Transcript: Friday, September 26, 2014

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

The man who built PIMCO into a bond powerhouse, running funds that are a staple in many retirement accounts is leaving. What should shareholders do now?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Five in a row. Stocks rebound, the Dow index sees its fifth triple digit move this week, and our market monitor has a list of stocks to buy in this market.

MATHISEN: And secret Fed audiotapes. Recordings have surfaced that the New York Federal Reserve likely doesn`t want you to hear.

All that and more tonight on NIGHTLY BUSINESS REPORT for Friday, September 26th.

GHARIB: Good evening, everyone. Stocks on Wall Street bolted higher with the blue chip Dow closing out the week with a solid triple-digit gain.
We`ll have more details on that a little later in the program.

But we begin tonight with the story that shocked investors around the world and rattled the bond market. Bill Gross, the bond king, the man who could move markets and was often compared to legendary Fidelity Magellan fund manager Peter Lynch, is leaving PIMCO, the firm he founded more than
30 years ago. He is heading to Janus Capital Group (NYSE:JNS) where he`ll manage a new bond fund for the much smaller firm.

Now, Gross` sudden exits sparked a knee-jerk selloff in the treasury market, PIMCO`s close in funds were hit hart. The PIMCO total return fell off slightly and Morningstar (NASDAQ:MORN) placed all rated PIMCO funds including the flagship total return fund under review.

But at Janus Capital, its stock soared 40 percent.

And Allianz, PIMCO`s parent company, was down 6 percent in Germany.
For many investors, PIMCO funds are a mainstay of 401(k) and retirement plans. So, who is Bill Gross? And why is he so important? How did he get to the point of leaving the firm he founded?

Jane Wells has more.


JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPODENT (voice-over): Bill Gross has been king of the world, at least the bond world, making investors oodles of money in the 32 years since he created PIMCO, building up the company with $2 trillion in assets, starting the largest bond fund on the planet averaging nearly 8 percent annual returns since inception, and turning this former Navy officer into a billionaire.

JACK BOGLE, THHE VANGUARD GROUP CEO: But he is a true giant in the industry. He`s a true legend.

WELLS: But this has not been a legend year.

MATHISEN: Mohamed El-Erian, a familiar face to NBR viewers, is stepping down as CEO and co-chief investment officer at PIMCO.

WELLS: In January, the man who helped to run PIMCO, Gross`s heir apparent, abruptly left.

UNIDENTIFIED MALE: There`s no clash of personalities here. We got along real well.

WELLS: Investors didn`t like it and began pulling out money.
Personnel changes included re-hiring former portfolio manager Paul McCulley, and parent company Allianz, at least publicly continue to stand by their man.

UNIDENTIFIED MALE: Is Bill Gross past his sell-by date?

DR. DIETER WEMMER, CFO, ALLIANZ: I think — Bill is working hard under the recovery.

WELLS (on camera): But behind the scenes there was talk of a brewing revolt, and then this week, the launch of an SEC investigation.

GHARIB: Regulators are reportedly investigating whether bonds giant PIMCO artificially pumped up the returns of one of its popular funds.

WELLS (voice-over): Finally, the man who once turned $200 into 10 grand at the blackjack table in Vegas decided to fold them at the company he built.

BOGLE: I don`t shock easily but I was surely shocked when I heard that basically soon as I got in the office about 8:30 this morning.

WELLS: Bill Gross said in a statement, it`s time for him to focus on the pure aspect of portfolio management at a smaller firm. He has chosen Denver-based Janus, where the king hopes to regain his crown.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.


MATHISEN: Joining us now to talk more about Bill Gross and what his departure means for the bond industry, for PIMCO, and for investors wondering what to do with her money are Michael Herbst, director of management research at Morningstar (NASDAQ:MORN), and Tim Speiss, he`s partner at EisnerAmper.

Welcome to both of you.

Michael, nice to see you again. How crippling is this to PIMCO or is it at all?

MICHAEL HERBST, MORNINGSTAR DIRECTOR OF MANAGER RESEARCH: Bill Gross obviously has had a huge impact and a huge imprint on PIMCO`s investment strategy across all of its funds. But this is far from a one-man show.
The research steps he has at his disposal and his successors will have at their disposal is virtually unparalleled in the bond industry.

GHARIB: Tim, do you agree with that? I know you were getting a lot of calls from your clients today, asking, “What should I do with PIMCO funds?” What were you telling them?

TIM SPEISS, EISNERAMPER: Well, first, they have to do due diligence on where to go as far as where they would place it.

