Transcript: Thursday, August 21, 2014

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

close. The S&P 500 finishes at a new record, the Dow back above 17,000.
Is your best bet in this market investing in an index fund that just tracks
(ph) the market, or should you try fixed stocks?

Top Federal Reserve officials speak out on the key issue facing the economy
— when to raise interest rates.

MATHISEN: Lighting up the sky. Why natural gas is being deliberately
burned across the oil-rich fields of North Dakota.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
August 21st.

GHARIB: Good evening, everyone.

A sweet spot for stocks today — the S&P 500 hit a new record, points
away from the 2,000 milestone, and the blue chip Dow closed above the key
17,000 level for the first time in about a month. The mood on Wall Street
was positive today as investors and market pros are feeling confident that
the Federal Reserve Chair Janet Yellen will continue to call for low
interest rates tomorrow when she addresses policy makers in Jackson Hole,
Wyoming. We`ll have more on that in just a moment.

Now, also adding to the upbeat mood, a batch of encouraging news about
the U.S. economy. In the job market, fewer Americans filed unemployment
claims. Existing home sales rose more than expected and a key report on
factory activity came in stronger than forecasts.

Here is look at the closing numbers: the Dow added 60 points, the
NASDAQ was up 5 1/2, and the S&P rose almost six points, closing at that
new record of 1992.

MATHISEN: The rising market has rekindled the debate over what`s the
best way to invest. Use a low cost index fund that basically matches the
market or try to beat it over time by hiring an active fund manager.

Well, it appears the people have spoken. In all but one of the past
seven years, reports “The Wall Street Journal”, net flows into index or
passively managed stock and bond funds have far outpaced those into
actively managed funds. This year through July, according to Morningstar,
investors dumped $177 billion net into index funds into actively managed
funds, just $78 billion.

Here to tell us whether those investors are making the right choice is
Jon Hale, director of North American research for Morningstar.

Jon, welcome. Good to have you with us.


MATHISEN: So, are they — are they making the right choice?

HALE: Well, I think for many investors out there, passive investing
is certainly a very good choice. You get low fees, you get returns that
are, you know, as you say, are going to generally match those of the
market. You know what is in the fund in S&P index fund.

You know, it`s great. It`s the kind of thing where investors today
are looking at the headline of your show and seeing what the S&P 500 is
doing, and they`re going to say, you know what? I feel confident I know
what I`m getting in my portfolio because that`s the kind of fund I`m
invested in. So, there are a lot of good things about it.

GHARIB: John, when you compare the performance of whether it`s
actively managed or if it`s index fund, how do they rank? I mean, how
often do the actively managed funds actually beat out the passive funds?

HALE: Yes, well, it`s interesting. I think the problems with active
investment performance has been a bit exaggerated, but it`s absolutely true
that on average, actively managed funds tend to trail passively managed
funds, no matter sort of what way you slice it, whether you look at, you
know, large cap U.S. stocks or in most cases, some other areas of the
market that have index options.

But kind of the other side of that is that, you know, the average
actively managed fund doesn`t necessarily trail by all that much, and in
any given sort of period of time like we were looking at the 10-year
trailing period just earlier today and the U.S. large cap blend category,
you know, the average manager trails by just a few basis points over that
10 years on annualized basis.

You know, there are 30 percent of the overall universal that`s
outperformed indexes. So, it`s definitely possible to find active managers
out there. It`s also the case that maybe it`s not so much —


HALE: Go ahead.

MATHISEN: I wanted — because you just said something interesting, 30
percent, did I hear you right?

HALE: Yes.

MATHISEN: Only 30 percent or roughly 30 percent of active managers
beat the benchmark over time?

HALE: Over the last 10 years, yes, as of July, correct.

MATHISEN: So, I`d have a 70 percent chance of doing better in
something that wasn`t actively managed.

Do active managers do better in down markets or do they do better, for
example, in more esoteric markets like emerging markets or alternatives?

HALE: Well, I think, more — definitely better in esoteric markets
like emerging or alternatives. I mean, in alternatives right now, you
can`t really index alternatives so any passive investing options there are
rules based quantitative strategies that really don`t have anyone at the
helm other than, you know, the people that just executing it. So, you
better off with active managers there.

Emerging markets, you know, there are areas of emerging markets where
maybe you don`t want to be in at the moment, and an active manager is going
to take you out of that, whereas an index isn`t going to be able to.

