Transcript: Wednesday, August 20, 2014

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

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: The great divide. When will the Federal Reserve start hiking interest rates? That question is intensifying a debate and grabbing the attention of investors, Wall Street and Main Street.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Turning point. Target (NYSE:TGT) cuts the profit forecast as it tries to win back customers and increase sales. But there may be a glimmer of hope in its latest earnings report.

GHARIB: And, subprime trouble? Is a bubble brewing in one of the hottest segments of the economy?

We’ll have that and more tonight on NIGHTLY BUSINESS REPORT for this Wednesday, August 20th.

MATHISEN: Good evening, everyone, and welcome. Thanks for joining us.

Great rate debate intensified today. Some of the most powerful people in monetary policy gathered in the small and beautiful town of Jackson Hole, Wyoming. This afternoon, the minutes of the Federal Reserve’s last meeting were released in Washington, showing that some officials think the economy is getting better quicker, so much so that the Central Bank will need to hike rates sooner than planned.

The initial reaction in the stock market was one of concern, and stocks shed some of the gains for a short time before they resumed their August ascent. In the meantime, a CNBC survey shows Wall Street thinks the next round of interest rate hikes, wherever they begin, will be so gradual and so prolonged they won’t end until the next president is in the Oval Office for nearly a year.

Steve Liesman is in Jackson Hole where Federal Reserve Chair Janet Yellen will speak on Friday with a look at why everyone from Wall Street to Main Street will be watching Jackson.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): When the leading luminaries of the central banking and economics world converge on the Teton Mountains for their annual conference this year, there will be three top picks on the agenda: jobs, jobs and jobs.

The Jackson Hole meeting to include the heads of the U.S. European and Japanese central banks is set to take a deep dive into labor markets, but it really comes down to a great rate debate between just two numbers, the 6.2 percent and falling unemployment rate and the zero Fed funds rate, which hasn’t budged in almost six years.

The key question for the Fed is its easy monitory policy behind the curve of the job market and the economy, risking inflation down the road.

STANLEY DRUCKENMILLER, DUQUESNE CAPITAL MANAGEMENT FOUNDER: The labor market largely healed. As you see, employment is back above trend in services and manufacturing. Today’s Fed policy seems not only unnecessary but fraught with unappreciated risk.

LIESMAN (on camera): The work of Princeton professor Alan Krueger will loom large at Jackson Hole this year. Krueger who was invited but couldn’t attend has argued that the labor market is far tighter than the Fed believes, risking inflation. That’s because millions of Americans who are long-term unemployed and who have dropped out of the workforce he believes are not coming back to work.

ALAN KRUEGER, PRINCETON UNIVERSITY PROFESSOR: It’s long-term employment remains high, and in my view, the evidence suggests the long-term unemployed exert relatively little pressure, on the labor market, that many of them sadly give up searching for a job and eventually withdraw from the labor force.

LIESMAN (voice-over): Fed Chair Janet Yellen knows of Krueger’s work but has politely dismissed his conclusions

JANET YELLEN, FEDERAL RESERVE CHAIR: I think it’s premature, frankly, to jump to that conclusion that that argument is correct, and I’ve made some arguments in other remarks that I’ve given about why I think that the long-term unemployed are likely to move back more actively into the labor force.

LIESMAN: Yellen got some backing in the most recent jobs report which showed 230,000 people came streaming back into the workforce for the third monthly gain in a row, and wage gains were muted. At issue in the great rate debate, when will the Fed start hiking rates and how far will they go once they start?

Judging by years past, when these leaders met in the Tetons, big things happen.

(on camera): So, this year, while it’s about labor, it’s really all about interest rates, markets and the economy, and that’s why Wall Street was listening very closely.

For NIGHTLY BUSINESS REPORT in Jackson Hole, Wyoming, I’m Steve Liesman.

(END VIDEOTAPE)

GHARIB: With us now to talk more about all of this, Josh Feinman. He’s chief global economist at Deutsche Asset and Wealth Management. And Jim Paulsen, chief investment strategist at Wells Capital Management.

Jim and Josh, thank you so much for joining us to talk about this very fascinating debate.

Josh, let me begin with you. What do investors and business leaders need to hear from Janet Yellen on Friday?

JOSHUA FEINMAN, DEUTSCHE ASSET & WELATH MANAGEMENT CHIEF GLOBAL ECONOMIST: I’m not sure what they need to hear. But I think what they are going to hear as Steve pointed out is big focus on the labor market, that progress is being made and increasing confidence with the Fed that that progress can continue, but we’re not there yet. That there is still slack, it’s too soon to throw in the towel on the long-term unemployed and those who left the force. The Fed would like to give these folks as much of a chance to repair the damage from the great recession as possible.

