Transcript: Tuesday, July 15, 2014

NBR ThumSUSIE GHARIB, PBS HOST: Split decision when it comes to tech earnings, Intel (NASDAQ:INTC) hits, Yahoo (NASDAQ:YHOO)! misses. The outlook for the whole sector this earnings season.

TYLER MATHISEN, PBS HOST: Tech team up, Apple (NASDAQ:AAPL) and IBM, mortal enemies in the desktop era 30 years ago join forces to develop apps and services blending Big Blue`s enterprise prowess with Apple`s mastery of mobility.

GHARIB: And hanging on every word, Wall Street focused more on what was written by the Federal Reserve than what Janet Yellen said to Congress.
And stocks halted in their tracks. We have all that and more tonight on NIGHTLY BUSINESS REPORT on this busy Tuesday, July 15th.

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MATHISEN: Good evening, everyone and welcome, major news breaking on multiple fronts in technology late today. Apple (NASDAQ:AAPL) and IBM announcing a landmark partnership to develop apps and business software for use by corporate employees on iPhones and iPads.

Both stocks moving higher in early post market trading. We`ll have more on this once unthinkable deal in just a moment.

But we begin tonight with after the bell earnings from two tech bellwethers, Intel (NASDAQ:INTC) and Yahoo (NASDAQ:YHOO)!. First up the computer chip maker Intel (NASDAQ:INTC), it reported better than expected revenues and earnings, net profit up of nearly $3 billion on strong demand for personal computers and the chips inside them.

Excluding certain items, Intel (NASDAQ:INTC) pulled down 55 cents a share; that`s 3 cents better than analysts` estimates. Revenue nearly $14 billion also topped the forecast. Shares of the Dow component rose as much as 3 percent in after-hours trading.

Seema Mody joins us now from the Nasdaq marketplace with more on Intel`s results.

Seema, from where you sit, what is the one big takeaway on Intel (NASDAQ:INTC)?

SEEMA MODY, PBS CORRESPONDENT: It`s the rebound in the PC market, Tyler, that`s what investors are really talking about, showing signs of growth in an industry that at some point was telling investors that there was a lack of growth but clearly, the personal computer market still adding value to Intel (NASDAQ:INTC). Management does see opportunity; they are going forward. In fact, it gave a strong forecast for the current quarter and the year citing PC shipments.

GHARIB: OK. Don`t go away Seema, we`ll be right back to you. Next in the profit parade, Yahoo (NASDAQ:YHOO)! the Internet giant earned 37 cents a share excluding certain items. Disappointing investors with a one penny a share miss.

Revenue was also short of forecast, just topping $1 billion even though rates for online display ads fell by a staggering 24 percent. Yahoo (NASDAQ:YHOO)! shares were initially up 2 percent in late day trading, so let`s turn now to Seema again.

What`s the big takeaway here about Yahoo (NASDAQ:YHOO)!`s results?

MODY: Well, results came in below street expectations due to a decline in display advertising sales but it was news on its Alibaba stake, the Chinese Internet player, that`s expected to go public in early August.
That`s what investors were really focused on.

Yahoo (NASDAQ:YHOO) said it will return at least half of the after tax IPO proceeds to shareholders . It`s also reducing the number of shares that Yahoo (NASDAQ:YHOO) is required to sell at the Alibaba IPO to 140 million shares from 208 million shares.

So basically when reading through the notes of the Yahoo (NASDAQ:YHOO)! earnings report, it`s really trying to capitalize on the Alibaba investment as its core business continues to struggle. Back to you.

GHARIB: Thanks a lot. Seema Mody reporting from the Nasdaq.

MATHISEN: And now to that big Apple (NASDAQ:AAPL) IBM news. Back in
1984 Apple (NASDAQ:AAPL) skewered IBM in an iconic TV ad portraying it as an evil Big Brother. Today the two companies are BFFs. Apple
(NASDAQ:AAPL) CEO Tim Cook and IBM`s Virginia Rometty announced they will team up to collaborate on a suite of more than 100 brand new made for business apps that will combine the strengths of IBM`s big data analytics and cloud services and Apple`s massive mobile reach via the iPhone and iPad and its AppleCare support system.