MATHISEN: All right. Jon, thank you very much. John Hale of
Morningstar tonight.

GHARIB: When it comes to Fed speaks, America`s central bank isn`t
speaking with one voice these days. Some influential members say now may
be the time for the Fed to raise interest rates. Others say not so fast.

And it`s all coming to a head at the annual gathering of the world`s
central bankers in Jackson Hole, Wyoming, where Steve Liesman spoke to many
of the key players.


the Federal Reserve gathers in the mountains of Wyoming to the U.S. labor
market, the debate brewing on the sideline is whether that labor market and
economy are strong enough to warrant earlier rate hikes.

Philadelphia Fed President Charles Plosser thinks it`s time for the
Fed to move.

we`re running a very risky policy, if you will, given where the stance of
the economy is and seems to be going. I would prefer us to begin raising
rates sooner and raising them more gradually. But the longer we wait, the
more risk as us having to raise rates very quickly in response to a
stronger economy and perhaps more inflation.

LIESMAN: San Francisco Fed President John Williams says if the
economy improves faster than the Fed forecast, you could see rates rising
sooner. But knowing what he knows now, he thinks the current consensus of
July 2015 is about right.

thinking around summer of 2015 for the first rate hike is a reasonable
guess given where we think the economy is going and, you know, how much
progress we`re making towards our goals. But again, it really depends on
the data. If the data gets stronger, then it could be a little earlier.
If the data disappoint, it could be a little later.

LIESMAN: While, the labor market is the subject of the meeting, other
issues on the mind of the policymakers include whether they should be
raising rates to ward off excessive risk-taking in markets, born of zero
interest rates, whether that should be done with regulation or by raising
rates, and whether the market is too complacent in thinking rate hikes are
a year away.

already showing signs. As we look ahead, does the economy look like it`s
able to sustain this? I think it signals a very important decision point
for the committee, to say we will have to move at some point. I don`t want
us to be behind the curve in beginning to normalize interest rates.

LIESMAN (on camera): The key speech will be tomorrow by Fed Chair
Janet Yellen at 10:00 a.m. Eastern. It will be her first address to the
Jackson Hole group as the head of the U.S. Central Bank. It will be
followed by European Central Bank President Mario Draghi, who could provide
some hints to measures he might take to address the renewed bout of
economic weakness on the continent.

(voice-over): The world will be listening as bankers get hints for
the policy outlook. And so will some of the locals who have it. It`s like
this moose and her calf in tow, who emerged from the brush outside lodge,
just as the Fed meeting was set to begin.

For NIGHTLY BUSINESS REPORT in Jackson Hole, Wyoming, I`m Steve


MATHISEN: Love that with the moose. That is gorgeous. Wow.

All right. Many Americans don`t believe it when they hear that the
U.S. economy is getting better and a new Census Bureau reports explains why
it finds that many people were in worse financial shape at the end of 2011
than they were a decade earlier. People in the bottom 60 percent of wage
earners lost nearly 7 percent in household net worth or about $5,000. But
people in the top 40 percent, they gained more than $61,000.

GHARIB: Oil prices rose today, lifted by those upbeat economic
reports we told you about a moment ago. Both Brent and West Texas crude
prices moved higher. WTI rose 51 cents settling at $93.96 a barrel.

MATHISEN: One of the reasons oil prices have essentially been capped
has been the increased production here in the United States. One of those
oil rich areas, as you probably know is North Dakota, the Bakken formation.
But with all of that drilling comes side effects.

Morgan Brennan has more.


It`s the biggest issue in the Bakken right now, natural gas flaring. North
Dakota now produces more than 1 million barrels of crude oil daily, second
only to Texas. But drillers are also producing more natural gas, more than
they can transport.

(on camera): The rig behind me is drilling 11 new wells that will
come online around the same time. This scenario is playing out across the
Bakken and therein lies the issue. More natural gas is coming online than
the current pipeline system can handle and that`s why drillers are forced
to flare.

(voice-over): Across the region, thousands of wells are burning so
brightly that astronauts have captured images from space. The flare rate
here is 30 times higher than other oil-producing states like Texas and
Alaska, resulting in more than $100 million worth of gas wasted each month.

LANCE LANGFORD, STATOIL VP: If you look at the value chain, 95
percent of the value is in the oil. The gas is 5 percent of the value
part, the revenue side.

