Transcript: Monday, July 14, 2014

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Bank on it. Better than forecast earnings out of Citigroup (NYSE:C) lists the financial sector and lead the Dow to a fresh intraday high. Do Citi’s numbers set the tone for a big week ahead for banks?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Checking out. How cyber criminals are lying in wait in your hotel. What business travelers and anyone else needs to know.

MATHISEN: And, bang for your buck. Why more of your 401(k) dollars are actually working for you and not your plan.

All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, July 14th.

GHARIB: Good evening, everyone.

Corporate deal-making and Citigroup (NYSE:C) earnings lifted stocks on Wall Street today. The flurry of mergers boosted investor sentiment and better-than-expected quarterly earnings from Citi raised hopes for more strong bank earnings this week.

Here’s a look at the closing numbers for the major averages. The Dow rose 111 points, closing back above the key 17,000 mark. The NASDAQ was up 26 and the S&P added nine points.

MATHISEN: Details now on those better than forecast earnings from Citigroup (NYSE:C), and the massive settlement the bank reached with regulators over shoddy mortgage-backed securities it packaged and sold ahead of the financial crisis. With the bank putting those soured investments behind it, investors dove in on Citi, sending shares of full 3 percent higher today.

Kayla Tausche has more on Citi’s solid results, its settlement with the Justice Department and what it means moving forward.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The bar for bank earnings may be low, but Citigroup (NYSE:C) easily cleared it in the second quarter, with a handy profit beat and a rise in revenues, too. The reason, trading activity that improved albeit slightly in June.

Chief financial officer Johnny Gerspach forecasts a drop in revenues of 25 percent. So, a drop of only 15 percent as it happened looked relatively better. Gerspach told investors that even with the drop, the bank can operate well.

JOHN GERSPACH, CITI CFO: I think we spend an awful lot of time focused on what’s going on in markets. So I think there are some legitimate questions going forward as far as markets. But the rest of the business, I’d say we feel pretty good about the revenue prospects.

TAUSCHE: That’s because loans and deposits grew and the bank released reserves previously stashed away for bad credit.

(on camera): But an otherwise rosy picture was clouded by a $7 billion settlement with the Justice Department, a $3.8 billion charge directly to Citi’s bottom line, wiping away all but $181 million of the bank’s profit.

Brian Rogers (NYSE:ROG), chairman of investing house T. Rowe Price reached concerns about the costs of these settlements last week.

BRIAN ROGERS, T. ROWE PRICE GROUP CHAIRMAN: That’s the shareholder’s money, I think the good news is, most of that is coming to an end. I feel as though, the Citigroup (NYSE:C) situation might be one of the last, B of A might be one of the last. And after that, the bank is going to look forward and look basically go about their business and not worry about further fines.

TAUSCHE (voice-over): For Citigroup (NYSE:C), it’s a major legal milestone now behind it. Still, some investors like David Katz of Matrix Advisors say the banks trade cheaply, but isn’t a buy yet.

DAVID KATZ, MATRIX ASSET ADVISORS: Citigroup’s book value was down 50 percent over that time frame. Citi seems to have its act together. But it’s not as well run as some of these others.

TAUSCHE: Citi still has some unique issues to tackle, an ongoing investigation into fraud at one of its Latin-American units and a failing grade into the Fed’s stress test, which CEO Mike Corbat says he’s confident the bank can reverse.

MICHAEL CORBAT, CITI CEO: We still are operating and feel strongly that this isn’t an issue with our business model, our strategy, our levels of capitol, clearly our ability to generate. We feel very good about the communication with the Fed. But it’s work in progress and we’ve got more work to do between now and year end.

TAUSCHE: A long to do list remaining despite an improving economy.

For NIGHTLY BUSINESS REPORT, I’m Kayla Tausche.

(END VIDEOTAPE)

GHARIB: And here to talk more about Citi and the big week ahead for bank earnings is Fred Cannon. He’s director of research and chief equity strategist at Keefe, Bruyette & Woods.