The theory here, combine IBM`s strength in enterprise computing with Apple`s keep it simple know-how in serving real people doing real work on tablets and handhelds. Apple (NASDAQ:AAPL) CEO Tim Cook says this was a deal that just had to be done.

(BEGIN VIDEO CLIP)

TIM COOK, CEO, APPLE: It takes the best of Apple (NASDAQ:AAPL) and the best of IBM and puts those together. There is no overlap. There is no competition. They`re totally complementary and more than anything it focuses on the enterprise customer. So this is all about transforming the enterprise, reinventing the enterprise, taking big data analytics down to the fingertips of people so they can spend their time making complex decisions not in running around getting data.

(END VIDEO CLIP)

MATHISEN: And the apps will be available starting this fall.

GHARIB: Google (NASDAQ:GOOG) making some news late today, as well, naming outgoing Ford Motors CEO Alan Mulally to its board of directors.
Mulally will serve on its audit committee. Now Mulally`s experience at Ford might come in handy as Google (NASDAQ:GOOG) develops a self-driving car and looks to get more of its Android software inside more vehicles.

MATHISEN: And not to be left out of today`s tech news trifecta and then some, Microsoft (NASDAQ:MSFT); respected tech websites report it`s planning its biggest round of job cuts in five years, perhaps as many as
6,000 workers with an announcement expected as early as later this week.

This comes after the software giant acquired Nokia`s handset business taking on 30,000 more employees. The cuts are expected to come where the two companies overlap.

GHARIB: Let`s turn now to Skip Aylesworth for his take on all of this tech news. He`s portfolio manager of the Hennessy Technology Fund.

Skip, nice to have you with us because we have so much to talk to you about and I`d like to start with that IBM and Apple (NASDAQ:AAPL) deal.

How much of a game changer is this — and I know you don`t have Apple
(NASDAQ:AAPL) or IBM in your portfolio.

Does this change your view on these two stocks?

SKIP AYLESWORTH, PORTFOLIO MANAGER, HENNESSY TECHNOLOGY FUND: Well, I think it`s too early to know. I think it`s good for both companies. I think certainly Apple (NASDAQ:AAPL) is looking to sell more equipment, more handheld devices, more iMacs, more phones, whatever and this gives IBM an ability to work on the software and what they do best.

So down the road, this should be good for both. Now whether it moves the needles enough to result in stock price changes long term won`t — we need to hold off and wait a quarter or two and let`s see what the results are.

MATHISEN: As we pointed out earlier today, the early reaction in the market was positive on both those stocks. I can well imagine that the folks up in Waterloo, Ontario, at RIM are shaking a little bit this evening.

AYLESWORTH: Well, I would think so. I think we`ve seen the stock price fall in aftermarket. Again, it`s putting the Apple (NASDAQ:AAPL) product right in direct competition with the RIM product in the enterprise marketplace and I think it will do well for Apple (NASDAQ:AAPL).

GHARIB: Skip, I want to talk to you also about Yahoo (NASDAQ:YHOO) not really great earnings report on a day that is the two-year anniversary since Marissa Mayer took over as CEO.

How is she doing and it looks like this Alibaba deal later this summer is critical to Yahoo`s success, do you agree with that?

AYLESWORTH: I would agree with your conclusion. I think she`s doing fine. We`re kind of in the middle innings of the ball game for her. She took over, she`s kind of stabilized the ship. There were a lot of holes to plug and she`s done a pretty good job with all of that, with what she had to work with.

The earnings are a little disappointing today, but as expected it`s really what happens next. She`s going to get a big influx of cash from Alibaba, assuming that all happens as expected and it`s what she does with it to reinvigorate Yahoo (NASDAQ:YHOO) and restart the growth cycle of Yahoo (NASDAQ:YHOO).

MATHISEN: Let`s get a quick reaction from you on Intel (NASDAQ:INTC) before we move on to some of the other companies that I know are in your sights down the road.