BRENNAN: Last month, North Dakota passed new flaring standards. By
October, at least74 percent of gas generated at existing wells must be
captured. A number the industry is already close to, but a rate that will
increase to 90 percent by 2020.

The rules are causing drillers to search for short-term solutions.
For Statoil, the sixth largest player in the Bakken, the answer is a
partnership with General Electric and gas logistics company, Ferus.
Together, they are compressing excess gas and storing it for mobile use,
used as a fuel source for Statoil`s operation.

LANGFORD: We`re lowering emissions and we`re burning the cheaper fuel
because diesel is much more expensive than natural gas.

BRENNAN: Statoil plans to roll this tech out to all of its rigs next
year, and others to follow suit.

(on camera): Just how effective is the technology? Well, 10 minutes
before we arrived here, the flare you see behind me didn`t exist. All the
natural gas burning off here was moving into CNG in a box, when you turn
that unit off, this 25-foot flare is the result.

(voice-over): Meanwhile, the flaring has drawn the eye of mineral
rights owners, many of whom are farmers with flares on their property.

THOMAS WHEELER, ND FARMER & RANCHER: It`s a waste. There has got to
be better ways to do it. Most of us are fair-minded people.

If you treat us fair, we`re easy to get along with. Don`t lie to us.
We`re not asking for the moon. We just want to be treated fairly.

BRENNAN (on camera): More than a dozen class action suits have been
brought against the oil and gas industry, but the long-term solution of
this problem will take team work as farmers like Wheeler work with the same
companies to bring better infrastructure to snuff out flares like this once
and for all.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in Ray, North Dakota.


MATHISEN: Still ahead, Bank of America agrees to pay a record fine
but some say this is the government piling on. Others say the government
didn`t go far enough. Who is right?


GHARIB: Dow component Home Depot has a new CEO. Craig Menear, the
current head of its retail operations, will take over the top job at the
home improvement retailer in November. Menear had been widely expected to
replace the current CEO Frank Blake who`s had the job since 2007.

MATHISEN: EBay prepares for a possible spin off, and that is where we
begin tonight`s “Market Focus”.

The company is reportedly getting ready to spin off PayPal, that`s its
fast-growing payments unit might do it as soon as next year. The activist
investor Carl Icahn, as you may remember, had been challenging eBay to make
just such a move, and eBay spokesperson says the company`s position on
PayPal has not changed. EBay shares up almost 5 percent, $55.89 the close

Wall Street had its first chance to react to Hewlett-Packard`s
earnings as we told you last night. The PC maker posted a surprise
increase in its quarterly revenue and CEO Meg Whitman says she`s very happy
with the results.


for the company. After three years, we put up 1 percent revenue growth,
which is, of course, not our aspiration. But it`s better than the declines
we`ve had.


MATHISEN: Shares of Hewlett on a nice ride today, up 5 percent or so,
to close at $37 on the button.

Family Dollar stores rejected Dollar General`s $9 billion acquisition
offer, saying it would be too hard to pass antitrust regulators and it
reaffirmed its support for an $8.5 billion offer from Dollar Tree. Dollar
General says its reviewing its options. You need a score card for this.
It still believes its offer is better than Dollar Tree`s deal and that it
could resolve any regulatory concerns about competition. Shares of all
three of those dollars fell today as you see there.

GHARIB: Intuit, the maker of TurboTax, reporting a penny loss in its
fourth quarter due to higher expenses. The street was looking for a gain
of 7 cents, revenues, though, did come in better than expected. Intuit
also gave weak guidance for its first quarter. Shares finished up a
fraction to $85.81 and sold off and snapped back in after hours trading.`s results were better than expected. Revenue rose 38
percent and that was helped by increased demand for its web-based sales and
marketing software and services. Shares were up a fraction to $55.71 and
relatively flat after the news came out.

And GameStop posting better than expected second quarter results
helped by the success of new game releases and strong sales of Microsoft
Xbox and Sony`s PlayStation 4. Shares closed down 2 percent of the regular
session to $40.49, but then spiked after-hours following the results.