Fred, nice to have you with us.

Let me just start by saying it seems so strange that Citi can deliver good news for the banking sector on the same day that it settles a huge settlement with the Justice Department.

Does Citi finally have its act together?

FRED CANNON, KBW (NYSE:KBW) CHIEF OF RESEARCH: Well, good news in a relative sense. Remember a couple things that were mentioned. Number one is that the settlement had already been signaled that came in line with that. But that $7 billion was much bigger than would have been expected just a month ago, and wiped out the quarter’s earnings.

Secondly is the expectations for the quarter have been quite diminished going in and they got over a low hurdle, that’s a good thing. Citi still has a lot to prove, though, as was mentioned. The litigation issues aren’t over. Yes, this is a big hurdle of the mortgage issues, but we have the FX issue, the Libor issue, and that issue that was mentioned in Mexico still in front of it.

So, this idea that somehow this settlement is finally getting litigation issues behind these big banks is probably a bit optimistic.

MATHISEN: Fred, let’s spin forward to a couple other banks. Later this week, JPMorgan (NYSE:JPM) among them, it is tougher today, isn’t it, or you tell me, for these big banks to make money. Their trading revenue is down. Interest rates are lower. That provides a challenge. Investment banking revenue despite all the mergers isn’t really blockbuster these days.

What do you expect from those two?

CANNON: Well, coming up at city, coming into the quarter, expectations really came down hard this year over year down 20 percent to 25 percent, trading activity. Citi seemed to see things pick up in June, that can help them get over a hurdle.

But what you said is very important. Making a good return on investment in these big companies is very difficult. You still have these litigation issues. We like to think on Wall Street that they’re one offs, but at the end of the day, they do add up over time. And there’s trading activity low.

That said, these big banks are getting to be in a position where they seem very cheap, and maybe we’re getting to a trough earnings level for these guys.

GHARIB: You know, everybody’s worried about higher interest rates. But the word on the street is, is that this is good for the banking sector. Are these buys? I know you have for JPMorgan (NYSE:JPM) a buy on it, but is it time to pick up as many of these stocks as you can?

CANNON: As you go into the back half of the year, I think you have to think, the Fed is going to stick to their word — who knows if they’re going to raise rates? But they’re going to stick to their word if they’re going to raise them in 2015. They’re going to end the bond-buying program.

There’s going to be a lot of people thinking about Fed exit and financials are a good place to be, because it’s the one area where higher interest rates at least arguably is a good thing. That’s not a good thing for most of the other parts of the economy. So, there is some good things there.

That said, the truth is, as the Fed mentioned last week, we really don’t have a good idea of what this Fed exit is going to look like in terms of bank earnings and bank balance sheets. It’s a brave new world because of the $4.5 trillion bank balance sheet at the Fed.

MATHISEN: I assume you heard Brian Rogers (NYSE:ROG) just a moment ago talk about how he thinks maybe this is getting the worst of the litigation risks behind Citi, though we did mention a couple of the other ones that were still there.

In terms of all of the banks, where are we in that process? Are we in the seventh inning, the eighth inning, the fifth inning, where?

CANNON: It looks like on the mortgage issue, we’re getting towards the seventh or eighth inning, I would say. And especially with Citi, getting this big settlement behind them, I think if we can get these DOJ settlements behind it, much higher than expected, FHA behind us, we have gotten over the mortgage issue.

But the fact is there’s still a lot out there. FX is just being underscored here. What about these issues on fraud in Mexico, the hole asset management liability issues, and the payment systems and the issues that have been raised.

Remember, this whole issue of BNP in these criminal charges, in the U.S., it’s — you know, let’s face it the French and Germans are going to look pretty hard at the U.S. bank operations over there.

GHARIB: All right. Fred, thank you so much for coming on the program. It’s always a pleasure to have you. Fred Cannon of KBW (NYSE:KBW).

CANNON: Thanks. Great to be on.