AYLESWORTH: I like the Intel (NASDAQ:INTC) earnings. They were good.
Intel (NASDAQ:INTC) is your classic turtle versus the hare. It just kind of plugs along. The problem with Intel (NASDAQ:INTC) is that it`s a huge company, huge revenues, huge profits and it takes a lot to move the needle to really ramp up the growth of the stock price. Today was a good day for Intel (NASDAQ:INTC), I think.

And next week we have a lot of big companies reporting, among them, Amazon (NASDAQ:AMZN). You`re a big fan of Amazon (NASDAQ:AMZN).

Why is it? And is it worthwhile to put new money in it now?

AYLESWORTH: Well, the rap against Amazon (NASDAQ:AMZN) is it`s expensive by various multiples. The good news is Amazon (NASDAQ:AMZN) is kind of — controls the space. It is the player in online purchasing and it`s had great growth in its net worth, in its revenues and its profits.

And we would expect that to continue, particularly when you look at year over year. It`s a seasonal type of revenue, so the look next week should be on a year over year basis, not a quarter to quarter basis.

GHARIB: All right. We`ll see what happens next week when all these companies report. Thanks a lot, Skip.

Skip Aylesworth of the Hennessy Technology Fund.

MATHISEN: And the markets fluctuated wildly today with investors reacting to every word spoken and written from Fed chair Janet Yellen on the first day of her semiannual monetary policy report to Congress.

Yellen said the central bank intends to keep providing support to the U.S. economy but it was the written report that accompanied her testimony that the market seemed to be fixated on.

Steve Liesman has more.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, PBS CORRESPONDENT (voice-over): The market getting a bit of a surprise not from Fed chair Janet Yellen`s written testimony but from the accompanying monetary policy report to Congress. That report raised questions about whether there were bubbles in some specific parts of the stock market.

The report read, quote, “Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”

Those stocks took a hit before recovering somewhat during the day.
Later in the Q&A, Yellen discussed how low rates can distort markets, pushing investors into risky positions and driving up asset prices.

(BEGIN VIDEO CLIP)

JANET YELLEN, CHAIR, FEDERAL RESERVE: Low interest rates, I think, have had a positive effect on helping the recovery, but of course, we have to be careful about looking for situations where low rates may be incenting behavior that can be dangerous to financial stability.

(END VIDEO CLIP)

LIESMAN (voice-over): On economic and monetary policy, Yellen seemed to keep the markets on track with its belief that the Fed would raise rates sometime in the middle of next year, though she never mentioned a date.

She did suggest the Fed could move faster if the economy and job market improved more quickly or more slowly if the economy lagged. But overall, her concerns were with getting it wrong by moving too early. She noticed for example that there were many, quote, “false dawns,” when the Fed thought the economy would take off but didn`t.

Credit Suisse in its commentary on Yellen`s remarks said, quote, “It seems to us that the Yellen Fed desperately wants to avoid doing anything that could bring a premature end to a recovery that finally appears to be gaining traction.”

While Yellen suggested there have been better results in the job market, she said wages have a ways to run before they will cause concern at the Fed about inflation.

(BEGIN VIDEO CLIP)

YELLEN: While rising compensation or wage growth is one sign that the labor market is healing, we`re not even at the point where wages are rising at a pace that they could give rise to inflation.

(END VIDEO CLIP)

LIESMAN (voice-over): What is clear is that Yellen and the Fed have a keen eye on market evaluations and the economic data, especially the jobs data. There is a market expectation the Fed will keep rates in check until next summer and gradually hike them next year.

But Yellen made clear it`s not a promise and the plan is only as good as the data. For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

GHARIB: Now before Janet Yellen`s testimony, the major stock averages started out higher. The Dow even reached a fresh intraday high following more solid bank earnings, good news about New York state manufacturing and slight increases in June retail sales and import prices.

But by the close, stocks pulled back ending the session mixed. The Dow added just five points and is only about seven points away from a new historic high. The Nasdaq where a lot of biotech and social media stocks trade lost 24 points and the S&P was off by three points.