MATHISEN: Bank of America hopes its mortgage problems are behind it
after agreeing finally to a $16.5 billion settlement over its role in the
2008 mortgage meltdown. The U.S. Attorney General Eric Holder calls the
settlement a historic resolution that goes far beyond the cost of doing


ERIC HOLDER, ATTORNEY GENERAL: As a part of this settlement, Bank of
America has acknowledged that in the years leading up to the financial
crisis that devastated our economy in 2008, it, Merrill Lynch and
Countrywide sold billions of dollars of RMBS backed by toxic loans whose
quality and level of risk they knowingly misrepresented to investors and to
the United States government.


MATHISEN: Bank of America says it expects the accord to reduce third-
quarter earnings by about $3.5 billion before taxes. That converts to
about 43 cents per share after taxes.

GHARIB: The former chairman and CEO of Wells Fargo had a lot to say
about the agreement between Bank of America and Department of Justice.
Dick Kovacevich says the government`s motivation is all political.


simply a political stance and theater that has been going on for five years
of bashing financial institutions. Again, neither JPMorgan or its
employees or Bank of America or its employees did anything wrong here.
They just bought companies that did wrong. They have big pockets and
therefore, they get a lot of political value by having press releases and
press conferences.


GHARIB: It`s a very controversial issue. Joining us to talk more
about all of this, Christopher Whelan, an investment banker and senior
managing director of research at Knolls Bond Ratings Agency.

You know, Chris, some people would argue that the government hasn`t
been tough enough on the banks.

What do you think of what Dick Kovacevich was saying and what do you
think of the public criticism?

RESEARCH: Well, Dick Kovacevich is absolutely right. I mean, the
settlements, Susie, are kind of welcome in a sense that we`re finally
hearing the attorney general talk about this, but he`s five years late. I

Instead of prosecuting the officer`s and directors of the banks that
did the wrong and it sold bad securities, we`re forcing investors to pay
for the settlement. The investors are the victims. If you look at the
Citi settlement, if you look at the Bank of America settlement, a very
large percentage of the funds that are being provided are going to go for
modification of loans, donations to worthy consumer groups.

But the real victims of the crisis were investors, pension funds,
insurance companies, financial institutions and unfortunately, the politics
of this as Dick said are really about pandering the consumers. That`s the
false narrative we`re facing here unfortunately.

MATHISEN: You know, the government would say, I think, by way of
rejoinder, though, they have not do so, they have not taken prosecutions
against individuals.

WHELAN: Right.

MATHISEN: But nothing in this settlement precludes them from doing
so. So, they could go after individuals, I supposed and, of course,
yesterday —

WHELAN: Oh, no, they can`t, Tyler. I mean, what happened is Tim
Geithner, Larry Summers, they all said, oh, we can`t prosecute the bankers
because of systemic risk. They said this very publicly. They are wrong.

You know, the way you heal the markets and get investor confidence
back is to show people that we have rules. Let me give you an example.
We`re talking for years now about getting private investors back in the
mortgage market. Why would any rational investor put money at risk if the
attorney general can show up and take money from you?

GHARIB: Right. OK.

WHELAN: There is no reason to do it.

GHARIB: All right. Let`s bring in Arthur Wilmarth to join this
conversation. He`s a professor of law at George Washington University.

I know, Arthur, that you`ve been listening in on this conversation.
What do you say to what Chris has been saying? Also what dick Kovacevich
said earlier today?

first of all, there are two groups of people whose opinions you have to
change. One is the senior executives. Senior executives have to be held
responsible. If senior executives are not held responsible, why would
their successors act differently? The other group you have to change is
large institutional investors, including pension funds, including mutual

And so, I think what the government has done in levying large civil
penalties against these three banks was necessary but not sufficient. It
brings to the shareholders` attention that there was pervasive and systemic
wrongdoing at these banks, and what is most shocking, the wrongdoing
continued even after the crisis broke out.

So, that allegations include allegations include — actually admitted
facts that they continued to sell shoddy and fraudulent mortgages to the
Federal Housing Administration after the crisis broke out. Their basic
conduct did not change and that`s very shocking.

MATHISEN: Let me turn the conversation back to Mr. Whelan. I mean,
get you to react to what Arthur just said. But the very same shareholders
whom you say are now paying and bearing responsibility, were shareholders
who made a lot of money at Countrywide and at Merrill Lynch over the years
through the practices that are being sanctioned today. And, secondly, some
of those very same shareholders in those banking companies benefitted from
taxpayer bailouts, didn`t they?