But the other matter is that it`s very likely or possible that the continued outpost could occur. Almost $63 billion has come out in the last, say, 16 months from PIMCO funds.

MATHISEN: You know, Michael, you say it`s got a deep bench, that they`ve got great research capabilities. But you all at Morningstar
(NASDAQ:MORN) put not just PIMCO bond — Gross`s main fund on watch, you put all the funds that you rate on watch. Why did you do it?

HERBST: Well, that`s — that reflects the imprint and the impact that Bill Gross has had on the firm and on the investment processes that carry across multiple funds. What we`re focusing on here will be the formal repercussions of his departure, and we expect further news from PIMCO later today on his successor. But there`s also going to be some unofficial or less formal repercussions, too, in terms of the mix of responsibilities.
How the investment process might get adjusted in the wake of his departure, and what day to day execution of that strategy looks like.

GHARIB: You know, Tim, bond investors are very conservative as a bunch of people. And while all of this uncertainty is hanging over PIMCO aren`t you better off just taking your money out of PIMCO and parking it someplace else?

SPEISS: That could be true, but we should not forget that over the past 10 years, PIMCO has returned 6 percent in their fixed income funds compared to say the benchmark of around 1.5. So they still have a very compelling story to tell. They have a lot of talent although any investor should go through due diligence process, their versions of risk, their investment horizon, understanding the duration. There is a whole process that an investor should consider whether they stay or leave PIMCO.

MATHISEN: You know, Michael, I heard you on the Morningstar
(NASDAQ:MORN) broadcast that inevitably you said a level of chaos ensues when something like this happens at a company like PIMCO. This is a company that has today lost its voice, its — the face of the company and it has lost its leader.

HERBST: Well, it certainly has lost its most public voice. But there are plenty of people that have supported Bill Gross over the years including the deputy CIOs that were named earlier this year when Mohamed El-Erian left. What we are trying to do is assess what the impact on those people will be, that is ultimately this is a group of people making decisions with each other day in and day out. Changes to how that occurs could be material for the funds.

So, we are reassessing the views once we have a little more information and can apply our judgment to what the new reality will be.

GHARIB: Tim, as Mike said a moment ago Bill Gross has a great track record. You said the same thing. Does it make sense to follow him to the new fund, to Janus? Would you recommend that to your clients?

SPEISS: We`re not recommending any funds — we`re in the business of helping our clients with due diligence, but I would say an infrastructure is going to need to be built there that would rival amongst the best funds in the world.

Remember, PIMCO is amongst the largest in the world. Janus has not quite attained that status.

GHARIB: Yes, but Bill Gross is the bond king.

SPEISS: True, but as you heard the people say, Mr. Gross had a deep staff and a deep bench.

MATHISEN: Michael, one of the leading contenders to succeed Bill Gross is Dan Ivascyn. He won your Morningstar (NASDAQ:MORN) the manager of the year award. We don`t know whether he`s going to step in at total return. But he very well might.

Quickly, what do you know about him?

HERBST: Dan Ivascyn has been responsible for heading up the mortgage at PIMCO, which touches most areas at the firm and actually gives him a great lend into some of the macro economic considerations that Bill Gross is rightfully so well known for.

Dan Ivascyn is well-regarded by past and current colleagues, as well.
And should he step into that role with other folks supporting him in their existing roles that brings a level of stability to the funds that would have essentially urging investors to catch their breath for a moment rather than leap to any immediate decisions.

MATHISEN: All right.

HERBST: That said, we`ll be looking to see how this unfolds in the coming weeks.

MATHISEN: Gentlemen, thank you very much — Tim Speiss of EisnerAmper, and Michael Herbst at Morningstar (NASDAQ:MORN).

GHARIB: More on the markets today on Wall Street. It was a fitting end to the week. The Dow had another triple digit move, its fifth in a row, rebounding after yesterday`s sharp selloff. The blue chips got a big boost from Dow component Nike (NYSE:NKE), shares jump 12 percent on those strong earnings that we told you about last night.

Helping investor confidence, the Commerce Department reports the economy grew 4.6 percent in the second quarter, much stronger than the prior estimate. Consumer sentiment also rose in September.

So, let`s take a look at the closing numbers on Wall Street. The Dow gained 167, the NASDAQ rose 45, and the S&P up 17 points. But today`s rebound was not enough to erase losses for this very volatile week. The Dow fell 1 percent, the NASDAQ dropped 1 1/2 percent, and the S&P off more than 1 percent.