MATHISEN: And joining us now to talk about the markets, Chair Yellen and more, Russ Koesterich. He`s the global chief investment strategist at Blackrock.

Russ, welcome back. Good as always to have you with us.

What worries you in the market today?

RUSS KOESTERICH, GLOBAL CHIEF INVESTMENT STRATEGIST, BLACKROCK: Well, ironically, it`s a lot of what I think the Fed chair spoke about.
Generally I don`t think financial markets are in a bubble. I think valuations are probably a little bit above average but they`re reasonable given the low rate, low inflation environment.

But as we read today, the challenge is there are parts of the market and — Janet Yellen mentioned a couple that do look very stretched. And the longer we have a monetary environment in which conditions are this unusual, the great the danger that more areas will become stretched because people are searching for yield and growth in a low yield world.

GHARIB: You know, Russ, it`s very rare to hear a top Federal Reserve official talk about specific parts about the stock market. I mean, what is the danger of being that specific about stock sectors and subsectors?

KOESTERICH: You know, it`s a fascinating question and I don`t think Janet Yellen is trying to get a job as a equity strategist. I think the point of this was really to say we get it. The Fed has been under a lot of criticism about this very topic, which is that there is a cost to keeping rates this low for this long and the cost is you raise the risk of inflating asset bubbles.

And I think what the Fed chair was trying to say today is, look, we`re aware of this. We`re cognizant of the fact that there are certain parts of the market that are extremely stretched.

Now what is important is also what she didn`t say. And I think implicit in the fact that she really highlighted just a couple of sectors is the notion that the Fed does not believe that the broader market, whether we`re talking about equity or credit, is in a bubble.

MATHISEN: That`s a fascinating point. So what I intuit that you`re saying is that in those parts of the market that are stretched, whether you find the Pandoras and the Groupons and some of the biotechs, that can snap back and hurt you. But that there are pockets of value.

Where are they?

KOESTERICH: There are pockets of value. I think they`re in a couple places. In the U.S. generally larger is cheaper. We had a huge run in small caps. Those valuations are roughly twice what they are for large cap companies at least on a price to earnings basis. Large looks cheaper.

More cyclical companies look cheaper. The reason is again, people have been stretching for yield in sectors like utilities; the more cyclical parts of the market look less expensive. And then finally what it emphasized is that the U.S. has been outperforming for a long time. That`s arguably justified because U.S. growth is stronger.

But it`s left U.S. stocks relatively expensive, compared to the rest of the world and for the most part stocks in Asia, other parts of the international sector, do look less expensive than stocks in the United States.

GHARIB: All right. So for the average investor who is listening to all these comments that you`re making and seeing the headlines about Janet Yellen, what is the takeaway here for them?

Should they feel good now to put their money in the market or what?

Connect the dots for us.

KOESTERICH: I think there are a couple dots to connect here, the first of which, again, going back to the comments by Janet Yellen: be careful. Be careful of the momentum parts of the market where valuations just got to unsustainable levels. Those are dangerous.

The broader market still looks reasonable. You can still make money but, and this is important caveat, stocks have really gained quite a bit from multiple expansion. They are not nearly as cheap as they were two years ago. And even if stocks go higher over the next year, which we expect, the rate of gains is likely to be slower over the next three or four years than they`ve been over the past three to four years.

MATHISEN: Russ, thank you so much, as always. Very helpful.
Appreciate it.

KOESTERICH: Oh, thanks, Tyler.

MATHISEN: Rich Koesterich of BlackRock (NYSE:BLK).

GHARIB: And coming up, we switch gears, the growing concern over a liver disease you probably never even heard of and which pharmaceutical companies are leading the way in developing treatments. That`s next.

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GHARIB: We begin tonight`s market focus with a $25 billion tobacco deal. Reynolds American (NYSE:RAI) is buying its smaller rival, Lorillard (NYSE:LO), in a merger that will combine two of the country`s largest tobacco producers.

