.

SARAT SETHI, DOUGLAS C. LANE MANAGING DIRECTOR: When yields do rise back, the first thing investors will do is sell utilities. Utilities are being bought for non-fundamental reasons, which is basically their dividends. But if you look at the S&P in the total growth, most of the utilities have very low to no growth.

CHU: So, the bullish case for utilities involves generating investment income from dividends. The bearish case for utilities involves an improving economy and rising interest rates, which could put a damper on low growth safety stocks. No matter what your view, utility stocks are definitely worth paying attention to.



GHARIB: So, let`s find out what our guest is paying attention to. He is Walter Bettinger, chief executive of Charles Schwab Corporation.

Walt, so nice to have you back on NIGHTLY BUSINESS REPORT. Thanks for joining us.

WALTER BETTINGER, CHARLES SCHWAB CEO: Well, thanks for your invitation, Susie. It`s great to be here.

GHARIB: Let me begin by just getting your gauge on investor sentiment because today, it was really nice. We had all of these records on the S&P. But a week or two weeks ago, we had big sell-offs. What is investor sentiment like from the perspective of Schwab clients and where are they putting their money these days?

BETTINGER: Well, I think the sentiment of our investors continues to be taken a long-term view and investing their portfolio based on their goals and objectives. As you indicated, Susie, just a couple of weeks, the headlines and many of the articles were investors selling their equity portfolios, the old “sell in May and walk away for the summer” type headlines, we know the timing of the market is always impossible. You`ve got to get it right twice, you`ve got to know when to sell and when to buy. It`s just too hard for most people to do.

Our clients are taking a long-term view. They have been net buyers for equities for well over a year and we expect that to continue in the future.

MATHISEN: It`s been a little bit of a surprising year. Bonds have basically out-performed most categories of stocks at least so far this year, notwithstanding the recent gains. What do you say to investors when the markets confound the predictions with which we began the year?

BETTINGER: Tyler, I think we say that is the markets. Nobody really has that crystal ball and as I always say, the more certain a person sounds that they know what the future holds, the faster we should all run away from them.

The bond market has its own life. It`s clearly getting some impact by Fed decisions. And as they have made the moves continuing to keep downward pressure on rates for the most part the bond market has responded this year.

GHARIB: You know, Walt, I was interested that just a few days ago your colleague, Charles Schwab himself, was saying that he thought that index funds is the best way for 98 percent of American investors. You obviously agree with that.

Tell us why and why now? Why index funds now?

BETTINGER: Well, as I indicated earlier with respect to market timing, it`s so hard to get it right. You have to be right twice, when to get out, when to get in. And the point that Chuck was making is that for most investors, simply being in the market is a winning strategy.

We`ve all seen studies where the market has gone up, say, 8 percent on average, but the typical investors only captured about half that because they make those moves in and out. And Chuck`s point was, buy the market, stay in the market and you`re likely to capture the upside gains over an extended period of time.

That`s the beauty of index funds and Chuck and I have both been long-time supporters of them.

MATHISEN: And, of course, they`re both tax efficient annals (ph), so inexpensive to own.

Let me turn you to an industry issue. I was at the Investment Company Institute`s meeting last week and one of the concerns there was the possibility that large assets manager, I would include Schwab in that category, might find themselves declared by financial regulators as financially significant institutions.

How do you feel about that knowing that an awful lot of your colleagues in the fund business oppose that vigorous?

BETTINGER: Well, Tyler I have to say in fairness before answering the question at Charles Schwab, we`re already under the Federal Reserve oversight. So we`re already in the category in which the Federal Reserve plays a meaningful role in regulating our firm.

I think the issue with respect to asset managers maybe more than just whether the management of other people`s money makes them systemically important. Most of the companies being looked at are in a variety of businesses. And although they may be known to the average person as an asset manager, they might be involved in running hedge funds or they might be involved in holding client cash on a balance sheet.

