Transcript: Monday, August 11, 2014

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Correction, please? Some market watchers say stocks have risen too far for too long without a 10 percent pull back. We’ll ask two top pros what they think.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Where’s the spike? Why oil and gas prices aren’t rising sharply, along with tensions in Iraq.

MATHISEN: A graying nation. Ten thousand baby boomers turn 65 every day. That could have a major lasting impact on our economy. Tonight, we begin a four-part series, “Aging in America”.

All that and the return of Susie Gharib on NIGHTLY BUSINESS REPORT for Monday, August 11th.

GHARIB: Good evening, everyone. Yes, I’m back.

Topping our news tonight: another positive day on Wall Street. As investors were able to look past the Russia/Ukraine conflict and the escalating tensions in Iraq.

Good news, right? Well, not for many investors, they are puzzled before how and why stocks can keep going up, avoiding the correction that so many have predicted after a five-year bull run. And with political turmoil and economic uncertainty all around the world, the rise in equities has confounded the experts.

Here’s how the major averages ended today’s session: the Dow rose 16 points, the NASDAQ up 30, and the S&P 500 added five points.

MATHISEN: Unnatural, that’s how Mark Luschini, chief investment strategist at Janney Montgomery Scott, describes the stock market that hasn’t experienced a 10 percent pullback in three years. So, would investors be on firmer footing if there had been a wicked selloff or two? And do stocks need to correct before they can move reliably higher?

Mark Luschini joins us now, as is Jack Ablin, chief investment officer with BMO Private Bank.

Gentlemen, good to have you here.

Mark, let me just start with you. Do we need a pullback for the market really to be healthy?

MARK LUSCHINI, JANNEY MONTGOMERY SCOTT CHIEF INVESTMENT STRATEGIST: I don’t think we need a pullback, Tyler, at least not in that vein. Certainly like many I would welcome one, because I do think it would reenergize equity investors at more attractive valuations that exist at the moment. But there’s no immutable law that says we have to a correction to find us a decline of 10 percent or more. In fact, over the last 34 years, while 19 of those 34 years, there has been a correction of that order of magnitude, it has hasn’t obviously been 100 percent.

And so, as a consequence, I think as long as we continue to see the economic and corporate fundamentals improving, that should allow for stock prices to advance commensurate with earnings growth.

And so, I don’t think we need to have one in order to invite continued interest in equities.

GHARIB: Jack, you are of a different opinion. You think we do need a correction in the stock market. Tell us why?

JACK ABLIN, BMO PRIVATE BANK CHIEF INVESTMENT OFFICER: Sure, I think that there are a lot of investors sitting on the sidelines, because valuations are expensive. Now, I think Mark is right, as long as earnings can outpace current valuations for a while and revenues can outpace them perhaps, we could move forward without a correction.

But I think the fact is that with valuations expensive, and the economy doing OK, we could use a pullback to get some of this cash sitting on the sidelines in the market.

MATHISEN: So, that’s the good side of a market pull back? In other words when valuations go down, it attracts more money in?

ABLIN: Yes, so I can — you know, in our own case, if someone were to open an account with us today and give us 100 percent cash, I would have a difficult time buying certainly small caps. I wouldn’t touch small caps at these levels. They’ve already had nearly a 10 percent correction.

But, you know, large caps, I would have to really be careful and pick and choose where we would go. I certainly would not just make a lump sum allocation to equities at this level.

GHARIB: You know, Mark, a lot of people are keeping score how many days it’s been since we’ve had a market correction, something like 1,000 plus. If you look back in Wall Street history, there have been periods that have gone even longer than this without a correction.

So, I mean, just answer the question, is it bad or is it good not to have a correction?

LUSCHINI: Well, it’s good not to have a correction, as long as equity prices continue to be supported by the fundamentals, I think on the other hand, Susie, it would be bad if we saw a melt up in equity prices in the absence of cooperating fundamentals, which drove valuations to egregiously high levels. And while I mostly agree with what Jack said, I will differ, I don’t think valuations are all that expensive.

I think valuations in U.S. equity market are about 15 times, a little more than that, perhaps forward 12-month earnings are full, I wouldn’t argue that they’re expenses, and as a consequence, particularly given the lack of alternatives in bonds and cash for risk base capital. I think equities can go higher without the need for a corrective phase.