So, while the Fed I think is increasingly getting their heads around the idea that economic conditions will justify them starting rate hikes next year, I think they will want to move slowly and cautiously. They don’t feel any great sense of urgency, and they’d rather err on the side of, as I said, giving the economy more chance to repair the damage rather than moving prematurely.

MATHISEN: Jim Paulsen today, a lot of people, my humble little self included, read the Fed minutes and found to be maybe a little more so-called “hawkish” than some people in the market had anticipated them being.

Did you read them that way? And if you did, why did the stock market move higher by the end of the day? Is the stock market being naive?

JIM PAULSEN, WELLS CAPITAL MANAGEMENT CHIEF INVESTMENT STRATEGIST: Well, I did read them the same way, Tyler. I thought it was more hawkish commentary than we’ve seen from the Fed, and I think the market looks at it a couple different ways. I mean, on the one hand, the fact that even the Fed is becoming a little bit more hawkish in their comments suggests that even they are seeing recovery going on in the economy, which really is a good thing. Even they now have confidence in the future economy. I think that’s good for the market overall.

What the market wants to see is that the Fed also sees improvement, but not to an extent that they have to panickedly move up the timetable for rate hikes, and that’s what I think investors will be looking for in Jackson Hole commentary is there a move of foot that we might move the first hate rate hike from next summer, maybe up to the first quarter of next year. That would be more concerning for the markets overall.

GHARIB: What do you say about that, Josh? Because in those minutes, it said some members want to move more promptly, most members were going to be more gradual. What is the risk if this time — if the Fed misses the right timetable?

FEINMAN: Well, I think there is a more active debate going on within the Fed and reflects we are getting closer. But I think the center of gravity of the committee, Yellen and others around her are likely to be a little slower. They just don’t feel that there is a sense of urgency, inflation is still very subdued, wages are extremely subdued, they still believe there’s slack and they just feel that it would be imprudent to move quickly.

Now, of course, the economy will be the ultimate arbiter here, you know, if it starts to show signs of over-heating, of course, the Fed will get going more quickly. But I think the risk of that is still fairly remote and I think more likely the Fed is going to move, you know, that summertime table maybe and then just move quite slowly thereafter.

MATHISEN: Does it really matter, Jim, whether to the economy and not just to traders in the marketplace, whether the Fed raises interest rates in June of next year or April of next year or august of next year? Does two or three months really in the grand scheme of things matter to anybody but you guys who want to trade?

PAULSEN: I think there is truth to that. It creates volatility short term, but like Josh said, ultimately it’s not the Fed’s decision. It’s going to be the Fed’s bosses’ decision and that’s the economy.

I really believe that with the unemployment rate likely to drop into the fives here really soon, the composite utilization (ph) likely to go over 80 percent, we’re just one hot wage number or one hot inflation report away from the economy, the boss of the Fed, telling the Fed and the financial markets hey, we got to move this thing up.

And I think that would be concerning is not so much when they do it but if they have to do it more aggressively and quicker in terms of magnitude, that would have to force investors to re-price assets on a different rate schedule.

GHARIB: All right. To be continued. Thank you so much, gentlemen.

Josh Feinman of Deutsche Asset and Wealth Management, and Jim Paulsen from Wells Capital Management.

MATHISEN: Well, despite the small pull back midday on those Fed minutes we’ve been talking about, the S&P 500 rebounded to within a few points of a new high, but it didn’t quite have enough steam to close. By the end of the day, the index did rise almost five points to 1986. It’s third straight day of gains. The blue chip Dow Industrials up 59 points and the NASDAQ, however, ended one point lower.

GHARIB: Looks like $17 billion is the big number for Bank of America (NYSE:BAC). Reportedly, the bank has agreed to pay a record $17 billion with federal and state officials to pay for its role in the sale of mortgage-backed securities in the run-up to the 2008 financial crisis. The officials say that Bank of America (NYSE:BAC) will pay $10 billion in cash and provide consumer relief valued at $7 billion and is expected to announce all of this tomorrow.

Also in the spotlight once again, Bank of America’s troublesome acquisition of Countrywide Financial. This is a mortgage lender at the center of the financial crisis. It now appears that Angelo Mozilo, the founder of Countrywide, is on the Justice Department’s radar, according to Bloomberg, and the U.S. attorney’s office in Los Angeles is considering filing civil charges against Mozilla and other Countrywide employees.