MATHISEN: Well, in addition to Citi’s news, some companies played let’s make a deal today. And that also lifted investors moods and spirits. So far this year, mergers and acquisitions are running nearly 70 percent above a year ago, for a total of almost $2 trillion in deals so far.

And today brought a few more. First up, the generic drug maker Mylan (NASDAQ:MYL) is buying the specialty and branded generics business outside the U.S. from the rival drugmaker Abbott Labs. It’s an all stock deal valued at more than $5 billion. Mylan (NASDAQ:MYL) is expected to move to the Netherlands after the deal is finalized. The so-called corporate inversion aimed at lowering its tax rates. Shares of both companies finished higher.

Also, Whiting Petroleum (NYSE:WLL) announced plans to buy Kodiak Oil and Gas in a deal worth $3.8 billion, along with $2.2 billion in debt, creating the biggest energy producer in the Bakken shale, and Three Forks formations in North Dakota. Both companies strongly higher on the news there.

GHARIB: And another big takeover today, this one involves rival engineering and construction companies, Los Angeles-based Aecom Technology (NYSE:ACM), which did work on the brand new World Trade Center here in New York City, is buying San Francisco-based URS (NYSE:URS) Corp. for $4 billion. The deal sent shares of both companies up more than 10 percent.

And still, another deal that’s almost there and it’s a biggie. Chicago-based drugmaker Abbvie is offering nearly $54 billion for Irish pharmaceutical giant Shire (NASDAQ:SHPGY). Now, if approved and Shire (NASDAQ:SHPGY) did say it’s ready to recommend the deal to shareholders, the company will do what Mylan (NASDAQ:MYL) plans on doing, a corporate inversion, moving its headquarters to the United Kingdom, in order to save on American corporate taxes.

Shire (NASDAQ:SHPGY) rose 2 percent on the news, but Abbvie was off a fraction.

MATHISEN: Well, stocks are higher, and so are expectations for salaries. A new survey from the Federal Reserve expects median earnings growth in June to be 2.5 percent, up from just 2 percent in May. And perhaps surprisingly, the increase is being driven mostly by workers who don’t have a college education.

GHARIB: With all those corporate deals sending stocks near all time highs again, and the nation’s jobless rate down to 6.1 percent, there’s growing concern about when the Federal Reserve might begin raising short term interest rates. Now, we got some more clues today about the timetable.

San Francisco Fed President John Williams told “The Wall Street Journal” that after making more progress toward unemployment goals, the Central Bank could begin raising its benchmark rates earlier than previously expected.

MATHISEN: Rates may not be the only things rising soon. The biggest names in aviation were in England today for the annual Farnborough International Airshow, where strong demand for jets is very evident.

Executives from Boeing (NYSE:BA) were on hand in the U.K. And on Wall Street, investors sent shares of Boeing (NYSE:BA) 1 percent higher.

Phil LeBeau has our report.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For those who think demand for new airplanes can’t go much higher, the Farnborough International Airshow flies in the face of conventional wisdom. Airbus is launching a new twin isle plane. The A330neo starts flying in late 2017 and is already requested by airlines seeking greater fuel efficiency.

FABRICE BREGIER, AIRBUS CEO: We sold more than 1,000 aircraft so far, the 330. And we have studied how to reduce (INAUDIBLE), so it will be more efficient regarding fuel burn than 787, lower capitol cost, higher maturity, higher reliability. So, we have a market of more than 1,000 aircraft to sell.

LEBEAU: Boeing’s Dreamliner, with the backlog stretching beyond 2020, shows airlines remain hungry for new airplanes with lower costs.

JAMES MCNERNEY, BOEING CHAIRMAN & CEO: We track deferrals and cancellations, below historical averages right now. There have been some other deferrals and cancellations in the industry. I think others would have to answer to those trends, but we see ongoing strong demand. And we’re going to produce to it.

LEBEAU: With several military jets soaring over the air show, many here in Farnborough were hoping to see the Lockheed Martin (NYSE:LMT) F-35. But the new fighter jet is still grounded while the Pentagon tries to figure out why the F-35 engine caught on fire in late June.