And so, there`s activities beyond traditional management. And my understanding is those are the areas that have particular interest to FSOC. And at this point in time, I think the best thing to do is to let that debate play itself out rather than have a strong opinion on it from Schwab`s standpoint.

GHARIB: Walt, just to wrap it up, we`ve got about half a minute. Any kind of advice or wisdom that you would impart to investors at this very confusing time?

BETTINGER: Well, seven out of 10 investors that we surveyed say they`re more comfortable investing when they have someone to talk about with respect to the markets, and that`s what I would encourage people to do today. There is no one with all the right appearances but getting assistance, getting a professional to guide you, I think, in most cases will give you a better outlook than purely trying to do it on your own. There are few people that can do it on their own, but there are few and far between.

GHARIB: All right. Well, we`ll leave it there. Thank you so much. Great talking to you as always.

BETTINGER: Thanks, Susie. Thank you, Tyler.

GHARIB: Walt Bettinger, CEO of Charles Schwab.

MATHISEN: It is over, at least for now. Pfizer (NYSE:PFE)`s bid to buy the British drugmaker AstraZeneca for almost $20 billion is now off the table after a U.K.-regulated time limit to reach a deal expired. That sent shares of AstraZeneca down a fraction, and Dow component Pfizer (NYSE:PFE) higher by a half percent.

So, what does Pfizer (NYSE:PFE) do now?

Meg Tirrell reports.


MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Pfizer (NYSE:PFE) could come back for round two, but not until later this year. Under the U.K. takeover law, the company must wait six months before reopening discussions, or three months if AstraZeneca extends the invitation.

Analysts say that in that time, investors will be watching AstraZeneca closely to see if it can deliver the same value on its own as the offer from Pfizer (NYSE:PFE).

DAMIEN CONOVER, MORNINGSTAR ANALYST: AstraZeneca put out some pretty lofty expectations for where they think the company can deliver over the next decade. And my sense is, over the next six months, there could be some setbacks. And any sort of setbacks could be an opportunity for Pfizer (NYSE:PFE) to come back into the situation and make another bid probably similar pricing to where its final bid was for AstraZeneca.

TIRRELL: Others suggest it`s time Pfizer (NYSE:PFE) look elsewhere. Analysts John at SunTrust suggest New York neighbor Bristol-Myers Squibb (NYSE:BMY), which he says is a leader in the hot area of immuno-oncology, drugs that harnessed the immune system to fight cancer. Morningstar (NASDAQ:MORN)`s Conover says the company could consider Irish drugmaker Shire (NASDAQ:SHPGY), the maker of the ADHD drug Vyvanse. There`s also been speculation Pfizer (NYSE:PFE) could split itself up in a few years, separating its businesses and the faster growing new drugs and older products.

(on camera): But there aren`t any other options, analysts say, that take all the boxes AstraZeneca did. The lower corporate tax rate in U.K., significant cost overlaps and a pipeline of complimentary drugs. So, it`s possible we shouldn`t count out a combined Pfizer (NYSE:PFE) and AstraZeneca just yet.



GHARIB: More now on that food deal that Tyler mentioned a little earlier in the program and it`s turning into quite a food fight. Pilgrim`s pride, this is the world`s second largest poultry producer, has offered to buy Hillshire brands for more than $6.5 billion. The takeover would expand Pilgrim`s business beyond chicken and into hot dogs and sausages. But such a deal could derail Hillshire`s own plans to buy Pinnacle Foods. It makes Bird`s Eye frozen vegetables and Duncan Hinds cake mix.

Hillshire says it still believes in the value of the Pinnacle deal, but plans to review Pilgrim`s proposal.

As for the stocks today, Hillshire soared at 22 percent. Pilgrim`s Pride also rose while shares of Pinnacle fell.

MATHISEN: Now to China, where officials are reportedly pressing banks to replace high-end servers made by IBM with Chinese-made machines. According to a media report, the move comes as tensions rise between Beijing and Washington over allegations of cyber espionage. IBM says it`s not aware of any such demands by the Chinese government.

