Transcript: Monday, July 7, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Now what? With Dow 17,000 in the rearview mirror, one long-time market watcher says there is very little that can prevent stocks from going even higher.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Summer stock sale. How and where bargain hunters are finding value now, even at these lofty levels?

GHARIB: And missing the bullseye? Three things retirement savers need to know about those popular target-date funds that most don’t.

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Monday, July 7th.

MATHISEN: Good evening, everyone, and welcome.

Thursday came the fireworks. Today, it was the fizzle that followed last week’s sizzle. Stocks sold off mildly after last week’s pre-Fourth of July parade the record highs. Yes, the Dow did stay above 17,000 for a second day and the S&P did remain day or two’s rally from the 2,000 mark.

But this sunny summer day on Wall Street was one for reflection and maybe taking chips off the board. The Dow lost 34 points to finish at 17,024. The NASDAQ was down 34, its biggest one-day drop in a month. And the S&P 500 slid 7 or about 0.4 of a percent.

Some now question whether consider whether the averages are just s too high and whether the day’s modest declines could be the start of a pullback that many bearish market watchers have been expecting.

Even Nobel Prize-winning economist Joseph Stiglitz expressed discomfort with current sky-high stock levels.

(BEGIN VIDEO CLIP)

JOSEPH STIGLITZ, FORMER WORLD BANK CHIEF ECONOMIST: These very strong stock market prices are in a sense a symptom of the weak economy, not a symptom that we are about to have a strong recovery to our real economy.

(END VIDEO CLIP)

MATHISEN: Stiglitz also pointed to the nation’s growing income inequality as another reason for a weak economic recovery.

GHARIB: Well, Byron Wien sees things differently. And he says that the U.S. economy as well the economies all around the world are doing well. That’s why he is very bullish on stocks right now. He is vice chairman with Blackstone Advisory Partners.

Mr. Wynn, so nice to have you on the program again, it’s been a while sense we talked to you.

BYRON WIEN, BLACKSTONE ADVISORY PARTNERS VICE CHAIRMAN: Always good to be here.

GHARIB: So, you know, so many people came back to work today with second thoughts about investing in stocks. But you are very bullish. And you also say stocks are very cheap right now.

Tell us your thinking.

WIEN: Well, I don’t think I said they’re cheap. I said they’re fairly valued and can go higher. The market is a selling at a reasonable multiple. A little above the long-term median and earnings estimates are $115 of the S&P 500, which is the index I watch. They — I think earnings co go to 20 times — the multiple can go to 20, and that would put the market to 2,300.

So, I think we could reach that sometime this year early next year.

MATHISEN: The first half of the year, Byron, has been pleasant, but not blockbuster. You think the second half is going to be better?

WIEN: I do. But the first half, Tyler, wasn’t bad.

MATHISEN: No.

WIEN: I mean, for all, for a negative 2.9 percent first quarter to have the first half up 37 percent on the S&P 500. I think we can do better than that. That would be 15 percent on the year. That would be terrific after 16 percent year and a 29 percent year.

GHARIB: So, Byron, I found that your asset allocations very intriguing. You said that 45 percent. I’m gong to go through this real quickly, but 45 percent of long equities in the U.S. and non-U.S., 30 percent in alternatives like hedge funds, private equities, things like that. You have some in gold, some in agriculture commodities. And no treasury, no traditional corporate bonds, which you are in some very high yield debt.

Tell us quickly what you’re thinking us here.

WIEN: Well, I think the equity market is reasonably priced and can go higher. I think the bond market is overpriced, especially quality bonds and treasuries.

So, I think yields are probably going to rise there. And that would cause a loss in whatever assets you have in quality fixed income and I think that valuations are going to arise for equities. I think you can make money in equities and lose money in bonds, and that’s why I have a virtually all equity portfolio.

MATHISEN: You are a fearless predictor, Byron. Every year, you make your 10 predictions and most of the time, seven or eight of 10 come true. What would cause you now to change your rather rosy view of the stock market?

WIEN: OK. Well, first of all, Tyler, you give me more credit than I deserve. There’s usually five or six of them that work out. They are surprises, not predictions. And they are events I think that have a probability of happening but they’re not sure things.

I think what would unsettle me is if the geopolitical framework that we are operating in really heated up. I think Iraq is going to be divided into three parts. I think Iran is going to move away from its nuclear development weapons development program. I don’t think China is going to go to war in the South China Sea. I think Putin is going to be patient in Ukraine.