MATHISEN: So, Jack, it seems like there are a couple things that may have sort of changed the equation a little bit. One is that the period of high liquidity, of easy money does seem to be changing. The Feds certainly are cutting back on the bond purchases and likely will raise interest rates next year. There is heightened geopolitical concern around the world.

How likely do you think a 10 percent pullback is in the market over let’s say the period between now and the end of the year? And what would you do? Where would you put money if one happened?

ABLIN: Sure, it’s entirely likely. I think that — you know, I agree with Mark, through the lens of bonds, stocks do look cheap. But that is the only lens in which stocks look cheap, because profit margins are near all-time record, if you’re relative to sales, just the revenue, stocks are probably 25 percentage points above their median levels.

So, if we do get a continued pull back in liquidity, which I believe has been the driver of the market over the last 12 do 18 months or so, it’s entirely likely we go to cash and sit it out. We watch liquidity in credit spreads and we watch momentum in the market action itself. And that could prompt us to reduce our risk and go to cash.

MATHISEN: A spirited discussion, gentlemen. Thank you very much.

LUSCHINI: Thank you, Tyler.

MATHISEN: Mark Luschini with Janney Montgomery and Jack Ablin with BMO Private Bank.

GHARIB: Well, for all the talk about a market correction, there are some S&P 500 stocks that have fallen sharply from their 52-week highs and some have even plunged into correction status. But could some of those hard hit companies now be poised for a comeback?

Dominic Chu has the story.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It was shaping up to be the pullback in stocks that so many traders had been waiting for. Geopolitical risk for flaring up all around the globe and stocks began selling off. But that drop was short lived. For now, the large cap S&P 500 index dips just 4 percent over the last couple weeks, and bargain hunters stepped in.

JERRY CASTELLINI, CASTLEARK MANAGEMENT PRES. & CIO: Coming out of this pullback, we think areas that are reflective of economic growth should be probably the best areas to be in, and that would be mostly energy, industrials and technology.

CHU (on camera): Many investors who are looking for bigger returns in the stock market often look towards the stocks that have been beaten up in training — the ones who have fallen the most since their recent highs.

(voice-over): Out of the 500 stocks in the large cap S&P 500, more than 1/3 of them have fallen by at least 10 percent from their respective takes over the last year. Out of those, just 30 stocks have lost a fifth of their value or more, a level that many traders call bear market territory.

Among the hardest hit stocks are Internet retail giant Amazon (NASDAQ:AMZN).com, also luxury goods retailer Coach (NYSE:COH) and upscale grocer Whole Foods. Investors in all three have sold shares because of concerns over things like future growth and stiffer competition. But the selloff in shares has given some traders a reason to give these companies another look.

Some experts are looking even deeper into those companies with particular strengths.

RON SLOAN, INVESCO GLOBAL CORE EQUITY TEAM CIO: Nordstrom (NYSE:JWN) and Macy’s (NYSE:M) and people like that who have had very strong online capabilities, that’s where the retail leadership has been, and probably will continue if there is any leadership out of retail.

CHU: Retail stocks will be especially important this week as companies like Macy’s (NYSE:M) and Walmart help to wind down large cap earnings seasons. Those reports may help shed more light on the health of the consumer and whether or not beaten up stocks can balance back.

For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.

(END VIDEOTAPE)

MATHISEN: In remarks widely interpreted as indicating he favors accommodative Fed policies aimed at supporting economic growth, new Federal Reserve vice chair, Stanley Fischer, called post-recession U.S. and global economic performance disappointing. Speaking at a conference in Stockholm, he questioned whether the growth was merely cyclical or as some economist maintains, structural. Whichever it turns out to be, Fischer said the result has been a general down shift in forecasts for long term U.S. growth.

GHARIB: Over in the oil patch today, a big corporate restructuring announced by the nation’s biggest energy pipeline company. Kinder Morgan is consolidating its huge pipeline business into a single company. It’s a $44 billion transaction, and investors like what they heard. Shares of Kinder Morgan gushed higher by 9 percent.

Morgan Brennan has more on what’s behind this massive change.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Kinder Morgan announcing plans to combine its four businesses to become the largest energy infrastructure company in America. Valued at $71 billion, it will be the second biggest energy deal in U.S. history, behind Exxon’s $74.5 billion purchase of Mobil in 1999. The consolidation will put Kinder Morgan Energy Partners (NYSE:KMP) (NYSE:EPL), Kinder Morgan Management (NYSE:KMR), and El Paso (NYSE:EP) Pipeline under the Kinder Morgan Inc umbrella, bringing together storage containers, terminal operations and 80,000 miles of oil and gas pipeline.