MATHISEN: Some alarming numbers on the state of the nation`s public pension funds. Moody`s says the pension gap — the difference between what the funds have and what actuary say they should hold to meet obligations has tripled in less than a decade. It`s now at least $2 trillion. That`s more than half of all outstanding state and local bond debt, by the way.

Despite recent gains of almost 7 1/2 percent on average on their investments, the plans don`t have enough money to pay what they owe current and future retirees.

GHARIB: Still ahead, why the fight on terror is bringing together two different groups — the U.S. military and advocates of the virtual currency bitcoin. We`ll explain right after this.


MATHISEN: Secret tapes are usually straight out of Hollywood. Today, Wall Street has its own version.

Auto recordings obtained by the journalism group ProPublica of meetings between the Federal Reserve Bank of New York and Goldman Sachs
(NYSE:GS) allegedly show what many Fed critics have been concerned about, that regulators may be too cozy with those they oversee. The tapes were made by Carmen Segarra, a former New York Fed Bank examiner who worked out of Goldman Sachs (NYSE:GS). That was the bank she was assigned to in 2011 and 2012.

Segarra says she found cases where Goldman Sachs (NYSE:GS) appeared to be engaged in questionable activities. But then felt pushback in her attempts to correct them. In one case, Segarra concluded that Goldman did not have the required firm-wide conflict of interest policy.

She then began recording numerous meetings, roughly 45 hours worth when she felt her opinions were not going over well with her bosses back at the New York Fed. The Fed, by the way, categorically rejects the allegations. Goldman Sachs (NYSE:GS) refutes the notion that there was no conflict of interest policy in place. Segarra was let go after seven months and then sued her former employer.

It`s also worth noting that in 2009, the New York Fed commissioned a report to look at its role in the financial crisis. The report conducted by a Columbia University finance professor concluded that the biggest issue the New York Fed faced when overseeing some of the country`s biggest banks was its own culture, when examiners didn`t speak up, and where supervisors were pay excessive deference to the banks.

This is a story that is likely far from over.

GHARIB: Well, here`s another fascinating story — this week in the first meeting of its kind, members of the United States Military Special Operations Command met with advocates for bitcoin, the virtual currency that`s not regulated. Now, the reason was to learn more about how terror groups like ISIS are being funded and whether they`re using things like bitcoin and what can be done to stop it.

Eamon Javers was the first to report the story and he joins us now from Washington.

So, Eamon, fill us in a little bit. I mean, to what extent is ISIS specifically using bitcoin?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, what Special Operations Command told me about ISIS was this is a group that is, by and large, using the traditional finance measures, like, you know, cash in a suitcase, allegedly selling oil on the black market. But they said that ISIS is active on what`s called the dark web, the part of the Internet where people can exchange things, participate in black markets. And so, they are concerned about groups like ISIS around the world having access to currencies exchanged over the Internet, exchanging value, laundering proceeds from illicit activities and potentially raising money for terrorist activities. That`s why Special Operations Command said they`re eager to meet with advocates for bitcoin so they can understand a little bit more about it.

And the big thing the U.S. military told me is what they want to be able to do is track bitcoin over the Internet. That`s not something they know how to do right now. They want to learn how to do it if they can, and, of course, civil liberties advocates and bitcoin folks who tend to have bristle at the idea that the U.S. government should be doing anything to track some of these crypto currencies around the world.

MATHISEN: So, what do they really hope to learn here? Repeat for me?

JAVERS: What they really want to do is figure how to track bitcoin.
That seems to be the main goal. They also want to understand how it works, how much of these crypto currencies they are. Bitcoin is just one of the more well known of a large group of crypto currencies.

This whole area of Internet finance is something that military does not know well, they say. They feel like they had an information gap and they wanted to bring in some of the world`s best experts. And that`s what they did on Monday down in Tampa, right near MacDill Air Force.

GHARIB: What cast of characters.

Thank you so much, Eamon — Eamon Javers from Washington.

Turning now to Wall Street, BlackBerry posts another loss, but it was smaller than expected. And that`s where we begin tonight`s “Market Focus”.

The smartphone maker`s cost-cutting efforts helped its profit margins in its latest quarter. Still, revenue was short of estimates. But the CEO says the company will double its software revenue next year. Shares rose more than 4 1/2 percent to $10.26.

An activist investor is taking aim at Yahoo (NASDAQ:YHOO). Starboard Value sent an open letter to the tech giants CEO, Marissa Mayer, outlining ways for the company to unlock shareholder value. One of those suggestions was to combine with AOL (NYSE:AOL). Yahoo (NASDAQ:YHOO) shares rose more than 4 percent to $40.66. That also sent AOL (NYSE:AOL) higher by more than 3 percent to $44.55.