GHARIB: Investors are also paying close attention to the Ukraine after a billionaire businessman won this weekend`s election. The hope is Petro Poroshenko can restore order in his country and have a working relationship with Moscow. That hope pushed down gold prices to nearly a four-month low.

Steve Sedgwick has more from Kiev.


STEVE SEDGWICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here in Ukraine, violence continues on Tuesday, in the eastern region of Donetsk, where the government now is trying to reclaim control of not only the airport but indeed of the entire region. It was a region, of course, which was unable meaningfully to take part in the recent election. An election which gave an overwhelming mandate to President-elect Petro Poroshenko, to take the country forward.

There are really concerns, though, that relations with Russia are still very poor. In fact those concerns were shared with us by Geoffrey Pyatt who is the U.S. ambassador to Ukraine.

GEOFFREY PYATT, U.S. AMBASSADOR TO UKRAINE: There are still Russian behaviors we are deeply concerned about. This violence in Donetsk over the past 24 hours, terrible violence seems to be fuelled at least in part by people coming across the Russian border. So, we believe the pressure needs to be maintained. We`re trying to do that jointly with our European partners.

And as far as what happens in terms of the next round of sanctions, we`ll have to wait and see what Washington concludes. But also, what we`re able to do with Brussels.

SEDGWICK: Lots of points of tension, including over gas. The Russians say they`re owed a total of US$5.1 billion. The Ukrainians for their part say they need to negotiate a longer gas for as much lower than what the Russians are offering.

There are real concerns, too, about whether another round of sanctions that escalates the crisis. But the U.S. and the E.U. hawks (ph) are looking waiting for a third round of sanctions, others are saying, let`s wait and trying to deescalate the sanctions, and see whether Mr. Poroshenko and Mr. Putin can come to the table diplomatically.

This is Steve Sedgwick for NIGHTLY BUSINESS REPORT in Kiev.


MATHISEN: Still ahead, new roles are coming to the power industry and they could change the way some companies do business.


MATHISEN: On Monday, the White House is expected to unveil the rule cutting emissions from coal plants. The regulation could have wide-ranging implications on companies and governments.

And John Harwood joins us from Washington with more.

John, what do we expect the administration propose?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: What they`re going to do, Tyler, is propose regulations using the authority that the Supreme Court has recognized to regulate the carbons emissions under the Clean Air Act. They`re going to do it not through the sort of cap and trade system that the Congress rejected a couple of years ago. But they`re going to do it by setting proportions that every state has to reduce their emissions and giving these states flexibility on how to achieve those reductions.

GHARIB: So, John, you just mentioned cap and trade. I mean, compare and contrast, how is this really that different?

HARWOOD: Well, the way it could end up being similar, Susie, is that the method a state could choose to comply with these regulations could be a cap and trade system.

Remember, we already have those systems in California and in several states in the Northeast. So, there is precedent for that. And one of the questions, things we`ll be watching is whether or not the one option for states will be to join one of those existing cap and trade systems so western states could join with California, for example, states in the Midwest and Northeast could join the ones that are already operating.

MATHISEN: John, how much of a political fire storm will this create in this election year?

HARWOOD: Very large because you already have the trade groups representing the power industry, complaining the Obama administration hopes to split some elements of the power industry. For example, those more reliant on coal will be much more deeply affected than those relying on gas, which is a lot cleaner burning.

But you can expect the argument lines to be drawn. But the core argument that Republicans and conservatives and industry are going to make is, this is going to raise energy prices and in fact it is likely to do so. The question is, will the public accept that trade-off for the environmental benefits that will come from the system if it survives court challenge?

MATHISEN: Thanks, John. John Harwood reporting from Washington tonight.

Well, General Electric (NYSE:GE) CEO tried to gain France`s support today for the company`s $17 billion bid to buy Alstom`s power unit and that is where we begin tonight`s “Market Focus”.

G.E.`s chief Jeffrey Immelt says he`s willing to partner with France`s government and he would make commitments to increase jobs in Frances by opening new sites.