But to do this, the company is abandoning the massive partnership structure associated with some of its businesses, putting assets into a single C corporation.

MARK EASTERBROOK, BP CAPITAL FUND ADVISORS PORTFOLIO MANAGER: First and foremost, I think the simplification of four entities going into one. Also, you had this C Corp. and three basically MLPs. Now, you’re going to have one entity, and I think it’s going to be a great way to play the energy renaissance going-forward.

BRENNAN (on camera): MLPs have become very popular in the energy sector because of their tax advantages and high dividends. But Kinder Morgan founder Richard Kinder probably considered a pioneer in the MLP space, says his partnerships have gotten too big to make significant investments and maintain growth. He says the C corporation will lower the cost of capital and result in tax savings.

RICHARD KINDER, KINDER MORGAN CHAIRMAN & CEO: You put all that together and we think this is a recipe for us being able to do lots of capitol projects and lots of potential acquisitions that we simply couldn’t do under the old structure.

BRENNAN (voice-over): The move also enables the combined company to increase its dividends to $2 next year and then continue raising it 10 percent annually through 2020.

As for potential acquisitions, analysts note that the company will now be able to acquire all kinds of energy assets, not just infrastructure, which is what the MLPs were limited to.

Even so, Kinder Morgan says it plans to continue investing in infrastructure, that there could be 120 energy MLPs that it could potentially target. And with $640 billion in new tanks and storage expected by 2035, that there will be plenty of room to now grow.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

MATHISEN: Another oil giant Shell appears to be pulling back on shale. According to “The Wall Street Journal”, private equity firm Blackstone group is close to a $1.2 billion deal to buy a 50 percent stake in natural gas assets in the Haynesville shale formation underneath Louisiana and Texas. That is now owned by Royal Dutch Shell. Neither company will confirm the report.

GHARIB: Well, while shale exits the shale business, several energy giants are scaling back operations in the wake of increasing violence in Iraq. And just this evening, President Obama said he stands ready to support the new government in that country and that the U.S. has stepped up military advice to the Iraqis and Kurds.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: The past few days, American forces have successfully conducted targeted air strikes to prevent terrorist forces from advancing on the city of Irbil, and to protect American civilians there. Kurdish forces on the ground continue to defend their city, and we stepped up military advice and assistance to Iraqi and Kurdish forces as they wage the fight against ISIL.

(END VIDEO CLIP)

MATHISEN: But what do these moves of the energy giants mean for the major oil companies and for oil prices?

Jackie DeAngelis reports.

(BEGIN VIDEOTAPE)

JACKI DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the situation in northern Iraq remains tense, reports that U.S. oil majors like Chevron (NYSE:CVX), Exxon and Hess (NYSE:HES) are removing nonessential employees from the region are a concern for the market.

Normally, news like this would cause oil price to spike, but this time the market seemed to be acting rationally. That’s because of Iraq’s 3 million barrels a day of production. Only 6000 come from the north, and only a third of those are exported.

Iraq’s ministry of natural resources saying this weekend that production in the north hasn’t been interrupted.

ANTHONY GRISANTI, GRZ ENERGY PRESIDENT: The south is what we’re really worried about, 3 million barrels a day come from there. If there’s any disruption to that supply, it’s going to be problems for the rest of the world.

DEANGELIS: In the Middle East and Iraq specifically, expat workers are no strangers to conflicts. Evacuations like this have been seen before, many times just temporary, and part of standard operating safety procedures.

What draws expats to the region? High salaries. Oil and gas industry workers are paid for the risks that they assume.

Rigzone says that average salaries are over $90,000 and in some cases where employees have more experience, they can bump into the six-figure range.

Also keeping crude prices in check: a balance in supply and demand. Barring any major catastrophes, global supplies on the rise, and demand seasonally in places like China and the United States is weakening.

GRISANTI: While geopolitical tensions have eased in certain parts of the world, they still remain a problem with Russia and Iraq in particular. But really in the fourth quarter, demand usually drops and that could offset any geopolitical tensions.