MATHISEN: Shares of Finish Line tripped and tumbled in today`s session. The shoe retailer reported disappointing results. Its profit ticked down in its second quarter as higher costs, expenses and write downs but into its sales. The stock down more than 14 percent. It finished to $25.11.

Hedge fund Standard General is in talks with lenders, working on a plan to improve RadioShack`s cash position to help the company avoid bankruptcy, according to a securities filing. The struggling electronics retailer warned investors this month that it is running out of cash and could have to seek bankruptcy court protection. The news gave investors some hope, sending shares of RadioShack up a big 19 cents to 99 cents.

GHARIB: Our market monitor tonight says investors need to be more selective when choosing stocks in today`s market. He is David Rainey, portfolio manager with the Hennessey Focus Fund.


I understand that your fund, you call it the best idea fund, and you got a couple of your best of the best to tell us about it.

Let`s start with O`Reilly Automotive (NASDAQ:ORLY), ORLY, trading at $151. Why do you like it?

DAVID RAINEY, HENNESSY FOCUS FUND PORTFOLIO MANAGER: We`ve been shareholders in O`Reilly for the last eight years. They are superbly managed. They`ve had great same store growth in this country, as well as store growth. The store growth count has gone from 1,400 eight years ago to about 4,000, and we can still — and it will likely reach the 6,000 unit mark in the next five to seven years.

Today, O`Reilly is trading about 17 times next year`s cash earnings.
We would expect the share price to grow in line with cash earnings for the next five years.

MATHISEN: It`s a crowded space, though, isn`t it, David? There is Napa. There`s Advance. There are a lot of them.

RAINEY: You know, O`Reilly is unique because it has a dual distribution model that serves both the retail and the wholesale customer.
It`s the only one of the big three that have found a way to do that and do that successful over many, many years, and it`s allowed it to grow in areas of the country that are other firms have been able to do.

MATHISEN: And second choice, not necessarily second in your heart, is American Tower (NYSE:AMT), a big cell phone company.

RAINEY: Right, American Tower (NYSE:AMT) is the large cap name, about a $38 billion market cap in here. It`s a name we`ve actually owned in the fund for the last 15 or so years. We`ve seen several CEO transitions and CFO transitions. The business continues to hum on all cylinders. They`re benefitting from the growth of 4G rollouts in this country. The growth of data use and American towers has been allocating money overseas into merging markets. Think about Brazil, India, places in South America, we feel as though their growth profile will continue in the next five to 10 years.

GHARIB: Tell us a little bit about your next pick, Encore Capital Group (NASDAQ:ECPG), ECPG, trading on the NASDAQ.

RAINEY: Sure, Encore is the small cap name, about a $1.1 billion market cap. It`s a specialty finance company. It too has begun to expand overseas first in Great Britain and now Continental Europe.

Encore buys defaulted consumer credit card debt from the credit card companies. They buy for pennies on the dollar. They service it in-house.
They service it both in the U.S. and in India.

And Encore today is trading just nine times next year`s cash earnings.
We think it`s one of the most under-valued stocks in the fund today.

MATHISEN: David, a broader question about the market today now. It was a volatile week, five days in a row of 100-point swings for the Dow.
Should we make anything of that? Is it something to worry about? Is it just something we should get used to?

RAINEY: I would think over the next six to nine months, as there is more talk about the Fed raising interest rates, you know, that mixes with a slowly improving job market in the U.S. So the market is kind of torn between two places, if you will. Rising interest rates generally are never good. But accelerating domestic growth is very good for the market.

GHARIB: All right, David, thank you so much. David Rainey with the Hennessy Focus Fund.

MATHISEN: Coming up, what the chief executives do in their spare time? I`ll introduce you to a Fortune 500 CEO who goes from the board room to silver screen.


MATHISEN: On Fridays, we sometimes like to show you what top business executives do on their own time. Tonight, Thomas Farrell, CEO of the Fortune 500 utility Dominion Resources (NYSE:D) and, by the way, a classmate of mine at the University of Virginia.

By day, Farrell runs a company with 15,000 employees, operations in more than a dozen states and more than $13 billion in annual sales.

But on nights and weekends over the past few years, he`s been pouring his soul and a hunk of his own cash into this — field of lost shoes.


THOMAS F. FARRELL II, CEO, DOMINION RESOURCES: It`s not a documentary. It`s not a set piece.