JEFFREY IMMELT, GENERAL ELECTRIC CHAIRMAN & CEO: As we build G.E. Alstom, we will locate the global headquarters for four of our businesses in France — grid, hydro, and offshore wind and steam turbines. Decision-making for these business will be based in France, and technology for these businesses will be made in France.


MATHISEN: G.E.`s proposal has been extended until the end of June, shares of General Electric (NYSE:GE) up a fraction to $26.57.

Netflix (NASDAQ:NFLX) is buying the rights to Sony (NYSE:SNE)`s animated films that pay channel stars had the right to those movies, but agreed to give them up to the video streaming services company. The multi-year agreement includes one or two films a year and will add to the company`s already large content costs. Shares of Netflix (NASDAQ:NFLX) off slightly to $398.81, Sony (NYSE:SNE) up more that 3 percent to $16.64.

And AutoZone (NYSE:AZO) saw its third quarter surge as its review grew and margins widen. The auto part retailer`s sales were helped by sales in Brazil and Mexico. Despite that, shares fell almost 4 percent to $524.25.

GHARIB: Shares of WellCare and Centene (NYSE:CNC) rose on speculation the companies could be takeover targets. According to a report in modern health care, the CEO of Ascension Health said last week that his company was in talks to acquire an insurer that operates in 18 states. Both companies fit that criteria. That sent shares of Centene (NYSE:CNC) to an all-time high of 4 percent, to $74 and change. WellCare also rose about 3 percent to $76.91.

BioCryst Pharma said its experimental drug which treats a rare immune disorder succeeded in the mid-stage trial, more testing must be done before the drug can win federal approval. But the promising result sent shares up almost 11 percent to $9.99.

Aeropostale (NYSE:ARO) surged today on news that the teen retailer has secured $150 million credit facility from private equity firm Sycamore Partners. Just last week, we told you the company posted another quarterly loss, and gave a weak outlook. But today`s news gave investors some hope. Shares popped 15 percent to $3.92.

And Apple (NASDAQ:AAPL) fans had another reason to buy up the stock. According to reports, the company is planning to introduce a smart home system at a conference on June 2nd. The technology will reportedly allow users to control their lights, appliances and security systems with their iPhone. The stock rose nearly 2 percent to $625.63.

MATHISEN: Ten million dollars, that is the median pay package for chief executives of large public companies in the United States. It was the fourth straight year of hefty pay increases and the first time median compensation rose into eight figures.

Mary Thompson takes a look at what`s driving the trend and who is bringing home the fattest paycheck.


MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): As the stock market goes, so too, does CEO pay. And in 2013, they both soared, the stock market by 30 percent and the median pay of an S&P 500 CEO by almost 9 percent, to a record $10.5 million.

This thanks to gains in equity link brands than other measures use to determine pay.

GREGG PASSIN, MERCER SENIOR PARTNER: It`s certainly stock price performance and total shareholder return. But it`s also financial performance, revenue, profitability, various returns in margins.

THOMPSON: 2013 marks the fourth straight increase in CEO pay after a brief dip in 2009. A studio by the compensation consultant Equilar and “The A.P.” showing pay gains in the C-Suite behind a widening gulf in pay, as the CEO now earns 257 times more than an average worker. That`s up from 180 times back in 2009.

(on camera): The widening gap failing to ignite investor outrage, though. Similar (INAUDIBLE) says only 2 1/2 percent of the firms in the Russell 3000 saw shareholders reject executive pay plans, towards a (ph) pay vote, a trend Mercer Consulting`s Greg Passin credits to better communication.

PASSIN: The companies are doing a much better job of engaging with their shareholders on a very pro-active basis, explaining their executive compensation program, how it aligns with the company`s strategy, why it`s important to be able to motivate, attract and retain the quality of executives that they need to be successful in the organization.