DEANGELIS: The good news? Domestic prices for crude have backed off almost 3 percent in a month. Now, back below $100 a barrel and gas prices have declined as well. The Lundberg Survey reporting another 6 cent drop in the last two weeks, bringing the national average for a gallon of regular to $3.52.

So, where does crude go from here? Traders say, unless geopolitics really explode, crude prices are headed lower.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.

(END VIDEOTAPE)

GHARIB: Coming up in the program, Amazon’s new playbook picking a fight over pricing. This time with Disney (NYSE:DIS), but which company will blink first? That’s next.

(MUSIC)

MATHISEN: The U.S. Postal Service delivering some bad news, overall revenue rose 2 percent in the third quarter, thanks to a boost in shipping and package services. But the post office lost $2 billion during the past three months on another big drop in first class mail. The postal service has now recorded a loss in 21 of the past 23 quarters.

GHARIB: Once again, Amazon (NASDAQ:AMZN).com is embroiled in a heated contract dispute with a major content provider. And this time it’s blocking preorders of some of this year’s biggest movies from Disney (NYSE:DIS)?

So, what’s Amazon (NASDAQ:AMZN) after? And could this fight be good news for consumers?

Julia Boorstin has the story.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: You go to Amazon (NASDAQ:AMZN) to preorder DVDs or Blu-Ray disks, of two of the biggest films of the year, “Captain America: The Winter Soldier” and “Maleficent”, both from Disney (NYSE:DIS), you’re out of luck. Amazon (NASDAQ:AMZN) allows users to preorder digital downloads but does not give the option of pre-ordering the DVDs.

Neither Amazon (NASDAQ:AMZN) nor Disney (NYSE:DIS) will comment, but the two companies are clearly in a dispute over pricing.

MICHAEL PACHTER, WEDBUSH SECURITIES: Amazon (NASDAQ:AMZN) is trying to use whatever leverage it has to squeeze some kind of a concession out of Disney (NYSE:DIS). I don’t know if that’s on pricing or some other type of terms, but most likely pricing. And I think that what’s interesting about it, is that Amazon (NASDAQ:AMZN) not being a brick and mortar retailer doesn’t really care about preorders.

BOORSTIN: This is just one of many stand-offs Amazon (NASDAQ:AMZN) has had with content giants. Earlier this year, cutting off preorders of Warner Brothers DVDs, including “300: Rise of an Empire”.

Though, Amazon (NASDAQ:AMZN) and Warner Brothers came to an agreement, Amazon (NASDAQ:AMZN) is still in the midst of a pricing battle with book publisher Hachette, over e-book prices. Hachette objected to Amazon’s push to lower e-book prices. Amazon (NASDAQ:AMZN) responding by suspending advance orders of some Hachette titles, reducing discounts and slowing delivery. The battle escalating with writers taking out an ad to protest Amazon’s actions.

PACHTER: This battle with Amazon (NASDAQ:AMZN) is about the lifeblood of the publishing industry. So, if they negotiate a discount on books, then the publishers actually eat it and the authors eat it. I mean, this is their only chance at monetizing the creative content selling books. So, when Amazon (NASDAQ:AMZN) squeezes them on price, everybody in the creative side and publishing side loses.

BOORSTIN: While Pachter predicts Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) will come to an agreement fairly soon, he warns that the book battle with stakes so high could continue to drag on.

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

(END VIDEOTAPE)

MATHISEN: Shares of the nation’s largest milk processor slumped, and that is where we begin tonight’s “Market Focus”. Dean Foods (NYSE:DF) reported a wider than expected second quarter loss and warned on its third quarter. The reason, raw milk prices remain, quote, unpredictable and volatile. But they also pulled its full-year forecast calling this the most difficult operating environment in its history. That sent shares curdling 3 percent lower to $15.20.

Better-than-expected earnings for Priceline, the online travel company reported a jump in international bookings for hotels, airlines, rental cars. But the company spent a lot to expand globally, and that will pressure its third quarter results. Nevertheless shares of Priceline up 2 percent to $1,309.28.

And shareholders of Mattress Firm will sleep well tonight. Shares of the mattress retailer bounced after the t company said it expects earnings and sales to exceed market expectations. The company also raised its outlook for the year. Thirteen percent gain today to $54.53.