MATHISEN: Target (NYSE:TGT) has slashed its annual profit outlook as it struggles with last year’s massive data breach, a disappointing expansion in Canada and sluggish sales here in the U.S. The nation’s third largest retailer reports its second quarter earnings fell 62 percent, but inside that down beat report, investors may have found a little gem, a glimmer of hope and that could be one of the reasons why Target (NYSE:TGT) shares rose by almost 2 percent today.

Courtney Reagan has more.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Another far from Bulls’ eye quarter for Target (NYSE:TGT). The big box retailer continues to struggle with falling store traffic and sluggish sales. Plus, it’s still relatively new entry into Canada continues to disappoint, though shareholders are most disappointed by Target’s much lower full-year profit forecast.

Many retailers have been struggling to grow sales and traffic, but Target (NYSE:TGT) has additional hurdles. Its entrance into Canada has been nothing short of a mess and losses there continue to mount. The discounter is dealing with losses associated with the holiday season data breach, and while the breach did hurt Target’s shopper confidence, most say, including the company, shoppers have put it behind them.

Chief financial officer John Mulligan says Target (NYSE:TGT) has recovered, quote, “the vast majority of shoppers scared away by the data breach.”

While Wall Street anxiously waited to hear from the new Target (NYSE:TGT) CEO Brian Cornell on the earnings conference call, he said very little, noting mainly that he’s focused on doing his homework, studying up on its Target (NYSE:TGT) business and current issues.

CHUCK GROM, STERNE-AGEE MANAGING DIRECTOR: Brian did a great job when he was at Sam’s Club. I’d expect him to write the ship here at Target (NYSE:TGT). I think Target’s biggest issue is, can they get really traffic back in their stores? And it’s not really clear to me how they do that without some heavy investment into margins, which obviously means, you know, a longer low-term earning structure.

REAGAN (on camera): Target (NYSE:TGT) does see signs of traffic improvement over the last three quarters and says sales at U.S. stores open at least year have been positive for the last six weeks. Mulligan added the company, quote, “feels good about back to school so far.”

(voice-over): Now, investors are waiting to hear the new CEO’s plan to grow the business and reinvigorate the brand, though Cornell won’t say when he’ll be ready to share more.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: Now, American Eagle Outfitters (NYSE:AEO) was a bright spot in the retail sector today. The apparel retailer reported higher than expected second quarter profit in sales, helped by inventory reductions. The company’s interim CEO says the company still isn’t performing up to its potential, though. But investors were still happy. The stock finished 12 percent higher.

MATHISEN: One day after Home Depot (NYSE:HD) raised its outlook, rival Lowe’s lowered its sales forecast for the full year. The CEO says the company made upmost of the sales it lost during the long winter but it wasn’t enough to cover the retailer’s full year’s sales forecast. Still, the number two home improvement retailer did report a 10 percent rise in second quarter profit and says it’s anticipating higher spending on renovations around the house in the second half of the year. That sent shares up 1 1/2 percent today.

GHARIB: And Hewlett-Packard (NYSE:HPQ) reported a surprise revenue gain and a spike in personal computer sales in its earnings report that was released after the market closed. The company earned 89 cents a share. That was right in line with analysts’ estimates. Revenues came in slightly better than expected, at nearly $28 billion — thanks to the strong PC sales. But sales in other units didn’t do as well. The stock initially rose in after-hours trading only to fall back.

MATHISEN: Still ahead, is there a bubble brewing in the subprime auto loan industry? Details of a new report, next.

(MUSIC)

MATHISEN: Hertz is in a world of hurt today. The rental car company says it is withdrawing its full-year forecast and expects 2014 results to be well-below its previous estimates because of accounting irregularities and massive recalls from General Motors (NYSE:GM) and Ford. The recalls are hurting Hertz’s ability to have cars available for customers.

Now, despite all that, maybe because of it, Carl Icahn has taken an 8.5 percent stake in the company, according to a regulatory filing, calling the stock undervalued. And that lifted shares from a big, big slump. Still, the stock finished the day lower by almost 4 percent.

GHARIB: A new report says Americans are having more problems making their monthly car payments. And many of those making late payments or no payments have some of the lowest credit scores. It’s the latest sign the surge in auto sales to people with subprime credit scores could be creating serious problems.

Phil LeBeau has more.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Go to any showroom and dealers will tell you, business is booming. New and used auto sales are the strongest in eight years. One reason why, dealers are selling more cars and trucks to those with less than ideal credit scores.