THOMPSON: The study of 337 S&P 500 firms found the CEO of Nabors industry took on the highest pay. Anthony Petrello`s compensation rose almost 250 percent, to over $68 million. CBS (NYSE:CBS)`s Les Moonves rose a modest 9 percent to a still staggering $66 million. The mining firm Freeport McMoRan restructured CEO Richard Atkinson`s compensation as he gave up claims to severance pay. The net result, he earned almost 300 percent more than in 2012, taking home over $55 million.

At number four, a new edition to the highest paid list, Trip Advisor`s Stephen Kaufer, as a grant made up most of his $38 million in compensation. This as the pay scale continues to tip in the favor of CEOs.



GHARIB: And coming up on the program, exit strategy, the five tools the Federal Reserve can use to get out from under its record economic stimulus program. That`s next.


MATHISEN: The investigation into General Motor`s faulty ignition switch is expanding. Canada`s top transportation official says her agency is now looking into the fatal crashes in G.M. cars, both of which are subject to the recall. Transport Canada received nine other complaints. G.M. is quoting with Canadian authorities.

GHARIB: Meanwhile, safety regulators have opened an investigation into about 200,000 Nissan automobiles for potential breakage issues, the car models involved here, the 2013 and 2014 Sentras and Versas. Consumer complaints alleged their cars continue to move even as the brake pedals are being pressed. There are no reports of accidents or injuries.

MATHISEN: A warning from Citigroup (NYSE:C)`s chief financial officer, John Gersback, warned that the slump in trading revenue could deepen in second quarter by as much as 20 percent to 25 percent earlier this month. J.P. Morgan gave a similar warning as banks continued to struggle with little volatility and low volume.

GHARIB: And Bank of America (NYSE:BAC) has submitted a new capital plan to the Federal Reserve. Last month, the bank disclosed a calculation error that forced Bank of America (NYSE:BAC) to suspend its stock buyback and dividends. The error left the bank with $4 billion less in capital than previously thought. The revised plan is smaller than the original, and the Fed has 75 days to review it.

MATHISEN: Federal Reserve officials broadly agreed to gradual pullback or taper of its monetary stimulus necessary. What is less clear is exactly how the central bank will decide to control interest rates when the time is right to let them rise.

Steve Liesman takes a look at the Fed`s exit strategy and the tools available to policymakers.


STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Let`s take a look inside the Federal Reserve`s tool box that it will use when it tries to normalize interest rates, a lot of background discussions going on at the Fed over this. Why? Because its main tool, the Fed fund rate is not doing to work, during quantitative easing the Federal Reserve bought all these security and put all this cash out into the system. In order to control interest rates, the Fed has to control the amount of money in the system.

So, if Fed funds rate goes away, what else does it have? Well, it`s got this big thing? It`s really an axe. It`s a huge thing. Interest on excess reserves.

Effectively, the Federal Reserve is going to pay the banks in order to keep that money on accounts at the Federal Reserve. Now, if that doesn`t work, what else does it have? A thing called a “reverse repo”. You know it sounds complicated, but we`re going to have to get used to these terms when interest rates normalized.

In reverse repo, the Fed lends out a security. Again, soaks up cash for some period of time. It could be overnight, or it could be as long as the week. And yet, folks, there is more.

The term “deposit facility”, think of it like a certificate of deposit at the Federal Reserve. It could e something like a crowbar, an interest rate, see if it works. You put your money in the bank in the Federal Reserve, for a period of time, the Fed pays you an interest rate.

Finally, if all else sells, the Fed has a thing, the size of the balance sheet. You can actually sell assets for good. Sell the assets, soak up the cash — essentially, retire the cash.

So, that`s what we have inside the Fed`s tool box that hopefully sometime next year if the economy is going well, the Fed will begin to raising rates and use all of these tools in order to keep interest rates, or normalize interest rates.



GHARIB: Just when you got used to a whole vocabulary of quantitative easing, and Q.E. and taper. Now, a whole bunch of new terms.

MATHISEN: Now, we have term repo facilities and things like — I`m going to audit his expense report after that report.

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

MATHISEN: I`m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. And we hope to see you back here tomorrow night.


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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