GHARIB: It was the opposite story for Gogo. This in-flight communications and entertainment provider reported a second quarter loss, and says operating profits this year will be at the low end of its prior guidance. The company blamed the weak forecast on higher costs to expand its business. Shares fell nearly 5 percent to $15.24.

Sanofi and MannKind (NASDAQ:MNKD) are teaming up. The French drug maker agreeing to pay MannKind (NASDAQ:MNKD) $925 million for the global rights for the world’s only available inhaled insulin. The deal comes just about two months after the drug won regulatory approval in the U.S.

Shares of MannKind (NASDAQ:MNKD) rose 4 1/2 percent $8.53. Sanofi fell slightly to $52.09.

And Intercept Pharmaceuticals soaring after ours after more details are released about clinical trials for its experimental liver drug OCA. The company says the drug showed improvement in 46 percent of patients with serious fatty liver disease versus 21 percent with a placebo. Shares were up a percent in regular session, but then you can see the spike after-hours once that data was released.

MATHISEN: Coming up, a large portion of Americans population is getting older and that could mean big changes for our economy tonight. We begin a four-part series on “Aging in America.”

(MUSIC)

MATHISEN: With thousands of American workers putting in their retirement papers every single day, we’re kicking off a four-part series called “Aging in America”. We begin part one tonight with a look at the impact of what an aging population along with an older workforce would have on the U.S. economy.

Steve Liesman has our story.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Every day in America, 10,000 baby boomers turn 65. By 2030, the population is set to grow from today’s 45 million to 72 million, or a fifth of the population.

For economists, these used to be much scarier numbers. They raised fears that an aging population would lower growth permanently. That an older workforce would be much less productive. But that view is changed. While the booming baby boomers present serious challenges, the new thinking is far more optimistic.

NICHOLAS EBERSTADT, AEI ECONOMIST: The really good news in our economy is that the employment patterns for the 55-plus group have been going steadily up for the last generation.

LIESMAN: They’ve also learned when you make a few changes in the workplace, the productivity for older and younger workers is about the same. Like red or white on the factory floor or bigger computer screens in the office. Finally, technology can be a major part of the solution, replacing the work of retirees who leave the workforce.

Still, the problems presented by baby boomers are considerable and won’t solve themselves.

EBERSTADT: The analogy is saying, oh, my God, those picnickers down by the seashore at low tide are all going to drown. Well, yes, of course, they’ll drown if they don’t move. But they can move.

LIESMAN: Moving could mean finding new ways to curtail the rise of health care costs. Government spending for health care and Social Security will double from an average of 7 percent of GDP over the last 40 years to 14 percent by 2039.

(on camera): And it may also include raising some taxes on the young or wealthy, to pay for the baby boomers retirement. Immigration reform and better overall economic growth can be a big part of the solution.

JAMES POTERBA, NBER PRESIDENT: Economically it is much easier to address these kinds of issues if you act sooner rather than later, because you’ve got more time, so you could for example implement whatever tax increases or benefit reductions you might make over a longer horizon.

LIESMAN (voice-over): Unfortunately, for some baby boomers, the one agreed solution could be the worst. They’re going to have to work longer and save more. But there’s some justification, one study found the health of 69-year-olds today is about the same as 60-year-olds back in the 1970s. Stats like that help put the problems into perspective.

TED FISHMAN, “SHOCK OF GRAY” AUTHOR: The fact that we’ve added 40 years to the human life span is way — overweighs any economic disadvantage we have, because that’s the biggest treasure. Don’t get depressed about the aging population. It’s the best thing that’s ever happened in the history of the world.

LIESMAN: For NIGHTLY BUSINESS REPORT. Steve Liesman.

(END VIDEOTAPE)

GHARIB: History of the world.

Well, tomorrow we’re going to continue our series, “Aging in America”, with a look at the impact on the health care industry. Something I have a lot to say about having gone through my —

MATHISEN: Having just gone through — welcome back, I wish everyone could see this wonderful pink cap and the beautiful matching pedicure. It’s a wonderful — nice to have you back.

GHARIB: Nice to be back. And don’t say break a leg.

MATHISEN: I won’t.

GHARIB: Not to me.

MATHISEN: No.

GHARIB: That’s NIGHTLY BUSINESS REPORT for tonight. And we want to remind you this is the time of year your public television station seeks your report.

MATHISEN: And I’m Tyler Mathisen. On behalf of your public TV station, thank you for your support, and we 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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