MELINDA ZABRITSKI, EXPERIAN AUTOMOTIVE: Right now, the subprime borrower is for the most part staying current on their automotive loans. We’re seeing some increases in delinquency, but it’s very modest.

LEBEAU: Experian Automotive says more subprime borrowers were a month or two late on their payments between April and June. At the same time, the number of auto loans that ended in default with cars being repossessed jumped 70 percent.

While the percentages are still well below where they were during the recession, some are worried the push to sell more cars has lenders writing too many loans to those who can’t make monthly payments.

KARL BRAUER, KELLEY BLUE BOOK: Maybe some of the — these people should buy a less expensive car or a used car, versus getting a new car and having the transaction prices continue to climb when they maybe can’t really afford them.

LEBEAU: The average price paid for a new vehicle now tops $31,000. In order to afford that price, with lower monthly payments, more borrowers are stretching out the payments over six, even seven years.

ZABRITSKI: The extension of term is a bit of a catch-22. It helps keep the payments lower but at the same time, it does force consumers to stay in the loan a little longer.

LEBEAU (on camera): When auto loans do go bad, the amount lenders have to write off have gone up by $1,000. Still, the charge-off amounts are well-below they were at the depths of the recession, when lenders were repossessing cars than they are right now.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

GHARIB: A $3 billion semi conductor deal is where we begin tonight’s “Market Focus”.

And that’s what’s Germany’s Infineon Technologies is paying for U.S.-based International Rectifier (NYSE:IRF). This is a company that makes chips for satellites, cars and aircraft. The merger is expected to be completed by early next year, as long as regulators give the OK for the combo. Shares of International Rectifier (NYSE:IRF) soared on the news, up 47 percent to $39.10.

A billion-dollar forecasting error has cost two top executives their jobs at Walgreen (NYSE:WAG). That’s according to “The Wall Street Journal”. The chief financial officer reportedly made a $1 billion forecasting error in the company’s Medicare-related business. Shares were off slightly at $62.

Profit and sales declined at Staples (NASDAQ:SPLS) as the company has faced more competition from online office supplies sellers. It is working to close some of its stores and beef up its presence online. But that turnaround won’t help the retailer right away, it warned that sales might decline in the current quarter as it sells fewer computers and basic office supplies. Shares fell 2.5 percent to $11.32.

MATHISEN: Well, with the name like Smucker, it may have to be good. But the results weren’t. Disappointing earnings there. The Folgers coffee maker missed on the top and bottom lines and it lowered its sales outlook. The food company said promotions took a bite — a bite, maybe a sip — out of its coffee profits. Shares down 1 percent to $102.42.

Madison Square Garden (NASDAQ:MSG), MSG, not to be confused with the food additive, mixed quarterly results there. Fourth quarter profit fell as the company was hurt by higher operating expenses. Revenue, though, climbed, beating estimates on growth in its entertainment and sports segments. Shares popped about 3.5 percent to $65.

Buyout buzz sent shares of Shutterfly (NASDAQ:SFLY) higher today. The online photo sharing services provider rose after reports that Silver Lake Partners and Bain Capital are among the firms interested in buying the company. Another report says the private equity firm Hellman and Friedman will make an offer to buy the company this week. That sent the stock 1 percent higher to $50.47.

GHARIB: And even the Oracle (NASDAQ:ORCL) of Omaha can make a mistake. Warren Buffett has agreed to pay a fine of $896,000 to settle government charges that his company, Berkshire Hathaway (NYSE:BRK.A), failed to report a transaction that boosted its stake in a building products company. In a statement today, Buffett said quote, “We made a mistake.”

MATHISEN: Labor Day is almost here, and with it, the official kick off to the 2014 campaign season. This year, the balance of power is up for grabs in the Senate and that could have a big impact on the world of business.

John Harwood has more from Iowa, which hosts one of a dozen races that will determine whether Republicans or Democrats take control of the Senate.

(BEGIN VIDEOTAPE)

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: We found a little news here in Iowa looking at one of the races that will determine the balance of power in the U.S. Senate between Democrats and Republicans next year. It was on the embattled Export Import Bank. Conservative Republican candidate Joni Ernst came out in favor of the bank, joining Democrat Bruce Braley.

BRUCE BRALEY (D), IOWA SENATORIAL CANDIDATE: The Export Import Bank has had enormous benefits to Iowa, $220 million in loans, the vast majority of those to small businesses. You look around this state and the ability to export commodities and to export John Deere tractors and combines around the world.

JONI ERNST (R), IOWA SENATORIAL CANDIDATE: As long as other countries offer that opportunity to their exporters, I think that’s something that we need to offer to our industry, also.