MARILYN HEWSON, LOCKHEED MARTIN CEO: I’m confident they’re going to go through a discipline process, they always do. This is normal for any aircraft development program. They’ll go through the discipline process. They’ll get to the root cause. And we’re very hopeful it will be in time for the aircraft to be here.

LEBEAU (on camera): If the F-35 is cleared to fly at this air show before the end of this week, it will be welcomed news for Lockheed Martin (NYSE:LMT) and for a program that’s been criticized for lengthy delays and costly overruns.

I’m Phil LeBeau for the NIGHTLY BUSINESS REPORT, at the Farnborough International Airshow in Hampshire, England.

(END VIDEOTAPE)

GHARIB: Coming up next, the surprising long term trend in your 401(k), and for a change, it’s good news. We’ll tell you what, just ahead.

(MUSIC)

GHARIB: Traveling for business can be hard and may have just gotten a little bit harder. Business travelers are being warned about a new threat, cyber attacks on their personal information through hotel business center computers.

Eamon Javers has our story.

(BEGIN VIDEOTAPE)

EMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s a familiar ritual for every business traveler on the road. Stop in at the hotel business center and print boarding passes for the next day’s flight. But now, the U.S. government is warning that those hotel business centers could be a dangerous place to do business, because cyber hackers are trying to get into the computers there and steal personal information about corporate executives on the road.

The U.S. Secret Service and Department of Homeland Security told hotel operators in a warning last week that they do this by infecting the computers with so-called key logging malware. That’s harmful software that allows attackers to copy every keystroke made by a computer’s user and capture sensitive information like passwords and account data.

The new government warning was first discovered by the cyber blog Krebs on Security.

CRAIG CARPENTER, ACCESSDATA, CHIEF CYBERSECURITY STRATEGIST: We need to realize that, you know, we don’t live in a world that our information is kept private just because we happen to be at our favorite hotel, and we happen to be at a — you know, at a coffee shop that’s got an open network.

JAVERS: But corporate road warriors, there really are only two ways to keep safe.

CARPENTER: Any time a road warrior encounters a situation like that, use your own laptop, you know, or communicate in a way that doesn’t share any confidential information, otherwise, you know, there’s really no telling what can happen.

JAVERS: The hotels say they know they’re under attack. A spokesperson for the American Hotel and Lodging Association says many hotels are already adding new layers of protection, including installing anti-virus software, using tamper-proof devices, restricting access to business centers and providing individual unique log on credentials to access business center computers.

(on camera): This is the kind of attack that can be very difficult to stop, the hackers can insert the malware over the Internet, or they can get physical access to the computers in person, using the disc drives of the machines themselves. And with the business centers busy 24/7, it can be very difficult for the hotel staff to see who’s there to do business and who’s there to commit a crime.

For NIGHTLY BUSINESS REPORT, I’m Eamon Javers in Washington.

(END VIDEOTAPE)

MATHISEN: Well, if you were on the market to buy some fine art, placing a bid will soon be a click away and that is where we begin tonight’s “Market Focus”.

EBay and Sotheby’s are teaming up to build an online platform to make it easier to buy collectibles online. The auction house and the online marketplace plan to broadcast live auctions from Sotheby’s New York headquarters. That way, you can bid live and real-time from anywhere in the world. The terms of the deal are not disclosed. Despite the news, shares of eBay (NASDAQ:EBAY) were down slightly today to $51.16. Sotheby’s was up 1 percent to $40.09.

Shares of Riverbed Technology (NASDAQ:RVBD) tumbled after the network equipment maker cut its second quarter revenue forecast, blamed lower sales in North America because of a delay in closing some of its large deals. Following the announcement, the hedge fund Elliot Management reaffirmed its bid to buy the company. The stock dropped 8.5 percent to $18.60.