WILMARTH: Well, they did, but let`s also remember that these large
public companies bought these crippled financial institutions, you know, in
the case of Countrywide, the firm would have failed if Bank of America
hadn`t bought it. Bear Sterns, WaMu were bought by JPMorgan.

MATHISEN: Bank of America moved to buy Countrywide before the crisis
was in full flower.

WHELAN: Well, yes, but they were the warehouse lender. Countrywide
had nowhere else to go. The firm definitely would have failed if it hadn`t
been acquired.

GHARIB: All right. We`d like to get Arthur back in. To what extent
have these actions by the government you think changed behavior? So, if
something like this were to happen again, whether it`s financial
institution or other institutions, do you think these fines have been
enough to deter bad behavior?

WILMARTH: Well, the three settlements were quite recent. So, it`s
early to tell. I mean, I think one thing we need to look for is whether
shareholders, large shareholders will seek themselves to hold the senior
executives accountable.

So far, I don`t think you can be confident that we have changed
behavior. I agree with Chris that you need to hold senior executives
accountable. The government has the tool to do that, which is civil money
penalties under this same statute and they need to do that.

But I think that Chris made an important observation, which is that
these three banks were warehouse lenders to all the subprime lenders. They
then packaged all the securities and sold them as we now know under
fraudulent and deceptive representations and warranties.


WILMARTH: So, they were deeply embedded in this from the very

GHARIB: Well, it`s — a conversation is going to obviously continue
for many years on. History will tell which is the right way to go on this.

Gentlemen, thank you both. Christopher Whelan of Knolls, a bond
rating agency, Arthur Wilmarth, from George Washington University.

And, still ahead on the program: the future of retail — why the mall
of tomorrow will look nothing like it does today.


GHARIB: Another unprofitable quarter for Sears, making this the ninth
straight quarterly loss for the retailer. Its CEO Edward Langford called
the result, quote, “unacceptable.” The company which operates both Sears
and Kmart says its plans to continue cutting costs, closing stores and
improving pricing and promotions. Shares fells more than 7 percent to

MATHISEN: And, Sears, like many other retailers, trying to reinvent
itself as consumer habits change and since we for the most part just
wrapped up the retail portion of the big earnings season, we thought it
would be a good time to examine the future of shopping.

Here is Courtney Reagan.


The future of retail is now in the making, in Manhattan studios, Silicon
Valley startups and retail labs that look like any old store but are

temple for your brand. It will feel a lot like your digital retail

and I`ve got this dress, I`m interested in this dress, I can come over to
the screen here and the screen will pick it up and know what I`ve got in
front of it. You can pick your size and if you`ve logged in, you can add
it to your fitting room. So, what you`re actually doing is creating a
shopping cart, that kind of like you do online.

REAGAN: The intersection of online information, physical product and
personalization from data analytics will redefine the retail experience.
By opting in, retailers will know who we are, what we like, and how we buy
as soon as we step inside.

UNIDENTIFIED MALE: As I move my feet, it creates artwork on the

REAGAN: And personalization will be paramount, like customizing a
pair of Converse for every shopper in the store.

KRAKOVSKY: The store knows who you are when you come in. They can
promote to you individually, based on your buying preferences, based on
your history, and based on what they think you`ll react to each individual

REAGAN (on camera): While it may be a challenge for retailers now, 25
years from now, the separation between digital and physical will no longer

(voice-over): Smart store fronts that sense what sports teams you
like and display the team jersey to prompt a purchase. Digital halos
around every product that tell a story, where it comes from, how it was
made and peer reviews of its performance, powered by your personal
preferences and particulars. Smart shelves will also protect you.

understands your daughter has a nut allergy, which is really incredibly
dangerous. Now, imagine that every single product in the store that has
nuts in it, peanuts in it, or was made in a factory that had it, they all
go dark.

REAGAN: And through all these experiences, the consumer will be in

it`s all going to come down to choice for the consumer. So, I don`t think
it`s a world where you`re going to walk in and a robot will hand you the
shirt that you browsed online. There is going to be people that do want
that human to human interaction.

I think the difference is they`ll actually be able to order it on
demand whenever they want it, their way.



GHARIB: And that is NIGHTLY BUSINESS REPORT for tonight. I`m Susie
Gharib. Thanks for watching.

MATHISEN: And thanks from me, as well. I`m Tyler Mathisen. We hope
you have a great evening and we hope you come back tomorrow night.


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