And so, you know, that’s a pretty thing when viewed of the four major geopolitical events take place around the world. If I were dead wrong about that and one of them interrupted into a major conflagration, then I’d have to rethink my optimistic view.

GHARIB: What about — it’s very reassuring to hear that those global hot spots, you’re not so worried about them. What about them here in the U.S.? A lot of people are skeptical about the U.S. economy, we get some good data, we get some bad data, or disappointing data.

I mean, what’s your view on the economy here?

WIEN: Well, I think the economy is doing well. You know, almost every parameter I look at, I listen to Joe Stiglitz’s comments, you know, but you have bank loans up. You have over $2 trillion worth deals announced. Both of those indicate business confidence, the purchasing manager indexes are headed higher, consumer confidence is improving, vehicle sales are strong. I think capital expenditures are going to improve.

So, I see a whole panoply of economic indicators that suggest to me that we’re going to be headed towards a 3 percent growth. I don’t think that’s what we’re going to have. I do agree with Joe that the inequality problem is a problem, is serious. I also think that median family income hasn’t risen, but I still think the U.S. economy is going to do much better in the second half than in the first.

GHARIB: Well, fascinating insights.

Thank you so much, Byron. Always a pleasure to have you with us.

WIEN: Thank you for having me.

GHARIB: Byron Wien, he’s with Blackstone Advisory Partners.

MATHISEN: Well, stock picking is always a hunt for value. But where can you find it with the market near record highs?

Dominic Chu went sleuthing. Here’s what he found.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hunting for discounts in the stock market for many investors comes down to one important measure. Price-to-earnings for P/E ratio. Simply put, it tells you how much you pay in stock price for every dollar of earnings that a company generates.

Some sectors are getting even more attention than others as value plays if you look at price-to-earnings ratio.

HUGH JOHNSON, HUGH JOHNSON ADVISORS: First of all, you look at the financial sector of the market, and that’s probably got the lowest pricings earnings multiple. And so, quite frankly, if earnings turn out to be as good as a lot of analysts are expecting, then that’s probably the cheapest.

CHU: Financials have lagged the overall stock market and they are a big part of the S&P 3500. But is P/E the best way to value a stock?

ART HOGAN: In simple terms, is there a better way? No, P/E is probably the best way, the P/E multiple is the best way. But you always have to factor in growth.

CHU: Among Hogan’s top picks are stocks like Gulfport Energy (NASDAQ:GPOR) and BankcorpSouth. So you can’t just look at a price-to-earnings ratio and make any kind of a judgment. You got to put that number into context to see if investors are willing to pay higher prices for stock.

JOHNSON: Clearly, if the growth rate of earnings, or the prospects for the growth rate of earnings for a company are very, very bright, then it justifies a high price earnings multiple. And when prospects for earnings are not particularly bright, then you probably have a price earnings multiple is very low.

CHU (on camera): Earnings season kicks off this week and corporate profits and growth rates are going to be a huge focus for investors.

That could help determine whether the market goes higher from here or takes a bit of a pause.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

GHARIB: While investors debate where to put their money right now, some economists are debating whether job growth or economic growth is a more important number to keep an eye on.

Steve Liesman explains.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Call it a case of a mysterious growth, job growth that is –1.23 million Americans found new jobs in 2014, one of the best showings for any six-month period since the recession ended.

But what has economists scratching their heads is that the economy probably didn’t grow at all. We know it shrank by about 3 percent in the first quarter and it’s estimated to have grown by 3 percent in the second quarter. Net growth: zero.

How could so many jobs be created if there was no growth?

The severe weather remains a prime suspect. Under this theory of the case, even though business was hurt by the heavy snows and cold weather, employers were confident enough in future business to add new staff.

Another suspect: weak global economies. In the first quarter, a decline in exports was responsible for half of the economy’s extraction. Some could have been weather-related, too, with the weather hobbling transportation. Several economists on Wall Street think the upbeat jobs number is the more believable witness for the economy. They point to other clues like Americans buying nearly 17 million cars in June, the most since 2006.

Separate surveys on manufacturing and services have been strong and the housing market in May showed clear signs of a bounce back, all evidence in favor of the jobs report.

In fact, the strong job growth has some thinking it can hike southeastern than the current consensus, which is mid-next year. Either the jobs or the growth data could be revised in the future, that might whittle away the gap between the two, or it could be the mystery remains unsolved, which won’t trouble anyone too much as long as the case is decided in favor of strong job growth and not the shrinking economy.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: Goldman Sachs’ chief economist has revised his forecast of when interest rates will rise. Jan Hatzius said today he now expects the Feds to make its first rate hike in the third quarter of 2015. That’s a six-month — fully six months sooner than his earlier forecast for the first quarter of 2016.