The combination will give Reynolds a dominant position in one area where the cigarette business is growing, menthol cigarettes, but it will sell its Blu e-cigarette brand to Britain`s Imperial Tobacco Group. Shares of Reynolds dropped actually on the news, down about 7 percent to $58.84; Lorillard (NYSE:LO) also fell, tumbling more than 10 percent to $60.17.

And another deal to tell you about, specialty chemicals company Albemarle (NYSE:ALB) is buying Rockwood Holdings (NYSE:ROC) for about $6 billion in cash and stock. The move is an effort by Albemarle (NYSE:ALB) to tap into the demand for lithium products that are used in mobile phones and car batteries.

Shares of Rockwood popped almost 10 percent to $83.14. Albemarle
(NYSE:ALB) fell 3.5 percent to $70 and change.

Goldman Sachs (NYSE:GS) posted earnings that trumped estimates. Its quarterly profit rose 5 percent, thanks to strong performance in its investment banking and lending units. Also its fixed income trading fell less than what Wall Street was expecting. Investors liked the news, shares rose more than 1 percent to $169.17.

And JPMorgan (NYSE:JPM) shares also rallied on better than expected quarterly results, even though the bank`s earnings and revenue declined from last year, trading revenue held up better than analysts` forecast.
JPM stock jumped 3.5 percent to $58.27.

MATHISEN: And after the bell, railroad operator CSX (NYSE:CSX) reported a rise in second quarter earnings as it benefited from broad volume growth. Earnings and revenue basically in line with estimates and the company confirmed its outlook for the full year. The stock initially down a little after the announcement. But during the regular session, though, shares were up a fraction to $31.15.

GoPro saw its shares pop after a bullish analyst note. JMP Securities began coverage of the wearable camera maker with an outperform rating and a
$60 price target, saying the company has established itself as a durable multimedia and active lifestyle brand and that sent the stock up 13 percent today to $41.63.

Opposite story, though, for Michael Kors, that stock down for the second day in a row as Stern AG and Barclays reduced their price targets for the high-end retailer. Both firms citing increased promotional activity that could put pressure on margins. Shares tumbled more than 7 percent to $79.44.

And Johnson & Johnson (NYSE:JNJ) reported quarterly revenue and earnings easily topping Wall Street estimates fueled by strong sales of its hepatitis C treatment. The company cautioned that the pill will lose some steam later this year as newer rivals come to the markets. Still, shares were about 2 percent lower today. They finished at $103.28.

You may not know about NASH, it`s a liver disease that affects up to 8 million Americans. But it`s a hot topic for drug companies. With no medication for it on the market right now, it`s being referred to as the new hepatitis C, a potential bonanza because treatment costs are expected to approach $40 billion over the next decade. Meg Tirrell has more on the dash to treat NASH.

(BEGIN VIDEOTAPE)

MEG TIRRELL, PBS CORRESPONDENT (voice-over): You probably never heard of it but some say it could become the next global epidemic. NASH or non- alcoholic steatohepatitis is a progressive liver disease often associated with obesity. Drugmakers developing medicines to treat the disease are eyeing a huge and still growing potential market.

ALETHIA YOUNG, ANALYST, DEUTSCHE BANK: There is probably 6 million,
6.5 million people with advanced NASH, meaning they have scarring or they have hardening of their liver conservatively here in the United States and in Europe, in the big five nations it`s about the same. So about 12 million people or so 12 million or 13 million people.

TIRRELL (voice-over): And that`s only counting people battling the advanced stages of the disease. The number jumps to 30 million in the U.S.
alone when people with milder forms are included.

Deutsche Bank analyst Alethia Young thinks the market for treating NASH will grow to between $35 billion and $40 billion by 2025.

So who is developing the treatments? The most familiar name is Gilead Sciences (NASDAQ:GILD), which already makes the hepatitis C medicine Sovaldi. In the United States, there is also Intercept Pharmaceuticals and in France, biotech company Genfit.

Results from the ongoing studies in this high-stakes race will begin to come out later this year.

YOUNG: I personally believe that we`ll probably need a couple years or so to see kind of the safety profile of these drugs in addition to efficiency. Any of that`s defined by outcomes here. But I have my little, the drugs will probably be on the market around 2019 or 2020.