MATHISEN (voice-over): “Field of Lost Shoes” is an historically accurate major motion pictures out this week. It tells a story of 250 cadets from Virginia Military Institute in Lexington. In May of 1864, with the Union pressing down the Shenandoah Valley, they marched 90 miles north over four and a half days through torrential rain to reinforce a fraying Confederate line.

They ended up here in this field, Bushong`s farm, near New Market, Virginia. Here on May 15th, 150 years ago, the schoolboys average age 17 fought, and 10 of them died for their state and the Confederate cause.

FARRELL: They were not good at parade, but these were not hardened veterans.

MATHISEN: And Farrell was not a movie producer or a screen writer.
Now, he is both.

FARRELL: My great grandfather, my grandfather, my father, uncles, were all career army officers. About 30 years ago, I went on sort of civil war bench. When I came across this story of these New Market cadets,

MATHISEN: Farrell started toying with making a movie about them roughly 10 years ago.

(on camera): You know how to build pipelines. You know how to run nuclear plants. You know how to do a lot of stuff. But you don`t know how to make a movie.

FARRELL: No. I don`t actually know how to run a nuclear plant.


FARRELL: But my job is to get the people together who do know how to run a nuclear plant.

MATHISEN: Yes, and make sure they`re doing it right.

FARRELL: Make sure they`re doing it right, and that`s what a producer`s job.

MATHISEN: How did you fit this?

FARRELL: That`s what nights and weekends are for.


MATHISEN: You had never written a screenplay before. Never written anything like it.


MATHISEN: How hard was it?

FARRELL: It was hard.

UNIDENTIFIED MALE: You don`t believe on what you`re fighting for, you won`t make it out of this valley.

FARRELL: The movie is about boys. It`s about seven boys. Six of whom were real cadets. The seventh one we made up as a composite. We call him the rat (ph) in the movie.

MATHISEN: The youngest.

FARRELL: The youngest.

But all the rest of the characters, all the adult characters are all real people.

MATHISEN (voice-over): Like General John C. Breckinridge, the Confederate commander and one time U.S. vice president played by Jason Isaacs of “Harry Potter” fame. Despite his grave reservations, he orders the cadets into battle.

FARRELL: That`s all he had left, 15-year-old boys.

They paused here at this fence line. Hardened Pennsylvania veterans firing at them down here. These young boys led the charge, up this hill and run through a sea of mud, mud was so deep that it sucked the shoes off of their feet.

MATHISEN (on camera): But then, very quickly, they got an education, and they are in hand to hand combat.

FARRELL: After the battle, down here in this area, there was a whole bunch of hundreds of shoes.

This area here has been called the field of lost shoes for over 100 years.

MATHISEN (voice-over): Breckinridge and his unlikely troops prevailed. For the Confederates outmanned two-to-one, it was a remarkable victory that delayed the inevitable ultimate defeat.

For the VMI cadets, a day of honor commemorated every May 15th by a new generation of VMI men and now women.

For Dominion CEO Tom Farrell, the movie is the realization of a dream.

(on camera): What are you going to do now?

FARRELL: Going to go back to my job.

MATHISEN: Why did you do it? Bottom line?

FARRELL: The bottom line, Tyler, is I thought it was a story that deserved to be told. I thought these boys deserved to have the story told, and we tried to tell it in a way that we think they would like.


MATHISEN: And the film opens this week in limited release in 20 or so markets. Farrell would be the first to tell you he didn`t do it alone.
His co-screenwriter David Kennedy was another college pal, as were some of his co-investors on the project.

Interestingly, Susie, he said there were very few at Dominion who knew about this, his secretary and, of course, his board who he wanted to know what he was doing in his spare time.

GHARIB: It`s interesting that every war has these little stories along the way that are big stories and it`s interesting that he discovered this one. What did you think of the movie?

MATHISEN: The movie was very good. My son who was eight absolutely loved it. I thought the performances were very nice.

GHARIB: Really?

MATHISEN: And I have to say, this was the only time that I know of in American history where schoolboys cadets were put into battle.

GHARIB: Well, I`ll go see it.

MATHISEN: Yes, go see it.

GHARIB: Sounds like a good movie.

Well, that`s it for tonight. I`m Susie Gharib. Thanks for watching.
Have a great weekend. Go see the movie.

MATHISEN: And I`m Tyler Mathisen. Have a great weekend, everybody.
We`ll see you back here on Monday.


Nightly Business Report transcripts and video are available on-line post broadcast at 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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