The reason for the change? The recent good news in the job market as Steve just talked about, as well as improving inflation and financial conditions.

GHARIB: Not everyone is a big fan of the Federal Reserve. And now, some lawmakers are looking to reform the Central Bank, which is celebrating its 100-year anniversary. The Republican-run House Financial Services Committee will hold a hearing this Thursday on reforming the Fed, but did not disclose any specific legislation on the agenda.

MATHISEN: And things may be getting a little tougher for banks. Regulators from the Swiss-based Basel Committee on Banking Supervision are considering new measures to make it harder for lenders to understate the riskiness of their assets, including government bonds and may require them to increase the amount of capital they have on hand by billions more dollars.

GHARIB: Still ahead, target-date funds — they’re very popular, low maintenance and easy to understand. But we’ll tell you about some hidden risks that retirement savers need to know. That’s next.

(MUSIC)

GHARIB: There is nothing hindering the sale of recreational marijuana in the state of Washington. State regulators issued 24 licenses to retail shops throughout the statement today, allowing them to begin legally selling pot for the first time ever on Tuesday morning.

MATHISEN: Well, from high times in Washington state to hard times in New Jersey, where an oversaturation of casinos in Atlantic City and in surrounding states has led to a dire outlook for the resort town.

Morgan Brennan has more.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Once the East Coast gaming Mecca, Atlantic City has fallen on hard times.

UNIDENTIFIED MALE: It’s a scene of a lot of changes. I have actually seen a lot less people come down here.

BRENNAN: By the end of summer, the seaside city could have 25 percent fewer casinos than it started the year with. As the Showboat Casino gets ready to close next month and the $2.5 billion megaresort Revel heads to auction, in bankruptcy for the second time in two years.

MAYOR DONALD GUARDIAN (R), ATLANTIC CITY: Five years ago, that monopoly ended. We didn’t act quick enough to realize we needed to invent ourselves. That there needs to be a transition period from Monopoly to having probably fewer casinos, but having a lot more venues and activities to give people reason to come to Atlantic City.

BRENNAN: Atlantic City’s main source of income, gaming revenue, has tumbled 45 percent since 2006 as states that once provided Atlantic City’s gamblers now compete for them. Pennsylvania now claims the most casinos in the region and new projects are slated or opening in others like New York and Maryland. Experts say this is all part of a larger industry trend, casino saturation.

In 1988, only two U.S. states actually allowed gambling. Today, 39, as local governments seek out new sources of revenue. That’s created a glut of casinos, especially in traditional gaming communities, where the impact has even weighed on state coffers.

But analysts say casino closures in Atlantic City might not be a bad thing.

MICHAEL PALADINO, FITCH RATINGS SENIOR ANALYST: Atlantic City is a legacy market that just has too much supply relative to demand. Some of the other markets that are newer, you know, are still ramping up and there was at least some foresight as to not oversupplying the market.

So, I think the brunt of the closures will be felt in Atlantic City.

BRENNAN (on camera): But Atlantic City struggles to reinvent itself, some businesses are already thriving. Like the Borgata Hotel Casino. Revenues here have been increasing this year, despite the overall industry’s decline.

As more competitors close, casinos like this only stand to gain.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Atlantic City, New Jersey.

(END VIDEOTAPE)

GHARIB: Archer Daniels Midland announces its biggest acquisition ever. And that’s where we begin tonight’s “Market Focus.”

The grain giant is paying $3 billion for Wild Flavors. This is the Swiss food ingredient maker. The move is an effort by ADM to protect itself from volatile crop prices and also to benefit from the new consumer appetite for natural foods. The deal still needs the OK from regulators, but it is expected to close by the end of the year. Shares of ADM rose 1.5 percent to $46.50.

Another deal to tell you about, this one — Expedia (NASDAQ:EXPE) is buying an Australian online travel company called Wotif.com. It’s a nearly $700 million deal for one of the largest online travel agencies in Australia and it will help Expedia (NASDAQ:EXPE) expand its presence in the Asia-Pacific region. Despite that, Expedia (NASDAQ:EXPE) shares lost more than 1.5 percent to $80.85.