TIRRELL: Until then, the company`s stock prices are likely to be volatile. Intercept already tripled earlier this year on positive data for its drug, OCA. Analysts say further positive data could cause the stock to double. On negative data, it could be cut in half. For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

GHARIB: And to read more about NASH and how drugs to treat the disease could rival hepatitis C medications, go to our website, nbr.com.

MATHISEN: Another piece of medical news to tell you about which could be a big help to the millions of people afflicted with diabetes. The Swiss drugmaker Novartis is teaming up with Google (NASDAQ:GOOG) to develop a smart contact lens that measures blood glucose levels in tear fluids and then wirelessly sends the data to a mobile device.

The smart lens may even help restore the eye`s ability to focus.

Amazing.

GHARIB: Coming up next, the new space race with a billion dollars in taxpayer money already committed and a Dow component vying to win. Why NASA`s latest spacecraft competition has a lot riding on it.

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GHARIB: Stocks might be flirting with historic highs but it`s a completely different story for energy prices. Crude oil closed below $100 a barrel today. This is the first time in more than two months and gasoline prices have fallen for 18 days in a row with gasbuddy.com reporting today that the average price fell below $3.60 a gallon for the first time in three months.

MATHISEN: There is a space race heating up. NASA has to choose a manufacturer for a new crew carrier to take astronauts up to the International Space Station. And the stakes are high for the private companies and for one large publicly traded one, competing for that prestigious contract. Jane Wells has more.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: Hey.

UNIDENTIFIED MALE: Hey. Welcome to the spacecraft.

JANE WELLS, PBS CORRESPONDENT (voice-over): Tony Castilleja wasn`t even born when the space shuttle program began.

CASTILLEJA: We know we`re making history again.

WELLS (voice-over): Now he`s part of the team at Boeing (NYSE:BA) trying to build its replacement.

WELLS: So no welds?

CASTILLEJA: No welds. No welds. It`s —

WELLS: Has that ever been done before?

CASTILLEJA: Never been done before.

WELLS (voice-over): Boeing (NYSE:BA) is competing against SpaceX and Colorado-based Sierra Nevada to build a space taxi to the International Space Station which will cost cheaper to fly than the $70 million a seat NASA is currently paying the Russians.

NASA wants one ready to go by 2017.

SpaceX has so far grabbed most of the headlines in the competition, offering up a capsule and rocket which Elon Musk basically created from the ground up.

Boeing (NYSE:BA), however, is offering NASA a system based on what has worked in the past.

JOHN MULHOLLAND: I think especially in human space flight where you have to be air free, bringing in flight crew and hardware and technology drives down the risk to humans.

WELLS: Even the spacesuits look traditional. Orange has always been the new black but there are some changes. For example, look at this, this is a Samsung tablet, a Galaxy, all the astronaut will have them if Boeing
(NYSE:BA) wins — and that`s a big if. NASA has spent over a billion dollars seating all three companies and each company has had to invest some of its own money.

That`s part of NASA`s new business model for low Earth orbit, leasing space on a capsule it helped develop, allowing the builder to keep the capsule and lease the remaining space. Space adventurers would like to use a seat on the Boeing (NYSE:BA) capsule for tourists. Bigelow Aerospace would like to lease the whole thing to set up space habitats so Boeing
(NYSE:BA) has added things like blue lighting used on its commercial airliners.

CASTILLEJA: We`re like at an inflection point in space travel, going from those military-like interiors into this commercial airliner feel in space flight.

WELLS (voice-over): NASA should announce a winner next month but if Boeing (NYSE:BA) loses, it`s already reportedly bracing for layoffs.

MULHOLLAND: I think it would be difficult to close that business case without that backstop of NASA development funding.

WELLS (voice-over): A sign that space has changed with budgets and figuring out how to survive in this new era really is rocket science. For NIGHTLY BUSINESS REPORT, Jane Wells, Houston.

(END VIDEOTAPE)

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

GHARIB: And I`m Susie Gharib. Have a great evening. We`ll see you back here tomorrow.

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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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