Home Depot (NYSE:HD) will start selling Stratasys’ 3D printers — say that five times fast — 3D printers at its stores beginning today. The home improvement retailer will have the products in 12 of its locations in California, Illinois and New York. Customers can use the printers to create parts like cup holders, making 3D printing a little more mainstream. Shares of Stratasys (NASDAQ:SSYS) edged up slightly to $104.62.

GHARIB: Domestic steel producers like U.S. Steel could face renewed price competition from China. The World Trade Organization ruled that U.S. tariffs violated global trade rules and improperly imposed duties on Chinese steel products. It also said the U.S. must change its taxes on certain Indian steel products. That sent shares of U.S. Steel down more than 5 percent to $26.16.

Manchester United and Adidas have agreed to a record-breaking $1.3 billion uniform deal. The 10-year contract will begin in 2015 when Nike’s deal with the soccer team expires. Now, for that hefty fee, Adidas will get free advertising on one of the world’s most popular soccer uniforms and it will also be the exclusive distributor of the team’s merchandise. Shares of Manchester United popped nearly 5 percent to $18.64.

Shares of Exelixis (NASDAQ:EXEL) soared on word its experimental skin cancer treatment that it’s developing with Roche is showing positive trail results. The company says the drug helped people with an advanced form of skin cancer to live longer without the disease worsening when combined with another treatment. The stock surged nearly 23 percent to $4 and change.

MATHISEN: Well, according to the Investment Company Institute, that’s the mutual funds big trade group, by the end of last year, nearly 38 percent of 401(k) plan assets were invested in equity mutual funds. And guess what? The fees on those funds continued to drop. And more of your money went to work for you.

Joining us to talk more about this trend and others is Brian Reid, chief economist at ICI.

Brian, welcome back.

Three quick questions: how much did the fees on average fall, why? And how does this translate into more money into my pocket as a fund holder?

BRIAN REID, ICI CHIEF ECONOMIST: Well, fees have dropped 30 percent in the last decade. Between 2012 and 2013, they’ve dropped 5 cents.

What do I mean by 5 cents? Well, stock in investors in a 401(k) now are paying 58 cents for every $100 invested compared to 63 cents in 2012 and a decade ago, 83 cents.

What this means for you is that, as you said, more money of your money is being put to work into the market, and why this is happening is that employers are helping to drive greater competition, and the fund industry is responding. They’re coming out with new share classes, new types of funds that have lower fees. And also, investors and their employers are going towards more index products or passive products which tend to be lower costs as well. All this is contributing to this decline.

GHARIB: And, Brian, are you finding that investors are putting more of their money to work possibly because of these fees we always hear that the individual investor has so much cash on the sidelines. Is that cash now going into these 401(k)s being invested?

REID: There’s a lot of money going into 401(k)s. There’s no doubt about that. I think the improving employment situation with unemployment coming down and employment going up, he’s helping investors have more cash flow in their overall balance sheets and their income, and some of that is being put in the 401(k) market.

To your point about sort of overall cash positions, we’re finding that if you look at households overall, the amount of cash they’re holding while total dollar amount is at a record high, the percentage of the overall financial assets of investors is at a near record low, below 15 percent, and this has been hovering in this area for a long time. So, investors look pretty fully invested right now, not only in their 401(k)s but outside.

MATHISEN: So far this year, where is the fund money? And not just in 401(k)s, where is the money going? In some of your research, it indicated to me that relatively less of it is going into actively manage domestic stock mutual funds, which speaks to the popularity I suppose of ETFs and index funds. But, overall, where is the money going?

REID: Well, we’re seeing several trends. First of all, as you indicated, we’re seeing strong in flows into paths, of particularly in domestic equity, where the pass has the strongest presence. We’re also seeing very strong investor demand for mutual funds that are investing outside the United States.

You know, this has been part of a trend that’s really been in place for close to a decade now, U.S. investors have tried to diversify their portfolios within their 401(k)s and outside, to include more foreign investing, this would include some emerging market bond funds. In addition, we are seeing renewed investor interest into taxable bond funds, as well as new flows coming into tax exempt bond funds, even though last year, we saw some outflows following interest rates, money is coming back in now.