HARWOOD: But mostly this race, like other Senate races across the country is about big disagreement on economic issues.

Obamacare, Republicans want to defund and repeal it. Democrats are defending.

Social Security, Republicans say it may need structural changes to survive in the long term. Democrats say they are going to protect the existing structure of the program.

The Environmental Protection Agency, Republicans opposed President Obama’s new rules curbing carbon emissions from power plants. Democrats are supporting them in the name of helping climate change. And the minimum wage, Republicans say it should stay where it is at the federal level. Democrats say it should go up to $10.10.

Now, how big are the stakes? Very big if you consider that Senator Republican Leader Mitch McConnell today said that if Republicans gain control in 2015 and 2016, they’re going to play hardball with President Obama, up to the point of threatening a government shut down.

For NIGHTLY BUSINESS REPORT, I’m John Harwood in Des Moines, Iowa.

(END VIDEOTAPE)

GHARIB: And coming up on NIGHTLY BUSINESS REPORT, imagine having a green lawn in the middle of drought-ridden California. It’s now possible without using any water and it’s big business for some small companies.

(MUSIC)

GHARIB: We turn to California, where the severe drought by one estimate could cost the state’s economy more than $2 billion, that warning from a new study by experts at the University of California at Davis. To conserve water, some towns and cities have imposed mandatory rationing but homeowners still want to keep their lawns green and that’s creating a big opportunity for some small businesses.

Jane Wells has our story.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Look at this lush green grass here in Los Angeles, how does it stay looking this way? Well, like a lot of things here, it’s fake. We’re in an epic drought, the one big difference isn’t how bad it is but how much water agencies are giving away in rebates, as much as $3 a square foot for people to rip out their old lawn and put in something else, like the fake stuff.

Vic Watterson, yes, his name is Watterson, owns Waterless Turf, and business is up 30 percent to 40 percent, even though it can cost $10 a square foot to take out the old and put in the new.

VIC WATTERSON, WATERLESS TURF: I attribute that mostly to the drought and also the Department of Water and Power, the water companies providing an incentive rebate to install the turf and replace their live turf with the artificial turf.

WELLS: Drew McClennan says business has doubled in the last few weeks for his lawn painting business, which costs the average homeowner about $175.

DREW MCCLENNAN, ALUCKYMAN.COM: It’s kind of sad. It’s not good for everybody else but yes, for the business, it’s very good.

During the summer, you can get up to three months. It depends how much I will last that long. I refer to it as hair dye, you know? As you dye your hair, you let it grow out, you keep getting haircuts, it will come off.

During the winter, when the grass isn’t going, you get a good solid six months out of it.

WELLS: One person waiting for his rebate is homeowner Les Bittenson. This is how his lawn looked before. Now, he’s got a fake one put in by Smart Grass. But even with the $6,000 rebate, it still cost him 19 grand, and he figures it will take eight years of water savings to pay off.

LES BITTENSON, HOMEOWNER: Our current cost is about $7.50 a day for water. My projection is we’ll be down to $3 a day. That’s a considerable savings.

WELLS: The irony, even with all the new water restrictions in California, in Sacramento, the state capital, it’s still against the rules to have fake grass in your front yard, only in California.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

MATHISEN: You don’t have to mow it, either. That’s pretty good deal.

Finally tonight, the big business of football. The Buffalo Bills are up for sale, you may want to know how much NFL teams are worth, in case you want to get a bid together. According to “Forbes” magazine, that answer is, a lot. This year, the average NFL team is valued at just under $1.5 billion. That is up almost 25 percent from last year, fueled in part, no doubt, by the 2 billion bucks Microsoft’s ex-CEO Steve Ballmer just paid for pro-basketball’s L.A. Clippers. And everybody knows, football teams are worth a lot more.

Here is the partial list: fifth most valuable team, if you can guess — Houston Texans, worth $1.8 billion. Number four: the New York Giants valued at more than $2.1 billion. Also worth more than $2 billion, my hometown team, the Washington Redskins, $2.4 billion, maybe worth even more without that last name. New England Patriots worth $2.6 billion.

And number one, here they are, eight years in a row, the Dallas Cowboys, $3.2 billion, first U.S. sports franchise to top $3 billion. Among globals, only the soccer team Royal Madrid is worth more, $3.4 billion.

As for the Bills, “Forbes” puts their price tag for the bills at $935 million.

GHARIB: Big numbers.

MATHISEN: Those are big numbers.

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

MATHISEN: And I’m Tyler Mathisen. Have a great evening, everyone. We’ll 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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