And shares of BioDelivery Science got a lift after good news about one of its treatments. A new drug to treat for severe pain performed well in a late-stage trial, taking it one step closer to market approval. So, that resulted in another $10 million milestone payment from Endo International, which has a licensing agreement with the company for developing that drug. Shares popped almost 9 percent to $13 and change.

MATHISEN: Apple (NASDAQ:AAPL) has nabbed the vice president of sales for luxury watch brand Tag Heuer. This comes as many are expecting the tech company to launch an iWatch or a wearable technology device this fall. Shares were higher by 2 percent to $95.97 for Apple (NASDAQ:AAPL).

A train derailment in Montana has damaged a shipment of Boeing’s aircraft components, specifically fuselage. Boeing’s production depends on a complex supply chain that delivers many parts just in time for assembly. It hasn’t been determined yet if the incident will impact plane production for Boeing (NYSE:BA). Despite that, shares of Boeing (NYSE:BA) were up slightly today to $129.09.

Not such good news for shares of major U.S. airlines like United Continental, American, Delta, they were down today, continuing a sell-off from last week. The Transportation Security Administration announced new security measures that would impact international flights coming into the United States. The new procedures include the requirement that some passengers power on their electronic devices before boarding to prove they aren’t explosive devices. Shares of Delta were off almost 4.5 percent to $36.90, American Airlines dropped more than 3.5 percent to $40.10 was the close there, United down 3 percent to $38.62.

GHARIB: It looks like Cloud storage startup of Box Inc. is waiting for just the right time for its initial public stock offering. The online storage company filed paper work to begin selling stock back in March, but then you putt off the IPO when investors seem to lost interest in tech stocks. But now, Box has raised $150 million in funding ahead of that IPO, thanks to some help from a private equity firm and a hedge fund.

Box expects to go public by the end of this year, but not until after the summer when trading usually picks up.

MATHISEN: Target (NYSE:TGT)-date funds have become all the rage for retirement savers. They like mutual funds. But they make investments that get more conservative as they get closer to the so-called target-date of an investor’s retirement. Still, there are some risks of having your money in a target-date fund.

Here to talk about it, Tim Maurer. He joins us to talk about target-date funds. He’s a personal finance director at BAM Alliance.

Tim, good to have you back.

My concern with the target-date funds are two things. They’re very different. Some are more conservatively run than others. But the other one is that I think there is an implicit promise in there. When that fund says I am a target 2030 fund, you want to retire in 2030, your money is going to be here.

That’s not true, is it?

TIM MAURER, BAM ALLIANCE: There is no question that is one of the biggest problems. There certainly is an implicit promise of sorts that seems to imply that that money will be there and as much money as you hope will be there, when you need it, Tyler, we saw this in 2008 when across the board, funds of all varieties suffered significant losses, especially in the equity side, but even on the fixed income side.

That was the first glimpse that we got into how target-date funds can fail investors. This is the type of investments that appears to be extremely simplistic, but there are complexities to it that are important to understand.

GHARIB: You said that there are some other risks, three in particular. Let’s go down the list for our viewer’s sake.

And the first is about the performance, that it’s kind of a secure hard-to-know since these are fund-to-funds, exactly how well they perform. Talk to us about that.

MAURER: Sure. A talk date fund, picture it as a wrapper around a basket of mutual funds that has a prescribed allocation. So, it’s really a good deal of complexity that is under the cover of the target-date fund and if you haven’t had the opportunity to rip that cover off and see what’s inside, you might not know exactly what you are dealing with.

Some fund families that have target-date funds are offered target-date funds, for example, might be very good large cap managers. But they might suffer in the large cap the international to fixed income space. And you might not know exactly how each slice of that pie is performing.

MATHISEN: What about the fees in these funds, Tim? Is that something I need to be concerned about when I’m buying fund-to-fund? Am I not only paying for the underlying fees of those funds, the constituents of it or what?

MAURER: I’m concerned about it, Tyler, especially considering that fees, expenses and costs are one of the few factors that we really can control when dealing with market dynamics. It is true that many target-date funds have above average expense ratios and it makes perfect sense.

Again, because they’re fund-to-funds, there are different layers of expense ratios on top of one another, that key factor is very important. So, both of these first two risks that we have discussed can be reduced pretty substantially if you are working with a more passively oriented target-date fund setup.

For example, vanguard is obviously the most notable monster in the rings here. They do focus on having extremely low expense ratios and a more predictable index space strategy. So both of these risks, these first two we have discussed can be reduced.