MATHISEN: All right. Brian Reid, thank you very much. Brian is chief economist at the Investment Company Institute.

GHARIB: And coming up on NIGHTLY BUSINESS REPORT, putting the fun in family road trips, how DreamWorks and Microsoft (NASDAQ:MSFT) are hoping to put an end to the infamous question, are we there yet?

(MUSIC)

GHARIB: Just as the nation hits the peak of the summer driving season, you’ve got some good news about the cost of gasoline. Prices at the pump are down an average of 4 cents a gallon over the past two weeks. That works out to $3.67 on average nationwide. And they’re now eight cents lower than this time last year.

MATHISEN: Volkswagen is making a big investment in Tennessee, $600 million to upgrade a current Chattanooga factory and build a brand new research center there. The German automaker will build a new 7-passenger SUV there, hoping for big sales in the U.S., and will add another 2,000 jobs to ramp up production.

GHARIB: Well, while one business opens, another looks to be closing down. Employees of the Trump Plaza in Atlantic City were notified today that the hotel casino expects to shut its doors in September. More than 1,100 people will lose their jobs.

Trump Plaza, though, isn’t alone. It could become the fourth casino in the struggling New Jersey gambling Mecca to close this year due to declining revenue from newer gambling sites in nearby Maryland and Pennsylvania.

MATHISEN: A different kind of gaming. Video games may never be the same again, especially for families on the road, after Microsoft (NASDAQ:MSFT) and DreamWorks Animation decided to combine forces on a new venture.

Julia Boorstin has the story.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): DreamWorks Animation and Microsoft (NASDAQ:MSFT) are teaming up to bring dragons into the world around you.

DreamWorks Animation’s “Dragon Adventure: World Explorer” targets kids playing games in the car, and layers in precise location based technology, Foursquare, map, and the Weather Channel, so when kids fly on the back of the Dragon Toothless through the isle of Berk, the game reflects the time of day, weather, and the roads and landmarks around them.

PETE MAURO, MICROSOFT PRODUCER INNOVATION AND APP DEVELOPMENT: When you get in the car and you start moving down the street, your car is represented by a cart, the actual streets and buildings around you are all transformed. So, if you drive by a restaurant, it will turn into a Viking eatery. And if it’s a popular place, you’ll see lots of Vikings milling about, and we’re getting that data from Foursquare.

BOORSTIN: And if parents plug in where they’re headed, the game automatically winds down when arriving at a destination to prevent battles getting out of the car.

(on camera): Starting today, the game is available for free for Microsoft (NASDAQ:MSFT) devices. The tech giant is looking to showcase its entertainment tools, while DreamWorks Animation invests in its characters. No word on if or when it will be available on Apple (NASDAQ:AAPL) and Android devices. When you’re at home, or want to turn off location tracking, the game allows kids to explore 16 cities from San Francisco to Washington, D.C., to Beijing.

MAURO: I think it’s a really new, kind of fertile area that people are starting to experiment with. We’re certainly going to be looking at introducing other experiences, not necessarily just games, and taking them to consumers, whether it be built directly into a car, or something that you could at home and explore the world virtually.

BOORSTIN (voice-over): As for concerns about location tracking kids, Microsoft (NASDAQ:MSFT) assures parents that it doesn’t retain location data. But down the line, all that location information could be valuable for targeting ads, which could translate to big revenue and annoyed parents.

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

(END VIDEOTAPE)

GHARIB: Kind of cool. Would you use it for your season son?

MATHISEN: Well, my son uses the iPad all the time on car trips. There’s one word of caution, on a windy road, use it at your own peril. It gets a little queasy with them.

GHARIB: It does look like fun, though.

That’s NIGHTLY BUSINESS REPORT for tonight. Thanks for watching. I’m Susie Gharib.

MATHISEN: And I’m Tyler Mathisen. Thanks for me as well. Have a great evening, everybody. We’ll hope to see you back here tomorrow night.

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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