GHARIB: And the third one — and that you say that people should be aware of is the investment risk. Some of these funds are a little more volatile and if you don’t have the appetite for that, you might not know about that. What are the things to watch for there?

MAURER: First, I think this is the biggest risk of the three. We are talking about individual risk tolerance here. And a target-date fund presumes that the only factor that makes any difference in someone’s tolerance for risk is the time horizon. And, of course, we know there is a lot more than that. Tyler alluded to it in the intro.

I personally think an investor’s willingness to accept risks is the number one factor that is not taken into account. So, it’s very possible that target-date set in the future might actually create a prescription or a fund of funds that is either too aggressive or too conservative based on the individual’s unique risk characteristics.

MATHISEN: Tim, always great to see you, relocated from I believe Baltimore down to South Carolina. Good to have you back —

MAURER: Charleston, South Carolina. Thank you.

MATHISEN: Tim Maurer, with BAM Alliance.

And coming up, box office bust. Why fewer people are going to the movies? Could it have anything to do with the movies? And what could turn a financial horror show in the right way for Hollywood?

(MUSIC)

GHARIB: The world’s sending largest economy keeps getting stronger. Economic growth in China picks up in the just completed second quarter to around 7.5 percent according to China’s premier. But he also says the economy still faces downward pressure so Beijing plans on increasing stimulus measures to boost growth.

MATHISEN: And now to drones. The FAA is working on new rulings to govern their commercial use. Right now, it’s technically illegal to use drones for commercial purposes, but the small remote controlled aircraft are being used more frequently now by real estate agents, film-makers, farmers and journalists. And the FAA is looking to ease regulation.

GHARIB: Well, Tyler, you didn’t need a drone to see that there weren’t many people lined up outside a theater over the just completed Fourth of July weekend. So, what happened? And what are people doing if they’re not going to the movies?

Julia Boorstin has the story.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): While summer sizzles, the July 4th box office fizzled. Down 44 percent from a year ago weekend, with no megahits on the scale of last year’s blockbusters in tough comparison. And the fact the fireworks landed on a Friday didn’t help.

“Transformers: Age of Extinction” topped the box office for the second consecutive week. Thought its $36 million gross declined substantially from the prior weekend.

PAUL DERGARABEDIAN, RENTRAK SR. MEDIA ANALYST: The movies that are in the marketplace have to be profoundly compelling to get people to move away from their, you know, on-demand the Internet, all the different services that allow people and potential movie-goers to get filmed entertainment on their devices at home and other places. So, the bar has been raised incredibly high.

BOORSTIN: This summer’s box office is down almost 20 percent compared to last year at this time and total U.S. box office so far this year is down nearly 4 percent.

(on camera): Hollywood is struggling to get audiences to drive to theaters and pay higher ticket prices with the World Cup on TV and virtually limitless content available online and on demand.

(voice-over): In fact, the average adult spends record time on entertainment other than going to the movies. Over five hours watching live TV and nearly three hours listening to the radio, according to Nielsen.

UNIDENTIFIED MALE: I am seeing more movies on demand, less movies in the theater.

UNIDENTIFIED FEMALE: I have Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime. And that covers pretty much everything.

UNIDENTIFIED MALE: I’ve spent about $35 to $40 each time I go to the movies. It’s ridiculous.

BOORSTIN: But that doesn’t mean Hollywood won’t have a happy ending. There is hope for this weekend’s “Dawn of the Planet of the Apes” from Fox, and Marvel’s “Guardians of the Galaxy”, opening August 1st.

And overseas, Hollywood is on fire.

DERGARABEDIAN: The international box office is the savior, because no matter what films do in North America, everyone fixates on that. But then, if you look at the bottom line like for a film like “Edge of Tomorrow,” the Tom Cruise movie, it didn’t open that big in North America, but overseas, it was a massive hit. This is a global marketplace.

BOORSTIN: And so far, “Transformers 4” has grossed $35 million more in China than it has in the U.S.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

MATHISEN: Seen any good movies lately?

GHARIB: I saw “The Chef” over the weekend. I still like going to movies.

Great to have you.

MATHISEN: It’s nice to be back. Two weeks of lovely vacation in Conca de Marina, Italy. It was beautiful.

GHARIB: It looks like. We can tell from your suntan, too. You’re very relaxed, at least for now. Welcome back. We missed you.

That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks so much for joining us.

MATHISEN: And I’m Tyler Mathisen, back from vacation. Have a great evening, everybody. We’ll see you tomorrow, if I come back.

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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